there is a conflict between the requirements of IFRS 10 and those of IAS 28 – Investments
in Associates and Joint Ventures. This is because IAS 28 restricts any gain arising on the sale
of an asset to an associate or joint venture, or on the contribution of a non-monetary asset
in exchange for an equity interest in an associate or a joint venture, to that attributable to
the unrelated investors’ interests in the associate or joint venture, whereas IFRS 10 does
not. In order to resolve the conflict, in September 2014, the IASB had issued Sale or
Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments
to IFRS 10 and IAS 28) – but subsequently deferred the effective date of application of the
amendments. This issue is discussed further at 3.3.2 and 7.1 below.
The following parts of this section address further issues relating to accounting for the
loss of control of a subsidiary including: where an interest is retained in the former
subsidiary (see 3.3 below), loss of control in multiple arrangements (see 3.4 below), the
treatment of other comprehensive income on loss of control (see 3.5 below), deemed
disposals (see 3.6 below), and demergers and distributions (see 3.7 below).
3.3
Accounting for a loss of control where an interest is retained in
the former subsidiary
According to IFRS 10, when a parent loses control of a subsidiary, it must recognise any
investment retained in the former subsidiary at its fair value at the date when control is
lost. Any gain or loss on the transaction will be recorded in profit or loss. The fair value
of any investment that it retains at the date control is lost, including any amounts owed
by or to the former subsidiary, will be accounted for, as applicable, as:
• the fair value on initial recognition of a financial asset (see Chapter 45 at 3); or
• the cost on initial recognition of an investment in an associate or joint venture (see
Chapter 11 at 7.4.1).
The IASB’s view is that the loss of control of a subsidiary is a significant economic event
that marks the end of the previous parent-subsidiary relationship and the start of a new
Consolidation procedures and non-controlling interests 477
investor-investee relationship, which is recognised and measured initially at the date
when control is lost. [IFRS 10.BCZ182]. IFRS 10 is based on the premise that an investor-
investee relationship differs significantly from a parent-subsidiary relationship.
Therefore, ‘any investment the parent has in the former subsidiary after control is lost
should be measured at fair value at the date that control is lost and that any resulting
gain or loss should be recognised in profit or loss.’ [IFRS 10.BCZ182].
The following discussion addresses the accounting for the loss of control in certain
situations – where the interest retained in the former subsidiary is a financial asset
(see 3.3.1 below), where the interest retained in the former subsidiary is an associate or
joint venture that is accounted for using the equity method (see 3.3.2 below), and where
the interest retained in the former subsidiary is a joint operation (see 3.3.3 below).
3.3.1
Interest retained in the former subsidiary – financial asset
Example 7.4 below illustrates the above requirement where the interest retained in the
former subsidiary is a financial asset.
Example 7.4:
Disposal of a subsidiary
A parent sells an 85% interest in a wholly owned subsidiary as follows:
• after the sale the parent elects to account for the interest at fair value through other comprehensive
income under IFRS 9;
• the subsidiary did not recognise any amounts in other comprehensive income;
• net assets of the subsidiary before the disposal are $500 million;
• cash proceeds from the sale of the 85% interest are $750 million; and
• the fair value of the 15% interest retained by the parent is $130 million.
The parent accounts for the disposal of an 85% interest as follows:
$m
$m
DR
CR
Financial asset 130
Cash 750
Net assets of the subsidiary derecognised
(summarised) 500
Gain on loss of control of subsidiary
380
The gain recognised on the loss of control of the subsidiary is calculated as follows:
$m
$m
Gain on interest disposed of
Cash proceeds on disposal of 85% interest
750
Carrying amount of 85% interest (85% × $500 million)
(425)
325
Gain on interest retained
Carrying amount of 15% investment carried at fair value through
other comprehensive income
130
Carrying amount of 15% interest (15% × $500 million)
(75)
55
Gain recognised on loss of control of subsidiary
380
478 Chapter
7
Although IFRS 10 requires that any investment retained in the former subsidiary is to
be recognised at its fair value at the date when control is lost, no guidance is given in
the standard as to how such fair value should be determined. However, IFRS 13
provides detailed guidance on how fair value should be determined for financial
reporting purposes. IFRS 13 is discussed in detail in Chapter 14.
3.3.2
Interest retained in the former subsidiary – associate or joint venture
It can be seen that the requirements in IFRS 10 discussed above result in a gain or loss
upon loss of control as if the parent had sold all of its interest in the subsidiary, not just
that relating to the percentage interest that has been sold.
IFRS 10’s requirements also apply where a parent loses control over a subsidiary that has
become an associate or a joint venture. However, there is a conflict between these
requirements and those of IAS 28 for transactions where a parent sells or contributes an
interest in a subsidiary to an associate or a joint venture (accounted for using the equity
method) and the sale or contribution results in a loss of control in the subsidiary by the
parent. This is because IAS 28 restricts any gain arising on the sale of an asset to an
associate or a joint venture, or on the contribution of a non-monetary asset in exchange
for an equity interest in an associate or a joint venture, to that attributable to unrelated
investors’ interests in the associate or joint venture. [IAS 28.28, 30].
In order to resolve the conflict, in September 2014, the IASB had issued Sale or
Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments
to IFRS 10 and IAS 28) (‘the September 2014 amendments’). These amendments, where
applied, would require the gain or loss resulting from the loss of control of a subsidiary that
does not contain a business (as defined in IFRS 3) – as a result of a sale or contribution of a
subsidiary to an existing associate or a joint venture (that is accounted for using the equity
method) – to be recognised only to the extent of the unrelated investors’ interests in the
associate or joint venture. The same applies if a parent retains an investment in a former
subsidiary and the former subsidiary is now an ass
ociate or a joint venture that is accounted
for using the equity method.1 However, a full gain or loss would be recognised on the loss
of control of a subsidiary that constitutes a business, including cases in which the investor
retains joint control of, or significant influence over, the investee.
IFRS 10, prior to the revisions resulting from the September 2014 amendments, does
not draw a distinction in accounting for the loss of control of a subsidiary that is a
business and one that is not.
The September 2014 amendments were to be applied prospectively to transactions
occurring in annual periods beginning on or after 1 January 2016, with earlier application
permitted. 2 However, in December 2015, the IASB issued a further amendment –
Effective Date of Amendments to IFRS 10 and IAS 28. This amendment defers the
effective date of the September 2014 amendment until the IASB has finalised any
revisions that result from the IASB’s research project on the equity method (although the
IASB now plans no further work on this project until the Post-implementation Review of
IFRS 11 – Joint Arrangements – is undertaken).3 Nevertheless, the IASB has continued
to allow early application of the September 2014 amendments as it did not wish to
prohibit the application of better financial reporting. [IFRS 10.BC190O].4
Consolidation procedures and non-controlling interests 479
The accounting treatment where the September 2014 amendments are not applied is
explained at 3.3.2.A below, whereas 3.3.2.B below addresses the accounting treatment
where the September 2014 amendments are applied. In these sections, IFRS 10’s
approach is also referred to as ‘full gain recognition’ whereas IAS 28’s approach is also
referred to as ‘partial gain recognition’.
3.3.2.C to 3.3.2.E below are relevant to loss of control transactions where the retained
interest is an associate or joint venture accounted for using the equity method, whether
or not the September 2014 amendments are applied (except where stated).
3.3.2.A
Conflict between IFRS 10 and IAS 28 (September 2014 amendments not
applied)
Situations that result in the loss of control of a subsidiary, where the interest retained
in the former subsidiary is an associate or joint venture (that is accounted for using the
equity method), include:
• Scenario 1 – a ‘downstream’ sale or contribution of the investment in the
subsidiary (which is a business) to an existing associate or joint venture;
• Scenario 2 – a ‘downstream’ sale or contribution of the investment in the
subsidiary (which is not a business) to an existing associate or joint venture;
• Scenario 3 – a direct sale or dilution of the investment in the subsidiary (which is
a business) for cash in a transaction involving a third party; and
• Scenario 4 – a direct sale or dilution of the investment in the subsidiary (which is
not a business) for cash in a transaction involving a third party.
Transactions involving the formation of an associate or joint venture, with contributions
(which could include an investment in a subsidiary) from the investors or venturers, are
discussed further in Chapter 11 at 7.6.5. [IAS 28.28-31].
For the purposes of this discussion, the September 2014 amendments have not been
early adopted. In determining the accounting under the scenarios prior to applying the
September 2014 amendments, it is important first to determine whether the
transactions fall within scope of IFRS 10 or IAS 28.
According to IAS 28, gains and losses resulting from ‘downstream’ transactions between an
entity (including its consolidated subsidiaries) and its associate or joint venture are
recognised in the entity’s financial statements only to the extent of unrelated investors’
interests in the associate or joint venture. ‘Downstream’ transactions are, for example, sales
or contributions of assets from the investor to its associate or its joint venture. The investor’s
share in the associate’s or joint venture’s gains or losses resulting from these transactions is
eliminated. [IAS 28.28]. Where a ‘downstream’ transaction provides evidence of impairment,
the losses shall be recognised in full. [IAS 28.29]. These requirements in IAS 28 only apply to
‘downstream’ transactions with an associate or joint venture accounted for using the equity
method and not to all transactions where the retained interest in the former subsidiary is an
associate or joint venture accounted for using the equity method. This means that
paragraph 28 of IAS 28 only applies in Scenarios 1 and 2 above.
In our view, an entity is not precluded from applying paragraph 25 of IFRS 10, i.e. full gain
recognition (see 3.2 above), in accounting for the loss of control of a subsidiary that is not
a business. The September 2014 amendments (and indeed other pronouncements, such as
480 Chapter
7
Accounting for Acquisitions of Interests in Joint Operations (Amendments to IFRS 11)
issued May 2014), however, do set out different accounting treatments depending on
whether an entity is a business or not. Therefore, we consider that entities not applying
the September 2014 amendments are entitled to make an accounting policy determination
as to whether paragraph 25 of IFRS 10 applies to all transactions involving a loss of control
of a subsidiary (or only to such transactions where the subsidiary is a business).
Therefore, in our view, the following accounting policy determinations should be made:
(a) Do the requirements of paragraph 25 of IFRS 10 apply to:
• a loss of control of a subsidiary that is a businesses (‘narrow view’); or
• a loss of control of a subsidiary (whether a business or not) (‘wide view’)?
(b) Where there is a conflict between the requirements of paragraph 25 of IFRS 10
and paragraph 28 of IAS 28, which accounting standard should take precedence?
(c) Where the transaction falls within the scope of neither paragraph 25 of IFRS 10
nor paragraph 28 of IAS 28, what accounting policy should be applied?
Scenarios 1 and 3 fall within the scope of paragraph 25 of IFRS 10, whether a ‘wide view’
or ‘narrow view’ is taken for accounting policy determination (a) above. However,
Scenarios 2 and 4 will only fall within the scope of IFRS 10 if a ‘wide view’ is taken. Only
Scenarios 1 and 2 fall within the scope of paragraph 28 of IAS 28.
Figure 7.1 below summarises how the above policy determinations apply to the four
scenarios where the September 2014 amendments are not applied. There is a more detailed
discussion, including illustrative examples, of sales or contributions to an associate or joint
venture (including on formation of an associate or joint venture) in Chapter 11 at 7.6.5.
Figure 7.1
Loss of control transactions where the retained interest in the
former subsidiary is an associate or joint venture accounted for
using the equity method
Subsidiary meets the definition of a Subsidiary does not meet the definition of
business
a business
Sale or
Scenario 1
Scenario 2
contribution
• Both IFRS 10.25 (as the subsidiary is • IAS 28.28 (as this is a ‘downstream’
of inves
tment
a business) and IAS 28.28 (as this is
transaction) applies to this scenario.
in former
a ‘downstream’ transaction) apply to
Therefore, partial recognition
subsidiary in
this scenario, so a conflict arises.
applies.
downstream
transaction
• An entity would need to develop an • However, if a ‘wide view’ is taken on
accounting policy to resolve the
the scope of IFRS 10.25, a conflict
with existing
conflict, which would result in either
arises. An entity would then need to
associate or
applying full gain recognition
develop an accounting policy to
joint venture
(IFRS 10 approach) or partial gain
resolve the conflict, which would
recognition (IAS 28 approach).
result in either applying full gain
• In our view, an entity must apply this
recognition (IFRS 10 approach) or
accounting policy consistently to like
partial gain recognition (IAS
28
transactions. This does not preclude a
approach). In our view, an entity
different choice of which standard
must apply this accounting policy
takes precedence to the choice made
consistently to like transactions (see
for transactions in Scenario 2.
comments on Scenario 1.
Consolidation procedures and non-controlling interests 481
Sale or
Scenario 3
Scenario 4
dilution of
• IAS 28.28 does not apply (as this is • IAS 28.28 does not apply (as this is
investment in
not a ‘downstream’ transaction).
not a ‘downstream transaction’).
former
subsidiary for
• IFRS 10.25 applies (as the subsidiary • IFRS 10.25 only applies if a ‘wide
is a business).
view’ is taken.
cash in
transaction
• Therefore, an entity applies full gain • Therefore, if a ‘wide view’ over the
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 95