entity a owns 100 of the shares of entity b the interest was originally purchased fo 611794

Accounting for retained interest in a jointly controlled entity following loss of control in an entity

Entity A owns 100% of the shares of Entity B. The interest was originally purchased for £500,000 and £40,000 of directly attributable costs relating to the acquisition were incurred. On 30 June 2012, Entity A sells 50% of the shares to Entity C for £1,100,000. As a result of the sale, Entity A loses control over Entity B, but enters into a contractual arrangement with Entity C, such that it has joint control over Entity B.

At the date of disposal, the carrying amount of the net assets of Entity B in Entity A’s consolidated financial statements is £1,200,000 and there is additionally also goodwill of £200,000 relating to the acquisition of Entity B. The fair value of the identifiable assets and liabilities of Entity B is £1,600,000. The fair value of Entity A’s retained interest of 50% of the shares of Entity B is £1,100,000.

Upon Entity A’s sale of 50% of the shares of Entity B, it deconsolidates Entity B and accounts for its investment in Entity B as a jointly controlled entity using the equity method of accounting.

Entity A’s initial carrying amount of the jointly controlled entity has to be based on the fair value of the retained interest, i.e. £1,100,000. It is not based on 50% of the original cost of £540,000 (purchase price plus directly attributable costs) as might be suggested by the Interpretations Committee statement, nor is it based on 50% of the carrying amount of the net assets and goodwill totalling £1,400,000 as would have generally been the treatment prior to changes made to IAS 27 (2012) and IFRS 3 as a result of phase II of the Business Combinations project.