a parent entity p owns 600 000 of the 1 000 000 shares issued by its subsidiary s gi 611713

Deemed disposal through share issue by subsidiary

A parent entity P owns 600,000 of the 1,000,000 shares issued by its subsidiary S, giving it a 60% interest. The carrying value of Ss net identifiable assets in the consolidated financial statements of P is £120 million. P measured the non-controlling interest using the proportionate share of net assets; therefore the non-controlling interest is £48m (40% of £120m). In addition, goodwill of £15 million was recognised upon the original acquisition of S, and has not subsequently been impaired.

Subsequently, S issues 500,000 shares to a new investor for £80 million. As a result, Ps 600,000 shares now represent 40% of the 1,500,000 shares issued by S in total and S becomes an associate of P. This transaction implies a fair value for S (excluding any control premium) of £240 million (the £80 million share issue proceeds give the new shareholder a one-third interest in S £80m × 3 = £240m).

IFRS 10 requires the remaining interest in the former subsidiary to be recognised at fair value. Therefore, the profit or loss recognised on the loss of control of a subsidiary considers the fair value of the new holding. The implied fair value of S following the new share issue is £240 million, of which Ps 40% share is £96 million. This results in a profit of £9 million on disposal, recognised as follows: