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CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Financial Reporting

Case: Varuna Industries Ltd holds 70% of Kaveri Components Ltd. During the year, Varuna sold 40% of its holding (i.e. 28% of Kaveri) to an outside investor for cash, and after the sale Varuna holds 42% and still retains control through a shareholder agreement. How should Varuna account for this disposal in its consolidated financial statements?

The disposal is an equity transaction because Varuna retains control. NCI is adjusted for its changed share, and any difference between that adjustment and the consideration received is recognised directly in equity attributable to owners, with no profit or loss and no goodwill remeasurement.

  1. ARecognise a gain or loss in profit or loss on the shares sold, and remeasure the retained interest to fair value
  2. BTreat it as an equity transaction: no gain or loss in profit or loss, with the difference between the consideration and the change in NCI recognised in equity attributable to ownersCorrect
  3. CDerecognise goodwill proportionately and recognise the gain in other comprehensive income
  4. DTreat Kaveri as an associate from the date of sale

Explanation

Under Ind AS 110, a change in ownership interest in a subsidiary that does not result in loss of control is an equity transaction. NCI is adjusted to reflect its changed share, and the difference between the amount by which NCI is adjusted and the fair value of consideration received goes directly to equity attributable to owners. No gain or loss is recognised in profit or loss and goodwill is not remeasured. Gain recognition and retained-interest remeasurement apply only when control is lost, which is not the case here because control continues.

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