Loss of control in step transactions

He is an investment banker and a very successful one, as well. He screams in

Antoine is not just strange. He is Special. He makes snap decisions and almost all those decisions turn

out to be right, just like that $$double fault$$ that for which he is almost always able to preempt. That$$s

strange too but in a good way.

Now he has another decision to make. His Company $($the parent company$)$ owns $70\%$ of a subsidiary

that has a net asset of $$3,000,000$ and a foreign currency translation loss that was recognised in other

comprehensive income and is accumulated within equity of $$100,000.$ Of this amount, $$30,000$ was

allocated to non$-$controlling interest, and is included within the total non$-$controlling interest. In

November $2022,$ his company sells $19\%$ of the ownership interest for $ $620,000.$ In January $2023$ his

company sells the remaining $51\%$ for $ $1,700,000$ in an arrangement that is considered a packaged

deal which is a typical Private Equity transaction. Assuming that there are no gains and losses in this

packaged interval.

The net assets of the subsidiary are not impaired under IAS $36,$ which is confirmed by the fact that the

totalsales price exceeds the parent$$s share in the net assets by $$220,000($$$2,320,000$ less $$2,100,000).$

The total loss on disposal can be calculated as follows:

$$000$ $$000$

DR CR

Proceeds from sale $2,320$

Net assets of the subsidiary derecognized $3,000$

Non$-$controlling interest derecognized $900$

Reclassification of parent$$s share of the loss in other $70$

Comprehensive income

Profit on disposal of the subsidiary attributable to the parent $150$

If the parent is considered not to have lost control over the investment in the subsidiary until February

$2023,$ then it accounts for the $$620,000$ received in the first step of the transaction as an advance

receipt of consideration. The parent continues to consolidate the subsidiary until the later date, at

which point the profit on disposal of $$150,000$ would be recognised.

If the parent is considered to have lost control over the investment in the subsidiary on the first step

of the transaction, then it ceases to consolidate the former subsidiary immediately, recognises a profit

on disposal of $$150,000,$ and accounts for the consideration of $ $1,700,000$ due in the second step as

deferred consideration receivable.

If the parent is considered to have lost control over the investment in the subsidiary on the first step

of the transaction but continues to have significant influence then it would recognize the investment

as an associate until it sells the remaining investment in subsidiary on February $2023.$ In this particular

case we need to know the gains and losses in the packed interval.

Since this is a packaged deal so Antoine has been successfully able to mint the coins from this

transaction and has successfully make an orderly private equity transfer of the subsidiary to a third

party. This has made the investors happy, and they are now willing to put their trust even more on

Antoine.

The power of snap decisions and common sense $($which is not very common$)$ can open the secret life

of a private equity investment banker. The locked doors are not locked anymore when we open our

eyes and senses to the flock of hummingbirds $-$so as to say $-$ popping through so many stations. Within

seconds this creates an inner voice that unravels the$-$past$-$from$-$the$-$present, the$-$genuine$-$from the$-$fake

and the$-$real$-$from$-$the$-$unreal, making people like Antoine truly $$fake busters$$ in the real world. Just

when the mayhem of the unknown create confusion, the inner voice of Antoine screams out loud,

$$Watch out!$.$ This creates the power of thinking without thinking.

Antoine still thinks he could have improved his performance, if only just, he had been a little more

patient. Do you think that the transaction cashflows could have improved with an orderly exit as

opposed to a packaged deal?

Case Questions

$1.$In the case study its mentioned, $$If the parent is considered not to have lost control over the

investment in the subsidiary until February $2023,$ then it accounts for the $$620,000$ received

in the first step of the transaction as an advance receipt of consideration. The parent continues

to consolidate the subsidiary until the later date, at which point the profit on disposal of

$$150,000$ would be recognized.$$ In this case:

a$.$ What would be the accounting entry for the first leg of the transaction in November

$2022$ when you were supposed to account for the $$620,000$ received as advance

receipt of consideration?

b$.$ What would be the accounting entry for adjusting that advance received in the second

leg of the transaction?