Disposals and Loss of Control

Definition

Disposals and loss of control refer to the process of selling, transferring, or otherwise relinquishing ownership of a subsidiary or significant assets, which results in the parent company losing its control over that entity. This concept is crucial in consolidation as it determines how to account for financial relationships, the impacts on financial statements, and whether to include the disposed entity in future consolidated reports.

5 Must Know Facts For Your Next Test

1. When a parent company disposes of a subsidiary, it must determine whether it has lost control based on factors like voting rights and operational involvement.
2. Loss of control typically requires the parent company to deconsolidate the subsidiary from its financial statements, impacting its assets and liabilities.
3. If the disposal results in a loss, the parent must recognize this loss on its income statement, affecting its net income for the period.
4. When disposing of a subsidiary, any remaining non-controlling interest must be measured at fair value to ensure accurate reporting.
5. The accounting treatment for disposals can vary significantly depending on whether the transaction qualifies as a sale or if it involves other forms of transfer.

Review Questions

• How does the loss of control over a subsidiary affect the consolidated financial statements of a parent company?
  • When a parent company loses control over a subsidiary, it must deconsolidate that subsidiary from its financial statements. This means that the assets and liabilities associated with that subsidiary will no longer appear in the parent’s consolidated balance sheet. Additionally, any gains or losses from the disposal will impact the parent’s income statement, thereby affecting overall profitability and financial ratios.
• Discuss how goodwill is treated during disposals when a parent company loses control over a subsidiary.
  • Goodwill associated with a disposed subsidiary must be evaluated during the disposal process. If control is lost, the parent company needs to determine how much goodwill to allocate to the remaining investment if any interest is retained. The remaining goodwill is then measured at fair value as part of recognizing any gain or loss on the transaction. This process is crucial for accurately reflecting the economic impact of the disposal on financial statements.
• Evaluate the implications of accounting for non-controlling interests when a company disposes of part of its ownership in a subsidiary.
  • When a company disposes of part of its ownership in a subsidiary but retains some level of non-controlling interest, it needs to assess how this interest will be reported moving forward. The remaining non-controlling interest must be measured at fair value at the time of loss of control. This affects both future financial reporting and potential earnings recognition, requiring careful consideration of how these interests are recorded under different accounting methods such as equity accounting.

Related terms

Non-controlling Interest: The portion of equity ownership in a subsidiary not attributable to the parent company, which can impact consolidation when control is lost.

Goodwill: An intangible asset that arises when a company acquires another company for more than the fair value of its net identifiable assets; relevant during disposals if goodwill needs to be allocated.

Equity Method: An accounting technique used to assess the investments made in associates and joint ventures, which may come into play when control is lost over a subsidiary.