Ind AS 105 Discontinued Operations – Subsidiary Held for Sale

1. Question

Advanta Buildwell & Construction Limited (hereinafter referred to as “the Company”) follows a financial year ending 31 March. The Company wholly owns a subsidiary, Structon Engineering Private Limited, which is engaged in infrastructure development, a major line of business for the group.

On 1 March 20X8, the Company’s Board of Directors formally approved a plan to dispose of 75% of its equity interest in Structon Engineering Private Limited. The plan was publicly announced, and necessary actions were initiated to identify buyers. As of that date, the subsidiary met the requirements to be classified as a disposal group held for sale, and its operations were proposed to be discontinued.

On 1 July 20X8, the Company completed the sale of the 75% interest to an unrelated third party, thereby losing control of the subsidiary. After this disposal, the remaining 25% interest was retained and accounted for as an investment in an associate, in accordance with applicable accounting standards.

Subsequently, on 1 December 20X8, the Board approved the sale of the remaining 25% interest, and the sale transaction was completed on 1 April 20X9.

Examine whether the accounting treatment followed by the Company for the financial year ended 31 March 20X8, classifying the subsidiary as a discontinued operation, is consistent with the provisions of Ind AS 105,Non-current Assets Held for Sale and Discontinued Operations.

2. Relevant Provisions

Ind AS 105, Non-current Assets Held for Sale and Discontinued Operations

Para 6 – An entity shall classify a non-current asset (or disposal group) as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use.

Para 7 – For this to be the case, the asset (or disposal group) must be available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (or disposal groups) and its sale must be highly probable. Thus, an asset (or disposal group) cannot be classified as a non-current asset (or disposal group) held for sale, if the entity intends to sell it in a distant future.

Para 8 – For the sale to be highly probable, the appropriate level of management must be committed to a plan to sell the asset (or disposal group), and an active programme to locate a buyer and complete the plan must have been initiated. Further, the asset (or disposal group) must be actively marketed for sale at a price that is reasonable in relation to its current fair value. In addition, the sale should be expected to qualify for recognition as a completed sale within one year from the date of classification, except as permitted by paragraph 9, and actions required to complete the plan should indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. The probability of shareholders’ approval (if required in the jurisdiction) should be considered as part of the assessment of whether the sale is highly probable.

Para 8A – An entity that is committed to a sale plan involving loss of control of a subsidiary shall classify all the assets and liabilities of that subsidiary as held for sale when the criteria set out in paragraphs 6-8 are met, regardless of whether the entity will retain a non-controlling interest in its former subsidiary after the sale.

3. Analysis

In the given case, the Company approved a formal plan on 1 March 20X8 to sell 75% of its wholly owned subsidiary, constituting a significant and distinct line of business. This decision marks a clear strategic shift and satisfies the conditions required for classifying the subsidiary as a disposal group held for sale.

The fact that actions were initiated to locate a buyer and the sale was expected to be completed within a year supports the conclusion that the sale was highly probable as of 31 March 20X8. The subsidiary was also available for immediate sale in its present condition, and no legal or operational impediments prevented the sale. Hence, the classification of the subsidiary as a disposal group held for sale at the end of the financial year 31 March 20X8 is appropriate.

Moreover, the subsidiary operated a significant line of business of the Company. Its disposal constitutes a discontinued operation, given that it significantly affected the Company’s financial and operating results. The operations of the subsidiary should therefore be presented as a discontinued operation for the year ended 31 March 20X8.

The sale of 75% of the shareholding on 1 July 20X8 resulted in the subsidiary’s loss of control. As per Ind AS, this necessitates the derecognition of the subsidiary’s assets and liabilities from the consolidated financial statements. The Company retained a 25% interest, which it correctly reclassified as an investment in an associate under Ind AS 28, Investments in Associates and Joint Ventures.

The subsequent decision to sell the remaining 25% in December 20X8, with completion in April 20X9, is a separate transaction and does not affect the classification or presentation in the financial statements for the year ended 31 March 20X8. What matters is the existence of a committed plan and high probability of sale for the initial 75% interest before the year-end, which is the trigger for classification under Ind AS 105.

Therefore, both the classification of the subsidiary as a disposal group held for sale and as a discontinued operation in the Company’s consolidated financial statements for the year ended 31 March 20X8 are supported by the standard and its intent.

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