Changes in Group Structure and Disposals
Groups
Changes in Group Structure and Disposals
Syllabus tag: KASNEB CPA | Advanced Level | CA32 Advanced Financial Reporting and Analysis | Topic 3 Changes in Group Structure and Disposals
Lesson objectives
By the end of this topic, you will be able to:
- Distinguish transactions that change control from those that do not
- Compute the gain or loss where control is lost
- Account for a step acquisition
- Explain the remeasurement of a previously held interest
- Identify the treatment of a retained holding
Why this matters
Everything in this topic turns on one question: has control changed? Get that right and the treatment follows; get it wrong and both the profit and the group reserves are wrong.
The decision that governs everything
| Transaction | Control | Treatment |
|---|---|---|
| Buy more shares in an existing subsidiary | Retained | Equity transaction — no gain |
| Sell shares, retaining control | Retained | Equity transaction — no gain |
| Sell shares, losing control | Lost | Gain or loss to profit or loss |
| Buy enough to gain control | Obtained | Business combination; remeasure any prior holding |
Where control does not change, the group has not bought or sold a business — it has only rearranged ownership among the owners of a business it already controlled. Recognising a profit on that would allow a group to report gains by selling shares in itself.
Where control changes, a business has genuinely been acquired or disposed of, and profit or loss is recognised.
Disposal with loss of control
P owns 75% of S and sells 55%, leaving 20% which becomes an associate. Proceeds KES 140,000,000. At the date of disposal S's net assets are 160,000,000 and goodwill 30,000,000. The retained 20% has a fair value of 34,000,000.
| KES | |
|---|---|
| Proceeds | 140,000,000 |
| Fair value of the retained interest | 34,000,000 |
| Less net assets disposed of | (160,000,000) |
| Less goodwill derecognised | (30,000,000) |
| Add NCI derecognised (25% × 160,000,000) | 40,000,000 |
| Gain to profit or loss | 24,000,000 |
The retained interest is included at fair value, and this is the line candidates omit. The whole holding is treated as if disposed of and the retained portion reacquired at fair value — because control has been lost over all of it, not merely the part sold.
The retained 20% is then carried forward at that fair value of 34,000,000 as the cost of the new associate.
:::checkpoint A candidate computes the gain using only the proceeds against the share of net assets sold, ignoring the retained interest. Explain what this omits and why the standard requires the retained holding to be remeasured. :::
Step acquisition: from associate to subsidiary
P holds 30% of S as an associate, at a cost of KES 40,000,000, and buys a further 50% for 120,000,000, obtaining control. At that date the fair value of the original 30% is 62,000,000, the NCI is measured at a fair value of 42,000,000, and S's net assets are 180,000,000.
Step 1 — remeasure the previously held interest to fair value:
62,000,000 − 40,000,000 = KES 22,000,000 gain to profit or loss
Step 2 — compute goodwill using the fair value of the whole:
| KES | |
|---|---|
| Consideration for the new 50% | 120,000,000 |
| Fair value of the previously held 30% | 62,000,000 |
| Fair value of the NCI | 42,000,000 |
| Less net assets at the date control was obtained | (180,000,000) |
| Goodwill | 44,000,000 |
The logic of the remeasurement. Obtaining control is a significant economic event: the investor moves from influencing to controlling. The standard treats it as though the original holding were disposed of and reacquired, which is why a gain arises even though nothing was sold.
Goodwill is computed once, at the date control is obtained, on the whole holding. It is not computed in stages.
Step acquisition: subsidiary to more of a subsidiary
Buying from 60% to 80% changes nothing about control. No goodwill is recomputed and no gain arises. NCI is reduced by the proportion acquired and the difference against the consideration goes to equity — the mirror image of the partial disposal in the previous topic.
Disposal of an associate
Where an associate is sold, the gain is proceeds less the equity-accounted carrying amount at the date of disposal, and any amounts previously recognised in other comprehensive income are reclassified on the same basis as if the underlying assets had been disposed of.
Summary of the retained interest
| Holding falls to | Retained interest becomes | Measured at |
|---|---|---|
| 20–50% with significant influence | An associate | Fair value at the date control was lost |
| Below 20%, no influence | A financial asset | Fair value |
| Above 50% | Still a subsidiary | Not remeasured |
In the first two rows the fair value at the date control ceased becomes the new cost. The remeasurement is what makes the gain calculation complete, and omitting it is the commonest single error in this topic.
:::checkpoint P reduces its holding in S from 90% to 55%. State whether a gain arises in profit or loss, and explain what would change if the holding had fallen to 45%. :::