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  • Accounting For Loss of Control

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    When a parent loses control of a subsidiary, it must deconsolidate the subsidiary's assets, liabilities, and equity from its financial statements. It derecognizes the assets and liabilities of the former subsidiary and recognizes any retained investment at fair value. It also recognizes a gain or loss on the loss of control, calculated as the difference between proceeds received and the carrying amount of the subsidiary's net assets. The gain or loss is included in the parent's income statement. An illustration is provided of a parent selling an 85% interest in a wholly owned subsidiary, resulting in a gain on deconsolidation of $380,000.

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    ACCOUNTING FOR LOSS OF CONTROL

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    When a parent loses control of a subsidiary, it must deconsolidate the subsidiary's assets, liabilities, and equity from its financial statements. It derecognizes the assets and liabilities of the former subsidiary and recognizes any retained investment at fair value. It also recognizes a gain or loss on the loss of control, calculated as the difference between proceeds received and the carrying amount of the subsidiary's net assets. The gain or loss is included in the parent's income statement. An illustration is provided of a parent selling an 85% interest in a wholly owned subsidiary, resulting in a gain on deconsolidation of $380,000.

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    6 views2 pages

    Accounting For Loss of Control

    Uploaded by

    Mixx Mine
    When a parent loses control of a subsidiary, it must deconsolidate the subsidiary's assets, liabilities, and equity from its financial statements. It derecognizes the assets and liabilities of the former subsidiary and recognizes any retained investment at fair value. It also recognizes a gain or loss on the loss of control, calculated as the difference between proceeds received and the carrying amount of the subsidiary's net assets. The gain or loss is included in the parent's income statement. An illustration is provided of a parent selling an 85% interest in a wholly owned subsidiary, resulting in a gain on deconsolidation of $380,000.

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    ACCOUNTING FOR LOSS OF CONTROL

    Whenever a parent ceases to have a controlling interest in a subsidiary, that subsidiary should
    be deconsolidated ( eliminated from the consolidated financial statement). Usually this would
    result from a sale of an interest in the subsidiary, which reduces the parent's share to less than
    50%.

    If a parent loses control of a subsidiary, the parent:


    a) Derecognizes the assets and liabilities of the former subsidiary from the consolidated SFP.
    b) Recognizes any investment related to the former subsidiary at its fair value when control is lost and
    subsequently accounts for it and for any amount owned by or to the former subsidiary in
    accordance with relevant IFRS.
    c) Recognizes the gain or less associated with the loss of control attributable to the former controlling
    interest.

    The gain or loss is included in the income statement of the parent. The gain or loss is the
    difference between:
    a) The aggregate of:
    1)The fair value of any consideration
    2) the fair value of any retained non-controlling interest in the former subsidiary on
    the date the former subsidiary is deconsolidated
    3) the carrying amount of the non-controlling interest in the former subsidiary
    (including any accumulated other comprehensive income attributable to the NCI)
    at the date the subsidiary is deconsolidated.

    b) the carrying amount of the subsidiary's net assets.

    Illustration:
    A parent sells an 85% interest in a wholly owned subsidiary, as follows:
    1) after the sale, the parent accounts for its remaining 15% interest as an available for sale investment
    2) the subsidiary did not recognize any amount in comprehensive income
    3) net assets of the subsidiary before the disposal is P500,000
    4) cash proceeds from the sale of the 85% interest is P750,000
    5) the fair value of the 15% interest retained by the parent is P130,000

    The parent accounts for the disposal of the 85% interest as follows:
    Cash 750,000
    Available for sale investment 130,000
    Investment in subsidiary (net assets) 500,000
    Gain on disposal 380,000

    The gain on disposal can be proven as follows:


    Cash proceeds on 85% interest 750,000
    BV of 85% interest (P500,000 x 85%) -425,000 325,000

    Carrying amount of 15% available for sale investment 130,000


    Carrying amount of 15% interest -75,000 55,000
    Gain on deconsolidation 380,000

    Sale of interest not resulting in Loss of Control


    A parent company may sell a portion of its investment in a subsidiary but still have an interest
    that provides control even after the sale.

    Gain on sale of investment in a subsidiary is recorded as an addition to APIC. Loss on sale of


    the investment in subsidiary is treated as a reduction from APIC. If the APIC is inadequate, the
    loss is deducted from Retained Earnings.

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