Grid of wooden blocks with black arrows all pointing right, except one red block whose white arrow points left, representing a subsidiary moving out of the group

Technical Consolidation

Accounting for the disposal of a subsidiary

Steven Auf

CEO and Founder

The corporate world is marked by constant shifts in ownership structures, strategic priorities, and market dynamics. Companies often face difficult decisions about which investments to retain and which to let go of. One of the most complex of these decisions is the disposal of a subsidiary. Whether prompted by financial necessity, a realignment of long-term strategy, or the desire to streamline operations, divesting a subsidiary carries significant financial, strategic and operational implications.

Interestingly, the process of losing control over a subsidiary can be compared to the end of a meaningful relationship. Much like a breakup, it requires careful navigation to part ways. The decision often stems from a misalignment of goals or priorities, where the maintenance of the relationship no longer serves mutual interests. Shared aspects, such as intertwined operations or resources, must be disentangled and redistributed thoughtfully.

As with a breakup, the experience can bring mixed emotions. On the one hand, there might be relief (again) or there may be a sense of loss and reflection on what once was. Retained interests, such as ongoing involvement in the form of minority stakes or collaborative ventures, mirror staying connected through mutual friends or co-parenting. Moreover, disclosures—whether to stakeholders or one's personal network—become a necessary part of explaining the transition.

Just as in personal growth after a breakup, the disposal of a subsidiary provides an opportunity for a company to refocus its energy and resources, aligning with new goals and exploring new opportunities. The process, while challenging, ultimately marks a step forward in pursuit of a better-aligned future.

Loss of control of a subsidiary normally occurs when the parent / holding company (‘P Ltd’) sells shares to the non-controlling interest (NCI) in the subsidiary company (‘SLtd’). This represents a significant economic event and the parent company is required to stop consolidating and recognise a gain/loss in its separate and consolidated financial statements.

Other reasons that could lead to a loss of control are:

· The expiring or change of a contractual agreement which had originally resulted in the parent company having control, such as a change in management of the subsidiary.

· A rights issue or share buyback that will result in a dilution of shares – if the subsidiary company issues more shares and the parent company has limited or no participation in the offering, this could lead to a change in the percentage of ownership and the loss of voting power.

· Regulatory or Legal Changes – For example a regulatory body steps in if a merger or acquisition occurs that causes anti-competitive concerns and the parent company is forced to divest its interest in the subsidiary.

This article addresses the accounting implications in the parent's separate financial statements and the group's consolidated financial statements for the disposal of a subsidiary where control as defined by IFRS 10 Consolidated Financial Statements is lost through the buying and selling of shares between existing shareholders and a simple investment is retained.

Important considerations when losing control:

Date of losing control – This is normally the date when the parent company legally receives the consideration for its shares however there could be an earlier date if the parent company loses control on the date a written agreement is entered into between the parent company and the NCI or S Ltd.

Consideration received – The consideration received should be measured at its fair value in accordance with IFRS 13 Fair Value Measurement.

PARENTS SEPARATEFINANCIAL STATEMENTS

P Ltd is required to recognise a profit or loss on the disposal of its investment (shares) in the subsidiary just like it would recognise a profit or loss on the disposal of any other asset. The accounting for the loss on disposal will be dependent on the accounting policy that P Ltd has chosen to account for the investment in the subsidiary in its separate financial statements. IAS 27 Separate Financial Statements paragraph 10 provides an entity with the options of cost, according to IFRS 9 Financial Instruments(fair value) or according to IAS 28 Investments in Associates and Joint Ventures (equity method).

Worked example setup for the separate financial statements: the accounting policies elected, and the scenario in which P Ltd acquires a 75 percent interest in S Ltd on 1 January 2024 for R182 000, disposes of 65 percent on 31 December 2024 for R273 000 cash, with the retained investment at a fair value of R42 000 rising to R48 000 by 31 December 2025

Note 1:

In the separate financial statements of P Ltd, there is a disposal of an asset. The consideration received on disposal is higher than the cost and therefore profit is recognised.

Calculation of the profit on sale in the separate financial statements: fair value of consideration received for the 65 percent interest of R273 000, less the cost of the disposed investment of R157 733 (R182 000 multiplied by 65 over 75), giving a profit of R115 267 recognised in profit or loss

Remeasurement of the retained investment to fair value through profit and loss as this is similar to a day one gain in terms of IFRS 9.B5.1.2A.

Remeasurement of the retained investment: cost of R24 267 (R182 000 multiplied by 10 over 75) against a fair value of R42 000, giving a remeasurement gain of R17 733 recognised in profit or loss

Note 2: All subsequent remeasurements to fair value are recognised in other comprehensive income.

Three journal entries in the separate financial statements — J1 recognising the profit on disposal with bank of R273 000, investment in shares of R157 733 and profit on sale of R115 267; J2 recognising the R17 733 fair value adjustment on the retained shares in profit or loss; and J3 recognising the R6 000 fair value adjustment through other comprehensive income in 2025

Journals to account for the investment in the separate financial statements of P (Ltd):

The above journals should be reversed through pro-forma journals on consolidation as the group profit and group re-measurement will be calculated differently.

What would be different if P Ltd made an irrevocable election to measure the investment at fair value through other comprehensive income in its separate financial statements?

If P Ltd accounts for its investment in S Ltd using the fair value method. On the date of disposal, P Ltd revalues the investment to its fair value through other comprehensive income (IFRS 9.5.7.5). There will be no profit or loss on disposal as the carrying amount (CA) will be equal to the fair value of the investment.

P Ltd can choose to reclassify cumulative gains/losses that were recognised in other comprehensive income to retained earnings when the investment is disposed of (IFRS 9.B5.7.1).

What would be different if P Ltd measured the investment using the equity method in its separate financial statements?

If P Ltd accounts for its investment in S Ltd using the equity method the cost of the disposed investment to be derecognised would be the CA of S Ltd as determined by IAS 28. The carrying amount is calculated using the equity method as the initial cost of the investment plus P Ltd’s share of profit and other comprehensive income of S Ltd less the distributions received from S Ltd.

Due to the part disposal, P Ltd should account for cumulative amounts previously recognised in other comprehensive income in relation to the investment on the same basis as would have been required as if P Ltd has disposed of the related assets or liabilities. For example, P Ltd’s share of other comprehensive income resulting from a revaluation surplus would be reclassified to retained earnings.

CONSOLIDATEDFINANCIAL STATEMENTS

The following procedure should be followed when there is a loss of control (IFRS 10.25 andB97-99):

Five-step process for loss of control: derecognise the subsidiary's assets, goodwill, liabilities and non-controlling interests at carrying amount; recognise the fair value of the consideration received and of the remaining investment; reclassify equity and other comprehensive income, such as transferring revaluation surplus to retained earnings; recognise the resulting difference in profit or loss attributable to the parent; and account for the retained investment under IFRS 9 or under IAS 28 if it is an associate

How is the group gain calculated in the consolidated financial statements (IFRS10.25)?

Three-step chevron diagram showing how the group gain is calculated: consideration received for the shares sold, plus the fair value of the retained investment on the date control is lost, less the carrying amount of the investment on that date

CA of the investment on the date control is lost is calculated as:

Three-step chevron diagram showing how the carrying amount of the investment is calculated on the date control is lost: total net assets of S Ltd, plus goodwill recognised at the acquisition date, less the carrying amount of non-controlling interests

The two methods to measure NCI (IFRS 3.19):

Two-column table comparing the two methods of measuring non-controlling interests — at its proportionate share of the subsidiary's identifiable net assets, known as the partial goodwill approach, versus at fair value at the acquisition date including goodwill attributable to NCI, known as the full goodwill approach

Worked example setup listing the accounting policies elected — NCI measured at proportionate share, the investment held at cost and then at fair value after loss of control — and the scenario in which P Ltd acquires a 75 percent interest in S Ltd on 1 January 2021 for R182 000, with S Ltd's share capital of R210 000, retained earnings of R14 000 and net asset value of R224 000

Worked example continued: P Ltd disposes of 65 percent of its interest on 31 December 2024 for R273 000 cash with the retained investment at a fair value of R42 000, alongside S Ltd's opening retained earnings of R50 000 and revaluation surplus of R6 000, and its results for the year showing sales of R52 500, cost of sales of R42 000 and profit of R7 000

Note 3: At the acquisition date 1 January 2021.

The net asset value is R224 000- representing 100% of the business.

P Ltd had purchased a 75% interest in S Ltd which is worth R168 000 (R224 000 x 75%). P Ltd had paid R182 000 in cash for this and therefore had paid a premium for the interest of R14 000 (R182 000 – R168 000). This premium is representative of goodwill.

At the acquisition date, the balance of NCI being measured at proportionate share is R56 000(R224 000 x 25%).

Note 4:

Up until the beginning of 2024 S Ltd has been profitable and was able to increase its retained earnings and revaluation surplus. P Ltd had a 75% interest and NCI had a 25% interest in the growth of this equity.

Growth in equity:

Note 5: The line items in the statement of profit or loss and other comprehensive income will be included in the consolidated statement of profit and loss as S Ltd was part of the group for the 12 months of the 2024reporting period.

If this was an interim disposal and S Ltd was disposed of on 30 June 2024 then only a portion (6/12)of each line item would have been included in the consolidated statement of profit and loss and other comprehensive income.

NCI 25% interest in the profit of 2024 is R1 750 (R7 000 x 25%).

P Ltd’s 75% interest in the profit of 2024 is R5 250 (R7 000 x 75%)

Note 6: The group gain to be recognised (group gain +remeasurement of the retained investment to its fair value) is calculated as:

Group gain calculation: fair value of the consideration received on the disposal of the 65 percent interest of R273 000, plus the fair value of the retained investment of R42 000, less the carrying amount of the investment on the date control is lost of R218 750, giving a group gain of R96 250 recognised in profit or loss

Note 7: CA of the investment on the date control is lost:

Calculation of the carrying amount of the investment on the date control is lost: total net assets of S Ltd of R273 000 — being R224 000 at acquisition plus R36 000 growth in retained earnings, R6 000 growth in revaluation surplus and R7 000 profit for the year — plus goodwill recognised at acquisition of R14 000, less non-controlling interests of R68 250, giving a carrying amount of R218 750

Note 8: Group gain on disposal to be recognised (excluding the remeasurement of the retained investment to fair value:

Group gain on disposal excluding the remeasurement of the retained investment: fair value of consideration received of R273 000, less net assets disposed of R177 450 (R273 000 multiplied by 65 percent), less goodwill realised of R12 133 (R14 000 multiplied by 65 over 75), giving a group gain of R83 417 recognised in profit or loss

Note 9: Remeasurement of the retained investment to its fair value on the group level:

Group remeasurement gain on the retained investment: fair value of R42 000, less net assets of R27 300 (R273 000 multiplied by 10 percent), less goodwill of R1 867 (R14 000 multiplied by 10 over 75), giving a remeasurement gain of R12 833 recognised in profit or loss

Note 10: Total to be recognised on a group level in profit or loss:

Total recognised in group profit or loss: group gain on disposal of R83 417 plus the remeasurement of the retained investment to fair value at group level of R12 833, giving R96 250

Pro-forma journals to account for the change in ownership in the consolidated financial statements of the Consol Ltd Group (single journal):

Single pro-forma consolidation journal recognising the opening balances — non-controlling interests of R66 500, retained earnings of R27 000 and revaluation surplus of R4 500 — the current year's profit and loss items, NCI's 25 percent share of profit of R1 750, the derecognition of NCI of R68 250, and group profit of R96 250, while reversing the R115 267 profit on sale and R17 733 remeasurement gain recorded in the separate financial statements

Pro-forma journal J2 realising any other reserve, such as a revaluation surplus or mark-to-market reserve, in full to retained earnings on the loss of control — debiting revaluation surplus and crediting retained earnings with R4 500, in terms of IFRS 10.B98(c) and B99

Alternative pro-forma journals to account for the change in ownership in the consolidated financial statements of the Consol Ltd Group (multiple journals):

Alternative set of six pro-forma consolidation journals — J1 recognising opening retained earnings of R27 000 and revaluation surplus of R4 500 against the investment of R31 500, J2 recognising the subsidiary's profit for the year, J3 reversing the R115 267 profit on sale and R17 733 remeasurement gain from the separate financial statements against the R133 000 investment, J4 recognising the group profit of R83 417, J5 recognising the R12 833 remeasurement gain at group level, and J6 realising the R4 500 revaluation surplus to retained earnings

What would be different if P Ltd retained no further interest in S Ltd?

There would be no consideration for the remeasurement of the retained investment in the separate or consolidated financial statement.

What would be different if P Ltd retained a 25% interest in S Ltd?

In the separate financial statements – The investment will continue to be held at cost in terms of IAS 27 and therefore there is no remeasurement of the retained investment to its fair value.

In the consolidated financial statements- If P Ltd retains 25% interest, the retained investment would need to be classified as an associate and accounted for in terms of IAS 28. The equity accounting approach will follow from the date control is lost.

P Ltd will need to account for its share of profit and other comprehensive income and eliminate any dividends received in the consolidated financial statements (IAS 28.10).

The pro-forma journals to be subsequently recorded will include:

Pro-forma journals for subsequently equity accounting the retained investment as an associate — recognising P Ltd's share of the associate's profit and other comprehensive income against the investment in A Ltd, and eliminating dividends received from the associate against other income

What would be different if NCI was measured at fair value instead of at its proportionate share?

The goodwill at acquisition will be reflective of the goodwill belonging to NCI and the parent as it is the full goodwill approach. This will impact the amount recognised as good will and NCI at acquisition.

Disclosure requirements:

Notes to the financial statements:

The following disclosures are required by IFRS 12 Disclosures of Interests in Other Entities paragraph 19:

· The total gain or loss as a result of the loss of control

· The portion of the gain or loss attributable to measuring any retained investment in the former subsidiary to its fair value

· The line item in the statement of profit or loss in which the gain or loss is recognised

Example disclosure note in Consol Ltd's consolidated financial statements for the year ended 31 December 2024 describing the loss of control over S Ltd — P Ltd sold a 65 percent interest and retained 10 percent, with a total of R96 250 included in other income, of which R12 833 relates to remeasuring the retained interest to fair value, and the retained investment measured at fair value through other comprehensive income

Further disclosure is required in terms of IAS 7 Cash Flows:

· The total consideration received

· The portion of the consideration consisting of cash and cash equivalents

· The amount of cash and cash equivalents in the subsidiary over which control is lost

· A summary of the amounts of assets and liabilities other than cash or cash equivalents in the subsidiary over which control is lost

Example disclosure note covering the IAS 7 cash flow requirements, setting out P Ltd's acquisition of 75 percent of S Ltd on 1 January 2021 for R182 000 with share capital of R210 000 and retained earnings of R14 000, the disposal of the 65 percent interest on 31 December 2024 for R273 000 cash, and the net assets of S Ltd at that date — land R170 000, intangible assets R30 000, inventory R50 000, bank overdraft of R3 000 and payables of R20 000

The consolidated statement of financial position

The consolidated statement of financial position will not include any balance relating to the assets and liabilities of the disposed subsidiary as it is disposed at year end. The retained investment will be presented as a simple investment as a financial asset.

The consolidated statement of statement of profit or loss and other comprehensive income

Each line item of profit or loss and other comprehensive income of the disposed subsidiary will be included in the statement of profit and loss and other comprehensive income up until the date it is disposed of. If it was disposed of at the end of the reporting period it will be included for the full year, however, if it was disposed of during the reporting period it will be included on an apportionment basis.

The other income line item will include the group gain or loss that is recognised on the loss of control (disposal of shares) and the group gain or loss on the remeasurement of the retained investment.

The consolidated statement of changes in equity

The effect of the disposal of the subsidiary should be shown as a current-year movement in the consolidated statement of changes in equity. This line item will derecognise the closing balance of NCI.

The consolidated statement of cash flows

The cash portion of the consideration received from the disposal of the subsidiary should be presented as an investing activity in the consolidated statement of cash flows. This amount is presented net of the bank balance of the subsidiary over which P Ltd has lost control.

This article does not address the following but if you have questions relating to this, the team is available to assist you:

· Tax considerations for the disposal of the subsidiary.

· The accounting for when the subsidiary is held for sale.

· The accounting to recognise the impairment of a subsidiary.

· The accounting for the sale of a subsidiary by an investment entity.

· The partial disposal of a subsidiary where control is retained.

· Loss of control due to a share buyback or a rights issue.

· Intercompany journals when there is a disposal of shares.

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