Investments in subsidiaries in the parent’s accounts

In its own separate accounts a parent company chooses, under FRS 102 paragraph 9.26, to carry its investments in subsidiaries at cost less impairment, at fair value through other comprehensive income, or at fair value through profit or loss, applying one policy to each class of investment. Most owner managed groups use cost. A cost based investment is tested under Section 27: at each reporting date the parent looks for indicators of impairment and, if there are any, writes the investment down to its recoverable amount, the higher of fair value less costs to sell and value in use.

What are the parent’s separate accounts?

FRS 102 paragraph 9.24 defines separate financial statements as those prepared by a parent in which investments in subsidiaries, associates or jointly controlled entities are accounted for at cost or fair value, rather than on the basis of the investees’ reported results and net assets. They are the parent’s individual accounts. The consolidation itself is covered in consolidated and separate accounts; this page deals with the single line in the parent’s balance sheet that represents its shares in each subsidiary.

Paragraph 9.26A applies the same rules to a parent that is exempt from preparing group accounts and presents separate accounts only. Paragraph 9.27 requires the accounts to say that they are separate financial statements and to describe the method used for the investments, and paragraph 9.27A requires an exempt parent to give the grounds for its exemption.

Which measurement options can a parent choose?

Paragraph 9.26 offers three policies:

1. cost less impairment;
2. fair value with changes in other comprehensive income (or profit or loss) in line with paragraphs 17.15E and 17.15F; or
3. fair value with changes in profit or loss.

The same policy must be applied to all investments in a single class. The standard gives as examples of classes subsidiaries held as part of an investment portfolio, subsidiaries not so held, associates and jointly controlled entities, and different classes may have different policies. Where fair value through profit or loss is chosen, paragraph 9.27B requires the Section 11 disclosures to be given to satisfy paragraph 36(4) of Schedule 1 to the accounts regulations. Section 2A gives the guidance on how to measure fair value; see measuring unquoted equity investments for how that works for private company shares.

Investments in subsidiaries are not financial instruments for these purposes: paragraph 11.7(a) takes them out of Section 11, and they are not among the assets excluded from Section 27 by paragraph 27.1. That is why the impairment test for a cost based investment comes from Section 27 rather than the financial instrument rules.

What goes into cost?

Paragraph 17 of Schedule 1 to the Large and Medium sized Companies and Groups (Accounts and Reports) Regulations 2008 says a fixed asset is included at its purchase price or production cost, and paragraph 27(1) defines purchase price as the actual price paid plus any expenses incidental to the acquisition. Legal fees, due diligence and stamp duty on the share purchase therefore form part of cost.

Where the parent pays for the shares by issuing its own shares, FRS 102 paragraph 22.8 measures that equity at the fair value of what is received, unless merger relief or group reconstruction relief applies. In that case section 615 of the Companies Act 2006 and paragraph A3.24 allow the investment to be recorded at the nominal value of the shares issued or at the transferor’s previous carrying amount; see merger relief and group reconstruction relief.

A loan from the parent to the subsidiary is a separate asset. It is not part of the investment in shares and, if held at cost or amortised cost, is assessed under the impairment rules for financial assets in paragraphs 11.21 to 11.26.

When must the investment be tested for impairment?

Section 27 does not require an annual calculation for a cost based investment. It requires an assessment at each reporting date of whether there is any indication of impairment, and paragraph 27.9 lists the minimum indicators to consider. Those most likely to apply to a holding in a trading subsidiary are:

• significant adverse changes in the technological, market, economic or legal environment in which the business operates (27.9(b));
• rises in market interest rates or rates of return likely to reduce value in use or fair value (27.9(c));
• the carrying amount of net assets being more than the estimated fair value of the entity as a whole, for example where a sale price has been discussed (27.9(d)); and
• internal reporting showing that economic performance is or will be worse than expected (27.9(g)).

In practice the warning signs in a parent’s accounts are a subsidiary that has started making losses, a subsidiary whose net assets have fallen well below the carrying amount of the investment, often after paying a large dividend up to the parent, and a lost customer or contract on which the original price depended. Company law points the same way: paragraph 19(2) of Schedule 1 requires a provision where a fixed asset has diminished in value and the reduction is expected to be permanent, and paragraph 19(1) permits a provision for a fixed asset investment whose value has diminished.

How is recoverable amount worked out?

Paragraph 27.11 defines recoverable amount as the higher of fair value less costs to sell and value in use. Paragraph 27.12 says that if either figure exceeds the carrying amount there is no impairment and the other need not be estimated, which often saves work where the subsidiary’s own net assets or a recent offer comfortably exceed cost.

Value in use is the present value of the future cash flows expected from the asset, including from its ultimate disposal (27.15). For shares in a subsidiary those cash flows are, in substance, the cash the subsidiary’s business will generate. Paragraph 27.17 allows recent budgets and forecasts to be used and extrapolated at a steady or declining growth rate unless an increasing rate can be justified. Paragraph 27.18 excludes financing cash flows and tax, paragraph 27.19 excludes uncommitted restructurings and enhancements, and paragraph 27.20 requires a pre tax discount rate reflecting current market assessments of the time value of money and the specific risks.

Net assets of the subsidiary are a useful first check but they are not recoverable amount. A subsidiary with modest net assets can have a value in use well above the parent’s cost because of goodwill and future profits that are not on its balance sheet.

What does an impairment look like in numbers?

Illustration only. Parent bought all the shares in Sub for £800,000 and paid £20,000 of legal and due diligence costs, so the investment is carried at £820,000. During the year Sub lost its largest customer. Parent’s forecasts, discounted at a pre tax rate, give a value in use of £600,000. A buyer has indicated £550,000 for the shares, with selling costs of £15,000.

• Fair value less costs to sell: £550,000 less £15,000 = £535,000.
• Value in use: £600,000.
• Recoverable amount: the higher, £600,000.
• Impairment loss: £820,000 less £600,000 = £220,000, charged to Parent’s profit and loss account.

Two years later Sub wins a replacement contract and value in use rises to £900,000. Paragraph 27.29 requires the loss to be reversed if the reasons for it have ceased to apply, but paragraph 27.30(c) caps the reversal at the carrying amount there would have been with no impairment. Parent can therefore restore the investment only to £820,000, a reversal of £220,000 credited to profit or loss.

Can an impairment be reversed, and how does it affect reserves?

Yes. Unlike goodwill, which paragraph 27.28 says can never be written back, an impairment of an investment in a subsidiary is reversed when the conditions in paragraph 27.29 are met, and paragraph 20 of Schedule 1 likewise requires a provision that is no longer needed to be written back. An impairment loss reduces the parent’s retained profits and so the profits available for distribution; if the parent’s reserves are thin, this can block a dividend the directors had planned. See unlawful dividends and impairment of assets for the wider Section 27 rules.

What about micro entities and the common mistakes?

A micro entity under FRS 105 accounts for investments in subsidiaries under its Section 9 (paragraph 7.2), measures them at cost less impairment (paragraph 9.8(a)), and recognises an impairment if the carrying amount exceeds the best estimate of the selling price at the reporting date (paragraph 9.18(a)). Paragraph 7.3 excludes any company that prepares group accounts from the micro entities regime. See micro entity accounts.

The mistakes that come up most often are:

• Carrying the investment at original cost year after year with no indicator review, even though the subsidiary is loss making.
• Writing the investment down to the subsidiary’s net assets as if that were recoverable amount, without considering value in use.
• Mixing cost and fair value for subsidiaries in the same class.
• Leaving acquisition costs out of cost, or adding costs that relate to the issue of the parent’s own shares, which paragraph 22.9 deducts from equity instead.
• Folding an intercompany loan into the investment line and testing the two together.
• Reversing an impairment above the original carrying amount.

When a subsidiary is later sold, the tax position is governed by the chargeable gains rules and, for many trading groups, the substantial shareholding exemption.

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Related Accountapedia entries

• Investments: fixed asset or current asset
• FRS 102 Section 14: investments in associates
• Buying a trade and assets vs buying shares
• Merger accounting for group reconstructions
• Writing down an intercompany debt
• FRS 102 Section 15: joint ventures

Sources

• Financial Reporting Council: FRS 102 September 2024 tmKYWO6
• legislation.gov.uk: SI 2008/410, schedule 1
• Financial Reporting Council: FRS 105 September 2024

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.