5.4 Changes in ownership interests

Changes in ownership interests can significantly impact a company's financial statements. This topic explores how parent companies account for increases or decreases in their ownership of subsidiaries, and the implications for control.

The accounting treatment depends on whether the parent maintains control after the change. We'll look at various scenarios, including increases, decreases, and dilutions in ownership, as well as how these changes affect non-controlling interests and financial reporting.

Changes in parent's ownership interest

• Changes in a parent company's ownership interest in a subsidiary can have significant accounting implications
• Accounting for these changes depends on whether the parent maintains control over the subsidiary
• Key factors to consider include the direction of the ownership change (increase or decrease) and the resulting impact on the parent's controlling interest

Increase in ownership interest

• Occurs when the parent company acquires additional shares in the subsidiary from non-controlling shareholders
• Increases the parent's proportionate share of the subsidiary's net assets and earnings
• Accounted for as an equity transaction, with no gain or loss recognized in the parent's income statement
• Difference between the fair value of the consideration paid and the carrying amount of the non-controlling interest acquired is recorded in the parent's equity (additional paid-in capital)

Decrease in ownership interest

• Happens when the parent company sells a portion of its shares in the subsidiary to non-controlling shareholders
• Decreases the parent's proportionate share of the subsidiary's net assets and earnings
• Accounted for as an equity transaction if the parent maintains control over the subsidiary
• Difference between the fair value of the consideration received and the carrying amount of the interest sold is recorded in the parent's equity
• If the decrease results in a loss of control, the transaction is accounted for as a deconsolidation, with any gain or loss recognized in the parent's income statement

Accounting for changes in ownership

• Changes in ownership interest that do not result in a loss of control are accounted for as equity transactions
• No gain or loss is recognized in the parent's income statement
• Adjustments are made to the parent's equity and the carrying amount of the non-controlling interest to reflect the change in ownership proportions
• If the change results in a loss of control, the subsidiary is deconsolidated, and any gain or loss is recognized in the parent's income statement

Subsidiary issues new shares

• Occurs when the subsidiary issues new shares to investors, diluting the parent's ownership interest
• Dilution can be caused by various events, such as the exercise of stock options, conversion of convertible securities, or issuance of shares for cash or other consideration

Dilution of parent's ownership

• When a subsidiary issues new shares, the parent's proportionate ownership interest in the subsidiary decreases
• Dilution reduces the parent's share of the subsidiary's net assets and earnings
• The extent of the dilution depends on the number of new shares issued relative to the total outstanding shares

Accounting for dilution

• Dilution is accounted for as an equity transaction in the consolidated financial statements
• No gain or loss is recognized in the parent's income statement
• The carrying amount of the non-controlling interest is adjusted to reflect the increased ownership proportion
• The difference between the fair value of the consideration received by the subsidiary and the change in the carrying amount of the non-controlling interest is recorded in the parent's equity (additional paid-in capital)

Parent sells subsidiary shares

• Involves the parent company selling a portion of its shares in the subsidiary to third-party investors
• Can be motivated by various factors, such as raising capital, diversifying holdings, or managing risk

Gain or loss on sale

• When the parent sells subsidiary shares, a gain or loss may be recognized in the parent's income statement
• The gain or loss is calculated as the difference between the fair value of the consideration received and the carrying amount of the interest sold
• If the sale results in a loss of control, the gain or loss calculation includes the remeasurement of any retained interest to fair value

Accounting for sale of shares

• If the parent maintains control after the sale, the transaction is accounted for as an equity transaction
• The carrying amount of the non-controlling interest is adjusted to reflect the increased ownership proportion
• The difference between the fair value of the consideration received and the carrying amount of the interest sold is recorded in the parent's equity
• If the sale results in a loss of control, the subsidiary is deconsolidated, and any gain or loss is recognized in the parent's income statement

Reacquisition of subsidiary shares

• Occurs when the parent company buys back previously issued subsidiary shares from non-controlling shareholders
• Can be motivated by various factors, such as increasing control, eliminating minority interests, or simplifying the ownership structure

Accounting for reacquisition

• Reacquisition of subsidiary shares is accounted for as an equity transaction
• The carrying amount of the non-controlling interest is reduced to reflect the decreased ownership proportion
• The difference between the fair value of the consideration paid and the carrying amount of the interest acquired is recorded in the parent's equity (additional paid-in capital)
• No gain or loss is recognized in the parent's income statement

Impact on non-controlling interest

• Reacquisition of subsidiary shares reduces the non-controlling interest in the subsidiary
• The non-controlling interest's proportionate share of the subsidiary's net assets and earnings decreases
• The carrying amount of the non-controlling interest is adjusted to reflect the change in ownership proportion

Changes in non-controlling interest

• Non-controlling interest (NCI) represents the equity ownership in a subsidiary held by shareholders other than the parent company
• Changes in NCI can occur through various transactions, such as acquisitions from or sales to non-controlling shareholders

Acquisitions from non-controlling interest

• Occurs when the parent company acquires additional shares in the subsidiary from non-controlling shareholders
• Increases the parent's proportionate ownership interest in the subsidiary
• Accounted for as an equity transaction, with no gain or loss recognized in the parent's income statement
• The carrying amount of the NCI is reduced, and the difference between the fair value of the consideration paid and the carrying amount of the interest acquired is recorded in the parent's equity

Sales to non-controlling interest

• Involves the parent company selling a portion of its shares in the subsidiary to non-controlling shareholders
• Decreases the parent's proportionate ownership interest in the subsidiary
• Accounted for as an equity transaction if the parent maintains control
• The carrying amount of the NCI is increased, and the difference between the fair value of the consideration received and the carrying amount of the interest sold is recorded in the parent's equity
• If the sale results in a loss of control, the transaction is accounted for as a deconsolidation, with any gain or loss recognized in the parent's income statement

Accounting for NCI transactions

• Changes in NCI that do not result in a loss of control are accounted for as equity transactions
• No gain or loss is recognized in the parent's income statement
• Adjustments are made to the parent's equity and the carrying amount of the NCI to reflect the change in ownership proportions
• If the change results in a loss of control, the subsidiary is deconsolidated, and any gain or loss is recognized in the parent's income statement

Intra-entity ownership changes

• Intra-entity ownership changes involve the transfer of ownership interests between the parent company and its subsidiaries
• These transactions can include the transfer of shares, assets, or liabilities between related parties

Transfers between parent and subsidiary

• Intra-entity transfers can be in the form of downstream transactions (parent to subsidiary) or upstream transactions (subsidiary to parent)
• Examples include the parent company selling shares of the subsidiary to the subsidiary itself or the subsidiary distributing shares of the parent company to its shareholders
• These transactions can have tax and legal implications that need to be considered

Accounting for intra-entity transfers

• Intra-entity ownership changes are generally accounted for as equity transactions in the consolidated financial statements
• No gain or loss is recognized in the consolidated income statement
• The carrying amounts of the parent's equity and the NCI are adjusted to reflect the change in ownership interests
• Any difference between the fair value of the consideration and the carrying amount of the transferred interest is recorded in the parent's equity

Presentation and disclosure

• Changes in ownership interests and related transactions require appropriate presentation and disclosure in the financial statements
• The objective is to provide users with relevant and transparent information about the nature and impact of these changes

Financial statement presentation

• Changes in ownership interests that do not result in a loss of control are presented as equity transactions in the consolidated statement of changes in equity
• The effects of these transactions on the parent's equity and the NCI are separately disclosed
• If a change in ownership results in a loss of control, the gain or loss on deconsolidation is presented in the consolidated income statement

Disclosure requirements for ownership changes

• Entities are required to disclose the nature and terms of significant changes in ownership interests
• Disclosures should include the impact on the parent's equity, NCI, and earnings per share
• The accounting policies applied to these transactions should be clearly described
• Comparative information for prior periods should be provided to enable users to understand the effects of ownership changes over time