Yes, I have Googled my question and searched existing threads, but I can't find the specific answers I'm looking for. Yes, I'm a professional, and no, this is not an exam question.
Now I've pre-empted the usual unnecessary replies, consider the following scenario.
Company A owns company B. In A's individual separate statutory accounts it has previously disclosed its investment in B at historic cost (£1.7m) less impairments (£0.8m), being a net book value of £0.9m.
In 20X1 B enters liquidation. Prior to liquidation, B's balance sheet is reduced, with its entire distributable reserves paid as a dividend to A, leaving B with only £1 net assets (being an informal £1 interco receivable from A). The liquidator does not distribute this £1 until 20X2, and company B is not dissolved until 20X3.
My question is, at what point should A technically recognise a full disposal of shares in B, and no longer recognise it as a subsidiary. I'm fully aware that in this scenario the choice is pretty immaterial, and no one will really care, but I'm interested in what should happen in principle.
When dealing with these types of transactions in batches of liquidations previously I've used the following convention:
- when B pays its pre-liquidation dividend to A, I recognise an impairment of A's investment in B down to equal the value of B's net assets. In this scenario that would be £1. At this point A still has a £1,700,000 investment, with a related accumulated impairment of £1,699,999.
- when B enters liquidation in 20X1, I make no entries. Rationale being A still owns the shares. I'm not sure on this though, because presumably the liquidator now has control.
- when the liquidator distributes B's assets to the shareholders in 20X2, in this case this is just company A, I will recognise £1 investment income in A, and a further £1 impairment charge in A (net zero P&L). Under this (probably incorrect) convention, A still has a £1,700,000 investment, this time with a £1,700,000 total impairment, but because B still exists, I haven't deemed it to be disposed of yet.
- Only when 20X3 rolls around and the liquidator has successfully dissolved the company will I deem company B to have been disposed by company A.
A few thoughts:
- That convention is based on what seems most aesthetically pleasing and sensible to me, rather than any specific reference to accounting standards.
- The problem with recognising a full disposal at the point B enters liquidation is that there is a timing mismatch in the P&L. To dispose of B is to derecognise it in A's accounts despite there still being value for A to extract from B. You would have a £1 impairment charge in 20X1, but then in 20X2 A receives the inevitable £1 distribution income.
- So if full disposal shouldn't be recognised at the point B enters liquidation, should A's disposal of B be recognised at the point B distributes its remaining assets (but is not dissolved yet as per Companies House), or when it's actually dissolved?
I'm not interested in the tax treatment by the way, that's the easy bit :)... just the quirky accounting treatment in question here!
Any thoughts on this extremely tedious scenario would be appreciated.