Is a Consolidation Appropriate for a Subsidiary Planned for Sale?

In our experiences with IFRS advisory, one intriguing scenario that arises is the continuation of consolidating a subsidiary until it is actually sold, despite a business having formulated a plan for its sale. Businesses initiating actions such as marketing and negotiations with potential buyers for a subsidiary planned for sale still continue to consolidate until the subsidiary is sold.

This accounting matter has recurrently appeared on the IASB agenda and has become a popular topic, drawing numerous questions. IFRS 5, in paragraph 6, mandates the classification of an asset group as held for sale if its carrying amount will be recovered through a sale rather than through its continuing use, thereby requiring accounting based on the principles outlined in IFRS 5.

On the other hand, both the previous standard IAS 27 and the current standard IFRS 10 state that a parent entity should continue consolidation until it loses control over a subsidiary. In IFRS 10, upon losing control, the assets and liabilities of the subsidiary are derecognized, and the remaining interests are accounted for based on the applicable accounting standard, depending on the size of the remaining interest.

The question arises: when a plan is in place to sell a subsidiary, should consolidation continue because control has not been lost, or should IFRS 5 be applied since a sale plan has been formulated and related actions have been taken?

Due to the apparent contradiction between the two standards, the IASB received numerous inquiries and requests for clarification. In response, in 2007, the IASB clarified its approach to this issue in the basis for conclusions of IFRS 5.

As explicitly stated in IFRS 5 BC24C, when a business creates a plan for the sale of a subsidiary and initiates actions accordingly, the business, in essence, relinquishes control over the subsidiary. In other words, acting in line with a sales plan aimed at losing control over a subsidiary is a trigger for the 'held for sale' classification under IFRS 5.

Consequently, a business planning to sell a subsidiary should cease consolidating the subsidiary. In such a scenario, accounting must adhere to the principles outlined in paragraphs 18, 19, and 23 of IFRS 5. The assets and liabilities of the relevant subsidiary fall under the definition of a 'disposal group' as specified in paragraph 4 of IFRS 5. Therefore, all assets and liabilities of the subsidiary should be classified entirely as 'held for sale' without considering the size of the remaining interests after control is lost.

When a group of assets and liabilities is classified as held for sale, it is crucial to remember that the measurement principles of IFRS 5 must be applied at the group level. In other words, the 'group' should be retained on the balance sheet at the lower of its carrying amount and fair value less costs to sell.

Before commencing accounting under IFRS 5, the carrying amounts of all assets and liabilities in the group should be determined based on their respective standards. In subsequent periods, the carrying amounts of each asset and liability within the group classified as held for sale must be determined according to the applicable IFRS, followed by calculating the fair value less costs to sell for the group (subsidiary) as a whole.

If impairment arises in subsequent periods, the carrying amounts of non-current assets within the scope of IFRS 5's measurement principles should be reduced in accordance with the distribution principles outlined in paragraphs 104(a), 104(b), and 122 of IAS 36.

Businesses planning to sell or in the process of selling subsidiaries should seek guidance from IFRS experts to prevent significant accounting errors and misguidance of financial statement readers during the preparation of their financial statements.