## **Learning Outcomes**

After reading this article, you will be able to explain and apply the basic principles of accounting for disposals and step acquisitions in consolidated financial statements. You will learn how to calculate group profit on disposal, account for the results of disposed subsidiaries and new subsidiaries, and understand the impact of step acquisitions and full disposals on both the parent’s and the group’s financial statements.

## **ACCA Financial Reporting (FR) Syllabus**

For ACCA Financial Reporting (FR), you are required to understand key aspects of group accounting involving changes in group structure. You should focus your revision on:

- Explaining and illustrating the effect of subsidiary disposals in parent and group accounts
- Preparing consolidated statements where a subsidiary is disposed (full disposal, not partial)
- Understanding and accounting for step acquisitions (where an associate or investment becomes a subsidiary partway through the year)
- Recognising discontinued operations and their effect on the group statement of profit or loss
- Calculating and interpreting group profit or loss on disposal, including removal of subsidiary balances and goodwill

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. What are the components required for calculating the group’s profit or loss on the disposal of a subsidiary?
2. What results of a disposed subsidiary should be included in the group statement of profit or loss?
3. Briefly explain what is meant by a step acquisition in group accounts and how the results of the newly acquired subsidiary are dealt with.
4. Identify one key disclosure required when a subsidiary disposal meets the criteria of a discontinued operation.

## **Introduction**

Changes in the group’s structure due to the disposal of a subsidiary or gaining control over an investment during the reporting period have significant impacts on the consolidated financial statements. The correct accounting treatment ensures the group’s financial information reflects only the period of control and accurately reports any gain or loss arising on disposal. Proper understanding of these requirements is essential for success in the ACCA Financial Reporting (FR) exam.

> **Key Term: group disposal**
> The full sale of a parent company’s interest in a subsidiary, resulting in the subsidiary leaving the group’s consolidated accounts.
>
> **Key Term: group profit (or loss) on disposal**
> The calculation of profit or loss in group accounts from disposing of a subsidiary—taking into account sale proceeds, net assets disposed, attributed goodwill, and the non-controlling interest at the disposal date.
>
> **Key Term: step acquisition**
> When a parent entity increases its investment in another entity from a non-subsidiary interest to a controlling stake, usually requiring consolidated accounts from the acquisition date.

## **Accounting for the Disposal of a Subsidiary**

When a parent company disposes of its entire holding in a subsidiary during a period, it must:

- Consolidate 100% of the subsidiary’s income and expenses up to the date of disposal.
- Exclude the subsidiary’s assets and liabilities from the group statement of financial position as at the period end.
- Calculate the profit or loss on disposal at the group level, which may differ from the figure in the parent company’s own accounts.
- Present the results and gain or loss from the disposal as a discontinued operation if the criteria of IFRS 5 are met.

### Calculating Group Profit or Loss on Disposal

To calculate the group’s profit or loss on disposal, use:

**Profit/(loss) on disposal in the group accounts =**
Sale proceeds  
– Carrying amount of net assets of the subsidiary at disposal  
– Carrying amount of goodwill at disposal  
\+ Non-controlling interest at disposal

Note: The carrying amounts should be at the disposal date, including any fair value adjustments or impairment charges to that point.

> **Exam Warning**
> Many students forget to remove both the goodwill and the associated non-controlling interest when calculating group profit on disposal—leading to a significant loss of marks.

### **Worked Example 1.1**

A parent company sells its entire 80% holding in a subsidiary for \$1,200,000. At the date of disposal, the subsidiary’s net assets are \$1,000,000, and the carrying amount of goodwill is \$180,000. The non-controlling interest at disposal is \$240,000. What is the group profit on disposal?

> **Answer:**
> Group profit on disposal = Sale proceeds (\$1,200,000)  
> – Net assets disposed (\$1,000,000)  
> – Goodwill disposed (\$180,000)  
> \+ Non-controlling interest at disposal (\$240,000)  
> = \$1,200,000 – \$1,000,000 – \$180,000 + \$240,000 = \$260,000

### Discontinued Operations

Where the entire investment in a subsidiary is sold and the operation is a major line of business or geographical segment, its results are shown as a discontinued operation on the face of the consolidated statement of profit or loss.

- The subsidiary’s results up to the date of disposal are grouped together as “profit/(loss) from discontinued operations”
- The gain or loss on disposal is included within discontinued operations

### **Worked Example 1.2**

During the year, a parent sells a 100% owned subsidiary for \$800,000. The subsidiary’s profit for the period up to disposal is \$100,000. The subsidiary’s net assets at disposal are \$700,000, and all goodwill (\$60,000 carrying amount) is fully impaired. There are no non-controlling interests. How should this appear in the group statement of profit or loss?

> **Answer:**
>
> - “Profit for period from discontinued operations”: \$100,000 (operating profit up to disposal) + \$40,000 (profit on disposal: \$800,000 – \$700,000) = \$140,000 included as a single line for the discontinued operation.

## **Step Acquisitions: New Subsidiary During the Year**

A step acquisition occurs when an existing investment (previously an associate or a simple investment) increases such that the investor gains control during the year.

Key treatments:

- **Consolidation**: Only consolidate the new subsidiary’s results from the acquisition date to year end—do not restate prior period comparatives.
- **No line-by-line prior results**: For the pre-acquisition period, only the investor’s share of profits as per the equity or cost method is included.
- **Fair Value Remeasurement**: Any existing interest must be remeasured to fair value at the acquisition date, with gains or losses taken to profit or loss.

> **Revision Tip**
> Consolidate subsidiary results _only_ for the period during which control exists—not for the full reporting period.

### **Worked Example 1.3**

At the start of the year, Parent owns 30% of Subsidiary, an associate. On 1 July, Parent acquires enough shares to take its holding to 70% and gains control. Subsidiary’s annual profit is \$120,000 (assume even accrual), and Parent previously used the equity method.

What portion of Subsidiary’s profit does the group consolidate?

> **Answer:**
> In the consolidated statement of profit or loss:
>
> - Include equity-accounted share (30% × \$60,000) = \$18,000 for the first half (pre-acquisition, up to control)
> - From acquisition (1 July), consolidate 100% of Subsidiary’s profits for the second half (\$60,000), then allocate non-controlling interest as normal.
> - Rest of the profit for the period (\$60,000) consolidated line-by-line as a subsidiary.

## **Summary**

When a group disposes of a subsidiary it must report:

- The subsidiary’s results up to disposal within the consolidated profit or loss
- The group profit or loss on disposal, calculated using group carrying amounts for net assets and goodwill, adjusted for non-controlling interest

If control is newly gained during the year (step acquisition), only the profits generated from the date of control are consolidated as subsidiary profits. Prior profits are recognised per the previous investment status.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Explain the accounting impact of a full disposal of a subsidiary in group accounts
- Calculate group profit or loss on disposal, including goodwill and non-controlling interest
- Distinguish between parent and group profit on disposal
- Identify when a subsidiary’s disposal meets discontinued operations criteria
- Describe step acquisitions and consolidation of new subsidiaries in the reporting period

## **Key Terms and Concepts**

- group disposal
- group profit (or loss) on disposal
- step acquisition

Consolidated financial statements - Disposals and step acquisitions (basic)