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Disposal of Shares in Subsidiaries

Lecture 7&8: DISPOSAL OF shares in SUBSIDIARIES & associate frs 3: business combinations frs 127 : consolidated and separate financial statements FRS 128: INVESTMENTS IN ASSOCIATE. Disposal of Shares in Subsidiaries.

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Disposal of Shares in Subsidiaries

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  1. Lecture 7&8: DISPOSAL OF shares in SUBSIDIARIES & associatefrs 3: business combinationsfrs 127 : consolidated and separate financial statementsFRS 128: INVESTMENTS IN ASSOCIATE

  2. Disposal of Shares in Subsidiaries (1) Two instances when the interest of the parent in the investee could decrease: (a) Investor disposes all or part of its shares (b) Deemed Disposal (E.g Special issue of shares to MI, MI shares >, Parent’s remains) (2) When parent disposes one of its subsidiaries, MAJOR CONSOLIDATION ISSUE : DETERMINATION OF GAIN/LOSS ON DISPOSAL ( See further FRS 127: Para 30) (3) Cases where PARENT’s disposes part of its shareholdings (a) Parent disposes a small part of its shareholding in subsidiary, AFTER STILL HAS CONTROL.E.g Initial Equity shareholding 90%, Later disposed 20%, Balance 70%, MI > from 10% to 30%. (b) Parent disposes of part of its shares in subsidiary, AFTER RETAINS ONLY SIGNIFICANT INFLUENCE. E.g Initial holding 80%, after disposal, parent holds between 20% - 50% of issued OSC of acquired co . (c) Parent disposes of a substantial part of its shareholding in subsidiary, AFTER RETAINS ONLY SIMPLE INVESTMENT.E.g. Initially parents holds 60%, after disposal holds < 20% issued OSC of acquired co.

  3. Implications: Holding Co Disposal of Shares(LAZAR & TAN: CHAPTER 16) (i) Change in the relationship bet Investor and Investee (a) Parent disposes all the shares, Investor ceases to be investor (b) See previous, Minority Interest shares (ii) Treatment of Goodwill on Consolidation attributable to shares disposed Goodwill relating to shares disposed off will be written off against the gain or loss on disposal E.g.: SmartLearning Bhd acquired 480K OSC out of an issued 600K OSC of HumanResource Bhd on 1/1/20x7. The goodwill on consolidation was RM200K and RM60K was written off. On 1/1/20x9 SmartLearning sold 120K of its shares. Goodwill remaining on 1/1/20x9 will be RM140K (200K-60K). Since 120K were disposed on 1/1/20x9, 120/480 of the gdwill eliminated which will be 25% x 140K = RM35K. The balance of gdwill of 105K relating to 360K shares will remained and tested for impairment annually.

  4. Continue…… GOODWILL iii) Determination of GAIN/LOSS on disposal of the shares in the investor from the point of view of: (a) Investor – Separate financial Stat Gain/Loss = Proceeds – Carrying Value of Invest (b) Investee – Consolidated Financial Stat Gain/Loss = Proceeds – (% NA of Sub. at disposal. date + GdwillRemainig) {i.e. Cost of Investment at the date of disposal} E.g: If 20% of issued shares are disposed then 20% of the NA at the date of disposal will be offset against the proceeds (i.e. Reverse of calculating goodwill on consolidation, Cost of investProceeds - % NA) WHY? In the CFS, Parent’s share of post-acq increase in the NA of sub has been recognised. Hence, on disposal of the shares the related net assets are being disposed of and not just the carrying value of the investment. The carrying value of the SUB to the holding enterprise at any time is NA+Gdwill Remaining.The invest. in SUB has grown by group % of post-acq reserves.

  5. Continue….. E.g. On 1/3/20x6 TitTop Bhd acquired 100% of shares of Ceiling Bhd for RM1Mil when the FV of acquiree’s NA were RM750K. On 1/3/20x9 TipTop disposed all its shares in Ceiling for RM2Mil and the NA of Ceiling at that time were RM1.2Mil. As at 1/3/20x9 the RM100K gdwill on consolidation was impaired and written off. Goodwill on consolidation was 250K (1Mil – 0.75). After impairment the balance was RM150K. Gain or Loss recognised by: TipTop Group Proceed 2Mil 2Mil Less: Cost of Investment (1Mil) % Net Assets (1.2Mil) Goodwill Remaining (0.15Mil) 1 Mil0.65Mil (iv)If the investee is a net investment in a foreign operation, the disposal of the accumulated exchange gain (or losses) on translating the Finl. Stat. of foreign entity

  6. Continue…. (i) Consolidated A/C : Results of a subsidiary recorded from the effect. date of acq. up to effect. date of disposal (ii) Disposal of shares in sub. during finl yr.? (a) The status of sub – Still exist? (b) Effects of disposal on the grp’s a/c? - Type of disposal - Effect date of disposal

  7. Continue… • Types of disposal can be categorised based on equity interest retained: (i) Sale of total shareholdings – ZERO ownership (ii) Sale of part of shareholdings, investee remains as:(a) (a) A Subsidiary (b) An Associate (c) A Simple Investment [Prior to the completion of the sale, the subsidiary may have been classified as non-current assets held for sale in prior reporting period (FRS 5)or subsidiary disposed had previously been reported separately as an identifiable business or geographical segments, (FRS 114) - DISPOSED constituted DISCONTINUED OPERATION – Disclosures of FRS 5 to be applied]

  8. Financial Effect of Sub. Disposal: Balance Sheet The gain and loss of shares disposal to be recognised in : • (i) Separate f/s: Parent’s a/c • (ii) Consolidated f/s: Groups a/c (i) In PARENT’S A/C Bal Sheet : Gain OR Loss? = (Proceed – CARY AMT) Bec invest in sub (i.e. shares acquired) is recorded at cost in Parent’s A/c, at its historical cost under cost method of accounting unless subsequent to acquisition the value has been written down for impairment losses (ii) In CFS Bal Sheet: Gain OR Loss? (a) PARENT’S GAIN OR LOSS –POST ACQUISITION RESERVES REALISED +GDWILL W/O OR (b) {PROCEEDS– % (NA) - Balance of Purchased Goodwill remaining at disposal date]} Viewed : DISPOSING assets and liabilities (Net Assets) and the balance of the allocated goodwill on acquisition of the subsidiary

  9. GAIN & LOSS RECOGNISED….

  10. Example 1: Disposal Effect on Bal. Sheet Healthy Bhd acquired 90% equity interest in Herbal Bhd on 31/12/20x7 paying RM5 Mil in cash. On 31st July 20x9, Healthy Bhd sold all its shares in Herbal Bhd for a consideration of RM7 Mil. The summarized balance sheets of Herbal Bhdat the dates of acquisition and disposal are as follows: At 31/12/20x7At 31/7/20x9 Share capital of RM1 each RM4Mil RM 4 Mil Retained profits RM 500KRM 1.5Mil RM4.5 MilRM 5.5Mil Sundry Assets RM4.5 Mil RM5.5 Mil Required: Calculate the gain or loss on disposal of shares in Herbal Bhd under the assumptions that: • The goodwill had not been impaired • 30% of the goodwill had been written down for impairment losses

  11. Solution…. (a) Parent’s a/c: (RM7 Mil – RM5 Mil) = RM 2 Mil (GAIN) (b) CFS a/c: Goodwill = RM 5 Mil – (0.9xRM4.5 Mil) = RM0.95 Mil (i) No Goodwill Impairment {RM7 Mil – [(90% x RM5.5Mil)+RM0.95Mil]} = RM1.1Mil OR [RM7Mil -RM5Mil – (90% x RM1Mil) + 0] = RM 1.1 Mil (ii) Goodwill Impaired {RM7 Mil – [(90% x RM5.5Mil) +(70% x RM0.95Mil)] } =RM1.385 Mil OR [RM7Mil – RM5Mil – (90% x RM1Mil) + (30% x RM0.95Mil)] =RM1.385 Mil

  12. Effects: Total S/hdg Disposal - Bal Sheet • Parent retains NO EQUITY INTEREST • Subsidiary’s Net Assets NOT RELEVANT at finl year end, hence the CBS

  13. Financial Effect of Sub. Disposal: Income Statement • The effect would depend on the effective date of disposal • If disposal took place 1st day of actg period, TOTALLY IGNORE subsidiary’s P&L Stat. • If disposal took place during actg period, CIS INCLUDE current and retained profit prior disposal date, BEC Post acq results of sub should be included up to effective date of disposal.

  14. Example 2: Disposal effect on P&L Stat Maju Bhd has 2 subsidiaries, Laju Bhd and Cepat Bhd, which it acquired on 1/8/2006 and 31/12/2006 respectively . At the acquisition date the retained profits of Laju and Cepat Bhd were RM500K and RM700K respectively. The followings are the summarised a/cs of the 3 companies as at finl yr end 31/07/2009. Balance Sheets as at 31st July 20x9 (RM’000)

  15. Continue…Example2 Summarised Income Statement and Retained Profits for the year ended 31st July 20x9 (RM’000) In compliance to FRS 3, the Group recorded goodwill at cost less accumulated impairment losses and there were no impairment losses recognised in the prior years. MajuBhd sold all its equity in CepatBhd for a cash of RM3.5 Mil. The cash received had been correctly recorded in the cash Book while the corresponding amount for the disposal had been credited to a suspense account. Required: Prepare CFS of MajuBhd for the financial year end 20x9 under following assumptions : (i) The effective date of disposal was 1/8/20x8 (ii) The effective date of disposal was 1/2/20x9

  16. Investee Remains a Sub. CONSOLIDATED INCOME STATEMENT (i) The Group’s Income Stat will include the results of operations of the SUB for the whole year. (ii) Beginning from the date of disposal, Minority Interest share of SUB’s profits will be based on their increased holdings, PREVIOUS HOLDINGS?. CONSOLIDATED BALANCE SHEET (i) The Group’s Bal. Sheet will be incorporating A + L of SUB and MI disclosed based on their year end holding

  17. Example 3: Investee Remains Sub Armada Bhd acquired 800K equity interests in Telaga Bhd on 1/1/20x4 when acquiree’s reserves was RM100K . On 1/12/20x8 Armada disposed 25% of its shares in Telaga for RM600K (not yet recorded in Armada’s a/c). (i) Goodwill on consolidation remains unimpaired; (ii) Goodwill impaired by 10% Balance Sheet as at 31/05/x9 Armada Bhd(RM’000) Telaga Bhd (RM’000) Ord Shares of RM 1 each 2000 1000 Retained Profit b/f 1000 500 Profit for the year 420140 34201640 Net Assets 2420 1640 Investment in Telaga 1000 Income Statement for the year ended 31/05/x9 Armada Bhd(RM’000) Telaga Bhd (RM’000) Revenue 800 300 Expenses (200)(100) PBT 600 200 Tax (180)(60) 420 140 Compute the Gain or Loss on disposal of shares in Telaga for Armada and the Group in the case of (i) and (ii). Prepare Parent’s Financial Statements and Group’s CFS

  18. Solutions: CIS ….Example 2 (i) (i) Disposal Date 1/8/20x8 Consolidated Income Statement for the Year Ended 31st July 20x9 (RM’000)

  19. Solution…CBS ….Example 2 (i) Consolidated Balance Sheet at year ended 31st July 20x9 Goodwill: Laju = 1000 – [90% x (500+500)] = 100K Cepat = 900 – [55% x (800+700)] = 75K Post-Acq Reserves: Laju = 90% x (3060 -500) = 2304K : Cepat = 55% x (2000-700) = 715K

  20. Solutions….Example 2 (ii) (ii) Disposal Date 1/2/20x9 Consolidated Income Statement for the Year Ended 31st July 20x9 (RM’000) • Disposal Date (1/2/20x9) 1160 x 10% 1450 x 6/12 x 45%

  21. Solutions….. ….Example 2 (ii) Consolidated Balance Sheet at year ended 31st July 20x9 Goodwill: Laju = 1000 – [90% x (500+500)] = 100K Cepat = 900 – [55% x (800+700)] = 75K Post-Acq Reserves: Laju = 90% x (3060 -500) = 2304K : Cepat = 55% x [(2000-700)+(6/12 x 1450)] = 1113.75K

  22. Solutions…..Example 3 (i) and (ii) Armada has disposed 25% of its interest which amounted 800K x 25% =200K. From 1/1/20x4 up to 30/11/20x8 MI was 20%. From 1/12/20x8 onwards MI is 40% as now Armada holds only 600 (800 -200) shares in Telaga. (i) Goodwil on Consolidation = Cost of Invest - % NA Acquired = 1000 – [80% X (1000+100)] = 120 (ii) Post Acq Reserves Before Disposal= 80% x [(500 -100) + (140 X 6/12)] = 376 Post Acq Reserves After Disposal = 60% x [(500-100) + (140 x 6/12)] = 282 Gains and Loss on disposal of subsidiary Armada (RM’000)Group (RM’000) Proceeds 600 600 Less: Cost of Investment (25% x 1000) (250) % NA disposed in Telaga [1000+500+(6/12 x 140)] x 20% (314) % Goodwill Remaining related to Disposal {1000 – (80% x (1000+100))] x 25%} (30) {[1000 – (80% x (1000+100))] x 90%} x 25% _________________ ( 27 ) Gain on Disposal 350 256 259 (ii)

  23. Solutions Example 3 (i) & (ii) – Parents and CFS (ii) Income Statement for the year ended 31/05/x9 Armada Bhd(RM’000) TelagaBhd (RM’000)CIS (RM’000) Revenue 800 300 1100 1100 Expenses (200)(100)(300)(300) Profits from Operations 600 200 800 800 Gain: Disposal shares in Telaga 350 256 259 Goodwill Impaired (12) PBT 950 200 1056 1047 Tax (180)(60)240) 240) 770 140 816 807 Profit Attributable to: Minority Interests (i) 140 x 20% x 6/12 (14) (14) (ii) 140 x 40% x 6/12 (28) (28) Armada’s Shareholders 774 765 Retained Profits b/f100050013201320 Retained Profits c/f 177064020942085

  24. Solution Example 3: Bal Sheet (ii) Balance Sheet as at 31/05/x9 Armada(RM’000) Telaga(RM’000) CIS(RM’000) Ord Shares of RM 1 each 2000 1000 2000 2000 Retained Profit b/f 1000 500 Profit for the year 420 140 2094 2085 Minority Interest ______ ______ 656656 3420164047504741 Net Assets (2420+600)24203020 1640 4660 4660 Investment in Telaga (1000 x 80%) (1000-250)1000 750 Goodwill on consolidation (i) [1000 – (80%X(1000+100))]X75% 90 (ii) {[1000 – (80%X(1000+100))]X90%}X75% ____ 81 47504741

  25. Investee Becomes An Associate CIS (i) The Group’s Income Statement will include the results of the operation of the investee up to the date of control is lost. If the investor retains a substantial interest and is able to exert influence on the investee, then the group’s share of the investee’s profit for the period (the investee is an associate) will be incorporated in the group income statement by using equity method. CBS (ii) In the balance sheet the investment will be accounted for using the equity method i.e. the carrying value of the investment will be increased or decreased by the post acquisition reserve of the associate

  26. Example 5 Followings are the balance sheets and income statements Jubin and Marble Bhd. Balance Sheets as at 31/7/x9 (RM’000) Income Statements for the year ended 31/7/x9 (RM’000)

  27. Continue…. Additional Information: a) Jubin acquired 1,012,500 ordinary shares of Marble on 1/8/x6 when the profit and loss bal. of Marble was RM500K. There were no other reserves in Mable. b) Goodwill on consolidation impaired by 10% c) On 1/4/x9 Jubin disposed 40% of it shares in Marble for RM1.2Mil. The proceeds have not been received and Jubin has not recorded the transaction yet. Jubin has lost control of Marble but is able to appoint 2 directors to the board of Marble. Required Compute CFS for the Group

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