Changes in Group Structures

Changes in a parent's ownership interest in a subsidiary can take many forms. The accounting depends critically on whether control is lost:

Key principle: If control is LOST → treat as a disposal (gain/loss in P/L). If control is RETAINED → treat as an equity transaction (no gain/loss; reallocation between parent's equity and NCI).

When the parent sells 100% of its interest in a subsidiary (losing control completely):

Gain/loss on disposal calculation (in consolidated accounts):

Amounts reclassified from OCI to P/L (as part of the gain/loss on disposal):

• Foreign currency translation differences (if the subsidiary was in a foreign operation — the cumulative amount in the FX translation reserve)
• Cash flow hedge reserve (effective portion of hedges)
• FVOCI debt — cumulative FV changes

Amounts NOT reclassified (remain in equity, often transferred to retained earnings):

• Revaluation surplus (IAS 16)
• FVOCI equity (elected) — cumulative FV changes
• Pension remeasurements (IAS 19)

In the parent's SEPARATE accounts: gain/loss = proceeds − carrying amount of investment at cost. This will differ from the consolidated gain/loss.

When the parent sells part of its holding but the remaining interest is no longer a subsidiary (loss of control), the accounting is similar to a full disposal — with the added step of measuring the retained interest at fair value:

Step 1: Derecognise the subsidiary at the date of loss of control — net assets, allocated goodwill, and NCI.

Step 2: Measure any retained interest at fair value on the date of loss of control. The retained interest becomes the initial carrying amount under the applicable standard:

• Retained interest giving significant influence → initial carrying amount for equity method (IAS 28)
• Retained interest giving joint control → joint venture (equity method) or joint operation under IFRS 11
• Retained interest with no influence → financial asset under IFRS 9

Step 3: Calculate the gain/loss (same formula as full disposal, including the FV of retained interest as part of the "receipts").

Step 4: Recycle applicable OCI amounts to P/L.

Practical note: The remeasurement of the retained interest to fair value often creates a gain/loss that reflects the "fresh start" valuation of the remaining interest. This is sometimes called a "deemed disposal" even though the parent didn't physically sell the retained portion.

When the parent disposes of some shares but retains control (e.g., sells from 90% to 75%), this is treated as an equity transaction between the parent and the NCI. There is NO gain or loss recognised in P/L.

Accounting:

1. Increase the NCI by its share of the subsidiary's net assets (including goodwill under full goodwill method)
2. Compare the increase in NCI with the consideration received from the disposal:
   • If consideration > increase in NCI → credit to equity (usually "other reserves" or the parent's share of equity)
   • If consideration < increase in NCI → debit to equity
3. The difference is recognised DIRECTLY in equity (retained earnings or other equity reserve — NOT P/L)

Rationale: The parent has not disposed of control — the subsidiary is still a group company. The transaction is simply a reallocation of ownership between existing owners (the parent and the NCI). Treating it as a gain/loss would imply a "sale" that has not economically occurred from the group's perspective.

Purchases of additional NCI shares (still retaining control): Treated the same way — as an equity transaction. No goodwill adjustment. The difference between consideration paid and the decrease in NCI goes to equity.

A deemed disposal occurs when the parent's percentage ownership decreases WITHOUT the parent selling any shares. Most commonly when:

• The subsidiary issues new shares to third parties (e.g., rights issue that the parent does not take up)
• The subsidiary issues shares on conversion of convertibles held by third parties
• The subsidiary purchases its own shares from parties other than the parent (increasing the parent's %, though this is the opposite)

Example: Parent P owns 80% (8,000 shares) of Subsidiary S, which has 10,000 shares outstanding. S issues 2,500 new shares to third parties. After the issuance:

• Total shares in S: 12,500
• P still owns 8,000 shares
• P's ownership %: 8,000/12,500 = 64%
• P has "deemed" disposed of 16% (80% − 64%) of its interest

Accounting — if control is RETAINED (64% still gives control):

• Treat as an equity transaction
• Adjust the NCI for the new shares issued (add the proceeds received by the subsidiary × NCI's new %)
• Difference between: (i) cash received by S from the new issue + change in NCI on the existing net assets, and (ii) parent's decrease in share of net assets, goes to equity

Accounting — if control is LOST (e.g., parent's interest falls below 50% with no other control indicators):

• Treat as a disposal with loss of control (per partial disposal rules)
• Remeasure retained interest at FV
• Gain/loss to P/L

The key test: ALWAYS return to the IFRS 10 control assessment. Does the parent still have control after the change? If yes → equity transaction. If no → apply disposal rules.

Key concepts:

• Functional currency: The currency of the primary economic environment in which the entity operates. Determined by looking at:
  • The currency that mainly influences sales prices (often the currency in which sale prices are denominated)
  • The currency of the country whose competitive forces/regulations mainly determine sale prices
  • The currency that mainly influences costs of providing goods/services
  • Secondary indicators: currency in which finance is generated; currency in which receipts from operations are usually retained
• Presentation currency: The currency in which the entity presents its financial statements. Can be any currency — typically the parent's functional currency, or a currency for reporting purposes.

Translation of a foreign subsidiary (functional currency different from presentation currency):

Use the closing rate method (also called the "current rate method"):

• Assets and liabilities at the reporting date: translated at the closing rate (spot rate at reporting date)
• Income and expenses (statement of profit or loss): translated at the rates on the date of each transaction. For practical reasons, an average rate is typically used (if exchange rates have not fluctuated significantly)
• Share capital and pre-acquisition reserves: translated at the historical rate at acquisition
• Post-acquisition retained earnings: accumulated at average rates (from the P/L translation)
• Exchange differences arising on translation are recognised in OCI (in a foreign currency translation reserve) — NOT in P/L

Where do exchange differences come from? Three main sources:

1. Translating the subsidiary's net assets at the closing rate while opening equity is at the historical rate
2. Translating P/L items at average rate while the change in net assets is at closing rate
3. Translating goodwill on acquisition: goodwill is treated as an asset of the foreign subsidiary and translated at closing rate — creating exchange differences over time

On disposal of a foreign subsidiary: The cumulative amount in the foreign currency translation reserve attributable to that subsidiary is reclassified from OCI to P/L as part of the gain/loss on disposal.

Hedging a net investment in a foreign operation: An entity can hedge the FX risk on its net investment (usually with a foreign currency borrowing or a forward contract). Effective portion of the hedge → OCI (translation reserve); reclassified to P/L on disposal.

Real groups are rarely simple parent-subsidiary structures. Common complexities:

1. Sub-subsidiaries (vertical groups): P owns 80% of A. A owns 70% of B. Therefore P owns B indirectly.

• Effective interest of P in B = 80% × 70% = 56%
• P controls A (80% direct) → A is a subsidiary
• A controls B (70% direct) → B is a subsidiary of A
• Therefore, P ALSO controls B through A → B is a sub-subsidiary of P
• NCI in B (from group perspective) = 100% − 56% = 44% (combining the NCI in A's 20% and the NCI in B's 30%)

Consolidation approach (vertical groups):

• "Chain" method: First consolidate A (with B already consolidated into A's sub-consolidated FS as a subsidiary of A). Then consolidate P with A's sub-consolidation.
• "Direct" method: Include all assets and liabilities of B directly in P's consolidated FS; calculate NCI in B as 44% of B's net assets.
• Both methods arrive at the same result — only NCI attribution requires care.

2. D-shaped groups (diamond structure): P owns both a direct interest in B (e.g., 40%) AND an indirect interest via A (e.g., P owns 60% of A, and A owns 30% of B).

• P's EFFECTIVE interest in B = direct 40% + (60% × 30%) = 40% + 18% = 58%
• P controls B directly? 40% alone may or may not be control. Combined with the 18% via A: P effectively controls 58% and definitely controls B.
• Typically both A and B are subsidiaries
• NCI in B = 100% − 58% = 42%

3. Mixed groups (subsidiary + associate): P owns 80% of A (subsidiary) and 30% of C (associate via significant influence).

• Consolidate A fully (line-by-line with 20% NCI)
• Apply equity method to C (single line "investment in associate" on SoFP and "share of profit of associate" on SoPL)

4. Indirect associates: What if A (a subsidiary) owns 30% of D (an associate of A)?

• D is an associate of A
• From the group's perspective (through A), D is also an associate
• Group's effective interest in D: 80% (in A) × 30% (A's share of D) = 24%
• In the consolidated FS, apply the equity method to D at the group's effective interest (24% × D's profit and net assets)
• The 20% NCI in A shares in A's share of D — accounted for through A's results and NCI allocation

Key skill — mapping the structure: Before any complex consolidation, draw the group structure. Label each entity with its type (subsidiary, associate, JV, IFRS 9 investment) and the direct and effective ownership percentages. This visualisation is essential for exam questions.