Accounting for retained interest in an associate or joint venture following loss of control of an entity
Entity A owns 100% of the shares of Entity B. The interest was originally purchased for £500,000 and £40,000 of directly attributable costs relating to the acquisition were incurred. On 30 June 2013, Entity A sells 60% of the shares to Entity C for £1,300,000. As a result of the sale, Entity C obtains control over Entity B, but by retaining a 40% interest, Entity A determines that it has significant influence over Entity B.
At the date of disposal, the carrying amount of the net assets of Entity B in Entity A”s consolidated financial statements is £1,200,000 and there is also goodwill of £200,000 relating to the acquisition of Entity B. The fair value of the identifiable assets and liabilities of Entity B is £1,600,000. The fair value of Entity A”s retained interest of 40% of the shares of Entity B is £800,000.
Upon Entity A”s sale of 60% of the shares of Entity B, it deconsolidates Entity B and accounts for its investment in Entity B as an associate using the equity method of accounting.
Entity A”s initial carrying amount of the associate has to be based on the fair value of the retained interest, i.e. £800,000. It is not based on 40% of the original cost of £540,000 (purchase price plus directly attributable costs) as might be suggested by the Interpretations Committee statement discussed at 7.4 above, nor is it based on 40% of the carrying amount of the net assets and goodwill totalling £1,400,000 as would have generally been the treatment prior to changes made to IAS 27 and IFRS 3 as a result of phase II of the Business Combinations project.