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Equity accounting.
28 August 2008
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When a parent company preperaing consolidated financials lost control and reaches significant influence , attracking equity method.
The change in ownership of subsidiary should be accounted for subsequently or to restate the prior period.
That is equity method should be applied from the date of change or should do this restructring from prior period financial staement presented.
thanks
With Best Wishes and Regards
SHABI
Dear Shabih,
When part of an investment in a subsidiary is sold during the reporting period, the parent should record its investment after the disposal in the consolidated accounts as follows:
- If a parent sells a portion of its investment in a subsidiary but still retains a controlling interest, the minority interest in the results of the subsidiary would be calculated for the period from the date of disposal. Subsequent consolidated balance sheets should include the assets, liabilities, and operations of the subsidiary, and reflect the new minority interest.
- If the parent sells a controlling interest in the subsidiary but still retains significant influence over it, the subsequent results should be reported using the equity method. The remaining investment should be reflected in subsequent balance sheets as a single line item, using the equity method in accordance with IAS 28, Investments in Associates.
- If the parent sells a controlling interest in the subsidiary and retains some interest in the entity, but does not retain significant influence over it, the interest in the entity should be accounted for in accordance with IAS 39, Financial Instruments: Recognition and Measurement, from the date of the transaction. The carrying amount of the investment at the date the entity ceases to be a subsidiary shall be regarded as the cost on initial measurement of a financial asset in accordance with IAS 39.
When all of a subsidiary is sold (or if an interest is retained, but the interest does not allow the parent to exert significant influence over the subsidiary), and if the sale of the subsidiary qualifies as a discontinued operation, presentation of the discontinued operation should follow IFRS 5, Non-current Assets Held for Sale and Discontinued Operations.
So, as you can see, the application is prospectively not retroactively.
Hopes this could be useful,
Best Regards,
Thanks Rodrigo
If this is my case:
Can I apply equity accounting from begining of the period????
I assume this is not part of a decision to discontinue the operations, it is merely a change in ownership to provide better opportunities for the investment (i.e. the investment is not held for sale).
Then this is a materiality question, first question is what is the impact of deconsolidation on net assets, turnover, operating result, if the year sums (income statement) or balance sheet amounts in itself are already affecting the financial statement materially (professional judgment) the de-cognition has to be pro-rato from the discontinuing date, so up to the date of de-consolidation consolidated full results in P&L, from that date on equity accounting with one line net result from investments. It might be necessary to provide an impact of the de-consolidation on an annual basis by stating the net assets and a summary of the income statement of the de-consolidated part for the year.
If the de-consolidation in itself is not material then it is simple, just start the net equity accounting from the beginning of the year.
There is off course also an in-between: The impact may be material but the transaction was that close to opening or ending balance date that either the complete income statement may be left out or the complete income statement may be left in.
So it is a matter of looking precisely at what is going on,
Henk
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Dear All, Can Any one Help me in this issue,
If A parent company owns 90 of a subsidiary, When preparing the consolidated financials of the parent company the investment will change according to the changes in the subsidiary (i.e if the subsidiary net income amouonted to 100K then in the consolidation this entry will pass
Dr. Investment in sub. 100K x 90%
Cr. Result of the sub 100K x 90%
Now in the stand alone financials the investment will remain booked at cost while we adjust the Investment balance on the consolidation sheets to reflect the changes of the subsidiary,
My question, if the parent company decided to decrease its share of ownership in the parent from 90% to 40% then it will not consolidate the subsidiary in it financials rather it will use the equity method and show the investment as a separete line item in its financials as investment in associate.
What is the entry to be passed in the stand alone financials and how this will be reflected in the consolidation sheets (my concern is that the investment balance in the consolidation sheet is not the same as the stand alone financials)
can any one help
demo example
Original investment booked in the parent in year 1 equal to 100,000———–> this will remain unchanged in the stand alone financials
at the end of year 1 the results of the subsidiary was +50,000
accordingly in the consoiation the following entry will be passed
Dr. Investment in subs (BS) 45,000 = (50,000 x90%)
Cr. Result of the subsidiary (P&L) 45,000—————-for sure this will be eleminated on the consolidation sheet
In year 2 the parent decided to decrease its ownership % to 40% and sell the 50% for an amount of 1,000,000
In stand alone financials the following entry will be passed
Dr. Cash 1,000,000
Cr. Investment 50,000 (100,000 origianl investment x 50% sold share)
Cr. gain from sale of investment 950,000
Now on consolidation how can i pass an enty to decrease the investment balance of 145,000 (100,000 original balance + 45,000)
can any one pleae advise
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