Determination of the gain or loss on the partial sale of an investment in a single-asset entity
A parent M owns 100% of a single-asset entity (SAE). The parent M sells 60% of its stake in its subsidiary to a third party X and as a result loses control of SAE. This is illustrated in the diagrams below.
Scenario A: Parent M retains a joint operation
At the same time, the parent M that still owns the 40% of the SAE enters into a joint arrangement with X to jointly control the SAE (and therefore the asset). The arrangement is considered to be a joint operation under IFRS 11.
Because the retained investment is a joint operation, it is accounted for as a proportionate share of the asset. Therefore, in scenario A, a gain or loss is recognised only in relation to the 60% sold.
Scenario B: Parent M retains an interest that is not a joint operation
The 40% retained interest does not give joint control over SAE. The entity needs to determine whether the retained interest is in substance an undivided interest in the asset or an investment in an entity, based on an assessment of all facts and circumstances.
- The investor retains an indirect interest in the underlying asset
The gain or loss is recognised only to the extent of the portion sold. Therefore, 60% of the asset is considered to be disposed, and the gain or loss calculated on that 60%.
- The investor retains an investment in an entity
The parent does not hold, in substance, an interest in an asset but has an investment in an entity. If the investment is recognised as an associate (if significant influence is held) or a joint venture (if there is joint control), either 100% of the asset is considered to be disposed of and the gain or loss calculated on that 100% or the gain is restricted to the 60% attributable to the other investor in the entity. If the investment is a financial asset, 100% of the asset is considered to be disposed of and the gain or loss calculated on that 100%.