Loss of control in a subsidiary

A parent consolidates a subsidiary from the date it obtains control over that subsidiary, and ceases consolidating on the date which it loses control. Control is lost when the investor no longer has the power to direct the investee’s relevant activities and thus loses the ability to affect its returns.

An investor is required to reassess continuously whether it controls and investee if the facts and circumstances indicate that changes have occurred in any of the three elements of control, i.e. having:

• Power over the investee,
• Exposure, or rights to variable returns from the involvement with the investee, and
• Ability to use the power over the investee to affect the amount of the investor’s returns.

How might the parent lose control of its subsidiary?

Control could be lost due to the transaction that changes the parent’s ownership level, e.g.:

• Parent sells some or all of its ownership interests,
• Parent contributes or distributes some or all of its ownership interests,
• A subsidiary issues new ownership interests to third party/parties, which in turn dilutes the parent’s interests.

Control could also be lost without a change in ownership levels. For example:

• A parent may lose control when a contractual agreement that previously gave the parent control, expires,
• A parent could enter into a contractual agreement that gives it joint control with another party/parties.
• A parent could lose control over a (foreign) subsidiary if the latter becomes subject to the control of a government, court, administrator, receiver, liquidator, or regulator. If the investor ceases to be entitled to receive returns from its involvement with the investee, i.e. restrictions over withdrawing the funds have been imposed, the investor might no longer control the investee.

What to do when parent loses control of a subsidiary?

Accounting for a loss of control

When parent entity loses control of a subsidiary it is required to:

• Derecognise the assets (including goodwill) and liabilities of this subsidiary at their carrying amounts at the date the parent loses control,
• Derecognise the carrying amount of any NCI (including components of OCI attributable to NCI) in this subsidiary at the date control is lost,
• Recognise the fair value of the consideration received (if any) from the transaction, event or circumstances that led to the loss of control,
• If the transaction, event, or circumstances that resulted in the loss of control involved distribution of shares in the subsidiary to owners, recognise this distribution,
• Recognise the investment retained (if any) in the former subsidiary at its fair value at the date control is lost,
• Reclassify to profit or loss, or transfer directly to retained earnings (if required in accordance with other standards), the amounts recognised in OCI related to that subsidiary,
• Recognise any resulting difference as a gain or loss in profit or loss attributable to the parent.

Any amounts owed to or by the former subsidiary, which after loss of control cease to be eliminated on consolidation, are accounted for in accordance with relevant standards. For example, such balances are often financial assets or liabilities, which are initially recorded at fair value at the date of loss of control.

How to treat components of OCI?

Upon loss of control of a subsidiary, amounts recognised in other comprehensive income are accounted for in the same manner as would be required if the parent would have disposed directly of the related assets or liabilities, i.e. if the gain or loss recognised in OCI would be reclassified to profit or loss upon disposal of the related asset or liability, the parent reclassifies the gain or loss from equity to profit or loss when it loses control of the subsidiary.

Therefore, when the parent loses control of the subsidiary, the parent:

• transfers a revaluation surplus directly to retained earnings if the revaluation surplus recognised in OCI would be transferred directly to retained earnings on the disposal of the asset.
• would not reclassify to profit or loss remeasurement gains or losses on a defined benefit plan recognised in OCI, but may transfer these within equity.
• in case of subsidiary that includes foreign operations, reclassifies from OCI to profit or loss related cumulative exchange differences attributable to the parent. Amounts attributable to the NCI, are not reclassified to profit or loss as these are included already with the carrying value of the NCI and are thus derecognised together when calculating the gain or loss attributable to the parent on loss of control.
• reclassifies from equity to profit or loss changes in fair value of debt instruments which are measured at fair value through other comprehensive income and accumulated within equity.
• reclassifies from equity to profit or loss the effective portion of gains and losses on hedging instruments in a cash flow or net investment hedge and the cost of hedging adjustments that have previously been recognised in OCI and accumulated within equity.

Illustrative example – Accounting for the full disposal of a subsidiary

Accounting for loss of control where an interest is retained in the former subsidiary

When a parent loses control of a subsidiary but retains any investment in the former subsidiary, it must recognise this retained investment at its fair value at the date of loss of control. Any gain or loss then arising, will be recorded in profit or loss. Depending on the type of investment retained, the fair value of that investment will be either an initial recognition:

• fair value of a financial assets, or
• cost of an investment in an associate or joint venture

Illustrative example – Accounting for the loss of control of a subsidiary with the interest retained in a financial asset

Illustrative example – Accounting for the loss of control of a subsidiary with the interest retained in an associate