how to handle a loss of control while retaining an interest

How to handle a loss of control while retaining an interest with SAP® Financial Consolidation 10.0, Starter Kit for IFRS?

How to handle a loss of control while retaining interest with SAP® IFRS Starter Kit Consolidation Practical Guide N°13– December, 2012

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TABLE OF CONTENTS

INTRODUCTION ............................................................................................................................................... 3

WHAT ARE THE REGULATION REQUIREMENTS? ...................................................................................... 4

PRESENTATION OF THE BUSINESS CASE .................................................................................................. 5

HOW TO HANDLE A LOSS OF CONTROL WHILE RETAINING INTEREST IN THE IFRS STARTER KIT? 8 Reminder .......................................................................................................................................................... 8 Overview of the operating process ................................................................................................................ 8 Consolidation scope ....................................................................................................................................... 9 Automatic journal entries ............................................................................................................................... 9 Manual journal entries................................................................................................................................... 10 Manual journal entries are necessary to: .................................................................................................... 10 Retrieval of consolidated data ..................................................................................................................... 12

HOW DOES THE LOSS OF CONTROL WHILE RETAINING INTEREST AFFECT FINANCIAL STATEMENTS? .............................................................................................................................................. 15 Consolidated Statement of Financial position ........................................................................................... 15 Consolidated statement of other comprehensive income ........................................................................ 16 Statement of cash flows................................................................................................................................ 17 Statement of changes in equity ................................................................................................................... 18


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INTRODUCTION

This practical guide is part of a new series of seven guides dedicated to help deal with the most frequent consolidation M&A requirements when using the SAP® Financial Consolidation 10.0, starter kit for IFRS. A first series was published to help deal with those cases when using SAP® Planning and Consolidation 10.0, starter kit for IFRS, version for SAP NetWeaver.

In this paper a loss of control in a subsidiary while retaining interest is explained through a real use case scenario and presented in three steps:

- what the IFRS text says, - how the business use case is handled in Financial Consolidation, - and what impact the CFO should expect on her/his company’s financial statements.

You can use this new paper to demonstrate SAP’s supremacy in addressing customers’ most complex and frequent business requirements.

SAP solutions for consolidation, part of SAP enterprise performance management (EPM) solutions, include SAP Financial Consolidation and SAP Business Planning and Consolidation. A starter kit for IFRS has been developed for each solution to perform, validate and publish a statutory consolidation in accordance with IFRS. These starter kits are based on a dynamic configuration easy to customize to specific requirement. They are provided with documentations.

To know more:

You will find further indications on how to deal with outgoing entities in the SAP® Financial consolidation 10.0, Starter kit for IFRS Operating guide.

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WHAT ARE THE REGULATION REQUIREMENTS?

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 75% of its former wholly-owned subsidiary S, retaining a 25%

interest, gain or loss will be calculated as if the 100% interest has been sold:

Proceeds from sale of 75% of S

+

Fair value of the 25% interest retained in S

-

Carrying amount of S’s net assets

=

Gain or loss on the loss of control of S

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. The goodwill on remaining

interest is recognized, the fair value of investment retained being regarded as the cost on initial recognition of

investment in the associate.


5

PRESENTATION OF THE BUSINESS CASE

This business case is included in the set of data provided with the IFRS starter kit SP3. It is possible to retrieve it using the following settings:

- CATEGORY: A- ACTUAL,

- DATA ENTRY PERIOD: 2021.12,

- CONSOLIDATION CURRENCY: USD

- SCOPE: CASE6,

- VERSION: IFRSYTD,

- REPORTING UNIT: P6, S6

Year 2019 P6 (USD) purchased a 100% interest in subsidiary S6 for USD125 000

S6 Fair value of net assets is USD100 000

A goodwill of USD25 000 was recognized.

Year 2020

S6 books a change in fair value of Available-For-Sale (AFS) financial assets for USD1 000

S6’s profit for the year = USD19 000

Year 2021

P6 disposes 75% of its equity interest in S6 for USD115 000 on January, 1st

P6 resulting 25% on S6 is classified as an associate under IAS28 and has a fair value of USD38 000

Y 2020 Y 2021

Parent P6 Parent P6

S6(Full Consolidation)

100%

S6(Equity Method)

25%


6

P6 individual accounts are as follows:

S6 individual accounts at the end of 2020 are as follows:

Calculation of the net gain/loss on disposal:

Before After Δ USD-93 750 Investment gross value sold

Investment S6 125 000 31 250

Cash and cash equivalents 115 000

Total assets 125 000 146 250

Issued capital 125 000 125 000

Retained earnings 21 250 Δ USD21 250 Gain on the sale of 75% of S6

Total equity and liabilities 125 000 146 250 Sale proceeds 115 000

Book value -93 750

21 250

Sale of 75% of S6

Δ USD115 000 Cash received on the sale of

75% of PS6

Closing

AFS 5 000

Trade receivables 105 000

Financial assets at FV 2 000

Cash and cash equivalents 15 000

Total assets 127 000

Issued capital 20 000 OCI to be recycled 1 000

Fair value reserve 1 000

Retained earnings 99 000 Equity at acquisition date 80 000

Borrowings, current 7 000 Year 2020 profit 19 000

Total equity and liabilities 127 000 99 000

Sale proceeds + 115 000

Cost of investment S6 (=125 000 x 75%) - 93 750

Gain = 21 250

Sale proceeds + 115 000

Fair value of residual interests + 38 000

Net assets derecognised - 120 000

Goodwill derecognised - 25 000

Recycling of Other Comprehensive Income + 1 000

Gain = 9 000

Difference (conso - individual) = -12 250

Gain recognised in P&L at consolidated statement level (P6) - includes

a gain on revaluation of the 25% retained interest

Gain recognised in P&L for the sale of the 75% of S6 at individual

statement level (P6)


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Calculation of the fair value adjustment on the 25% retained interest in S6:

Calculation of the new goodwill

Fair value of residual interests + 38 000 Original book value 125 000

Net book value of investment in S6 - 31 250 Gross book value sold -93 750

Fair value adjustment on retained interests = 6 750 31 250

Fair value of residual interests + 38 000

P6's share of S6's identifiable assets - 30 000 USD120 000 x 25% = USD30 000

Goodwill = 8 000


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HOW TO HANDLE A LOSS OF CONTROL WHILE RETAINING INTEREST IN THE IFRS STARTER KIT?

REMINDER

The amounts stored in the database are identified thanks to a set of elements called dimensions.

The main dimensions are listed below:

The account dimension indicates which item of the balance sheet or P&L is impacted.

The flow dimension is used to identify and analyze the changes between the opening (flow F00) and closing (flow F99) balances.

The audit ID dimension identifies the origin of the data for input data, local adjustments, manual and automatic journal entries.

The in-built dimension (Journal entry number) provides a full audit trail as it retrieves the number of the manual or automatic journal entry. The use of this feature is illustrated in the chapter “How the loss of control affects financial statements” where we show screenshots of the analysis reports that can be accessed by drill down from the financial statements.

OVERVIEW OF THE OPERATING PROCESS

The actions to perform to deal with a fully-consolidated subsidiary that becomes an associate are listed hereafter. A tick mark indicates which apply to case#6. In this business case, we will focus on year 2021.

Parent: Account for the selling price and the net book value sold of the investmentP

New financial rate, consolidation rate and method of the associate (EM 25%) P

Parent: Gain or loss on change of consolidation method audit ID INV31 (local currency) or

INV32 (consolidation currency) using flows Y99 (P&L) and F02 (balance sheet)P

Associate: Apply uniform accounting policies audit IDs ADJ91 or PACK11 on flow F03

Deferred taxes posting should use the same Audit ID as the one used to identify the

base of the deferred tax on flow F03

Fair value (recorded at 100 %) audit ID FVA11 on flow F03

Goodwill / bargain purchase audit ID GW01 on flow F03P

Correct the effects of the change of consolidation method date (e.g. 6 months under

equity method and 6 months under full consolidation) audit IDs NCI11, CONS01

Correct intercompany eliminations with partners audit ID ELIM11

Run the consolidation processingP

Validate the scope change accounting with several preconfigured reportsP

Consolidation:

Report navigator:

Lab

#6

If the change

occurs during

the period

Package data entry

Consolidation scope

Manual journal entries:


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Company S6 is accounted for using full consolidation method (FC) at opening - 100% interest rate

Company S6 is accounted for at equity (EM)at opening - 25% consolidation and interest rate

Variation = -75% (consolidation rate and financial interest rate)

(b)

(a)

(c)

(c)(b) (a)

CONSOLIDATION SCOPE

In the consolidation scope, S6 is accounted for using the equity method at closing with a consolidation rate equal to the financial rate i.e. 25% whereas it is fully consolidated at opening.

AUTOMATIC JOURNAL ENTRIES

In SAP Financial consolidation, changes in consolidation method are handled as follows:

Opening balances are reversed on the “old method” flow (F02)

Opening balances are reloaded on the “new method” flow (F03) with the new consolidation method applying

As regards a change from full consolidation to equity method, it means that:

the subsidiary’s assets and liabilities are reversed and “replaced” by the line “Investments accounted for using equity method”

the equity accounts are reversed on the old method flow and reloaded on the new method flow taking into account the consolidation rate of the associate or joint venture; allocation between group and indirect non-controlling interests (if any) is made on this flow according to the new interest rate

Any goodwill existing at opening is not reloaded on the new method flow. Indeed, it is part of the assets sold and is, therefore, taken into account to calculate the profit on “disposal”. A new goodwill has to be calculated as part of the acquisition method process of the associate or joint venture and declared by a manual journal entry using the new method flow.

Accumulated other comprehensive income at opening is automatically reclassified to retained earnings on the new method flow like incoming entities. Reclassification adjustments displayed in the comprehensive income take into account the old method flow because change in consolidation method is handled as if the subsidiary was disposed of.


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MANUAL JOURNAL ENTRIES

Manual journal entries are necessary to:

adjust the gain or loss recognized in the parent’s separate financial statements on the interest sold

recognize a gain or loss on the remeasurement of the interest retained at fair value

remeasure net identifiable assets of the new associate/joint venture to fair value (as if it was an incoming entity)

declare goodwill.

Existing goodwill at opening (USD25 000) is automatically reversed on flow F02 (old method) and you have to book the new goodwill value by manual journal entry (#16) for USD8 000, using audit ID GW01 –Disclosure of goodwill (gross value and impairment) and bargain purchase – Man

(*) in the current version of Financial Consolidation, it is mandatory to specify a restriction on scope, variant or consolidation

currency in order to load a manual journal entry on an entity with a change of consolidation method .

(a)

(b)

(c)

(d) (e)

(f)

(a) Posted on S6(b) Using dedicated audit ID for goodwill declaration "GW01"(c) in S6 currency (USD)

(d) Posted on technical account for goodwill declaration "XA1310"(e) Posted on flow F03 "Change of consolidation method - NEW"(f) Declared on share P6

(*)


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(*) in the current version of Financial Consolidation, it is mandatory to specify a restriction on scope, variant or consolidation

currency when posting data on flow F02.

(a)

(b)

(*)

(c)

(d)

(e)

(a) Posted on P6(b) Using dedicated audit ID for gain on sale of investment "INV31"(c) Adjustment on Gain/Loss on sale of S6 with breakdown by share

(d) Remeasurement of investment at fair value(e) Neutralization of the impact on retained earnings

(c)

Another manual journal entry (#15), accounted for using audit ID INV31 – Adjustments on gain / losses on disposal of a subsidiary, JV or associate (local currency):

posts the difference between the individual and the consolidated statements on gain or loss on sale of S2 – as calculated previously, the difference is equal to (9 000 – 21 250 = -12 250)

recognizes a gain or loss on the remeasurement of the interest retained at fair value – as calculated previously, the difference is equal to (38 000 – 31 250 = 6 750)

neutralize the impact of the change of method on account E1610 – Retained earnings, using the flow F02 (see screenshot hereafter)

Figure 1- Report C31-10: Balance Sheet by flow and audit ID

(e)

C

d

e


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(a) Flow F00 shows the opening consolidated balance of the group

(b) Flow F02 shows the change in consolidation method of S6 (reversal of full method)

(c) Reclassification of the fair value of residual interests on flow F03

Flow F03 is balanced

(d) Cash received for the sale of 75% of S6 (USD115,000)

Investment gross value sold (USD93,750)

Clearing accounts used to post investment elimination are balanced

(e) Gain on sale of 75% of S6

(a) (b)

(c)

(d)

(e)

(d)

(d)

RETRIEVAL OF CONSOLIDATED DATA

After running the consolidation, the consolidated balance sheet is as follows:

Figure 2- Report C31-05: Balance Sheet by flow


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The equity movements are explained below:

Figure 3- Report C31-12: Balance Sheet by flow, audit ID and reporting unit

(a) S6 opening package data are reversed on flow F02

(b) S6 opening allocation is reversed on flow F02

S6 opening allocation is accounted for on flow F03

(c) S6 opening OCI accounted for at EM (25%) on flow F03 are reclassified to retained earnings

(d) Previous goodwill (USD25,000) is reversed on flow F02

New goodwill (USD8,000) is posted on flow F03

(e)

New investment elimination (USD38,000) is posted on flow F03

(f) P6 package net income (USD21,250)

P6 MJE to correct the gain on sale of S6

Transfer of retained earnings from S6 to P6

S6 opening package data are accounted for equity method at 25% on flow F03

Previous investment elimination (USD125,000) is reversed on flow F02

(a)

(a)

(a)

(b)

(b)

(c)

(c)

(d)

(e)

(f)

(f)


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(a) Automated entries processed by the consolidation engine

(b) Manual journal entry (CENTRAL-15) adjusting the gain on sale

(c) Automated entries processed by rules

Reclassification of OCI to retained earnings (AUTOCO 2 )

Allocation (AUTOCO 7 )

Goodwill (AUTOCO 3) detailed by share

Investment elimination (AUTOCO 4 & AUTOCO 5) detailed by share

(a)

(a)

(b) (b)

(b)

(a)

(c)

(c)

Analysis of account E1610 Retained earnings

Figure 4- Report C32-05: General Ledger by audit ID, share, JE number


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HOW DOES THE LOSS OF CONTROL WHILE RETAINING INTEREST AFFECT FINANCIAL STATEMENTS?

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

The loss of control of S6, while retaining a 25% interest impacts the non-current and current assets & liabilities, the cash and the equity.

Figure 5- Report C11-05: Statement of financial position

Figure 6- Report C32-05: General Ledger by audit ID, share, JE number

(a) Derecognition of non current / current assets and liabilities

(c) Impact on equity: gain on sale for +9 000 and OCI recycling - 1000

(b) Impact on cash:

- Cash received for the sale of PS6: USD115 000

- S6 cash derecognition due to the change in consolidation method: SD15 000

(a)

(a)

(a)

(b)

(c)

You can drill down to the automatic journal entries GW-450 (goodwill booking) and EQM-110 (booking of 25%

of S6's net equity i.e. 120 000 x 25%)


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CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME

Figure 7- Report C11-15: Statement of Other Comprehensive Income

Figure 8- Report C23-05: Statement of Other Comprehensive Income breakdown

As stated before, the comprehensive income is impacted by: - P6’s gain on sales of 75% of S6 and on the revaluation of the 25%

retained interest - the recycling of S6’s opening OCI

You can have the detail of each line item as for example (see below) the share of OCI of associates and JV


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STATEMENT OF CASH FLOWS

Figure 9- Report C11-25: Statement of Cash Flows

Figure 10- Report C22-35: Analysis of line item by Reporting unit

Figure 11- Report C23-10: Statement of Cash Flows breakdown

Sales proceed at P6: a. Net Book Value: 93 750 b. Gain on sale of S6 at consolidated level: 9 000

c. Automatic entry to reclassify non-cash operation: 12 250

115 000

d. Derecognition of S6's cash due to the change of consolidation method : - 15 000

(a)

(b)

(c)

(d)

You can drill down from the Statement of Cash Flows to a detail by reporting unit of any item. It is then possible to have the detail of the account/flow pairs used to build the item


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The changes in equity come from the gain on sale of 75% of S6 and from the recycling of S6's OCI

STATEMENT OF CHANGES IN EQUITY

Figure 12- Report C11-30: Statement of Changes in Equity

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