This blog is the last of a series explaining how the main International Financial Reporting Standards (IFRS) have been implemented in SAP® Business Planning and Consolidation, starter kit for IFRS on SAP NetWeaver – powered by SAP HANA™.
After an introduction to “IFRS in the Starter Kit” (blog#1) and two blogs dedicated to the Presentation of Financial statements as required by IAS 1 (blog #2) and IAS 7 (blog #3), we describe in the next blogs how the Starter Kit addresses IFRS’s consolidation principles as regards:
- Conversion process (blog #4)
- Current consolidation procedure (blog #5)
- First consolidation of an entity (blog #6)
- Associates and Joint Ventures (blog #7)
- Further changes in ownership interests in a subsidiary(this blog)
We will focus on changes in ownership interests in a subsidiary that can result in:
– losing control over this subsidiary
– an increase or a decrease in the parent’s share without any consequence on control
After a reminder of the accounting principles, we will see how they are implemented in the Starter Kit.
Loss of control
According to IFRS 10, the loss of control of a subsidiary results in recognizing a gain or loss in the statement of profit or loss. When the parent company loses control but retains an interest, it triggers recognition of gain or loss on the entire interest:
- a gain or loss is recognized on the portion that has been disposed of;
- a further gain is recognized on the interest retained, being the difference between the fair value of the interest and its book value.
Both are recognized in the statement of profit or loss.
For example, if a parent company sells 80% of its former wholly-owned subsidiary S, retaining a 20% interest, gain or loss will be calculated as if the 100% interest has been sold:
When a parent loses control of a subsidiary, the parent should account for all amounts recognized in other comprehensive income in relation to that subsidiary on the same basis as would be required if the parent has directly disposed of the related assets or liabilities. Therefore, if a gain or loss previously recognized in other comprehensive income would be reclassified to profit or loss on the disposal of the related assets or liabilities, the parent reclassifies the gain or loss from equity to profit or loss (as a reclassification adjustment) when it loses control of the subsidiary (IFRS 10. B99).
If the residual interest in the former subsidiary gives a significant influence or a joint control, the acquisition method is applied as if a new associate or joint venture has been acquired.
In the starter kit
In SAP Business Planning and Consolidation, loss of control can result:
- in an entity leaving the scope (when the parent company does not keep any interest or when the remaining interest is under the consolidation threshold)
- in a change in consolidation method (subsidiary becoming an associate or a joint venture accounted for using equity method)
In the consolidation scope, outgoing entities are identified as “outgoing at the opening” or “outgoing during the period” depending on whether data are entered or not for the period. Data entered, if any, must correspond to the period lasting from the beginning of the year to the date when control is lost so that income and expenses of the subsidiary are included in the financial statements until the date when the parent ceases to control the subsidiary (as required by IFRS 10).
All of the outgoing company’s data at the date of the disposal (which means opening data plus movements of the period if data have been entered) are automatically reversed on a dedicated flow (F98). As regards accumulated other comprehensive income that has to be recycled (fair value reserve, hedging reserve and foreign currency translation reserve), this flow is regarded as a reclassification adjustment in the statement of comprehensive income.
After gain or loss on disposal has been calculated, a manual journal entry has to be booked to adjust the gain or loss recognized in the parent’s separate financial statements.
See example in this blog: Managing a loss of control without retaining an interest with BPC NW 10.0 Starter Kit for IFRS.
Changes in the consolidation method
In SAP Business Planning and Consolidation, changes in consolidation method (subsidiary becoming an associate or a joint venture) are handled as follows:
- Automatic booking of parent’s share in associate’s equity against the dedicated investment account A1500 Investments accounted for using equity method using MTH_EQU audit ID on flow F03. All possible amounts reported by the associate on other balance sheet accounts and income statement accounts are cancelled out by the apportionment entries on this Audit ID and this flow.
- Opening intercompany declarations (if any) are reversed on flow F03
- Reversal on flow F03 of the goodwill existing at opening on account A1310-Goodwill. Booking of the new goodwill on account A1500 – Investments accounted for using equity method. This automatic journal entry is triggered by the manual declaration on technical account XA1310 and audit ID GW01.
- Booking of a manual journal entry using audit ID INV31 (in local currency) or INV32 (in consolidation currency) in order to recognize the gain or loss on “disposal” of the previously held interest and the difference between the net book value and the fair value of remaining interests.
- Elimination of the change in investment is posted using audit ID INV10:
- At parent’s on flow F03 for the difference between the fair value and the net book value of the investments sold, based on the manual journal entry INV31
- At parent’s on flow F30 for the net book value of the investment
- At held entity’s on flow F03 for the net variation booked at parent’s
- Accumulated other comprehensive income at opening is reclassified to retained earnings on the old method flow (F03) by manual journal entry FVA11 like incoming entities. Another manual journal entry is posted on audit ID CONS01 to transfer the impact on OCI from flow F03 to flow F98 in order to display these reclassification adjustments in the comprehensive income as if the subsidiary was disposed of.
- A reclassification adjustment on the statement of cash flow using audit ID SCF_ADJ is booked manually as flow F03 is unbalanced and assigned by default to SCF4120 « Cash used to obtain control in subsidiaries » instead of SCF4110 « Cash flow from losing control of subsidiaries ».
See example in this blog: Managing loss of control while retaining an interest in the BPC NW 10.0 Starter Kit for IFRS.
Changes in a parent’s ownership interest in a subsidiary that do not result in the parent losing control of the subsidiary are equity transactions (IFRS 10.23). The carrying amounts of the controlling and non-controlling interests should be adjusted to reflect the changes intheir relative interests in the subsidiary. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognized directly in equity and attributed to the owners of the parent (IFRS 10. B96).
IFRS 10 does not give detailed guidance on how to measure the amount to be allocated to the parent and non-controlling interest to reflect a change in their relative interests in the subsidiary. Main issues regard goodwill and accumulated other comprehensive income.
In its Basis for conclusions (BCZ168), IFRS 10 states that no change in the carrying amounts of the subsidiary’s assets (including goodwill) should be recognized as a result of such transactions. But it does not specify whether the allocation of goodwill between parent and non-controlling interests should be modified.
In the Basis for conclusions of IFRS 3 (BC218), the Board explains that the adjustment to the carrying amount of non-controlling interests, that will be recognized when the acquirer purchases shares held by non-controlling interests, will be affected by the choice of measurement basis for non-controlling interests at acquisition date (fair value or proportionate share of net assets). It means that, when parent acquires non-controlling interests that have been initially measured at their fair value, goodwill is included in the carrying amount of non-controlling interests that is transferred to group equity.
With partial disposals, where the parent disposes part of its interest to non-controlling interest without losing control, the question remains whether part of the parent’s goodwill should be transferred to NCI or not. Interpretations published by professional bodies differ. Some consider that goodwill is part of the transfer whereas others think that no goodwill has to be allocated to NCI (which means that principles would apply differently whether the equity transaction is an increase or a decrease of the parent’s ownership interest).
Accumulated other comprehensive income
The question is: should accumulated other comprehensive income (for example: exchange differences on foreign subsidiaries) be part of the transfer between group and non-controlling interest in case of an equity transaction?
As regards partial disposals, IAS 21 requires that “the entity shall re-attribute the proportionate share of the cumulative amount of the exchange differences recognized in other comprehensive income to the non-controlling interests in that foreign operation” (§ 48.C). IAS 39 has been amended in the same manner regarding hedging reserves.
On the other hand, IFRS are silent when it comes to an increase in parent’s ownership interest. SFAS 160 Non-Controlling Interests in Consolidated Financial Statements, which is supposed to be the US GAAP equivalent of IFRS 10, is clearer: “A change in a parent’s ownership interest
might occur in a subsidiary that has accumulated other comprehensive income. If that is the case, the carrying amount of accumulated other comprehensive income shall be adjusted to reflect the change in the ownership interest in the subsidiary through a corresponding charge or credit to equity attributable to the parent (§ 34)”.
As a consequence, we assume that accumulated other comprehensive income has to be re-allocated between group and NCI according to their new respective shares, regardless of whether there is an increase or a decrease in the parent’s ownership interest.
In the starter kit
Configuration principles are the following:
- The amount to be transferred from group’s equity to NCI (or conversely) is calculated on the basis of the subsidiary’s opening equity after deduction of dividends paid on the period (but relating to prior benefits)
Accumulated other comprehensive income (revaluation surplus, fair value reserve, hedging reserve and foreign currency translation reserve) is part of the transfer
This transfer is recognized on flow F92 ‘Increase / decrease in interest rate
- If need be, the amount of goodwill to be transferred from NCI to group (or conversely depending on the interpretation of IFRS 10), is declared by manual journal entry using flow F92.
See example of Acquisition of further equity interests from Non Controlling Interests in this blog
See example of Partial disposal of an investment in a subsidiary while control is retained in this blog
To know more
For more information about how IFRS (including standards that are not addressed in this series of blogs) have been taken into account in SAP Business Planning and Consolidation, starter kit for IFRS, a comprehensive paper is available here