Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA SBR Exams › Disposal of subsidiary – June 2010 exam
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- March 18, 2017 at 12:41 pm #378620
Hi Sir,
For this question in June 2010 exam, there is one adjustment as follow: “Bochem acquired 80% of the equity interests of Ceram, a public limited company, on 1 May 20X3. The purchase consideration was cash of $136 million. Ceram’s identifiable net assets were fair valued at $115 million and the NCI of Ceram attributable to Ashanti had a fair value of $26 million at that date. On 1 November 20X4, Bochem disposed of 50% of the equity of Ceram for a consideration of $90 million. Ceram’s identifiable net assets were $160 million and the consolidated value of the NCI of Ceram attributable to Bochem was $35 million at the date of disposal. The remaining equity interest of Ceram held by Bochem was fair valued at $45 million. After the disposal, Bochem can still exert significant influence. Goodwill had been impairment tested and no impairment had occurred. Ceram’s profits are deemed to accrue evenly over the year.”
From my understanding, there will be already a profit on disposal recorded in Bochem’s books = 90 – 136/2 = 22m. At the same time, we have to calculate our Group’s profit/loss on disposal = 3.8m (90 price + 45 residual – (160 NA + 6.2 GW – 35 NCI))
My question is do we have to eliminate the 22m accounting profit in Bochem’s books and then show the Group’s profit on disposal of 3.8m only? In the answer, I did not see any entry to eliminate the profit 22m and I am quite confused why. I think that only Group’s profit on disposal should be recognized?
Thank you.
March 20, 2017 at 9:13 pm #378814Hi,
You’re correct in your understanding about the elimination of the profit on disposal in the individual company accounts and it being replaced by the group profit on disposal on consolidation. The only reason why they have not eliminated the $22 million could be because the question doesn’t mention that it has been recorded or because if it was recorded it would be on a separate line item given it is material and we cannot see the separate line item here.
Thanks
March 21, 2017 at 6:53 am #378835Thank you very much. I think for this question when it was unclear, I should clearly state my assumption in the exam then.
March 22, 2017 at 8:14 pm #379005It is very, very rarely unclear so I wouldn’t worry too much about stating your assumptions.
March 23, 2017 at 11:32 pm #379068Hi,
Sometimes the question state that no entry has been recorded for the sale of shares in subsidiaries, except for the receipt of cash. In such case, will there be already gain/loss on disposal recorded in the individual seller’s books?
I understand that if cash is recorded, then respective investment balance on SoFP is reduced and respective gain/loss on that book disposal is recorded, as full journal entries. As a result, in consolidation, we should eliminate these gain/loss and calculate Group’s gain/loss instead in such case? I did not see this practice in June 2014, and it seem like they assumed no gain/loss was recorded in seller’s books.
March 30, 2017 at 11:08 pm #379693Hi,
I’d presume that it the cash has been received then all they will have done is recognise the other side of the entry through profit or loss, without derecognising the shares and recording the profit or loss. This is why there was no gain/loss assumed in the June 2014 exam.
Thanks
March 30, 2017 at 11:16 pm #379694Hi,
Can you help elaborate more on that a bit? It is not very clear to me. If we presume the other side of the cash entry is a whole gain on P&L equal to the cash received, then it is an error actually and the whole amount should be eliminated from the parent’s P&L?
I dont know when the question state only cash has been recorded like this, then there must be some countering entries that we need to eliminate…
Regards,
April 19, 2017 at 8:13 pm #382715If they tell you one side and not the other then you can only assume that it has gone through profit or loss.
Thanks
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