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The loss of control of a subsidiary that is a business, other than in a nonreciprocal transfer to owners, results in the recognition of a gain or loss on the sale of the interest sold and on the revaluation of any retained noncontrolling investment. A loss of control is an economic event, similar to that of gaining control, and therefore is a remeasurement event.
The scope of the guidance for changes in a parent’s ownership interest in a subsidiary that result in loss of control is set forth in ASC 810-10-40-3A.

ASC 810-10-40-3A

The deconsolidation and derecognition guidance in this Section applies to the following:

  1. A subsidiary that is a nonprofit activity or a business, except for either of the following:
    1. Subparagraph superseded by Accounting Standards Update No. 2017-05
    2. A conveyance of oil and gas mineral rights (for guidance on conveyances of oil and gas mineral rights and related transactions, see Subtopic 932-360)
    3. A transfer of a good or service in a contract with a customer within the scope of Topic 606.
  2. A group of assets that is a nonprofit activity or a business, except for either of the following:
    1. Subparagraph superseded by Accounting Standards Update No. 2017-05
    2. A conveyance of oil and gas mineral rights (for guidance on conveyances of oil and gas mineral rights and related transactions, see Subtopic 932-360)
    3. A transfer of a good or service in a contract with a customer within the scope of Topic 606.
  3. A subsidiary that is not a nonprofit activity or a business if the substance of the transaction is not addressed directly by guidance in other Topics that include, but are not limited to, all of the following:
    1. Topic 606 on revenue from contracts with customers
    2. Topic 845 on exchanges of nonmonetary assets
    3. Topic 860 on transferring and servicing financial assets
    4. Topic 932 on conveyances of mineral rights and related transactions
    5. Subtopic 610-20 on gains and losses from the derecognition of nonfinancial assets.

In accordance with ASC 810-10-55-4A, events resulting in deconsolidation of a subsidiary that is a business include the following:
  • A parent sells all or part of its ownership interest in its subsidiary, thereby losing its controlling financial interest in its subsidiary
  • A contractual agreement that gave control of the subsidiary to the parent expires
  • The subsidiary issues shares, thereby reducing the parent’s ownership interest in the subsidiary so that the parent no longer has a controlling financial interest in the subsidiary
  • The subsidiary becomes subject to the control of a government, court, administrator, or regulator
For example, once a subsidiary files for bankruptcy protection, a parent no longer has control over the subsidiary (as the bankruptcy court must approve all significant actions). The parent should deconsolidate the subsidiary on that date. The parent company should also determine the gain or loss to recognize on the date of the bankruptcy filing. See BLG 3.18 for further information.

5.5.1 Accounting for changes in interest if control is lost

If a parent loses control of a subsidiary that is a business through means other than a nonreciprocal transfer to owners, it must:
  • derecognize the assets (including an appropriate allocation of goodwill) and liabilities of the subsidiary at their carrying amounts at the date control is lost,
  • derecognize the carrying amount of any NCI at the date control is lost (including any components of accumulated other comprehensive income attributable to it),
  • recognize the fair value of the proceeds from the transaction, event, or circumstances that resulted in the loss of control,
  • recognize any noncontrolling investment retained in the former subsidiary at its fair value at the date control is lost,
  • reclassify to income the amounts recognized in other comprehensive income in relation to that subsidiary, and
  • recognize any resulting difference as a gain or loss in income attributable to the parent.
The gain or loss is calculated as the difference between (a) and (b):
  1. The aggregate of:
    • the fair value of the consideration received,
    • the fair value of any retained noncontrolling investment in the former subsidiary on the date the subsidiary is deconsolidated, and
    • the carrying amount of any noncontrolling interest in the former subsidiary (including any accumulated other comprehensive income or loss attributable to the NCI) on the date the subsidiary is deconsolidated.
  2. The carrying amount of the former subsidiary’s net assets
The calculation outlined above, as described in ASC 810-10-40-5, results in an amount that includes the gain or loss for both the interest sold and the noncontrolling investment retained. However, a parent is required to separately disclose the total gain or loss and the portion of the gain or loss related to the retained noncontrolling investment in accordance with ASC 810-10-50-1B. To obtain the information necessary for disclosure, a second calculation of the portion related to the gain or loss on the retained noncontrolling investment is necessary. See Example BCG 5-14 and Example BCG 5-15 for an illustration of the calculation of the gain or loss on the retained noncontrolling interest.
It is also important to identify any gains or losses deferred in accumulated other comprehensive income attributable to the subsidiary. The cumulative amount deferred in other comprehensive income related to that subsidiary is considered part of the carrying amount of the subsidiary and is included in determining the gain or loss on the interest sold and the retained noncontrolling investment in accordance with ASC 810-10-40-4A. This includes the parent’s and the NCI’s share of gains or losses previously recognized in other comprehensive income.
Amounts recognized in equity (outside of accumulated other comprehensive income) related to changes in ownership interests that did not result in a change in control should not be included in determining the gain or loss on the interest sold and the retained noncontrolling investment. These amounts resulted from transactions among shareholders and are not directly attributable to the NCI.
The effect of applying the steps above when a subsidiary that is a business is partially owned prior to the loss of control is that the noncontrolling interests held by third parties are not revalued to fair value. As part of the deconsolidation of the subsidiary, the carrying value of the NCI’s portion of the subsidiary’s net assets is derecognized against the carrying amount of the NCI, with no gain or loss.
A subsidiary to be deconsolidated may have redeemable NCI that the reporting entity accounted for as mezzanine equity in accordance with the guidance described in BCG 6.2.1.4 and FG 7.4.3.2. If accretion of that mezzanine NCI was required, the accretion would have been reflected in equity and would not have impacted net income. Accordingly, the carrying amount of the NCI used for purposes of determining the gain or loss on deconsolidation should not include those accretion adjustments. Rather, previously recorded accretion adjustments to the carrying amount of the NCI should be reversed prior to calculating the gain or loss on disposition by recording a credit to equity of the parent.
Typically, impairment tests for goodwill and long-lived assets (asset group) are needed when a parent expects that it will sell or lose control of a subsidiary. If the goodwill or long-lived asset group is impaired, the impairment loss should be recognized in earnings in accordance with ASC 350-20 and ASC 360-10-35, respectively.
Upon deconsolidation, the reporting entity should assess whether the deconsolidated subsidiary meets the criteria for discontinued operations and consider the applicability of the presentation and disclosure requirements for discontinued operations in accordance with ASC 205-20. See FSP 27 for additional information on discontinued operations.
Example BCG 5-14 and Example BCG 5-15 demonstrate the accounting for a change in interest when control is lost, assuming the transactions do not involve nonreciprocal transfers to owners.
EXAMPLE BCG 5-14
Accounting for changes in interest of a wholly-owned subsidiary that is a business if control is lost
Company A owns 100% of a subsidiary that is a business. Company A disposes of 60% of its interest in the subsidiary for $360 million and loses control of the subsidiary. At the disposal date, the fair value of the retained noncontrolling investment is determined to be $240 million. The carrying value of the identifiable net assets is $500 million, including $60 million of goodwill recorded from when the subsidiary was previously acquired. (For illustrative purposes, the tax consequences on the gain have been ignored.)
How should Company A account for the change in interest?
Analysis
Company A should record the following journal entry on the disposal date to record the 60% interest sold, the gain recognized on the 40% retained noncontrolling investment, and the derecognition of the subsidiary (in millions):
Dr. Cash
$360
Dr. Equity-method investment
$240 1
Cr. Net assets
$500 2
Cr. Gain on investment
$100 3
1 Fair value of the 40% retained noncontrolling investment is recognized
2 Deconsolidation of the subsidiary and removal of 100% of carrying value of the subsidiary’s net assets, including an appropriately allocated portion of previously recorded goodwill ($440 net assets excluding goodwill + $60 goodwill)
3 Gain or loss on the interest sold and the retained noncontrolling investment is recognized in earnings, calculated as follows:
Fair value of consideration
$360
Fair value of retained noncontrolling investment
240
Carrying value of NCI
n/a
Subtotal
600
Less: carrying value of former subsidiary’s net assets
($440 net assets excluding goodwill + $60 goodwill)
(500)
Gain on interest sold and retained noncontrolling investment
$100
The $100 million gain on the interest sold and the retained noncontrolling investment would be recognized in earnings and disclosed in the financial statements. Additionally, Company A would need to disclose the portion of the gain or loss related to the remeasurement of the retained noncontrolling investment to fair value. This amount is calculated as follows (in millions):
Fair value of retained noncontrolling investment
$240
Percentage retained of carrying value of subsidiary
(($440 + $60) x 40%)
(200)
Gain on retained noncontrolling investment
$40
EXAMPLE BCG 5-15
Accounting for changes in interest of a partially-owned subsidiary when control is lost
Company B owns 80% of a subsidiary that is a business. Company B disposes of 50% of the subsidiary for $300 million and loses control of the subsidiary. Company B will deconsolidate the subsidiary and account for the remaining 30% interest as an equity-method investment. At the disposal date, the fair value of the retained noncontrolling investment is determined to be $180 million. The carrying value of the identifiable net assets is $440 million and there is no goodwill. The carrying value of the 20% noncontrolling interests held by third parties prior to the transaction is $88 million. (For illustrative purposes, the tax consequences on the gain have been ignored.)
How should Company B reflect the change in interest?
Analysis
Company B would record the following journal entry on the disposal date to record the 50% interest sold, the gain recognized on the 30% retained noncontrolling investment, and the derecognition of the subsidiary (in millions):
Dr. Cash
$300
Dr. Equity-method investment
$180 1
Dr. NCI
$ 88 2
Cr. Net assets
$440
Cr. Gain on investment
$128 3
1 Fair value of the 30% retained noncontrolling investment is recognized
2 Derecognition of the carrying value of the NCI
3 Gain or loss on the interest sold and the retained noncontrolling investment is recognized in the income statement, calculated as follows:
Fair value of consideration
$300
Fair value of retained noncontrolling investment
180
Carrying value of NCI
88
Subtotal
568
Less: carrying value of former subsidiary’s net assets
(440)
Gain on interest sold and retained noncontrolling investment
$128
The $128 million gain on the interest sold and the retained noncontrolling investment would be recognized in earnings and disclosed in the financial statements. Additionally, Company B would need to disclose the portion of the gain or loss related to the remeasurement of the retained noncontrolling investment to fair value. This amount is calculated as follows (in millions):
Fair value of retained noncontrolling investment
$180
Percentage retained of carrying value of subsidiary ($440 × 30%)
(132)
Gain on retained noncontrolling investment
$ 48

Question BCG 5-1
Is there a difference between (1) the gain recognized when an entity sells 100% of a consolidated subsidiary’s shares (that is a business) to an equity-method investee and (2) the gain recognized when an entity sells shares of a consolidated subsidiary to an unrelated party but retains an equity interest in the former subsidiary?
PwC response
The two transactions are substantively similar, and the accounting result should be similar. This is best understood by analyzing the following two scenarios. Assume a parent company owns 30% of Investee A and 100% of Subsidiary B and both entities are businesses. In one scenario, Parent sells 100% of Subsidiary B to Investee A. Investee A pays cash for 100% of Subsidiary B. Parent indirectly retains a 30% interest in Subsidiary B through its equity holding of Investee A. In another scenario, Parent sells 70% of Subsidiary B to an unrelated third party. In the first scenario, one could argue that a gain should be recognized on only the 70% interest in Subsidiary B that was not retained by Parent. However, even though Parent retains its 30% interest in Investee A, which now owns 100% of Subsidiary B, the Parent would recognize a gain or loss on the sale of the 100% interest sold in Subsidiary B, as there has been a change of control. In the second scenario, the Parent would recognize a gain or loss on the sale of the 70% interest sold, and a gain or loss on the remeasurement of the retained 30% noncontrolling investment in Subsidiary B. As a result, under both scenarios, the gain will be recognized upon the deconsolidation of a subsidiary in accordance with the guidance in ASC 810-10. Assuming similar facts and circumstances in the scenarios, an equal gain would result.

5.5.2 Other interests retained when control is lost

The retained noncontrolling investment includes the retained equity investment in the subsidiary upon deconsolidation. There may be other interests retained by the investor (parent) in the investee (subsidiary), such as a preferred share investment, debt investment, or other contractual arrangements (e.g., off-market contracts) that may need to be considered by the parent company in determining the amount of gain or loss to be recognized upon deconsolidation of the subsidiary. Example BCG 5-16 illustrates the guidance for determining the amount of gain or loss to be recognized upon the sale of a controlling interest in a subsidiary with an off-market contract.
EXAMPLE BCG 5-16
Determining the amount of gain or loss to be recognized upon the sale of a controlling interest in a subsidiary with an off-market contract
Company A owns 100% of Subsidiary B. Subsidiary B purchases electronic components from Company A under a four-year supply contract at fixed rates. The fixed rates are currently lower than what Subsidiary B would otherwise pay to a third party (i.e., below market rates). Company A sells 60% of its ownership in Subsidiary B to an unrelated third party one year after the commencement of the supply contract. The supply contract remains unchanged after the sale. Company A deconsolidates Subsidiary B on the sale date.
How should Company A determine the gain or loss to be recognized?
Analysis
In determining the amount of gain or loss upon deconsolidation of Subsidiary B, Company A should determine what portion of the consideration received from the buyer relates to compensation for Company A continuing to provide electronic components to its former Subsidiary B under its unfavorable supply contract, versus consideration for the sale of the 60% ownership in Subsidiary B. The amount ascribed to the below market supply contract should be recorded at fair value on the balance sheet. This reduces the consideration attributed to the deconsolidation of Subsidiary B and therefore reduces the gain recognized by Company A.

5.5.3 Nonreciprocal transfer to owners

If a reporting entity loses control of a subsidiary that is a business through a pro rata nonreciprocal transfer to owners (i.e., a pro rata distribution of a business to owners in a spinoff), the guidance in ASC 810-10 for measuring the gain or loss does not apply to the transferred portion. Rather, the transferred portion is accounted for under ASC 845-10-30-10 and ASC 505-60. Under this guidance, the accounting for the distribution of nonmonetary assets to owners of an entity either (1) in a spinoff or other form of reorganization or liquidation or (2) in a plan that is in substance the rescission of a prior business combination is based on the recorded amount of the nonmonetary assets distributed (after reduction for any impairment). The transaction is recorded by the transferor within equity, and no gain or loss is recognized. This guidance is equally applicable to distributions to owners of an entity of a subsidiary or another investee entity that has been or is being consolidated as well as to distributions to shareholders of an investee that is a business that has been or is being accounted for under the equity method.
In some circumstances, the spinnor may not distribute all of the spinnee’s shares to its shareholders, but instead retains an equity interest in the spinnee after the spinoff. The spinnor must first analyze whether it still controls the spinnee.
  • If the spinnor determines it still controls the spinnee, the spinnor should continue to consolidate the spinnee under ASC 810 after the spinoff and would account for the change in interest as an equity transaction in accordance with ASC 810-10-45-23.
  • If the spinnor determines it no longer controls the spinnee, the spinnor should account for the nonmonetary assets distributed to its owners using the guidance in the preceding paragraph. The spinnor’s retained equity interest in the spinnee should be accounted for at an amount equal to the spinnor’s proportionate share of the carrying amount of the spinnee’s net assets. Subsequently, the retained equity interest in the spinnee would be accounted for in accordance with other applicable GAAP (e.g., ASC 323, Investments – Equity Method and Joint Ventures).
Other nonreciprocal transfers of nonmonetary assets to owners (e.g., a distribution that is not pro rata or does not represent a business or an equity method investment in a business) may be accounted for at fair value if the fair value of the nonmonetary asset distributed is objectively measurable and would be clearly realizable to the distributing entity in an outright sale at or near the time of the distribution. See PPE 6.3.2 and PPE 6.3.3 for additional guidance on a nonreciprocal transfer of assets that are not a business and a nonreciprocal transfer of assets in a split-off, respectively.

5.5.4 Multiple transactions that result in loss of control

Sometimes a company may lose control of a subsidiary that is a business as a result of two or more transactions (e.g., sale of 40% of the subsidiary and a second sale of 20% of the subsidiary shortly thereafter). Circumstances sometimes indicate that multiple arrangements should be accounted for as a single transaction. In determining whether to account for arrangements as a single transaction, ASC 810-10-40-6 requires that the terms and conditions of the arrangements and their economic effects be considered. If multiple transactions resulting in a loss of control are considered separate transactions, then each transaction should be accounted for separately in accordance with its nature. The transactions that do not result in a loss of control are accounted for as equity transactions and any differences between the amount received and the carrying value of the NCI on these transactions should be recorded in equity and not in the income statement. If a transaction results in a loss of control, it should be recognized in earnings, along with the related gain or loss on the final transaction (including the revalued amount of any retained noncontrolling investment).
Sometimes a company may determine that multiple transactions should be considered as a single transaction that resulted in a loss of control. In these cases, the gains and losses on all of the transactions (including the revaluation of any retained noncontrolling investment) should be recognized in earnings.
The existence of one or more of the following indicators in ASC 810-10-40-6 may signal that multiple arrangements should be treated as a single arrangement:
  • The arrangements are entered into at the same time or in contemplation of each other.
  • The arrangements form a single transaction designed to achieve an overall commercial effect.
  • The occurrence of one arrangement is dependent on the occurrence of at least one other arrangement.
  • One arrangement considered on its own is not economically justified, but it is economically justified when considered together with other arrangements. An example is when one disposal of shares is priced below market and is compensated for by a subsequent disposal priced above market.

PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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