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Hi all,

Question relates to transaction between 2 entities within the same Group.

Sub1 is in possession of a contract that gives rise to an intangible asset of $10m, accounted for at cost with an indefinite useful life.
For Group restructuring purposes, the contract is being transferred to Sub2 after which Sub1 will be deregistered.
The contract is being transferred at zero compensation.
The fair value of the intangible asset can be reliably measured at $30m.

Sub1 will impair the asset, since it no longer has the contract which underpins the intangible asset value.
How will Sub2 account for the intangible asset gained for zero compensation? Debit intangible assets $10m, Credit P&L $10m?

Thanks.

not sure it's right to impair given it's not a market transaction

Perhaps there's a deemed distribution to parent, and contribution to sub ?

JRSB wrote: ↑23 Jun 2022, 18:03 not sure it's right to impair given it's not a market transaction

Perhaps there's a deemed distribution to parent, and contribution to sub ?

Thanks. So sub1 will do a deemed distribution to parent (holdco), who in turn contributes to sub2? Not sure how I would justify a deemed distribution?

just an idea. may be a better answer

I would just credit intangible assets by 10m and debit P&L in the package of sub 1
and debit intangible assets by 10m and credit P&L in the package of sub 2

Intercompany P&L accounts should be eliminated at consolidation level.

By the way @ JRSB, what's a deemed distribution ? I've never heard of it before, could you provide me with a definition ? I'd appreciate that thanks a lot !

well suppose the example above was that the company receiving the asset for $0 was the immediate parent company. should be no different in principle to sending up cash, ie distribution.

Oh I got it thanks, like a dividend or something.

Maybe in the separate financial statement of the parent, but Id say it's unchanged at conso level.

From I said earlier, I forgot you mentioned that the intangible asset bears a fair value of 30m now.

In that case, I think, you should revalue the asset at 30m in sub 2, which will result in a net gain in consolidated P&L for 20m.

But in real life, I've never seen something like it.

Any thoughts guys, can we show a gain of 20m in the consolidated P&L every time that type of operation occurs ?

on consolidation I assume zero impact - I was assuming the question was about entity accounts. "how will sub 2 account for..."

in the UK you would transfer at book value for tax purposes, so you don't see this except maybe in very small companies who don't do things properly

My view:
Sub 2: capital contribution at fair value:
Dr intangible assets 30m
Cr Equity 30m

Sub 1 non cash distribution analogous to IFRIC 17 (this isn't in the scope of IFRIC 17 but this interpretation can be applied by analogy)

@Marek, so in sub 1, it would be :

per IFRIC 17 :
"a dividend payable should be recognised when the dividend is appropriately authorised and is no longer at the discretion of the entity"
"an entity should measure the dividend payable at the fair value of the net assets to be distributed"
"an entity should recognise the difference between the dividend paid and the carrying amount of the net assets distributed in profit or loss, and should disclose it separately" :

Dr Equity : 10m
Dr P&L : 20m
Dt Liability : 30m

right ?

Thanks all for the input.

So sub1 transfers the intangble asset directly to sub2, not via the holdco/parent. not sure if this makes any difference? So no distribution to holdco?

yes the reason is that you're getting pretty complicated if a sub contributes to another because it doesn't have an equity interest..

ultimately, why would these standalone entities do this transaction? It's only because the common control has told them to (that's why the parent's involvement is relevant).

companies don't normally give away $30m for nothing....

So in the end, we would have ?

Leo wrote: ↑24 Jun 2022, 09:23 Dr Equity : 10m
Dr P&L : 20m
Dt Liability : 30m

right ?

Hm! Aren't we missing the credit side?
And what about derecognition of the asset?

JRSB wrote: ↑24 Jun 2022, 09:29 ultimately, why would these standalone entities do this transaction? It's only because the common control has told them to (that's why the parent's involvement is relevant).

companies don't normally give away $30m for nothing....

Exactly. We can say the the sub acts like an agent of the patent.

sorry typo cr liability 30m

JRSB wrote: ↑24 Jun 2022, 09:29 yes the reason is that you're getting pretty complicated if a sub contributes to another because it doesn't have an equity interest..

ultimately, why would these standalone entities do this transaction? It's only because the common control has told them to (that's why the parent's involvement is relevant).

companies don't normally give away $30m for nothing....

yeah, this is getting complicated and all to do with insurance licenses. The ultimate goal is to sell sub1 and the insurance license it holds for $1. All the business in sub1 is our business that we will retain, hence moving the contract to sub2 with a less complicated license and with the intangible asset of $10m.

There is a strategic reason why we don't just apply for a new license in sub1, but rather sell sub1 with the current license for $1. And I know this is becoming very much a corporate finance discussion vs accounting, but it does not make economic sense to realise any pnl loss or gain in the consolidated accounts just because IFRS says so, because we are not really changing anything when all is said and done. Our business will continue as normal, just in a new sub. The intangible will still hold the value it always has and we as holdco will still receive the dividends we've always had.

From previous discussions, we were saying :
Sub 2 receive a free assets, when you receive something free, you have to value it at fair value, and the counterpart depends on the circumstance. Here we consider it as a capital contribution as sub acts for the PARENT :

dt : intangible assets 30m
Cr : Equity (retained earnings) 30m

Sub 1, we are inspired by IFRIC 17 here and we consider it as a capital distribution :

Dt Equity 30m
Cr Intangible assets 10m
Cr P&L 20m

SO, at conso level, you'll have on top of what you have already :
Intangible assets 20m
P&L 20 m

So, it winds up being what I wrote earlier in my post, it is similar to if you consider sub 1 selling something for free to sub 2.

in the UK, sub 1 would need sufficient reserves to make that distribution and would be unable if it didn't. hence more typical approach of transfer at carrying value.

Leo wrote: ↑24 Jun 2022, 10:20 SO, at conso level, you'll have on top of what you have already :
Intangible assets 20m
P&L 20 m

Obviously, there won't be any impact at consolidated level as a result of this transaction

Why ? your intangible asset was 10m before.

JRSB wrote: ↑24 Jun 2022, 10:23 in the UK, sub 1 would need sufficient reserves to make that distribution and would be unable if it didn't. hence more typical approach of transfer at carrying value.

Carrying value approach is also possible as this transaction is scoped out of IFRIC 17 and effectively not specifically covered in IFRS.

Leo wrote: ↑24 Jun 2022, 10:37 Why ? your intangible asset was 10m before.

As still is. This transaction has no impact at group level. We're discussing separate financial statements only.

Ok, so you make a top conso adjustment. But it gonna raise eyebrows when you have an asset of 30m in separate financial statements and 10m in conso.

Either of two ways focus on the transfer of the asset at fair value. Might eventually be easier if we transfer it at carrying amount.