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How to handle the partial disposal of an investment while retaining control with SAP® Financial Consolidation 10.0, Starter Kit for IFRS?

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TABLE OF CONTENTS

INTRODUCTION ............................................................................................................................................... 3

WHAT ARE THE REGULATION REQUIREMENTS? ...................................................................................... 4

PRESENTATION OF THE BUSINESS CASE .................................................................................................. 5

HOW TO HANDLE THE PARTIAL DISPOSAL OF AN INVESTMENT (CONTROL RETAINED) IN THE IFRS STARTER KIT? ........................................................................................................................................ 7 Reminder .......................................................................................................................................................... 7 Overview of the operating process ................................................................................................................ 7 Consolidation scope ....................................................................................................................................... 8 Automatic journal entries ............................................................................................................................... 8 Manual journal entries..................................................................................................................................... 8 Retrieval of consolidated data ....................................................................................................................... 9

HOW THE PARTIAL DISPOSAL OF AN INVESTMENT (CONTROL RETAINED) AFFECTS FINANCIAL STATEMENTS ................................................................................................................................................ 12 Consolidated Statement of Financial position ........................................................................................... 12 Consolidated statement of cash flows ........................................................................................................ 13 Statement of changes in equity ................................................................................................................... 14

How to handle the partial disposal of an investment (control retained) with SAP® IFRS Starter Kits Consolidation Practical Guide N°11– October, 2012

3

INTRODUCTION

This practical guide is part of a new series of seven guides dedicated to help deal with the most frequent consolidation M&A requirements when using the SAP® Financial Consolidation 10.0, starter kit for IFRS. A first series was published to help deal with those cases when using SAP® Planning and Consolidation 10.0, starter kit for IFRS, version for SAP NetWeaver.

In this paper the partial disposal of a subsidiary while retaining control (equity transaction) is explained through a real use case scenario and presented in three steps:

what the IFRS text says,

how the business use case is handled in Financial Consolidation,

and what impact the CFO should expect on her/his company’s financial statements.

You can use this new paper to demonstrate SAP’s supremacy in addressing customers’ most complex and frequent business requirements.

SAP solutions for consolidation, part of SAP enterprise performance management (EPM) solutions, include SAP Financial Consolidation and SAP Business Planning and Consolidation. A starter kit for IFRS has been developed for each solution to perform, validate and publish a statutory consolidation in accordance with IFRS. These starter kits are based on a dynamic configuration easy to customize to specific requirement. They are provided with documentations.

To know more:

You will find further regulation analysis on how SAP® Financial consolidation 10.0, Starter kit for IFRS meets IFRS requirements and further indications on how to deal with scope changes in the SAP® Financial consolidation 10.0, Starter kit for IFRS SP2 Operating guide.

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4

WHAT ARE THE REGULATION REQUIREMENTS?

According to IFRS 3 and IFRS10, only a change in control is a significant economic event. Once control has been achieved, any subsequent transactions that do not result in a loss of control are accounted for as equity transactions. Equity transactions should be accounted for as follows:

The carrying amounts of the controlling and non-controlling interests should be adjusted to reflect the

changes in their relative interests in the subsidiary

Any difference between the amount by which the non-controlling interests are adjusted and the fair

value of the consideration paid is recognized directly in equity and attributed to the owners of the

parent

No change in the carrying amounts of the subsidiary’s assets (including goodwill) should be

recognized as a result of such transactions

IFRS 10 does not give detailed guidance on how to measure the amount to be allocated to the parent and non-controlling interest to reflect a change in their relative interests in the subsidiary. Main issues regard goodwill and accumulated other comprehensive income. Goodwill

In the Basis for conclusions of IFRS 3 (BC218), the Board explains that the adjustment to the carrying amount of non-controlling interests, that will be recognized when the acquirer purchases shares held by non-controlling interests, will be affected by the choice of measurement basis for non-controlling interests at acquisition date (fair value or proportionate share of net assets). It means that, when parent acquires non-controlling interests that have been initially measured at their fair value, goodwill is included in the carrying amount of non-controlling interests that is transferred to group equity.

With partial disposals, where the parent disposes part of its interest to non-controlling interest without losing control, the question remains whether part of the parent’s goodwill should be transferred to NCI or not. Interpretations published by professional bodies differ. Some consider that goodwill is part of the transfer whereas others think that no goodwill has to be allocated to NCI (which means that principles apply differently whether the equity transaction is an increase or a decrease of the parent’s ownership interest).

Accumulated other comprehensive income

As regards partial disposals, IAS 21 requires that “the entity shall re-attribute the proportionate share of the cumulative amount of the exchange differences recognized in other comprehensive income to the non-controlling interests in that foreign operation” (§ 48.C). IAS 39 has been amended in the same manner regarding hedging reserves.

On the other hand, IFRS are silent when it comes to an increase in parent’s ownership interest. SFAS 160 Non-Controlling Interests in Consolidated Financial Statements, which is supposed to be the US GAAP equivalent of IFRS 10, is clearer:

“A change in a parent’s ownership interest might occur in a subsidiary that has accumulated other comprehensive income. If that is the case, the carrying amount of accumulated other comprehensive income shall be adjusted to reflect the change in the ownership interest in the subsidiary through a corresponding charge or credit to equity attributable to the parent (§ 34)”.

As a consequence, we assume that accumulated other comprehensive income has to be re-allocated between group and NCI according to their new respective shares, regardless of whether there is an increase or a decrease in the parent’s ownership interest.


5

PRESENTATION OF THE BUSINESS CASE

This business case is included in the set of data provided with the IFRS starter kit SP2. It is possible to retrieve it using the following settings:

- CATEGORY: A- ACTUAL,

- DATA ENTRY PERIOD: 2021.12,

- CONSOLIDATION CURRENCY: USD

- SCOPE: CASE4,

- VERSION: IFRSYTD,

- REPORTING UNIT: P4, S4

Year 2019

Parent company P4 (USD) purchased a 100% interest in subsidiary S4 for USD125 000

S4 Fair value of net assets is USD100 000

Goodwill calculated = USD25 000

Year 2020

S4 Profit for the year = USD20 000

Year 2021

P4 sells 30% interests to NCI for USD40 000 at the beginning of 2021.

Y 2020 Y 2021

Parent P4 Parent P4

Subsidiary S4

100%

Subsidiary S4

70%


6

P4 individual accounts in 2021:

S4 individual accounts at the beginning of 2021:

Equity transaction impact on consolidated statement of financial position:

Y2019 S4 Acquisition 125 000

Y2021 S4 Gross value sold -37 500

Before After (125 000 x 30% = 37 500)

Investments in S4 125 000 87 500 87 500

Cash and cash equivalents 40 000

Assets 125 000 127 500 Cash received on the sale of S4 40000

Issued capital 125 000 125 000 Y2021 S4 Selling price 40 000

Retained earnings 2 500 Y2021 S4 Gross value sold -37 500

Equity & Liabilities 125 000 127 500 2 500

Sale of 30% of S4

Disp. Date

Cash and cash equivalents 120 000

Assets 120 000

Issued capital 20 000

Retained earnings 100 000

Equity & Liabilities 120 000

Before After

Goodwill 25 000 25 000 Δ = Cash received on the sale of S4 40 000

Cash and cash equivalents 120 000 160 000

Assets 145 000 185 000 Share of equity transferred to NCI -36 000

Gross value of investment sold 37 500

Issued capital 125 000 125 000 Gain on sale of 30% of S4 2 500

Retained earnings 20 000 24 000 Δ = Effect of decrease in financial rate 4 000

Non-controlling interest 36 000

Equity & Liabilities 125 000 185 000 Δ = Incoming NCI (120 000 x 30%) = 36 000

Sale of 30% of S4


7

HOW TO HANDLE THE PARTIAL DISPOSAL OF AN INVESTMENT (CONTROL RETAINED) IN THE IFRS STARTER KIT?

REMINDER

The amounts stored in the database are identified thanks to a set of elements called dimensions.

The main dimensions are listed below:

The account dimension indicates which item of the balance sheet or P&L is impacted.

The flow dimension is used to identify and analyze the changes between the opening (flow F00) and closing (flow F99) balances.

The audit ID dimension identifies the origin of the data for input data, local adjustments, manual and automatic journal entries.

The in-built dimension (Journal entry number) provides a full audit trail as it retrieves the number of the manual or automatic journal entry. The use of this feature is illustrated in the chapter “How the partial disposal of an investment (control retained) affects financial statements” where we show screenshots of the analysis reports that can be accessed by drill down from the financial statements.

OVERVIEW OF THE OPERATING PROCESS

The actions to perform to deal with a decrease in interest rate are listed hereafter. A tick mark indicates which actions apply to case#4. In this business case, we will focus on year 2021.

Package data entry

Parent:Parent company has to account for the selling price on the sale of part of the investment

(schedules PA2100 and PA2300) P

Consolidation scope

Enter the new financial rate of the subsidiaryP

Manual journal entries:

Subsidiary:Correct the allocation of the net income between CI and NCI using audit ID NCI11-

Calculation of NCI - Correction (if occurs during the period)

Parent:

The gain or loss on the sale accounted for in the net income, must be reclassified into

retained earnings on flow F92 using audit ID INV31 (Local currency) or 1 INV32 - Adj.on

gain /loss on disp of subsidiary, JV or associate (consolidation currency).

P

Consolidation:

Run the consolidation processingP

Report navigator:

Validate the scope change accounting with dedicated preconfigured reportsP

1 INV32 should be used if the holding company of an outgoing company is in foreign currency. In that case the

correction of the gain/loss should be booked with the consolidation currency to avoid conversion calculation.


8

CONSOLIDATION SCOPE

The financial rate variation is calculated automatically after having entered the closing financial rate, by difference with the financial rate of the opening consolidation scope.

AUTOMATIC JOURNAL ENTRIES

Elimination of the decrease in investment at parent’s using audit ID INV10 – Elimination of investment. Posting of the impact at subsidiary using flow F92- Change in interest rate and audit ID INV10

Reclassification of equity accounts between controlling interests and NCI according to the change of financial rate is posted on flow F92 for all audit IDs (except goodwill).

MANUAL JOURNAL ENTRIES

A manual journal entry is posted to reclassify the gain on partial disposal of S4 to retained earnings using the dedicated audit ID INV31 – Adj. on gains and losses on disposal of a subsidiary, JV or associate (Local currency) - Man

(a) Posted on P4(b) Using dedicated audit ID for gains or losses on sale of investment INV31(c) in P4 currency (USD)(d) Using the accounting scheme for gains or losses on sale of investments(e) On flow F92 (change in interest rate)

(a)

(d)

(b)

(c)

(d)(e)


9

(a)

(c)

(d)

(b)

(e)

(a) F00 shows the consolidated opening balance sheet of P4 + S4

(b) No gain / loss on the sale of 30% of S4

(c) Cash inflow due to disposal of 30% of S4

(d) Clearing accounts used to post investment eliminition are balanced

(e) Flow F92 is unbalanced and the difference is the gain or loss on sale of S4 in P4's individual accounts. The sum of Retained

earnings and NCI on flow F92 is equal to the consideration received for the disposal of 30% of S4

RETRIEVAL OF CONSOLIDATED DATA

After running the consolidation, the consolidated balance sheet is as follows:

Figure 1- Report C31-05: Balance Sheet by flow


10

(a)

(a) Reclassification of the 30% Controlling Interests to Non Controlling Interests-> Share capital (20 000 x 30% = 6 000)-> Retained earnings (100 000 x 30% = 30 000)

(b) Gain on sale of S4 in P4's individual statements is reclassified to retained earnings by manual journal entry

(c) Investment elimination trigerred by P4

(d) We consider in case #5 that goodwill allocation is not affected by the equity transaction

(a)

(a)

(a)

(b)

(c)

(b)

(d)

The equity movements are explained below:

Figure 2- Report C31-12: Balance Sheet by flow, audit ID and reporting unit (extract)


11

(a)

(b)

(a)

(b)

(c)

(c)

(a) Reclassification of the equity between CI and NCI to take into account the 30% change in interest rate (120 000 x 30%)

(b) Reversal of the elimination of sold investment with detail by share (holding entity P4)

(c) Manual journal entry #21 posted in order to reclassify the gain on sale of S4 to retained earnings

Analysis of account E1610 Retained earnings

Figure 3- Report C32-05: General Ledger by audit ID, share, JE number


12

Figure 4- Report C11-05: Statement of Financial Position

Figure 5- Report C32-05: GL by audit ID, partner, JE number

As stated previously, the equity transaction (partial disposal while retaining control) impacts the following accounts:(a) the cash received for the proceed of S4 40 000(b) the controlling interest : 4 000

Share of equity lost -36 000Gross value of invt sold + 37 500Gain on sale of S4 + 2 500

(c) the 30% incoming NCI: 120 000 x 30% 36 000

(a)

(b)

(c)

You can drill down from any item of the statement of financial position to the detail by entity, account, flows, audit ID and journal entry

HOW THE PARTIAL DISPOSAL OF AN INVESTMENT (CONTROL RETAINED) AFFECTS FINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF FINANCIAL POSITION


13

Figure 6- Report C11-25: Statement of Cash Flows

(a)

(a) As stated previously, the cash inflow corresponds to the proceeds received when selling 30% of S4:

- Net book value of sold investments

- Gain on sale in P4's individual accounts

CONSOLIDATED STATEMENT OF CASH FLOWS


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Figure 7- Report C11-30: Statement of Changes in Equity

Figure 8- Report C23-25: Statement of Changes in Equity breakdown

Figure 9- Report C32-15: General ledger by reporting unit and audit ID (flows)

(a) (b)

As expected, the changes in equity come from:(a) the difference between the sale price and the share of interest sold i.e. +40 000 - 36 000 = 4 000(b) the 30% incoming Non Controlling interest : 120 000 x 30% = 36 000

You can drill down from the statement of changes in equity to the detail by

account / flows...

...then to the detail by entity, flow, audit ID

STATEMENT OF CHANGES IN EQUITY

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