Changes in ownership
Changes in ownership interest in a subsidiary without loss of control
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- Rephop
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An investor’s ownership interest in an investee may change throughout the period of holding an investment. Changes in the ownership interest could result in control being obtained or lost or they could have no effect on the existing relationship between the investor and an investee. For example, a parent company could sell a proportion of its shareholding in a subsidiary to non-controlling interests (NCI) or buy additional shares of the subsidiary from the NCI but still retain the existing relationship with the subsidiary. Meaning it will neither lose nor obtain control in the transaction but retains the existing holding of control. Such changes in the parent’s ownership interest in the subsidiary where control is retained, are considered equity transactions, i.e.. transactions taking place between the owners of the subsidiary in their capacity as owners.
Therefore, if the parent entity maintains control, it will not recognise any gain or loss in the income statement on the sale of subsidiary’s shares. Further, the parent will not recognise any additional goodwill when purchasing additional shares of the subsidiary with no change in control (i.e.. the parent already controls the subsidiary and simply increases its shareholding). These changes in the ownership in a subsidiary are reflected through the adjustments to the carrying amounts of the controlling and non-controlling interests in equity. Any difference between the fair value of the consideration paid or received and the amount by which the non-controlling interests are adjusted is recognised directly in equity and attributed to the owners of the parent.
Illustrative example – Sale of a 30% ownership interest in a wholly owned subsidiary without loss of control
Parent Co sells a 30% interest in a wholly owned subsidiary to a third-party investor for €300M. Parent Co retains an ownership interest of 70% and continues to control the subsidiary. The carrying amount of the subsidiary’s net assets is €800M, including goodwill of €200M, recognised on the initial acquisition of the subsidiary.
The accounting entry to record the transaction is as follows:
| DR | Cash | €300M | ||
| CR | Non-controlling interest (€800M*30%) | €240M | ||
| CR | Equity (parent’s other reserves) | €60M |
The carrying value of the NCI is calculated as the proportionate interest in the subsidiary’s net assets.
Since the standards do not specify where exactly within equity should the adjustment be recognised, this would be permitted in retained earnings or another component of parent equity that will not be reclassified on loss of control.
Illustrative example – Purchase of a 20% ownership interest with no impact on investor/investee relationship
Parent Co holds a 60% interest in a subsidiary whose net assets amount to €1000M. There is no goodwill recognised in relation to that subsidiary. The carrying value of the 40% NCI is €400M. Parent Co acquires an additional 20% interest in this subsidiary for €250M, increasing its ownership interest to 80%.
The accounting entry to record the transaction is as follows:
| DR | Non-controlling interest (€400M - (€1000M*20%)) | €200M | ||
| DR | Equity (parent’s other reserves | €50M | ||
| CR | Cash | €250M |
Reattribution of OCI
If parent entity’s ownership interest changes without loss of control, the parent must also reattribute other comprehensive income (OCI) between the owners of the parent and the NCI. For example, if the parent sells a partial ownership in a foreign subsidiary, without losing control of the subsidiary, the proportionate share of cumulative amount of exchange differences recognised in OCI is reattributed to the NCI related to that foreign subsidiary, i.e.. these exchange differences are not reclassified to profit or loss.
Illustrative example – Sale of a 20% ownership interest in a wholly owned foreign subsidiary without loss of control
Parent Co sells a 20% interest in a wholly owned foreign subsidiary to a third-party investor for €600M. Parent Co retains a controlling ownership interest of 80% in the subsidiary. The carrying amount of the subsidiary’s net assets is €3000M and total OCI accumulated within equity in relation to exchange differences amounts to €500M. There is no goodwill recognised in relation to that subsidiary.
The accounting entry to record the transaction is as follows:
| DR | Cash | €600M | ||
| DR | Parent's share of OCI (€500M*20%) | €100M | ||
| CR | NCI's share of OCI (€500M*20%) | €100M | ||
| CR | NCI (excl share of OCI > (€3000M*20%) – (€500M*20%)) | €500M | ||
| CR | Equity (parent’s other reserves) | €100M |
As a result of the partial sale transaction:
- the carrying value of NCI of €600M is recognised in equity (attributable to the NCI),
- parent’s cumulative foreign currency translation reserve is reduced from €500M to €400M,
- parent’s other components of equity increase by €100M
Once the parent subsequently disposes of the remainder of its interest in such foreign subsidiary, the exchange differences previously attributed to the non-controlling interest are derecognised, along with the rest of the NCI balance, and are not separately reclassified to income statement. It means that on loss of control, only the exchange differences attributable to the controlling interest are reclassified to profit or loss.
Illustrative example – Treatment of exchange differences upon subsequent loss of control
Assume the facts from previous example. The parent subsequently sells the retained 80% interest for €4500M. For illustrative purposes, there have been no changes in the net assets and OCI from the date of partial sale (as above) till the date of full disposal.
The accounting entry to record the transaction is as follows:
| DR | Cash | €4500M | ||
| DR | NCI derecognised | €600M | ||
| DR | Parent's share of OCI reclassified to profit or loss | €400M | ||
| CR | Net assets of subsidiary derecognised | €3000M | ||
| CR | Gain on disposal of subsidiary (attributable to parent) | €2500M |
Reallocation of goodwill
When changes in ownership interest occur, the parent shall also reallocate a proportion of the goodwill between the controlling and non-controlling interests. The amount of goodwill to be reallocated depends on whether the NCI was initially recognised at fair value or not and whether the ownership interest of NCI increases or decreases without loss of control.
Illustrative example – Reallocation of goodwill to NCI
Parent Co acquired an 80% ownership interest in a subsidiary for €1600M. Fair value of the net assets of the subsidiary amounted to €1500M. NCI is initially recognised at the date of acquisition at fair value of €390M.
| (€M) | Parent | NCI | Total |
|---|---|---|---|
| Share of net assets | 1200 | 300 | 1500 |
| Share of goodwill | 400 | 90 | 490 |
| Total | 1600 | 390 | 1990 |
Decrease in ownership interest
Half a year after the acquisition, Parent Co sells a 20% interest in a subsidiary to a third-party investor for €430M. Assume that there has been no change in the net assets of the subsidiary. Parent Co's ownership interest decreases to 60%, its share of net assets of subsidiary decreasing to €900M (€1500M*60%). The share of net assets attributable to the NCI increases from €300M to €600M (€1500M*40%).
One way of reallocating goodwill would be to allocate €400M*20/80 = €100M of the parent's goodwill to the non-controlling interest. Parent's share of goodwill would after the transaction amount to €400M – €100M = €300M.
In the consolidated financial statements the transaction would be accounted for as follows:
| DR | Cash | €430M | ||
| CR | NCI ((€600M - €300M) + €100M) | €400M | ||
| CR | Equity (parent's other reserves) | €30M |
Increase in ownership interest
After the initial acquisition of a subsidiary, Parent Co acquires an additional 10% interest in the subsidiary €220M (no ownership decrease occurred). Assume that there has been no change in the net assets of the subsidiary. Parent Co's ownership interest increases to 90%, its share of net assets of subsidiary increasing to €1350M (€1500M*90%). The share of net assets attributable to the NCI decreases from €300M to €150M (€1500M*10%). Parent Co acquired half of the NCI.
Using the proportionate allocation approach, Parent Co reallocates €90M*10/20 = €45M of the NCI's goodwill to the parent.
In the consolidated financial statements the transaction would be accounted for as follows:
| DR | NCI ((€300M - €150M) + €45M) 1 | €195M | ||
| DR | Equity (parent's other reserves) | €25M | ||
| CR | Cash | €220M |
Non-cash acquisition of NCI
If the parent entity acquires additional shares of the subsidiary (without loss of control) in return of a consideration in non-cash items (e.g. shares or non-current assets), the difference between the fair value of the assets transferred and their carrying amount arises due to the derecognition of those assets. Therefore, as any gain or loss arising from the derecognition of an asset is recognised in profit or loss, then the difference between the fair value of a non-cash consideration given and the carrying amount of such consideration is also recognised in profit or loss and not in equity.
Transaction costs
Only incremental costs which can directly be attributed to the equity transaction and would otherwise have been avoided qualify as transaction costs. Incremental transaction costs incurred in relation to transaction with non-controlling interest without loss of control are not part of the income and expenses generated by the entity’s activities during the period. Therefore, such transaction costs should, in line with the above, be deducted from equity, regardless of whether the consideration is in the form of cash or non-cash items.
Parent entity can choose whether to allocate the transaction costs incurred to the equity attributable to the owners of the parent or to the NCI. However, as the transaction costs would not be reclassified to profit or loss in the future periods then if these costs are allocated to the NCI, a parent should keep track of such costs. If the subsidiary is subsequently sold with loss of control, the transaction costs previously recognised against NCI would have to be reallocated from NCI to the parent equity before determining the gain or loss from the loss of control.
Rephop assists with the calculation of non-controlling interests (NCI), the recording of goodwill, and the recording of NCI in the Other Comprehensive Income (OCI) and Financial Position. We also ensure accurate representation of the NCI and goodwill in the financial statements, providing valuable insights into the financial health of the organization.
Footnotes
In this example, NCI was measured at fair value at the initial acquisition of the subsidiary. If the NCI had been measured based on the proportionate share of net assets, the debit adjustment to NCI would have only amounted to €150M (€300M - €150M), because the carrying amount of the NCI did not include any goodwill. Subsequently, the adjustment to parent’s equity would have amounted to €70M. In case of decrease in ownership interest, the treatment would have been the same as above, under both the fair value and proportionate share measurement basis of NCI. ↩