What is a deemed disposal, and how is it accounted for when a subsidiary issues new shares to third parties?
An advanced Group Accounting question — expect it in final rounds and case-heavy interviews (IB, PE, Big-4 Transaction Services).
THE SHORT ANSWER
A deemed disposal happens when a parent's percentage interest in a subsidiary falls without it selling any shares — typically because the subsidiary issues new shares to third parties (a capital raise, an IPO, or shares to another investor) and the parent doesn't take up its full pro-rata. The parent's stake is diluted. The accounting depends on whether control is retained: if the parent still controls the sub, the dilution is a transaction with owners in their capacity as owners — accounted for within equity, adjusting NCI and the parent's equity for the change in ownership, with no gain or loss in P&L. If the share issue causes the parent to lose control, it's accounted for as a loss of control: derecognize the subsidiary, remeasure any retained interest to fair value, recycle related OCI, and recognize the gain or loss in P&L. The subtle point is that a deemed disposal can trigger full loss-of-control accounting even though the parent never sold a share — the dilution alone did it.
WHAT INTERVIEWERS LISTEN FOR
- ✓Interest falls via the sub issuing shares to others, not a sale
- ✓Control retained: equity transaction, adjust NCI/parent equity, no P&L gain
- ✓Control lost: loss-of-control accounting (remeasure retained interest, recycle OCI, P&L gain/loss)
- ✓Dilution alone can trigger loss-of-control accounting
COMMON MISTAKES
- ✗Recognizing P&L gain while control is retained
- ✗Missing that dilution can cause loss of control
- ✗Treating it as a normal share issue with no group effect
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