CHAPTER 5

GROUP DISPOSALS
In this chapter we will be considering how to deal with the situation where a parent sells its
shareholding in a subsidiary during the year. We will have to calculate a profit or loss on disposal in
the statement of profit or loss of both the parent and the group.

Disposals
When a shareholding in a subsidiary is disposed of it must be reflected in the
a) parent company’s individual financial statements and
b) the group financial statements.

a) Parent company financial statements

Gain to parent company
The gain/loss on disposal in the parent company’s accounts is calculated as follows:

The gain is reported as an exceptional item –

• must be disclosed separately on the face of the parent’s SPL
• after profit from operations.

Any tax on the gain is calculated by reference to the gain in the parent's individual financial
statements.

Consolidated financial statements – Full disposal

Disposal of whole subsidiary
The impact of the disposal on the financial statements can be seen below.
• Statement of profit or loss
– 100% of the subsidiary’s results consolidated up to date of disposal
– Gain/(loss) on disposal.

• Statement of financial position

– At the year-end no shares are held by the parent and therefore the disposed subsidiary is
not included in the group statement of financial position.
– Gain/loss on disposal to be included within retained earnings

Page 1 of 4
This gain will be included in the consolidated statement of profit or loss.

Note: Any tax on the gain is calculated using the gain in the parent's individual financial statements.

Note: The net assets at disposal may also include any remaining fair value adjustments to the
subsidiary's net assets. The amount to include in net assets at disposal is the fair value adjustment
made on acquisition, less fair value depreciation to date between acquisition and disposal. It may be
helpful to use a standard W2 for the figures at the disposal date.

Non-controlling interest (NCI) at disposal

(i) Fair value (FV) method
If using the FV method, you will either be given the FV at the date of disposal, or you will need to
calculate as below:

Page 2 of 4
(ii) Proportion of net assets method
If non-controlling interest is valued as the proportion of net assets, then the NCI at disposal is NCI %
of S's net assets at the date of disposal. Alternatively, you can use the method below.

Exercise 1
Rock acquired a 70% investment in Dog for $2,000 two years ago. It is group policy to measure non-
controlling interests at fair value at the date of acquisition. The fair value of the non-controlling
interest in Dog at the date of acquisition was $800 and the fair value of Dog's net assets was $1,900.
The goodwill has not been impaired.

Rock disposed of all of its shares in Dog for sale proceeds of $3,000. The fair value of Dog’s net
assets at the date of disposal was $2,400.

Required: Calculate the profit/loss on disposal that would be recorded in:

1 Rock's individual statement of profit or loss.
2 Rock's consolidated statement of profit or loss.

Exercise 2
The statements of profit or loss for the year ended 31 December 20X9 are as
follows:

Additional information:
On 1 January 20X5 Kathmandu acquired 70% of the shares of Nepal for $100,000 when the fair
value of Nepal's net assets was $110,000. Nepal has equity capital of $50,000. At that date, the fair
value of the noncontrolling interest was $40,000. It is group policy to measure the NCI at

Page 3 of 4
 fair value at the date of acquisition.
Nepal paid a $10,000 dividend on 31 March 20X9.

Nepal had retained earnings of $80,000 on 1 January 20X9.

Goodwill has not been impaired.

Required: Prepare the group statement of profit or loss for the year ended 31 December 20X9 for
the Kathmandu group on the basis that Kathmandu sold its holding in Nepal on 1 July 20X9 for
$200,000. This disposal is not yet recognised in any way in Kathmandu’s statement of profit or
loss.

Alternative presentation – if subsidiary represents a discontinued operation

The disposal of a subsidiary may meet the definition of a discontinued operation in accordance with
IFRS 5, and would therefore be presented as such. This would mean that in the statement of profit or
loss, the results from the subsidiary would be presented as a single line 'Profit/(loss) from discontinued
operations', rather than being consolidated line by line.

Page 4 of 4