Consolidation Accounting Conundrum?
XYZ Ltd. acquired 80% stake in ABC Ltd. last year. However, due to a change in management, XYZ Ltd. decided to divest its stake by selling 20% of its holding to an unrelated party. However, ABC Ltd.'s financial statements for the current year are not prepared on a going concern basis. How will XYZ Ltd. account for the changes in its stake in ABC Ltd.?
1 Answer
📌 CONCEPT: When a parent company changes its stake in a subsidiary, the changes should be accounted for in the consolidated financial statements. This involves adjusting the carrying value of the investment in the subsidiary to reflect the new ownership percentage.
📐 RULE / FORMULA: The parent company will adjust the carrying value of the investment by recognizing the difference between the new stake's cost and its original carrying value in the profit or loss of the consolidated entity.
💡 WORKED EXAMPLE: Suppose XYZ Ltd. initially acquired 80% of ABC Ltd.'s shares for ₹ 10,000. Later, it sold 20% to an unrelated party for ₹ 4,000. ABC Ltd.'s assets and liabilities are valued at ₹ 100,000 and ₹ 50,000, respectively. The new carrying value of the investment will be 60% of ₹ 100,000, which is ₹ 60,000. The adjustment to be recognized in the consolidated profit or loss will be ₹ 4,000 (₹ 60,000 - ₹ 56,000).
⚠️ COMMON MISTAKE: Students may forget to consider the change in carrying value of the investment when the stake in the subsidiary changes, which can lead to incorrect consolidated financial statements.
03 Oct 26
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