USA Recording the Sale of Subsidiary A to Subsidiary C in a Consolidation Environment

[swiggins]

We are trying to decide how to record the following scenario. We have Subsidiary A (Sub A) that was 50% owned by Sub B and 50% owned by Sub C. All subsidiaries are 100% owned by the parent company so the consolidation method of accounting is used. Sub B and Sub C both show ~$5M in investment in subsidiary for Sub A and Sub A shows ~$10M in additional paid in capital from the original purchase. Subsequently, Sub B sold its 50% share of Sub A to Sub C for $20M. My initial thoughts are that the sale should be recorded as below:

Sub A
Dr. APIC from Sub B $5M
Dr. Goodwill $15M
Cr. APIC from Sub C $20M

Sub B
Dr. Cash $20M
Cr. Investment in Sub A $5M
Cr. Gain on Sale of Sub A $15M

Sub C
Dr. Investment in Sub A $20M
Cr. Cash $20M

I have been told that since these entities are all wholly owned subsidiaries that consolidate, we should NOT record goodwill and that it should be recorded as a loss on the sale so that the gain and loss net to zero in consolidation. I cannot find this verbiage in the codification. Should Sub A record Goodwill or a Loss so that in consolidation, the gain and loss net to zero?

 

[kirby]

"Should Sub A record Goodwill or a Loss so that in consolidation, the gain and loss net to zero?"

No.

After the sale, on a Combined basis right before elim entries, Sub A has <$10> M equity, Sub C has a $25M Invest in Sub, Cash has no net change (C paid B) and Gain on sale is <$15> M. So in elim:

Invest in Sub <$25M>
Sub Equity 10M
Sub gain on sale $15M

and the whole mess goes away. In consolidation: Inv in Sub is now zero, The $10M equity of Sub A is zero, the Sub gain on sale is zero.

What you should check is if there are going to be tax effects from this little party. Especially if the subs are subject to different tax authorities.

 

[swiggins]

"Should Sub A record Goodwill or a Loss so that in consolidation, the gain and loss net to zero?"

No.

After the sale, on a Combined basis right before elim entries, Sub A has <$10> M equity, Sub C has a $25M Invest in Sub, Cash has no net change (C paid B) and Gain on sale is <$15> M. So in elim:

Invest in Sub <$25M>
Sub Equity 10M
Sub gain on sale $15M

and the whole mess goes away. In consolidation: Inv in Sub is now zero, The $10M equity of Sub A is zero, the Sub gain on sale is zero.

What you should check is if there are going to be tax effects from this little party. Especially if the subs are subject to different tax authorities.

Hi Kirby! Thanks for the response. There were 2 options in the question so are you saying no to both? I need to have some sort of offset to record on Sub A so I'm not sure I understand your explanation. These are all UK entities. A tax team has already reviewed and determined this is a tax neutral transaction.

 

[kirby]

Hi swiggins

Keep in mind that Sub A received no new cash nor paid cash as a result of the purchase by C from B. So no entry needs to be made to Sub A at all. Nothing happened to Sub A.

So I recommend you do a proforma of the consolidation after the sale. I laid out above what the COMBINED results look like. Then I also showed the ELIM entry and what the final CONSOLIDATED would look like.

And as far as recording a "loss", who lost money on this deal?
Sub A had nothing to do with the sale. Sub B sold at a profit. Sub C bought at (I assume) fair value. And I myself did not lose money.

 

[swiggins]

Keep in mind that Sub A received no new cash nor paid cash as a result of the purchase by C from B. So no entry needs to be made to Sub A at all. Nothing happened to Sub A.

But something DID happen to Sub A... it has new owners. So we have to record something. Sub A used to be 50/50 owned by Sub B and C and now, Sub C owns it all. We had APIC balances with both Sub B and Sub C, so at a minimum, we need to eliminate that APIC with Sub B and record all the APIC from Sub C. We can't continue to show on Sub A that it is still owned by an old owner.

 

[kirby]

Ok. Now that I know that you have separate equity accounts in the name of the specific owners, B and C. I would move the B equity to the C equity by journal entry. That’s all.
My point still is in all this, Sub A neither received or paid out anything. So no loss to be recorded by Sub A

 

[swiggins]

Ok. Now that I know that you have separate equity accounts in the name of the specific owners, B and C. I would move the B equity to the C equity by journal entry. That’s all.
My point still is in all this, Sub A neither received or paid out anything. So no loss to be recorded by Sub A

Ok, so then what would the offset be? If Sub A had equity of $5M from Sub B and now has new equity of $20M from Sub C, where does the $15M difference get recorded? Again, we would need to debit equity (APIC) from Sub B $5M (to remove it from the books), credit equity (APIC) from Sub C $20M (to record equity with the current owner), and then debit what for $15M? Keep in mind, this transaction was not done at FMV, if that makes a difference.

ORRRR.... Instead of recording $15M on Sub A, should Sub C record a debit to Investment in Sub A $5M, debit loss on investment (since they overpaid), and then credit cash $20M? If this is the case then the entry for Sub A would only show the change in ownership at $5M.

So the entries I had above were:
Sub A
Dr. APIC from Sub B $5M
Dr. Goodwill (Or Loss on Sale) $15M
Cr. APIC from Sub C $20M

Sub B
Dr. Cash $20M
Cr. Investment in Sub A $5M
Cr. Gain on Sale of Sub A $15M

Sub C
Dr. Investment in Sub A $20M
Cr. Cash $20M

But maybe they should be:
Sub A
Dr. APIC from Sub B $5M
Cr. APIC from Sub C $5M

Sub B
Dr. Cash $20M
Cr. Investment in Sub A $5M
Cr. Gain on Sale of Sub A $15M

Sub C
Dr. Investment in Sub A $5M
Dr. Loss on sale $15M
Cr. Cash $20M

 

[kirby]

Ok, they say always follow the money. So let’s do just that. In slow motion : Sub C sends $20 M to Sub B and NOT to Sub A.

Before all this, Sub A had a total of $10 M in capital. And after the sale, Sub A received nothing and STILL has $10 M in capital. So the key is: Sub A does NOT “ have new equity of $20M from Sub C” as you wrote above.

And your paragraph starting with “ORRRR” is fun but not correct. And in reality, any top Exec who executes a deal that immediately loses his/her company $15M would and should be terminated fast.

PLEASE do the transactions on a proforma basis as I asked and I think this will clarify things for you. Again, above I laid out the whole thing for you.

 

[swiggins]

Ok, they say always follow the money. So let’s do just that. In slow motion : Sub C sends $20 M to Sub B and NOT to Sub A.

Before all this, Sub A had a total of $10 M in capital. And after the sale, Sub A received nothing and STILL has $10 M in capital. So the key is: Sub A does NOT “ have new equity of $20M from Sub C” as you wrote above.

And your paragraph starting with “ORRRR” is fun but not correct. And in reality, any top Exec who executes a deal that immediately loses his/her company $15M would and should be terminated fast.

PLEASE do the transactions on a proforma basis as I asked and I think this will clarify things for you. Again, above I laid out the whole thing for you.

Hi there! I did do the transactions on a proforma basis and I understand what you posted above... I guess I'm just struggling to let go of the idea that Sub A's APIC and Sub C's IIS need to match... I feel like it should. But because Sub A got nothing out of this whole deal except a new parent, the APIC shouldn't change. If we were to consider this transaction outside of a consolidated environment, we would have Sub C recording Goodwill for paying $20M when the company was truly only worth $5M. So why wouldn't that be the case here?

Beginning State

Sub A	Sub B	Sub C
APIC from Sub B ($5)	IIS w. Sub A $5	IIS w. Sub A $5
APIC from Sub C ($5)

Entries Needed

Sub A	Sub B	Sub C
Dr. APIC from Sub B $5	Dr. Cash $20	Dr. IIS w. Sub A $5
Cr. APIC from Sub C $5	Cr. IIS w. Sub A $5	Dr. IC Goodwill $15
	Cr. Gain on sale $15	Cr. Cash $20

Ending State

Sub A	Sub B	Sub C
APIC from Sub C ($10)	Gain on Sale ($15)	IIS w. Sub A $10
		IC Goodwill $15

It still eliminates in consolidation but now we've solved our issue of keeping IIS and APIC aligned on both entities, and we've recorded the Goodwill as the amount Sub C "overpaid" for Sub A.

Apologies if I'm being dense. Just trying to understand and make sure I'm really grasping what should happen before I go make an even bigger mess! lol

 

[kirby]

That works.