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Hi Mike, thought I posted this question the other day but it must not have submitted.
Marchant (parent) owns 60% of Nathan on 01/05/x2.
Marchant disposed of an 8% equity interest in Nathan on 30 April 2014 for a cash consideration of $18 million and had accounted for the gain or loss in other income. The carrying value of the net assets of Nathan at 30 April 2014 was $120 million before any adjustments on consolidation. Marchant accounts for investments in subsidiaries using IFRS 9 Financial Instruments and has made an election to show gains and losses in other comprehensive income. The carrying value of the investment in Nathan was $90 million at 30 April 2013 and $95 million at 30 April 2014 before the disposal of the equity interest.
When disposing of interest but still remaining control the calculation I would use is:
Net Assets plus any FV Adjustment plus any Goodwill multiplied by amount disposed of (8%) and subtract from sale proceeds ($18m) in this question for example.
However the solution in the book calculates it as
$95 x (8% / 60%).
Why is it not net assets which is $120m with any FV Adjustment & Goodwill multiplied by 8% ? Instead they seem to be using the carrying value of the investment?
Thanks
“Marchant disposed of an 8% equity interest” is the problem
The calculation is for the parents records and is incorrect for a part disposal where control is not lost. The carrying value of the original investment was $95 and Marchant held 60%. So the carrying value disposed of is 8 out of that 60 x the carrying value to calculate the gain / loss in the parent, but for a part disposal not involving loss of control, there is no gain or loss calculated. Instead we have a movement between the owners through the statement of changes in equity
Is that ok?
Hi Mike,
Thanks for your reply, unfortunately it is still not clear to me.
The solution in the book says
“The sale of the 8% equity in Nathan does not result in loss of control, and is shown as a movement in equity in the consolidated financial statements, with no profit or loss arising.
Accordingly the gain on the sale recognised in the parents separate financial statements must be reversed”Debit Other Income (18-(95 x 8%/60%)) = 5.33
Debit Investment in Nathan (95 x 8%/60%) = 12.67
Credit Other Components of Equity = 18.00Part B of Question 1 then asks
“Explain with suitable calculation, how the sale of the 8% interest in Nathan should be dealt with in the group SOFP at 30/April/x4?
This is then calculated as Id expected:
Net Assets plus any FV Adjustment plus any Goodwill multiplied by amount disposed of (8%) and subtract from sale proceeds ($18m) in this question for example.
So I guess what I am saying is why was it not calculated like this in the SPLOCI?
__________________________________________________________________
Because in the Q Grange (December 2009) a SOFP
Fence owns 100% of Fence and disposed of 25% of its equity interest to the non controlling interest for a consideration of $80m. The disposal proceeds had been credited to ther cost of investment in the SOFP.
The solution to this disposal was:
Net Assets, FV Adjustment & Goodwill all added together and multiplied by 25% and subtracted from the sale proceeds.With the accounting entries being:
DR Cost of Investment
Credit NCI
Credit Parents EquitThe 18 – (95 x 8%/60%) is not calculating anything! It’s reversing the bad entry that the company put through. The company has calculated the profit on the disposal by taking 8/60 x the carrying value but shouldn’t have done that because control was not lost
So the entry that calculated 5.33 profit on disposal and 12.67 carrying value disposed of needed to be reversed.
Then comes the second part of the question where you’re calculating the figures for the statement of financial position calculated, as you say, in the correct way. And you can’t understand why it wasn’t done this way for the statement of comprehensive income. Was the statement of comprehensive income asked for? If it was, there should be nothing in there for the result of the partial disposal because control was not lost so it’s simply a movement between owners – an adjustment within the statement of changes in equity
In the question Grange, again the disposal proceeds have been credited against cost of investment and again they shouldn’t have been. The journal entry that you have given me is a reversal of the bad entry effected by the Grange accountant. Instead of being credited against cost of investment (which is now reversed by the debit entry of 25) it should have been credited through statement of changes in equity as a movement between owners ie an adjustment in parent’s equity … so credit nci and credit parent’s equity
Better now?
Hi mr mike
I too use the method given by gillers for calculating the Change to paremts equity on disposal of Nathan in Marchant. Accordingly
Sale proceeds 18
Less. Fair value of net assets on disposal(120+14 land+ 12 impaired goodwill) x 8%. =(11.68)anf hence the adjustment to parents equity of 18-11.68=6.32…
whereas in the answer its 7.32…
kindly advise me on this.
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