(1) A holds 100% on C.
If structure changes that there is an immediate holding co of C named B, then A holds 100% on B and then B 100% on C.
(1) Can A transfer the shares to B at consideration of USD 1 in the fact that C has negative NAV ?
(2) What is accounting entry in A’s books in USGAAP? written off the investment as impairment ?
(3) What is accounting entry in B’s books in USGAAP ? How to account for the investment ?
To start with is A holding its investment against cost or against equity value?
I presume equity value,
1. A has to transfer its holding to B against fair (market) value (transactions between related companies) as would be the case between normal parties, that value may be USD 1 (I do not know).
2. A will value the investment against net equity value/net assets value, based on the same accounting rules as used in the consolidated accounts. This is not an impairment but a ‘regular’ result on investment in subsidiaries (loss), accounted for in the income statement. An impairment would be a more permanent downward valuation based on more fundamental changes in the business environment etc that were not foreseen at the moment of investment.
3. B will account for C at the initial recognition at cost (e.g. USD 1) and then against net equity value/net assets value applying the same accounting rules as A and C. i.e. the value would be the same as in A’s books.
pan style=”font-size:10pt;font-family:Arial;color:navy;”>4. The share premium will only be reduced when paid back to the shareholders. The losses incurred in C will be reported under a separate reporting line in equity, for example accumulated losses or other reserves. Share premium will always remain a separate reporting line within equity, unless completely repaid to the owners of the share capital.
Hope this helps,
Let me clarify more on the case. Hope someone can help.
To start with is A holding its investment against cost or against equity value? equity value
I presume equity value,
1. A has to transfer its holding to B against fair (market) value (transactions between related companies) as would be the case between normal parties, that value may be USD 1 (I do not know). A, B and C still in a same group : A—> 100% in B—–>100% in C, just wondering the consideration/ purchase price of USD 1 is allowable even in related companies ? In normal case, if it is a 3rd party, there will be no problem.
I am asking on A’s books on company level when A disposes investment in C. Is the entry below is correct ?
Dr. Investment USD 1,000,000 (if book as 1m investment, it can eliminate directly with share cap and share premium in C)
Cr. Impairment / Negative goodwill USD 999,999 (should be in P/L or B/S?) [negative goodwill concept]
Cr. Bank USD 1
If so, how can it eliminate the share cap and share premium (USD 1m) in C on consolidation level ?