To mark this momentous year for UK GAAP, I'm embarking on a mission to work my way through FRS 102, reading a portion on each working day of 2015 and writing a short blog entry on my thoughts and musings (be they few or many).
It's a grey, chilly Thursday which meteorologists universally agree is the best weather in which to consider increases and decreases in a parent entity's stake in its subsidiary. Best get on with it, then...
DAY 14 (22 Jan)So here's a scenario. A parent company (say, Freddie Ltd) has a 60% stake in a subsidiary, Bohemian Ltd. Freddie Ltd increases its stake by buying an additional 30% for £1m because it wants it all, and it wants it now. Bohemian's assets are worth £2.4m at fair value. How should this increase be accounted for?
Under FRS 2 para 51, ' the identifiable assets and liabilities of that subsidiary undertaking should be revalued to fair value and goodwill arising on the increase in interest should be calculated by reference to those fair values.' So the additional assets acquired by the group (30% of £2.4m, ie £720K) is deducted from the £1m purchase price and the result is additional goodwill of £280K.
But does this make sense? Wouldn't it be better to simply say that Freddie's transaction with the other shareholders shouldn't create goodwill - it should merely alter the allocation of profits and assets to 'non-controlling interests' from 40% to 10% from the date of the increase? Well, that's exactly how FRS 102 sees it. Paras 9.19C-9.19D state that in this situation, 'the identifiable assets and liabilities and a provision for contingent liabilities of the subsidiary shall not be revalued to fair value and no additional goodwill shall be recognised at the date the controlling interest is increased. The transaction shall be accounted for as a transaction between equity holders and the resulting change in non-controlling interest shall be accounted for in accordance with paragraph 22.19.'
Right. I need a lie down and a hot compress (or did I mean a hot chocolate?). See you tomorrow.
P.S. If you missed yesterday's instalment click here