Accounting Treatment of Disposals of

Subsidiary and Associates

Disposals of group companies or associates has been relatively less tested area in exams,
despite the fact that the treatment and quite critical and requires thorough understanding
and practice. In present economic scenario group disposals have been common for cost
cutting purposes. Given the emerging importance, this area may be tested in professional
exams.
Treatment for disposals of subsidiary varies on account of whether control or significant
influence is retained or lost. Following treatments are applicable depending on type of
disposal;

1. Sale of shares in subsidiary such that control is retained————–No gain or loss

on disposal required
2. Full sale of shares in associate or subsidiary—————————Gain or loss
calculation needed
3. Sale of subsidiary such that associate is formed———————– Gain or loss
calculation needed

Sale of shares in subsidiary such that control

retained
Rules for consolidation
No gain or loss on disposal is computed

No adjustment required to the goodwill

Difference of net proceeds received to changes in Non Controlling Interest (NCI) is

debited / credited to shareholder’s equity.

Consolidate subsidiary results as before disposal

NCI calculation with reference to year end shareholding and on pro rata basis.

Entry:    Dr. Proceeds       xxx

Cr. NCI                  xxx
Cr. Equity             xxx
Example:
E Plc

acquired 90% holding of B Plc when it had retained earnings of $250,000. 10% of holding
was disposed off on 31 August 2008 for $ 70,000. Year end and acquisition date 31 Dec.
Profit for the year of disposal $ 36,000, retained earnings $304,000 and share capital was
$100,000. Calculate debit / credit adjustment required to equity?

Solution:
Changes in NCI share needs to be calculated and accounted for, therefore;

Net Assets at closing date comprise;

Share Capital ———————————-$ 100,000

Retained Earnings —————————-$ 304,000

Profit on disposal——————————$ 24,000 (36,000*8/12)

Total———————————————$ 428,000
Changes in NCI;

NCI before disposal——————————–428,000*10%= 42,800

NCI after disposal———————————-428,000*20%=85,600

Changes in NCI————————————$ 42,800

Entry:
Dr. Proceeds —————————————-$ 70,000 (mentioned in question)

Cr. NCI———————————————-$ 42,800 (as above)

Cr. Shareholder’s equity—————————$ 27,200 (balancing figure)

2. Full sale of shares in associate or

subsidiary
Profit or loss on disposal is calculated as;
Proceeds                                                                              xxx

Plus: NCI up to disposal                                                  xxx

Less: Net Assets of subsidiary up to disposal date             (xxx)

Goodwill                                                                              (xxx)

Profit or loss                                                                        xxx / (xxx)

Rules for consolidation

 If the disposal is mid of the year then NCI and Net Assets need to be calculated
till the date of disposal.
 Dividends paid must be deducted in calculating Net Assets.
 Goodwill recognized prior disposal is original goodwill less any impairment to
date.

Sale of subsidiary such that associate is formed

Profit or loss on disposal is calculated as;

Proceeds                                                                             xxx

Plus: Fair Value of Interest retained                        xxx

Plus: NCI                                                                              xxx

Less:

Net Assets of subsidiary up to disposal date        (xxx)

Goodwill                                                                              (xxx)

Profit or loss                                                                        xxx / (xxx)

Rules for consolidation

Fair Value of interest retained is needed for calculation.

By using above calculation method two types of gain; realized gain and holding gain are
accounted for.
Realized gain is gain of interest disposed of while holding gain is due to FV measurement
of interest retained.

Subsidiary results are pro-rated.

Accounted for according to equity method subsequent disposal.