Really stuck :(

cornflower

I've tried to do this question for ages and just can't. It's on ACCA P2 paper.

Parent sells a 70% interest in a 90% owned subsidiary to a third party. The subsidiary had recognised in its own financial statements the following:

1. Revaluation reserve for PPE of 2m.
2. Surplus on available for sale investment of 3m.
3. Cumulative actuarial loss of 1.5m.
4. Cumulative translation difference of 4m.

Required:

How will the parent deal with the treatment of the above?

Any help will be appreciated.

C x

Steve Collings

Hi Cornflower

If you're faced with questions like this, my advice is to take a moment to think about the overall impact of the transaction rather than focus on the question as a whole i.e. break it down into bite-size bits. The first thing to note here is that the parent has lost control of the subsidiary, hence the parent must account for all amounts which have been recognised in other comp income and accumulated in equity even if the parent only sells off part of its interest in a subsidiary.

So in order of the question scenario:

Revaluation Surplus
The parent will reclassify the entire surplus of 2m within equity. 90% of the balance is attributable to the parent and the remaining 10% is attributable to the non-controlling interests.

Available-for-sale investment
There are 2 approaches that the parent can take here. The first one will be that the parent will reclassify its 2.7m interest (3m x 90%) in the surplus of the AFS investment to profit or loss for the period OR the entire 3m surplus is reclassified to profit or loss for the period with 90% of the balance (2.7m) belonging to the parent and the balance of 0.3m (ie 10% x 3m) belong to the NCIs.

Actuarial loss
You won't reclassify the actuarial loss of 1.5m to profit or loss because para 93D to IAS 19 states that actuarial gains/losses which are recognised in OCI are recognised immediately in retained earnings - not recycled through profit or loss.

Cumulative translation difference
The cumulative translation difference is 3.6m (90% x 4m) and the parent will reclassify its interest to profit or loss. The difference of 0.4m (10% x 4m) relates to non controlling interests will be derecognised but don't reclassify it to profit or loss.

I hope that helps to steer you in the right direction. As I say try and break down each bit of information and deal with it in isolation as I have done here - it makes the question more manageable.

All the best
Steve

cornflower

That's great thanks Steve.

Steve if a company had 100,000 issued shares worth £2 and it acquires 100% of the shares in entity B for £500,000 by issuing 200,000 shares worth £400,000 and cash of £100000 and B has 200,000 issued shares with a fair value of £2.50 per share. After the combination B controls A and has the power to govern the financial and operating policies of A.

The question is asking how the consideration transferred by B for its interest in A be calculated?

This one also has me stumped. Everything else is fine apart from these horrible situations in the questions.

Last question I promise x

Steve Collings

This is a very vague question in my opinion. On the one hand A controls B because A has obtained a 100% share in B, but on the other the question says that AFTER the combination B controls A. The only time this could occur is in a reverse acquisition but in a reverse acquisition there has to be evidence that the legal acquiree has, in fact, obtained control ("control" being the power to govern the financial and operating policies of the acquirer). Let me get this right:

A has 100,000 x £2 = £200,000 shares in issue. A has had to issue 200,000 to B resulting in B's shareholders owing (200,000 / 300,000) = 66.67%. A's shareholders will own the remaining 33.33% (ie 100,000 / 300,000). A has also issued cash of £100k to obain a 100% holding which has been given to B's shareholders.

B has 200,000 shares issued worth £2.50 per share= £500,000 in the SOFP. According to you B controls A (assuming I am right and this question is a 'reverse acquisition' question). So if I use B's share price of £2.50 then B would have had to issue another 100,000 shares to A's shareholders to result in the same % shareholding (ie A = 300,000 after the combination when B had 200,000 so B has to issue a further 100,000). Therefore the consideration transferred by B would seem to work out at 100,000 x £2.50 = £250k which I don't think is right at all. As I say the question is quite weird!

If the Q is cited verbatim and we are on about a reverse acquisition then in my opinion of the 100,000 shares that B is deemed to issue, only 80,000 of them are to reverse acquire entity A (costing 80,000 x £2.50) = £200k because the other 20,000 shares are to compensate A's shareholders because B's shareholders have received cash of £100,000 which is essentially a stock distribution to A's shareholders of (£2.50 x 20,000) = £50,000 therefore £150,000 is the total distribution and the £50,000 element represents A's share (33.33%).

The consolidated financial statements of the legal parent (A) will only show the £100,000 cash paid to B's shareholders as a movement in equity - it won't show the £50k 'stock' distribution.

As I say I don't think this is a good question at all and it did take some number-crunching to arrive at those figures but that's how it works. By the way I worked to the requirements of IFRS 3 at para B20 if you want to re-work the question using the "official" standards.

All the best

Steve

cornflower

Thanks Steve. I'm sorry but I did miss out a lot on the question as I was rushing it. The consideration you have come back with are as the answers says but I didn't understand how they had arrived at them which I do now after your reply.

Thank you again.

Steve Collings

No problem. Which study material are you using?