Therefore, in the draft accounts I have written down the value of the investment to £100 (being the share capital), giving a write-off of £399,900 to the P&L. Having obtained control of the subsidiary, I guess my client simply decided to put all the trade through the one company, with a view to striking off the subsidiary in the future. 3.2 Recognising an impairment loss for cash generating units 48 3.3 Considerations for foreign operations 50 3.4 Reversing an impairment loss 51 3.4.1 Indicators for reversing an impairment loss 51 3.4.2 Reversing impairment losses for individual assets (other than goodwill) 52 3.4.3 Reversing impairment losses for cash generating units 53 E. IAS 36 seeks to ensure that an entity's assets are not carried at more than their recoverable amount (i.e. Therefore, I don't see how the market value of £400k can be justified. My view is that, as the subsidiary company has no trade or assets, the market value can now be reliably valued as being worthless. It has been suggested that the parent should somehow introduce goodwill onto its balance sheet to reflect what it has acquired from the subsidiary (substance over form?). Guys, Entity X has a 100% shareholding in Entity Y which is booked as in investment (share in subsidiaries) at a cost of EUR 1M. Is there justification to write this off over 4 years? With the exception of goodwill (see earlier), impairment losses on other assets can be reversed when the circumstances giving rise to the original impairment loss cease to apply. How to account for grant for electric car ? The TaxCalc Survival Guide to Self Assessment, Payroll and Covid: Growth and profit opportunities, Formulas to avoid sluggish payroll during COVID-19. On 31 March 2020, the carrying amount of Subco’s net assets were £880,000, excluding goodwill of £120,000 (net of amortisation). Sorry, I assumed you were saying that the assets had been stripped out by the holding company after the acquisition. The monetary asset (cash at bank) is also not affected by the impairment because this will be realised at full value. Sorry if I've missed something obvious in my thinking :). That’s a rather useless link unless you’re one of the suckers subscribing for ICAEW membership. Where a parent does not wholly-own a subsidiary, FRS 102, para 27.26 requires the goodwill to be grossed up to include goodwill attributable to the non-controlling interest (NCI) before conducting the impairment review. The total carrying amount of the CGU after impairment of the machinery is £2,710,000 (see below). Section 35 – Transition to FRS 102 – For individual entity financial statements the investment can be measured at cost or fair value. As the global financial crisis has worsened, the number of companies to Investment properties (Section 16). Rather, IAS 27 applies to such investments. ‘Recoverable amount’ is defined in the Glossary to FRS 102 as: Where recoverable amount is lower than carrying amount, the asset is written down to recoverable amount by way of an impairment loss which is recognised in profit or loss. 40% of the machinery was destroyed but the remaining 60% can be sold. It was withdrawn for accounting periods beginning on or after 1 January 2015, when FRS 102 became effective. an impairment test and identifies impairment of certain PPE, then following disclosures become significant and should be disclosed in the financial statements: • Amount of impairment losses recognised in the statement of profit and loss during the period including the line item in which the impairment losses are included. Effectively, for fixed assets, a previously recognised impairment loss can only be reversed to the extent that it brings the asset back up to the value it would have been stated at (net of depreciation/amortisation) had no impairment loss originally been recognised, so do be careful of this restriction to avoid overstating assets and impairment reversals. In three years time, if the trade lists etc were to be sold, who would be the seller of same ? 33 A parent of an investment entity shall consolidate all entities that it controls, including those controlled through an investment entity subsidiary, unless the parent itself is an investment entity. In addition, the impairment loss cannot be set against the building because its fair value is greater than its carrying amount (£1.6m as suggested by the independent surveyor) so the restriction in FRS 102, para 27.22(a) applies. FRS 102 states that “Investments in unlisted Company shares, whose market value can be reliably determined, are remeasured to market value at each balance sheet date. Surely in the absence of some agreement one could just as easily say the sub retains the goodwill inherent in the list and is licensing the parent to use said list for no consideration, meantime. So nothing has changed since the acquisition. FRS 102 will require interest to be accounted for on such a loan. This important title guides practitioners through their first implementation of FRSs, 100, 101 and 102. So the assets were "stripped out" by the vendor not the purchaser? No mention of transfer of business etc. Perfectly valid and well worded question. Most companies reporting under FRS 102 will not meet the above criteria so they will not be required to comply with non-financial reporting requirements of section 414CB. Gains and losses on remeasurement are recognised in the Statement of comprehensive income for the period. It is the notionally adjusted goodwill figure which is then aggregated with the other net assets of the CGU. fair value less costs to sell (if determinable). What were the net assets of the subsidiary on the acquisition date? On the basis that a company now has no trade (because subsequent to the sale the trade has been hived up to the parent) and no assets, it is simply an empty shell - it doesn't generate any turnover. Examples of source references used are: 4.14 Paragraph 4.14 of FRS 102 In these challenging times where businesses are facing tremendous disruption due to the Coronavirus, there will invariably be some assets that are showing indicators of impairment, hence may need to be written down to recoverable amount by way of an impairment loss in the entity’s financial statements. Gains and losses on remeasurement are recognised in the Statement of comprehensive income for the period. Category: Accounting and standards, Audit. This is allocated first to goodwill and then to the other assets in the CGU on a pro rata basis (FRS 102, para 27.21). This has been treated as an investment in a subsidiary in the draft accounts at cost. The consideration was £400,000. FRS 102 will have to provide a formal Statement of Compliance with FRS 102 in their financial statements, probably in their accounting policy note. objective evidence of an impairment is it recognised. The justification is that it was worth £400,000 when someone decided to pay that for it, and nothing has changed. Long term contracts (Section 23). The finance director has calculated recoverable amount of Subco’s net assets to be £950,000. But something surely has changed. FRS and apply the requirements of FRS 103 to the acquisition of any such subsidiary. There should be no further impairment to the machinery because these have already been written down to their recoverable amount. Why do you want to impair the investment in the holding company? So, for example, the amount attributable to licences is £53,000 ((250 / (250 + 220 + 48)) x 110). The agreement simply states that the acquisition was for the shares. There were no intangible assets such as goodwill previously reflected on the subsidiary's balance sheet, as it was all internally generated. So has the holding company suffered a loss by acquiring £400,000 of goodwill without paying for it? What are the key points? Impairment of assets (Section 27). contents. The investment is an investment in an equity I do not believe that a balance sheet was drawn up at the acquisition date (or if it was it has not been made available), but reading the agreement it states that all loans/indebtedness were to be settled by the completion date, with the typical clauses covering anything which comes 'out of the woodwork' post-completion. While the agreement clearly states that they solely acquired the shares, is this a kind of 'substance over form' style justification to keep the investment unimpaired? An entity is required to first assess whether an asset (including goodwill) is showing indicators of impairment and, if it is, calculate recoverable amount. There are specific impairment requirements relating to goodwill in FRS 102, paragraphs 27.24 to 27.27 that a group will need to carefully consider (this article cannot cover all the requirements of these paragraphs). Obviously there are the intangible assets such as goodwill, the customer list etc., which were not recognised on the balance sheet, that would effectively have passed to the purchaser on acquisition. Goodwill is dealt with in FRS 102, Section 19 Business Combinations and Goodwill. The aggregate amount is then compared to recoverable amount to determine the value of any write-down. This article examines some of the main concepts of goodwill impairment and impairment of non-current assets under UK GAAP. How to Account for Write-Offs of Investment in Subsidiaries. FRS 11 Impairment of Fixed Assets and Goodwill. This could be particularly the case with an asset such as goodwill where a subsidiary has been significantly affected by the effects of the pandemic. This has caused some lively debate in our office, where us 'minions' are like-minded that the investment should essentially be written off, but if anyone has other ideas or views it would be helpful to know. 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