Definition
A subsidiary undertaking may be excluded from a group’s consolidated financial statements if the group’s interest in the subsidiary is held exclusively with a view to subsequent resale. Such a subsidiary should not have been previously consolidated in the group accounts prepared by the parent company. When excluded on these grounds, the subsidiary should be recorded in the consolidated financial statements as a current asset at either (i) cost less impairment or (ii) fair value.
The governing principles for this are outlined in Section 27 of the Financial Reporting Standard (FRS) Applicable in the UK and Republic of Ireland, and the relevant International Financial Reporting Standard (IFRS) is IFRS 5, Non-current Assets Held for Sale and Discontinued Operations.
Examples
-
Planned Divesture: A company acquires a subsidiary with the intention of selling it within a year to focus solely on its core operations. The subsidiary is not consolidated but recorded as a held-for-sale asset at fair value.
-
Strategic Realignment: A large conglomerate decides to sell off a non-core subsidiary to streamline its business and focus on more lucrative sectors, recording the subsidiary as a current asset held for sale.
-
Exit from Market: A parent company decides to exit a particular geographical market by selling its subsidiaries in that region. The subsidiaries are removed from the consolidation and reported as current assets held for sale.
Frequently Asked Questions
What does “held for sale” mean in accounting?
“Held for sale” means that an asset or a subsidiary is expected to be sold rather than used by the company. Such assets are reported separately on the balance sheet as current assets.
Why would a subsidiary be excluded from consolidation?
A subsidiary would be excluded from consolidation when the parent company’s interest in the subsidiary is held with a view to resale within a year, and it meets specific conditions outlined by accounting standards.
How should a held-for-sale subsidiary be measured?
A held-for-sale subsidiary should be measured at the lower of its carrying amount or fair value less costs to sell.
What standards govern the accounting of held-for-sale subsidiaries?
The relevant standards are Section 27 of the Financial Reporting Standard (FRS) Applicable in the UK and Republic of Ireland, and IFRS 5.
What is IFRS 5?
IFRS 5 establishes the accounting treatment for non-current assets held for sale and discontinued operations. It ensures that such assets are measured and presented separately from other assets.
Related Terms with Definitions
-
Consolidated Financial Statements: Financial statements that show the overall financial position of a parent company and its subsidiaries.
-
Current Asset: An asset expected to be converted into cash or used up within one year or within the operating cycle of the business.
-
Parent Company: A company that owns enough voting stock in another company to control its policies and management.
-
Impairment: When an asset’s carrying amount exceeds its recoverable amount, requiring a write-down to reflect its reduced value.
-
Fair Value: The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Online References
Suggested Books for Further Studies
- “International Financial Reporting Standards (IFRS) 2019” by Deloitte
- “Fair Value Measurements: Practical Guidance and Implementation” by Mark L. Zyla
- “Wiley IFRS 2019: Interpretation and Application of IFRS Standards” by PKF International Ltd
Accounting Basics: “Held for Sale” Fundamentals Quiz
Thank you for exploring our detailed guide on “Held for Sale” and tackling our challenging quiz questions. Your commitment to advancing your accounting knowledge is admirable!
