Presentation of disposal of a subsidiary

Presentation of disposal of a subsidiary

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Company A (a foreign company) owns 100% of the share capital of company B (a UK company) and company B owns 100% of the share capital of company C (a UK company).  Company A has now acquired the entire share capital in company C in a group reconstruction.  In the years leading up to the transfer, Company C was loss making and Company B valued its investment in Company C on a net asset basis every year.  However the entry for this transaction was to credit investments and debit permanent diminution in value and was therefore shown in the profit and loss account as 'amounts written off investments' underneath 'operating loss' and therefore reduced profit and loss reserves of Company B each year.  I think this should have been shown as a transfer to revaluation reserve rather than profit and loss reserves.

Company B has sold its shares in Company C to Company A at fair value being the net asset valuation at the date of transfer as it is loss making (this was necessary for tax purposes).  The net asset value of company C increased significantly prior to transfer due to the acquisition of a property in the prior year which was subsequently revalued prior to the group reconstruction.  The result is that the accounts of Company B show a large gain on the disposal of Company C which I think it misleading. 

Had the diminution in value of the investment over the years been shown as a debit to revaluation reserve rather than profit and loss reserves, then the revaluation reserve would be released now and would actually show a loss on disposal of investment.

I would be grateful of some advice as to what to do: 

Should we just show the large gain in this year (which would be shown as investment income in the profit and loss account after operating profit)

Should we write back the amounts written off in previous years in to the profit and loss account (which would be shown just below investment income) and show the loss at the correct amount?  

Should we revalue the investment upwards to fair value the day before the group reconstruction and then dispose of that figure to the p&l to offset against the proceeds?

Or some other presentation? 

The overall effect on the profit and loss account of the transaction is the same, it is the presentation in the accounts of Company B that concerns me.  

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By TerryD
23rd Mar 2015 16:47

I'm not sure that it would have been correct to charge the previous years' diminution in value to a revaluation reserve, unless there had been prior credits held in that revaluation reserve, and then only to the extent that you were reversing those credits. It's a general principle with all revalued fixed assets that any diminution in value below depreciated cost should go through P & L Account.So I think the previous accounting was correct

By the same token, the surplus on disposal arises due to events that are recognised this year (the property revaluation in C Ltd), and so should be reflected in this year's P & L Account. But I don't think it's "investment income" - I think it should go in as profit on disposal of investment as an exceptional item below operating profit and above interest, etc.

 

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Replying to Lone_Wolf:
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By lisa pattenden
23rd Mar 2015 17:25

Thank you very much for your response.  That all makes sense.

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