Deemed Disposal of Subsidiary Due to Ownership Dilution | Ind AS 110

Facts of the Case

Alpha Limited (hereinafter referred to as “the company”), a listed manufacturing company, holds 60% of the equity shares in its subsidiary, Beta Engineering Private Limited (hereinafter referred to as “Beta”). Beta is engaged in precision component manufacturing and has been fully consolidated in the company’s financial statements since acquisition.

During FY 2024-25, Beta issued new equity shares worth ₹60 crore to a private equity investor to fund expansion. The company chose not to participate in the fresh issue. Consequently, the company’s shareholding reduced from 60% to 45%, and the new investor obtained significant decision-making rights through board representation.

Despite this dilution, the company continued to consolidate Beta as a subsidiary in its consolidated financial statements, on the assumption that since it did not sell any of its existing shares, there was no “disposal.”State, whether the company’s loss of majority voting rights due to non-participation in the fresh issue constitutes a deemed disposal under Ind AS Framework and what shall be the correct accounting treatment?

Relevant Provisions

Ind AS 110, Consolidated Financial Statements

Para 6- An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.

Para 7- Thus, an investor controls an investee if and only if the investor has all the following:

(a) power over the investee (see paragraphs 10–14);

(b) exposure, or rights, to variable returns from its involvement with the investee (see paragraphs 15 and 16); and

(c) the ability to use its power over the investee to affect the amount of the investor’s returns (see paragraphs 17 and 18).

Para 20- Consolidation of an investee shall begin from the date the investor obtains control of the investee and cease when the investor loses control of the investee.

Para 23- Changes in a parent’s ownership interest in a subsidiary that do not result in the parent losing control of the subsidiary are equity transactions (i.e. transactions with owners in their capacity as owners).

Para 25- If a parent loses control of a subsidiary, the parent:

(a) derecognises the assets and liabilities of the former subsidiary from the consolidated balance sheet.

(b) recognises any investment retained in the former subsidiary at its fair value when control is lost and subsequently accounts for it and for any amounts owed by or to the former subsidiary in accordance with relevant Ind ASs. That fair value shall be regarded as the fair value on initial recognition of a financial asset in accordance with Ind AS 109 or, when appropriate, the cost on initial recognition of an investment in an associate or joint venture.

(c) recognises the gain or loss associated with the loss of control attributable to the former controlling interest

Para B98- If a parent loses control of a subsidiary, it shall:

(a) derecognize:

(i) the assets (including any goodwill) and liabilities of the subsidiary at their carrying amounts at the date when control is lost; and

(ii) the carrying amount of any non-controlling interests in the former subsidiary at the date when control is lost (including any components of other comprehensive income attributable to them).

(b) recognise:

(i) the fair value of the consideration received, if any, from the transaction, event or circumstances that resulted in the loss of control;

(ii) if the transaction, event or circumstances that resulted in the loss of control involves a distribution of shares of the subsidiary to owners in their capacity as owners, that distribution; and

(iii) any investment retained in the former subsidiary at its fair value at the date when control is lost.

(c) reclassify to profit or loss, or transfer directly to retained earnings if required by other Ind ASs, the amounts recognised in other comprehensive income in relation to the subsidiary on the basis described in paragraph B99.

(d) recognise any resulting difference as a gain or loss in profit or loss attributable to the parent.

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