Background A Co is a subsidiary of B Co, which proposes to demerge an identified business division to B Co.
Under the transaction, the identified business division will be transferred from A Co to B Co through a scheme of demerger approved by the NCLT. As a consideration for demerger, B Co to issue shares to the shareholders of A Co (except B Co).
One of the ingredients as assets of the business being demerged is portfolio investments of the business. The portfolio investment is treated as Fair Value Through Other Comprehensive Income (FVTOCI) in accordance with IndAS 109.
Accordingly, all fair value gains/loss in relation to the investment are recorded in statement of profit and loss account under the head â€śOther Comprehensive Income (OCI) Items that will not be reclassified to Profit or Lossâ€ť.
Illustratively, following is the position in the balance sheet of March 31, 2019 (in relation to the portfolio investment): â€˘ Original acquisition cost: INR 1000 â€˘ Fair value gain (accumulated in OCI): Rs 4000 â€˘ Book value of investment: Rs 5000
Query 1. In the above scenario what should be the accounting entry A Co should pass in its books for the demerger as a Demerged Company?
2. Through the demerger entries can A Co reverse the fair value gain impact of previous years (which increased the value of the investment) by debiting the head under the statement of profit and loss account â€śOther Comprehensive Income (OCI) Items that will not be reclassified to Profit or Lossâ€ť? Please suggest how to record entries in the books of Demerged Company?