Financial reporting
developments
Noncontrolling interests in
consolidated financial statements
Revised March 2010
To our clients and other friends
FASB Statement No. 141(R), Business Combinations (Statement 141(R)) (codified primarily
in ASC 805, Business Combinations), and FASB Statement No. 160, Noncontrolling Interests
in Consolidated Financial Statements, an amendment of ARB No. 51 (Statement 160, codified
primarily in ASC 810, Consolidation), significantly changed the accounting and reporting for
business combinations and any noncontrolling interests in consolidated financial statements.
These standards represent the culmination of the first major collaborative convergence
project with the International Accounting Standards Board (IASB). This publication provides
our views on the application of ASC 810 as amended by Statement 160 and the recently
issued Accounting Standard Update No. 2010-02, Accounting and Reporting for Decreases
in Ownership of a Subsidiary — a Scope Clarification (ASU 2010-02). The latter update
clarifies the scope of ASC 810-10’s guidance for decreases in ownership and requires
additional disclosures.
The accounting for noncontrolling interests is based on the economic entity concept of
consolidated financial statements. Under the economic entity concept, all residual economic
interest holders in an entity have an equity interest in the consolidated entity even if the
residual interest is relative to only a portion of the entity (that is, a residual interest in a
subsidiary). Therefore, a noncontrolling interest is required to be displayed in the
consolidated statement of financial position as a separate component of equity.
Consistent with this view, after control is obtained, changes in ownership interests that do not
result in a loss of control should be accounted for as equity transactions. Furthermore, in a
significant change to prior practice, changes in ownership interests of a consolidated
subsidiary that result in a loss of control and deconsolidation trigger full gain or loss
recognition by measuring at the deconsolidation date any remaining ownership interests at
fair value. However, ASU 2010-02 provides that the decrease in ownership guidance in
ASC 810-10 does not apply to transactions involving in substance real estate or oil and gas
conveyances.
Statement 160 also changed the reporting of noncontrolling interests in the consolidated
income statement. ASC 810 now provides that net income or loss of an entity includes
amounts attributable to the noncontrolling interest. It also requires additional disclosures.
Statement 160 carried forward, without reconsideration, the provisions of ARB 51 (codified
primarily in ASC 810), related to consolidation purpose and policy, including the accounting
for intercompany eliminations, combined financial statements and parent-company financial
statements.
This publication is designed to assist professionals in understanding certain aspects of
ASC 810’s provisions. This publication reflects our current understanding of these
provisions based on our experience with financial statement preparers and related
discussions with the FASB and SEC staffs. This edition has been updated to include the
excerpts from and references to the FASB Accounting Standards Codification. It has also
been updated to reflect the recently issued ASU 2010-02. The majority of the updated
Financial reporting developments Noncontrolling interests in consolidated financial statements
To our clients and other friends
discussions and updated FAQs can be found in the following chapters: Chapter 5, Changes in
a parent’s ownership interest in a subsidiary; Chapter 7, Deconsolidation; Chapter 10,
Disclosures, Chapter 11, Effective date and transition; Appendix B, Comparison of ASC 810
to prior practice and IAS 27(R); Appendix C, Abbreviations used in this publication; and
Appendix D, Index of ASC references in this publication.
Practice continues to form and additional authoritative guidance interpreting the provisions
of ASC 810 could be issued subsequent to the release of this publication. Preparers of
financial statements should closely monitor developments in this area.
March 2010
Financial reporting developments Noncontrolling interests in consolidated financial statements
Contents
Contents
Chapter 1: Consolidation policy....................................................................................... 1 Interpretive guidance .................................................................................................. 3 FAQs.......................................................................................................................... 5 1-1 Proportionate consolidation as an alternative to full consolidation ................ 5 1-2 Bankruptcy ................................................................................................ 6 Chapter 2: Nature and classification of the noncontrolling interest ................................ 1 Interpretive guidance .................................................................................................. 2 Derivative instruments issued on the stock of a subsidiary ....................................... 3 Application of the SEC’s guidance on redeemable equity securities........................... 5 FAQs........................................................................................................................ 13 2-1 Redeemable or convertible equity securities and UPREIT structures ............ 13 2-2 Application of the SEC staff’s views on redeemable equity securities ........... 14 Chapter 3: Consolidation procedure — time of acquisition ............................................. 17 Acquisition through single step .................................................................................. 17 Acquisition through multiple steps ............................................................................. 17 Chapter 4: Attribution of net income and comprehensive income ................................. 18 Interpretive guidance ................................................................................................ 18 Substantive profit-sharing arrangements .............................................................. 19 Business combinations effected after the adoption of Statement 160..................... 19 Business combinations effected before the adoption of Statement 160 .................. 20 Attribution of losses ............................................................................................ 20 Income taxes ...................................................................................................... 22 FAQs........................................................................................................................ 24 4-1 Accounting for a debt refinancing and distribution of proceeds in the
real estate industry .................................................................................. 24 4-2 Attribution of losses to noncontrolling interests held by
preferred shareholders............................................................................. 24 Chapter 5: Changes in a parent’s ownership interest in a subsidiary............................. 26 Interpretive guidance ................................................................................................ 27 Decreases in a parent’s ownership interest in a subsidiary without loss
of control ................................................................................................ 28 Increases in a parent’s ownership interest in a subsidiary....................................... 29 Accumulated other comprehensive income considerations .................................... 29 Summary chart ................................................................................................... 31 Comprehensive example ........................................................................................... 31 Consolidation at the acquisition date .................................................................... 32 Consolidation in year of combination .................................................................... 34 Consolidation after purchasing an additional interest............................................. 36 Consolidation in year 2 ........................................................................................ 39 Consolidation after selling an interest without loss of control ................................. 42 Consolidation in year 3 ........................................................................................ 44 Financial reporting developments Noncontrolling interests in consolidated financial statements
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Contents
FAQs ........................................................................................................................ 47 5-1 Requirement to allocate goodwill upon change in parent’s
ownership interest.................................................................................... 47 5-2 Applicability to business combinations effected prior to adoption of
Statement 160 ......................................................................................... 47 5-3 Gain recognition option in SAB 51 ............................................................. 48 5-4 Transaction costs ..................................................................................... 48 5-5 In-substance real estate transactions ......................................................... 49 5-6 Scope exception for oil and gas conveyances ............................................. 49 5-7 Decrease in ownership in a subsidiary that is not a business or
nonprofit activity ...................................................................................... 51 5-8 Master limited partnership accounting ....................................................... 51 Chapter 6: Intercompany eliminations........................................................................... 54 Interpretive guidance ................................................................................................ 54 Effect of noncontrolling interest on elimination of intercompany amounts............... 55 FAQs ........................................................................................................................ 69 6-1 Intercompany losses ................................................................................. 69 Chapter 7: Deconsolidation ........................................................................................... 70 Interpretive guidance ................................................................................................ 72 Loss of control .................................................................................................... 73 Nonreciprocal transfers to owners ........................................................................ 73 Gain/loss recognition ........................................................................................... 73 Accumulated other comprehensive income ........................................................... 75 Deconsolidation through multiple arrangements .................................................... 76 Comprehensive example............................................................................................ 76 Deconsolidation by selling entire interest .............................................................. 77 Deconsolidation by selling a partial interest ........................................................... 80 FAQs ........................................................................................................................ 82 7-1 Accounting for retained ownership interest subsequent to
deconsolidation ........................................................................................ 82 7-2 Accounting for retained creditor interest in deconsolidation ........................ 83 7-3 Effect of Statement 160 on Topic 5-E ........................................................ 83 7-4 Contingent consideration .......................................................................... 83 7-5 Discontinued operations ........................................................................... 85 7-6 Gain/loss classification and presentation on deconsolidation of
a subsidiary.............................................................................................. 86 Chapter 8: Combined financial statements .................................................................... 87 Interpretive guidance ................................................................................................ 87 FAQs ........................................................................................................................ 88 8-1 Combined financial statements concept ..................................................... 88 8-2 Common management.............................................................................. 88 8-3 Presentation of noncontrolling interests in combined financial statements ... 89 vi
Financial reporting developments Noncontrolling interests in consolidated financial statements
Contents
Chapter 9: Parent-company financial statements ......................................................... 90 Interpretive guidance ................................................................................................ 90 FAQs........................................................................................................................ 91 9-1 Parent-company financial statements and the equity method ..................... 91 Chapter 10: Disclosures................................................................................................ 92 Interpretive guidance ................................................................................................ 93 Presentation ....................................................................................................... 93 Disclosure........................................................................................................... 94 Disclosure example ................................................................................................... 96 FAQs...................................................................................................................... 101 10-1 Statement of cash flow presentation of cash flows relating to
noncontrolling interests.......................................................................... 101 10-2 Statement of cash flow presentation — starting point for
indirect method ..................................................................................... 102 10-3 Equity reconciliation — interim reporting period requirements ................... 102 10-4 Equity reconciliation and redeemable noncontrolling interests —
applicable to public companies ................................................................ 103 10-5 “Total parent shareholders’ equity” subtotal on the balance sheet ............ 104 Chapter 11: Effective date and transition ................................................................... 105 Interpretive guidance .............................................................................................. 107 Appendix A: Comprehensive example ......................................................................... 109 Appendix B: Comparison of ASC 810 as amended to prior practice and IAS 27(R) ....... 125 Appendix C: Abbreviations used in this publication ..................................................... 127 Appendix D: Index of ASC references in this publication ............................................. 129 Financial reporting developments Noncontrolling interests in consolidated financial statements
vii
Contents
Notice to Readers:
This publication includes excerpts from and references to the FASB Accounting Standards
Codification (“the Codification” or “ASC”). The Codification is the single source of
authoritative nongovernmental U.S. generally accepted accounting principles (US GAAP),
with the exception of guidance issued by the SEC, and is effective for interim and annual
periods ending after 15 September 2009. The Codification comprises all US GAAP issued
by a standard setter, excluding those standards for state and local governments, and
supersedes previously issued accounting standards.
The Codification uses a hierarchy that includes Topics, Subtopics, Sections and
Paragraphs. Each Topic includes an Overall Subtopic that generally includes pervasive
guidance for the topic, and additional Subtopics, as needed, with incremental or unique
guidance. Each Subtopic includes Sections which in turn include numbered Paragraphs.
Thus, a codification reference includes the Topic (XXX), Subtopic (YY), Section (ZZ) and
Paragraph (PP). Throughout this publication references to guidance in the Codification are
shown using these reference numbers. For example, references to specific Topics within
the Codification are presented as ASC XXX, references to specific Subtopics are presented
as ASC XXX-YY and references to specific Paragraphs are shown as ASC XXX-YY-ZZ-PP.
Certain content from pre-codification standards (e.g., basis for conclusions) is excluded
from the Codification. Throughout this publication, references are made to certain precodification standards (and specific sections or paragraphs of pre-codification standards)
in situations in which the content being discussed is excluded from the Codification.
Appendix C of this publication provides abbreviations for accounting standards used
throughout this publication. Appendix D of this publication provides an index of specific
Codification paragraphs and the relevant sections within this publication in which those
paragraphs are included or discussed.
This publication is organized by paragraph number of ASC 810. The shaded sections at the
beginning of each chapter are excerpted from ASC 810. (There are numerous examples in
this publication, some of which have shaded sections for ease of reading. They are not
excerpted from ASC 810.) The interpretive guidance sections following the respective
paragraphs summarize our understanding of the paragraphs’ requirements, including the
basis for the FASB’s conclusions. Detailed illustrative examples are also provided. This is
followed by a list of frequently asked questions and our interpretive responses. Our
responses include some basic examples to assist in illustrating the key concepts, where
applicable. The appendices to this publication include additional interpretive guidance.
Portions of FASB ASC 810, and other FASB publications, reprinted with permission. Copyright 2010 Financial Accounting
Standards Board, 401 Merritt 7, P.O. Box 5116, Norwalk, CT, 06856-5116, USA. Copies of complete documents are available
from the FASB.
viii
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 1: Consolidation policy
Chapter 1: Consolidation policy
Excerpt from Accounting Standards Codification
Consolidation — Overall
Objectives
General
810-10-10-1
The purpose of consolidated financial statements is to present, primarily for the benefit of
the owners and creditors of the parent, the results of operations and the financial position of
a parent and all its subsidiaries as if the consolidated group were a single economic entity.
There is a presumption that consolidated financial statements are more meaningful than
separate financial statements and that they are usually necessary for a fair presentation
when one of the entities in the consolidated group directly or indirectly has a controlling
financial interest in the other entities.
Scope and Scope Exceptions
Entities
810-10-15-8
The usual condition for a controlling financial interest is ownership of a majority voting
interest, and, therefore, as a general rule ownership by one reporting entity, directly or
indirectly, of more than 50 percent of the outstanding voting shares of another entity is a
condition pointing toward consolidation. The power to control may also exist with a lesser
percentage of ownership, for example, by contract, lease, agreement with other
stockholders, or by court decree.
810-10-15-10
A reporting entity shall apply consolidation guidance for entities that are not in the scope of
the Variable Interest Entities Subsections (see the Variable Interest Entities Subsection of
this Section) as follows:
a.
All majority-owned subsidiaries — all entities in which a parent has a controlling financial
interest — shall be consolidated. However, there are exceptions to this general rule.
1. A majority-owned subsidiary shall not be consolidated if control does not rest with
the majority owner — for instance, if any of the following are present:
i.
The subsidiary is in legal reorganization
ii.
The subsidiary is in bankruptcy
iii. The subsidiary operates under foreign exchange restrictions, controls, or other
governmentally imposed uncertainties so severe that they cast significant doubt
on the parent's ability to control the subsidiary.
Financial reporting developments Noncontrolling interests in consolidated financial statements
1
Chapter 1: Consolidation policy
iv.
In some instances, the powers of a shareholder with a majority voting interest
to control the operations or assets of the investee are restricted in certain
respects by approval or veto rights granted to noncontrolling shareholder
(hereafter referred to as noncontrolling rights). In paragraphs 810-10-25-2
through 25-14, the term noncontrolling shareholder refers to one or more
noncontrolling shareholders. Those noncontrolling rights may have little or no
impact on the ability of a shareholder with a majority voting interest to control
the investee's operations or assets, or, alternatively, those rights may be so
restrictive as to call into question whether control rests with the majority owner.
v.
Control exists through means other than through ownership of a majority voting
interest, for example as described in (b) through (e).
2. A majority-owned subsidiary in which a parent has a controlling financial interest
shall not be consolidated if the parent is a broker-dealer within the scope of
Topic 940 and control is likely to be temporary.
3. Except as discussed in paragraph 946-810-45-3, consolidation by an investment
company within the scope of Topic 946 of a non-investment-company investee is
not appropriate.
b.
Subtopic 810-20 shall be applied to determine whether the rights of the limited
partners in a limited partnership overcome the presumption that the general partner
controls, and therefore should consolidate, the partnership.
c.
Subtopic 810-30 shall be applied to determine the consolidation status of a research
and development arrangement.
d.
The Consolidation of Entities Controlled by Contract Subsections of this Subtopic shall
be applied to determine whether a contractual management relationship represents a
controlling financial interest.
e.
Paragraph 710-10-45-1 addresses the circumstances in which the accounts of a rabbi
trust that is not a VIE (see the Variable Interest Entities Subsections for guidance on
VIEs) shall be consolidated with the accounts of the employer in the financial
statements of the employer.
Differing Fiscal Year-Ends Between Parent and Subsidiary
810-10-15-11
A difference in fiscal periods of a parent and a subsidiary does not justify the exclusion of the
subsidiary from consolidation.
2
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 1: Consolidation policy
Other Presentation Matters
Differing Fiscal Year-Ends Between Parent and Subsidiary
810-10-45-12
It ordinarily is feasible for the subsidiary to prepare, for consolidation purposes, financial
statements for a period that corresponds with or closely approaches the fiscal period of the
parent. However, if the difference is not more than about three months, it usually is
acceptable to use, for consolidation purposes, the subsidiary's financial statements for its
fiscal period; if this is done, recognition should be given by disclosure or otherwise to the
effect of intervening events that materially affect the financial position or results of
operations
Interpretive guidance
Statement 160 did not modify the requirement that the condition for consolidation under the
voting interest model is holding — directly or indirectly — a controlling financial interest in a
subsidiary. The condition for a controlling financial interest, which is not defined in ASC 810,
is generally ownership of a majority voting interest.
Although Statement 160 did not change consolidation policy in GAAP, it clarified that
a subsidiary is an entity in which a parent has a controlling financial interest, whether
that controlling interest comes through voting interests or other means (for example,
variable interests).
While consolidation policy is not the subject of this booklet, in general, the first step in
determining whether an entity has a controlling financial interest in a subsidiary is to
establish the basis on which the investee is to be evaluated for control (that is, whether the
consolidation determination should be based on ownership of the investee’s outstanding
voting interests or its variable interests). Accordingly, the provisions of ASC 810-10’s
variable interest model1 should first be applied to determine whether the investee is a
variable interest entity (VIE). Only if the entity is determined not to be a VIE, should the
consolidation guidance for voting interest entities within ASC 810-10 (hereinafter referred to
as ASC’s control model) be applied.
1
Generally ASC 810-10 includes guidance with respect to the consolidation considerations for
voting interest entities and variable interest entities for each of ASC 810-10’s sections. In each of
ASC 810-10’s sections there is a General subsection with respect to the consolidation model. This
guidance applies to voting interest entities and also may apply to variable interest entities in certain
circumstances. The Variable Interest Entities subsection within each of ASC 810-10’s sections
contains considerations with respect to variable interest entities. In referring to the Variable Interest
Model in ASC 810-10, we are referring to the guidance applicable to variable interest entities in each
of ASC 810-10’s sections.
Financial reporting developments Noncontrolling interests in consolidated financial statements
3
Chapter 1: Consolidation policy
Figure 1-1 summarizes how GAAP’s consolidation policy framework should be applied to
ownership interests in an entity. It does not address structures in which control is obtained
through other means (for example, consolidation by contract pursuant to ASC 810-10-25-60
through 25-81). Investments in partnerships and limited liability companies should be
evaluated for potential consolidation pursuant to ASC 810-20.
Figure 1-1: ASC 810, Consolidation Decision Tree(1)
Ownership interest(2)
Is investee
a VIE?(3)
Yes
No
Ownership
of more than 50%
of outstanding
voting stock?
Primary
beneficiary?(4)
Yes
Consolidate VIE
No
No
Follow other GAAP
(ASC 320, ASC 323
and ASC 815,
among others)
Yes
Other
investors have
liquidating, kick-out,
or substantive
participating
rights? (5)
Yes
No
Consolidate
(ASC 810’s control
model related
guidance)
4
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 1: Consolidation policy
Notes
1 This decision tree does not address structures where control is obtained through means other than ownership
interests (for example, by contract). Refer to other GAAP and our Financial Reporting Developments booklet on
ASC 810-10’s variable interest model for further interpretive guidance. Investments in partnerships and limited
liability companies should be evaluated for potential consolidation pursuant to ASC 810-20.
2 Includes instruments representing an ownership interest in an enterprise (for example, common, preferred or
other capital stock) or the right to acquire an ownership interest in an enterprise at fixed or determinable prices.
Convertible debt or preferred stock that by its terms either must be redeemed by the issuing enterprise or is
redeemable at the option of the investors is not included in this term. An investment company does not apply
ASC 810-10’s variable interest model and consolidates other entities pursuant to other literature, including SEC
Regulation S-X 6-03(c)(1) and ASC 946.
3
4
5
The investee is not a VIE if the equity investment at risk is sufficient and the group of holders of the equity
investment at risk have through their equity interests the:
•
Ability through voting or other rights to make significant decisions
•
Obligation to absorb the entity’s expected losses
•
Right to receive the entity’s expected residual returns
In determining whether a partnership is a VIE, the general partner’s investment must be evaluated for
sufficiency. Refer to other GAAP and our Financial Reporting Developments booklet on ASC 810-10’s variable
interest model for further interpretive guidance.
Once it is determined that the investee is a VIE, all of the equity holders’ variable interests should be considered
in this determination.
Consider the guidance in ASC 810-10-25-1 through 25-14 and 810-10-55-1 and ASC 810-20, to determine if
the majority voting equity holder or general partner controls the investee.
FAQs
1-1
Proportionate consolidation as an alternative to full consolidation
(Added March 2010)
Question:
Is the proportionate consolidation method (as described in ASC 810-10-45-14) an acceptable
alternative to full consolidation?
Response:
ASC 805 requires identifiable assets acquired, liabilities assumed and any noncontrolling
interest in a business combination initially be measured at their fair values. ASC 810 contains
similar requirements for primary beneficiaries of variable interest entities.
We do not believe that US GAAP (that is, ASC 805 and ASC 810) permits the use of the
proportionate gross financial statement presentation method (that is, proportionate
consolidation) when an entity is controlled (and thus required to be consolidated). That is, we
do not believe that proportionate gross financial statement presentation method should be
applied in consolidating a controlled entity. The use of the proportionate gross financial
statement presentation method applies only in limited circumstances. It applies to
investments in certain unincorporated legal entities in the extractive or construction industry
that otherwise would be accounted for under the equity method of accounting (which are not
Financial reporting developments Noncontrolling interests in consolidated financial statements
5
Chapter 1: Consolidation policy
controlled investees). It also applies to an ownership of an undivided interest in real property
where each owner is entitled only to its pro rata share of income and expenses and is
proportionately (i.e., severally) liable for its share of each liability, and the real property
owned is not subject to joint control by the owners.
1-2
Bankruptcy
(Added March 2010)
Question:
Should a parent entity consolidate a subsidiary that is in bankruptcy?
Response:
ASC 810-10-15-10 provides the following:
“A majority-owned entity shall not be consolidated if control does not rest with the
majority owner - for instance, if any of the following are present:
i.
The subsidiary is in legal reorganization
ii. The subsidiary is in bankruptcy
iii. The subsidiary operates under foreign exchange restrictions, controls or other
governmentally imposed uncertainties so severe that they cast significant doubt on
the parent's ability to control the subsidiary.”
The bankruptcy status of entities within a consolidated group may affect whether the entities
continue to be consolidated. Consolidation considerations include the status of the
bankruptcy proceedings as well as the facts and circumstances of the parent’s relationship
with the subsidiary (that is, majority shareholder, priority debt holder, single largest creditor).
Generally, when a subsidiary enters into bankruptcy, the parent does not maintain control
over the substantive operations of the subsidiary as the rights and responsibilities over the
entity are held by the Bankruptcy Court. Additionally, consolidation of the subsidiary by the
parent would often be precluded if the parent and subsidiary were both in bankruptcy, but the
parent and subsidiary were not under the oversight of the same Bankruptcy Court. However,
if the parent and subsidiary are both in bankruptcy and the proceedings are both in the same
Court, the parent may conclude based on the status of the bankruptcy proceeding that the
subsidiary should continue to be consolidated.
Refer to our Financial Reporting Developments, Reorganizations — A Summary, for further
discussion of the accounting considerations related to entities in bankruptcy.
6
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 2: Nature and classification of
the noncontrolling interest
Chapter 2: Nature and classification of the noncontrolling interest
Excerpt from Accounting Standards Codification
Consolidation — Overall
Glossary
810-10-20
Noncontrolling Interest
The portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a
parent. A noncontrolling interest is sometimes called a minority interest.
Other Presentation Matters
Nature and Classification of the Noncontrolling Interest in the Consolidated Statement of
Financial Position
810-10-45-15
The ownership interests in the subsidiary that are held by owners other than the parent is a
noncontrolling interest. The noncontrolling interest in a subsidiary is part of the equity of the
consolidated group.
810-10-45-16
The noncontrolling interest shall be reported in the consolidated statement of financial
position within equity, separately from the parent’s equity. That amount shall be clearly
identified and labeled, for example, as noncontrolling interest in subsidiaries (see paragraph
810-10-55-4I). An entity with noncontrolling interests in more than one subsidiary may
present those interests in aggregate in the consolidated financial statements.
810-10-45-16A
Only either of the following can be a noncontrolling interest in the consolidated financial
statements:
a.
A financial instrument (or an embedded feature) issued by a subsidiary that is classified
as equity in the subsidiary’s financial statements
b.
A financial instrument (or an embedded feature) issued by a parent or a subsidiary for
which the payoff to the counterparty is based, in whole or in part, on the stock of a
consolidated subsidiary, that is considered indexed to the entity’s own stock in the
consolidated financial statements of the parent and that is classified as equity.
810-10-45-17
A financial instrument issued by a subsidiary that is classified as a liability in the subsidiary’s
financial statements based on the guidance in other Subtopics is not a noncontrolling
interest because it is not an ownership interest. For example, Topic 480 provides guidance
for classifying certain financial instruments issued by a subsidiary.
Financial reporting developments Noncontrolling interests in consolidated financial statements
1
Chapter 2: Nature and classification of the noncontrolling interest
810-10-45-17A
An equity-classified instrument (including an embedded feature that is separately recorded in
equity under applicable GAAP) within the scope of the guidance in paragraph815-40-15-5C
shall be presented as a component of noncontrolling interest in the consolidated financial
statements whether the instrument was entered into by the parent or the subsidiary.
However, if such an equity-classified instrument was entered into by the parent and expires
unexercised, the carrying amount of the instrument shall be reclassified from the
noncontrolling interest to the controlling interest.
Interpretive guidance
ASC 810-10 indicates that a noncontrolling interest in an entity is any equity interest in the
consolidated entity that is not attributable to the parent. ASC 810-10 requires that the
noncontrolling interest be classified as a separate component of consolidated equity. Under
prior consolidation procedures, the noncontrolling interest was generally presented as a
“mezzanine” item between liabilities and equity, and was not considered to be part of
consolidated equity.
The FASB concluded that a noncontrolling interest in an entity meets the definition of equity in
Concepts Statement 6, which defines equity (or net assets) as, “the residual interest in the
assets of an entity that remains after deducting its liabilities.” A noncontrolling interest
represents a residual interest in the assets of a subsidiary within a consolidated group and is,
therefore, consistent with the definition of equity in Concepts Statement 6. The noncontrolling
interest is presented separately from the equity of the parent so that users of the consolidated
financial statements can distinguish the parent’s equity from the equity attributable to the
noncontrolling interest (that is, equity of the subsidiary held by owners other than the parent).
Only a financial instrument issued by a subsidiary that is classified as equity by the subsidiary
can be a noncontrolling interest. A financial instrument classified as a liability based on other
authoritative literature cannot be a noncontrolling interest because that instrument does not
represent an ownership interest in the entity. For example, mandatorily redeemable
preferred stock issued by a subsidiary would be classified as a liability in accordance with
ASC 480. Accordingly, the carrying value of the preferred stock would not be included as a
noncontrolling interest in the consolidated financial statements. Certain derivative
instruments on the stock of a subsidiary may also result in the noncontrolling interest being
classified as a liability (for example, certain freestanding forward contracts or certain
embedded purchased call/written put option combinations accounted for like a forward under
ASC 480-10-55-53 through 55-62). Refer to the discussion of derivative instruments issued
on the stock of a subsidiary for further guidance.
2
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 2: Nature and classification of the noncontrolling interest
Derivative instruments issued on the stock of a subsidiary
Accounting and reporting issues arise when a parent enters into derivative instruments on
the stock of a subsidiary.2 These derivatives can take the form of options (written or
purchased, puts or calls), forwards (date-certain or contingent), or even swap-like contracts.
The accounting in this area can be complex because of the different GAAP that must be
considered. This complexity is compounded because (1) the form of the derivative (that is,
whether it is embedded or freestanding) can be determinative and (2) the derivative may be
set at either a fixed or variable price or at fair value.
Is the derivative embedded in the noncontrolling interest or freestanding?
While ASC 480 provides little interpretive guidance on the definition of a “freestanding”
financial instrument, we believe that the substance of a transaction must be considered in
making this determination under ASC 480.
In this regard, whether an instrument is documented in a contract separate and apart from
any other contract is not necessarily determinative when a contract is entered into in
conjunction with some other transaction. If the transactions are between the same parties
and involve the same underlying (in this context, the issuer’s shares), it is important to assess
whether the instruments are (1) legally detachable and (2) separately exercisable.
►
►
Legally detachable — whether two instruments can be legally separated and transferred
such that the two components may be held by different parties. As long as an investor is
somehow able to separate the components, they are considered legally detachable.
Separately exercisable — whether the exercise of one instrument results in the termination
of the other instrument (e.g., through redemption, simultaneous exercise or expiration).
If the exercise of one instrument must result in the termination of the other (either through
redemption, simultaneous exercise or expiration), then the instruments normally would not
be considered freestanding under ASC 480. On the other hand, if one instrument can be
exercised while the other instrument continues to be outstanding (for example, if a forward
can be satisfied with any outstanding shares of the issuer or can be net settled), the
instruments would be considered freestanding under ASC 480. For example, if a parent
company enters into a contract with the only minority shareholder of its privately held
subsidiary that allows the shareholder to put its shares to the parent at a fixed price, that put
option generally would be considered to be embedded in the related shares. As a result, the
redeemable equity securities are not subject to ASC 480 (although, if the parent is a public
company, the SEC’s guidance on redeemable equity securities discussed below will apply to
those redeemable shares). However, if the same parent enters into a put option on publicly
2
This section refers to all “derivatives” in the common use of the word, not just instruments that meet
the definition of a derivative in ASC 815-10-15.
Financial reporting developments Noncontrolling interests in consolidated financial statements
3
Chapter 2: Nature and classification of the noncontrolling interest
traded common stock of a different subsidiary, and that put option allows the counterparty to
put any common shares of the subsidiary to the parent at a fixed price (e.g., the counterparty
could put shares of the subsidiary he or she already owns or buy sufficient shares in the
public market with which to exercise the put), that written put option would be considered
freestanding and classified as a liability under ASC 480.
Determining whether a derivative is embedded or freestanding requires a careful analysis of
the facts and circumstances, consideration of other literature and is outside the scope of this
publication. The table below should be applied only after determining whether the derivative
is embedded or freestanding.
Importantly, and as reflected in the table below, if the derivative is considered a feature
embedded in the subsidiary’s shares based on the facts and circumstances, then that
embedded feature must be analyzed to determine if it should be bifurcated from the interest
in the subsidiary under the accounting literature. Determining whether the embedded feature
should be bifurcated will involve evaluating the hybrid instrument (the noncontrolling interest
and embedded feature) under the guidance in ASC 815-15. In many cases, unless the
subsidiary itself is a publicly traded entity, the feature will not meet the definition of a
derivative pursuant to ASC 815-10-15. That is because these features usually require gross
physical settlement, or the transfer of the full amount of consideration payable in exchange
for the full number of underlying non-public subsidiary interests that are not readily
convertible to cash. This gross physical settlement for non-public shares does not meet any of
the forms of net settlement under ASC 815-10-15-99. However, if the instrument meets the
definition of a derivative, it would be evaluated under 815-10-15-74(a) to determine if an
exception from bifurcation is available. That exception is applicable if the feature is
considered indexed to the issuer’s own stock and would be classified in equity. That analysis
includes the consideration of ASC 815-40, which includes guidance that is considered when
determining whether a derivative is considered indexed to the issuer’s own stock as well as
whether a derivative should be classified in equity3.
In November 2008, the FASB ratified EITF 08-8 (codified primarily in ASC 815-40-15-5C),
which addressed the inconsistency between Statement 160’s conclusion that a noncontrolling
interest is equity of the consolidated entity and the consensus in EITF 00-6 (partially nullified
by EITF 08-8) that concluded that “stock of a subsidiary is not considered equity of the parent
(reporting entity).” This inconsistency had been acknowledged by the FASB in the basis for
conclusions in Statement 160.
3
4
Specifically, ASC 815-40-15-5 through 15-8 and related interpretative guidance (especially the
examples illustrated in ASC 815-40-55-19 through 55-48) address whether a derivative is considered
indexed to the issuer’s own stock. ASC 815-40-25-1 through 25-43 and related interpretative
guidance (primarily codified in ASC 815-40-55-1 through 55-18) address whether a derivative
should be classified in equity.
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 2: Nature and classification of the noncontrolling interest
ASC 815-40-15-5C concludes that:
►
►
►
all freestanding financial instruments (or embedded features) with a settlement amount
based on the stock of a consolidated subsidiary (provided the subsidiary is a substantive
entity) are subject to the guidance under this paragraph4
freestanding financial instruments (or embedded features) within the scope of ASC 81540-15-5C are not precluded from being considered indexed to an entity’s own stock.
Other accounting literature (e.g., ASC 480 and the rest of ASC 815-40) must be
considered when determining the appropriate classification of such instruments as a
liability (or in some cases an asset) or equity, and
if an instrument in the scope of ASC 815-40-15-5C is determined to be equity, the
instrument should be presented as a component of noncontrolling interest regardless of
whether the instrument was issued by the parent or subsidiary
ASC 815-40-15-5C is effective for fiscal years, and interim periods within those fiscal years,
beginning after 15 December 2008 (same effective date as Statement 160). Early adoption is
not permitted. As of the effective date, if an instrument that previously was classified as an
asset or liability now qualifies for equity classification, the instrument’s carrying value should
be reclassified to equity (as part of noncontrolling interest). Gains or losses recorded during
the period that the instrument was classified as an asset or liability should not be reversed.
ASC 815-40-15-5C partially nullifies EITF 00-6.
Application of the SEC’s guidance on redeemable equity securities
Public entities must consider the guidance from the SEC staff in ASR 268, Redeemable
Preferred Stocks (included in codification at ASC 480-10-S99-1) when classifying
noncontrolling interests (as discussed further below, the SEC staff has extended this
guidance to redeemable common shares as well). This guidance specifies that securities that
are redeemable at the option of the holder or outside the control of the issuer are not
considered permanent equity and are therefore to be classified outside of shareholders’
equity. ASC 480-10-S99-1 remains applicable after the adoption of Statement 160 because
ASC 810-10 does not address whether a redeemable noncontrolling interest is a liability or
equity. Accordingly, until the FASB completes its Financial Instruments with Characteristics of
Equity project, an instrument in the scope of ASC 480-10-S99-1 should be presented outside
of permanent equity in the “mezzanine” or “temporary equity” section between liabilities and
shareholders’ equity in the financial statements of public entities. These instruments are not
liabilities, but also cannot be included in total equity.
4
ASC 815-40-15-5C did not amend ASC 718 and ASC 505-50. Therefore, share-based payments within
the scope of either ASC 505-50 or ASC 718 continue to be subject to the provisions of that literature.
Financial reporting developments Noncontrolling interests in consolidated financial statements
5
Chapter 2: Nature and classification of the noncontrolling interest
The SEC staff’s guidance in ASC 480-10-S99-3A (formerly known as EITF Topic D-98)
clarifies the scope of ASC 480-10-S99-1 by expanding it beyond just preferred shares and
further requires securities subject to ASC 480-10-S99-3A’s provisions to be reported
initially at fair value. Subsequent measurement of these securities depends on the
redemption feature’s terms, as does the effect on earnings-per-share. Pursuant to the
SEC staff’s guidance, a redeemable noncontrolling interest would be included in the
“mezzanine” section for public entities.
In certain instances, the issuer may be required or may have a choice to settle the
redeemable securities contract by delivery of its own shares, rather than cash. For these
instruments, the guidance in ASC 815-40-25-7 through 25-35 should be used to evaluate
whether the issuer controls the actions or events necessary to issue the maximum number of
shares that could be required to be delivered under share settlement of the contract. If the
issuer does not completely control settlement by delivery of its own shares, cash settlement
of the instrument would be presumed and the instrument would be classified as temporary
equity (that is, “mezzanine”). For example, if shares are redeemable at the option of a
noncontrolling interest holder (that is, puttable shares) and the issuer is permitted to settle
the redemption amount in cash or by delivery of a variable number of its common shares with
an equivalent value, the absence of a cap on the number of common shares that could be
potentially issuable upon redemption requires classification of the noncontrolling interest
outside of permanent equity. In other words, classification of a redeemable instrument is
dependent on the issuer’s ability to actually settle in shares. A careful examination of the
facts and circumstances will be required in these instances.
Examples of the presentation of noncontrolling interests with derivatives issued on those
interests
The following table summarizes the accounting for common derivatives on the stock of a
subsidiary, along with the basis for our conclusions. This table assumes the derivative
instruments are issued on all of the outstanding noncontrolling interest (that is, for the fixed
number of shares not held by the parent) and are entered into by the controlling interest.
Careful consideration of the individual facts and circumstances will be necessary to determine
the appropriate accounting for any derivative issued on the stock of a subsidiary.
This table does not include guidance on the application of ASC 480-10-S99-3A but does
reference where it would be an additional consideration. Generally, an embedded feature that
(a) has not been bifurcated and (b) permits or requires the noncontrolling interest holder to
deliver the subsidiary’s interests in exchange for consideration from the controlling entity (or
the subsidiary itself) will be deemed a redeemable noncontrolling interest. Redeemable
noncontrolling interests in the consolidated financial statements of public entities are
addressed in ASC 480-10-S99-3A. Accordingly, readers should apply ASC 480-10-S99-3A to
instruments within its scope. While these instruments would still be deemed noncontrolling
interests, and initially accounted for as such (including allocation of earnings, adjustments for
6
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 2: Nature and classification of the noncontrolling interest
dividends, etc.), the SEC’s accounting would be incremental, and would affect the
classification (in the mezzanine versus in equity), and likely would affect the measurement of
any noncontrolling interest and the related earnings per share calculations (depending on
how the redemption price was determined). Additionally, as noted previously, this table
should be applied only after determining (1) whether the instrument is embedded or
freestanding and (2) whether its price is fixed, variable or at fair value. This table is a starting
point in applying the literature related to this complex area of GAAP. The parenthetical
references provide the literature cited.
This table, necessarily, does not contemplate all possible instruments and structures and
assumes subsidiaries represent substantive entities as contemplated by the scope of
ASC 815-40-15-5C.
Instrument
Entered into
Redemption amount Accounting
Written put option
allowing the
noncontrolling
interest holder to
put its interest to
the controlling
interest
Contemporaneous Fixed, fair value or
with creation of
variable
noncontrolling
interest
If considered embedded
If the embedded written put option does not
require bifurcation under ASC 815-15, the put
option is recognized as part of the noncontrolling
interest. Changes in the fair value of the option
over its life are not recognized. Earnings are
generally attributed to the controlling and
noncontrolling interests without considering the
put option.
If the embedded put option is exercised, the
noncontrolling interest is reduced and APIC is
adjusted for any difference between the
noncontrolling interest’s carrying value and the
consideration paid. 5
Additional consideration of ASC 480-10-S99-3A
is required.
If considered freestanding
If the option is concluded to be freestanding,
ASC 480 requires it to be classified as a liability
and measured at fair value with the changes in
value recognized in earnings.
The exercise of the option results in the
acquisition of noncontrolling interest and
any difference between cash paid and the
combined value of the freestanding instrument
and noncontrolling interest would be recorded
to APIC.
5
ASC 810-10 requires transactions between the controlling and noncontrolling interests that do not result in consolidation or
deconsolidation to be recognized in equity.
Financial reporting developments Noncontrolling interests in consolidated financial statements
7
Chapter 2: Nature and classification of the noncontrolling interest
Instrument
Entered into
Redemption amount Accounting
Written put option
allowing the
noncontrolling
interest holder to
put its interest to
the controlling
interest
(continued)
If in ASC 815-10’s scope
If the written put option is bifurcated and
accounted for under ASC 815-10, it is reported
separately at fair value with changes in fair value
recorded in earnings. The noncontrolling interest
is recognized and measured in accordance with
ASC 810.
Additional consideration of ASC 480-10-S99-3A
is required for the host equity contract.
Subsequent to
creation of
noncontrolling
interest 6
Purchased call
option allowing
the controlling
interest to acquire
the noncontrolling
interest
Fixed, fair value or
variable
Contemporaneous Fixed, fair value or
with creation of
variable
noncontrolling
interest
The written put option is recognized as a liability
that is initially and subsequently measured at fair
value in accordance with ASC 480. The
noncontrolling interest is recognized and
measured in accordance with ASC 810.
If considered embedded
If the embedded purchased call option does not
require bifurcation under ASC 815, the call
option is recognized as part of the noncontrolling
interest. Changes in the fair value of the option
over its life are not recognized. Earnings are
generally attributed to the controlling and
noncontrolling interests without considering the
call option.
If the embedded call option is exercised, the
noncontrolling interest is reduced and APIC is
adjusted for any difference between the
noncontrolling interest’s carrying value and the
consideration paid.
If considered freestanding and in the scope of
ASC 815-10
If the purchased call option is in the scope of
ASC 815-10 and is either freestanding or
bifurcated, it should be reported separately and
measured at fair value with changes in value
recognized in earnings. The noncontrolling
interest is recognized and measured in
accordance with ASC 810.
6
8
This table assumes that derivatives issued subsequent to the creation of the noncontrolling interest are freestanding. Depending
on individual facts and circumstances, certain derivatives issued subsequent to the creation of the noncontrolling interest could
be considered embedded. If the derivative instrument is considered to be embedded, the guidance on derivatives embedded in
the noncontrolling interest should be applied, and the guidance in ASC 480-10-S99-3A would be considered. The determination
of whether or not a derivative instrument issued on the noncontrolling interest is embedded or freestanding is outside of the
scope of this publication. See our Financial Reporting Developments booklets on ASC 480 and ASC 815 for interpretive
guidance relating to the determination of whether or not an instrument is embedded or freestanding.
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 2: Nature and classification of the noncontrolling interest
Instrument
Entered into
Redemption amount Accounting
Purchased call
option allowing
the controlling
interest to acquire
the noncontrolling
interest
(continued)
If considered freestanding and not in the scope of
ASC 815-10
If not in the scope of ASC 815-10, but required to
be accounted for as a freestanding instrument,
follow ASC 815-40 to determine the appropriate
classification and subsequent measurement of
such instruments as an asset or equity.
(ASC 815-40-25-1 through 25-43 )
For a freestanding call option classified as equity
under ASC 815-40, if the call option is not
exercised and was entered into by the parent, the
carrying amount of the instrument should be
reclassified from the noncontrolling interest to
the controlling interest. If it is not exercised and
was entered into by the subsidiary, there is no
reclassification to be made.
The 1986 AICPA Options Paper provides
potential alternatives to be evaluated if it was
determined that neither ASC 815-10 nor
ASC 815-40 applied.
Subsequent to
creation of
noncontrolling
interest 7
Fixed, fair value or
variable
In ASC 815-10’s scope
If the freestanding purchased call option is in the
scope of ASC 815-10, it should be reported
separately and measured at fair value with
changes in value recognized in earnings. The
noncontrolling interest is recognized and
measured in accordance with ASC 810.
Not in ASC 815-10’s scope
The freestanding purchased call option
is recognized and subsequently measured
as an asset or equity in accordance with
ASC 815-40-25-1 through 25-43. The
noncontrolling interest continues to be
recognized in accordance with ASC 810.
For a freestanding call option classified as equity
under ASC 815-40, if the call option is not
exercised and was entered into by the parent, the
carrying amount of the instrument should be
reclassified from the noncontrolling interest to
the controlling interest. If it is not exercised and
was entered into by the subsidiary, there is no
reclassification to be made.
7
This table assumes derivative is freestanding. See footnote 6.
Financial reporting developments Noncontrolling interests in consolidated financial statements
9
Chapter 2: Nature and classification of the noncontrolling interest
Instrument
Entered into
Redemption amount Accounting
Forward contract
to acquire the
noncontrolling
interest
Contemporaneous Payment amount
with creation of
and settlement date
noncontrolling
are fixed
interest
The freestanding 8 derivative instrument is
classified as a liability and initially measured
at an appropriate value. 9 The liability is
accreted to the settlement amount over the
term of the forward contract with the resulting
expense recognized as interest cost.
Noncontrolling interest is not recognized at
inception and no earnings are allocated to the
noncontrolling interest. The parent accounts for
this transaction as a financing and recognizes
100% of the subsidiary’s assets and liabilities.
(ASC 480-10-30-3 and ASC 480-10-55-53
through 55-54)
When the forward contract is settled, the liability
is derecognized.
Payment amount or
settlement date vary
based on certain
conditions
8
9
10
11
10
The freestanding 10 forward contract is not
subject to ASC 480-10-55-54 as the settlement
price is not fixed. Pursuant to other sections of
ASC 480, a liability should be recognized at an
appropriate initial measurement with changes in
value from the previous reporting date
recognized as interest cost. 11
If considered embedded, the shares that represent the noncontrolling interest would themselves be mandatorily redeemable
financial instruments which are classified as a liability under ASC 480-10-30-1 and measured at fair value. However, whether
the measurement requirements of ASC 480-10 or ASC 480-10-S99 would be required depends on the application of the
transition guidance in ASC 480-10-65-1(b). If the measurement guidance under ASC 480-10 is applicable, see footnote 9 for
further discussion.
A freestanding forward contract under ASC 480-10-30-3 (codified from Statement 150) is initially measured at the fair value
of the shares to be repurchased, adjusted for any consideration or unstated rights or privileges. A freestanding forward
contract under ASC 480-10-55-54 (codified from EITF 00-4) is initially measured at the present value of the contract amount,
which we believe should be discounted using a market-based rate reflecting the issuer’s own credit risk. If the forward contract
is considered embedded, the resulting mandatorily redeemable financial instruments (see footnote 8) are measured at fair
value under ASC 480-10-30-1. We generally believe that these methods should result in approximately the same initial
measurement. Any significant differences would require additional analysis to determine if there were additional rights or
privileges granted in the transaction.
See footnote 8 if the instruments were considered embedded in the shares, resulting in a mandatorily redeemable financial
instrument.
While not initially addressed in former EITF 00-4, this instrument is a forward contract for a fixed number of equity shares and
subject to ASC 480-10-30-3, which requires the forward contract to be valued at the fair value of the shares at inception,
adjusted for any consideration or unstated rights or privileges.
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 2: Nature and classification of the noncontrolling interest
Instrument
Entered into
Redemption amount Accounting
Forward contract
to acquire the
noncontrolling
interest
(continued)
Subsequent to
creation of
noncontrolling
interest5
Payment amount
and settlement date
are fixed
In accordance with ASC 480, the freestanding
forward contract is recognized as a liability at the
date on which the forward contract was entered
into. The liability is initially measured at the fair
value of the shares at inception adjusted for any
consideration or unstated rights or privileges.
Subsequent measurement is at the present value
of the amount to be paid at settlement, accruing
interest cost using the rate implicit at inception
based on the initial measurement. The previously
recognized noncontrolling interest is
derecognized and any difference between the
amount of the liability and the noncontrolling
interest is recognized in APIC. No further
attribution of earnings is necessary because
there is no noncontrolling interest.
Either payment
amount or
settlement date
varies based on
certain conditions
Same as the accounting if the settlement date is
fixed except that the liability is subsequently
measured at the amount that would be paid on
the reporting date with any change in value from
the previous reporting date recognized as
interest cost. No further attribution of earnings is
necessary because there is no noncontrolling
interest.
Written put option
and purchased
call option with
same strike price
and exercise date
12
13
Contemporaneous Fixed Price
with creation of
noncontrolling
interest
If fixed price and viewed as embedded, 12 in
accordance with ASC 480-10-55-59 through
55-62, the instrument is classified as a liability,
initially measured at the present value of the
settlement amount. 13 The liability is
subsequently accreted to the strike price with the
accretion recognized as interest expense. No
noncontrolling interest is recognized and earnings
are not attributed. The parent accounts for this
transaction as a financing and consolidates
100% of the subsidiary. (ASC 480-10-55-55,
55-59 and 55-62)
ASC 480-10-55-55 establishes three scenarios for the written put/purchased call scenario, including one single instrument
(combined written put/purchased call), two instruments (written put and purchased call), and embedded (both derivatives
embedded in the noncontrolling interest). However, ASC 480-10-55-59 suggests that the derivatives should be considered
embedded. As the Codification was not intended to change current practice, we believe that this contradiction should be
resolved in favor of ASC 480-10-55-55 after considering the legacy guidance in paragraphs 16 through 18 of pre-Codification
EITF 00-4.
This instrument is not considered mandatorily redeemable, as there is the possibility, while highly unlikely, that on the exercise
date the noncontrolling interest has a fair value equal to the strike price in the options and neither party is economically
motivated to exercise (as opposed to an embedded forward contract that requires settlement and renders the shares
mandatorily redeemable). Therefore, the guidance in ASC 480-10-30-1 is not applicable. However, see footnote 9 which
states our belief that the various initial measurement methods in ASC 480-10 should be approximately the same.
Financial reporting developments Noncontrolling interests in consolidated financial statements
11
Chapter 2: Nature and classification of the noncontrolling interest
Instrument
Written put option
and purchased
call option with
same strike price
and exercise date
(continued)
Entered into
Redemption amount Accounting
Other than fixed
price
If considered embedded, and the written put
option and purchased call option are to be settled
at other than a fixed price, they are not subject to
ASC 480-10-55-59 through 55-62 .
Noncontrolling interest is not mandatorily
redeemable and no liability should be recognized
at inception.
Additional consideration of ASC 480-10-S99-3A
is required.
Fixed price or other
than fixed price
If viewed as two freestanding instruments (a
written put and a separate purchased call),14 the
written put option is recognized separately from
the purchased call option. The put option is
recognized as a liability under ASC 480 and the
call option is evaluated under ASC 815-10 and
ASC 815-40 and may be recognized as an asset
or equity.
The liability for the written put option is initially
and subsequently measured at fair value
pursuant to ASC 480.
For the purchased call option, if recognized as an
asset under either ASC 815-10 or ASC 815-40, it
would be subsequently measured at fair value. If
recognized as equity under ASC 815-40, it would
not be remeasured. The AICPA Options Paper
provides potential alternatives to be evaluated if
it was determined that neither ASC 815-10 nor
ASC 815-40 applied.
Both the purchased call option asset and written
put liability are reported separately from the
noncontrolling interest, which continues to be
recognized in accordance with ASC 810-10.
Issued subsequent Fixed price or other
to creation of
than fixed price
noncontrolling
interest and
issued as
freestanding
instruments
14
12
Refer to freestanding analysis above.
If viewed as a single freestanding instrument, the combined instrument containing a written put is recognized as a liability (or
asset in certain instances), initially and subsequently measured at fair value. (ASC 480-10-55-18 and ASC 480-15-55-55)
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 2: Nature and classification of the noncontrolling interest
FAQs
2-1
Redeemable or convertible equity securities and UPREIT
structures
Question:
A real estate investment trust (REIT) with an “umbrella partnership REIT” structure (UPREIT)
will typically have a consolidated operating partnership (OP) which has issued ownership units
to noncontrolling parties. How will the adoption of Statement 160 affect the accounting for
these noncontrolling interests?
Response:
The accounting for the formation of a REIT, including accounting for the noncontrolling OP
units initially issued to the sponsoring real estate partnership, was previously discussed in
EITF 94-2 and EITF 95-7. However, those issues were nullified with the issuance of
Statement 160. After the adoption of Statement 160, noncontrolling interests are presented
as a component of shareholders’ equity, separately from the parent’s equity. However, with
the issuance of Statement 160, the SEC staff updated its guidance in ASC 480-10-S99-3A to
clarify that redeemable noncontrolling interests, as determined by applying that guidance,
still require presentation in the mezzanine section of the statement of financial position. In
addition, the SEC staff clarified its views on measurement of redeemable noncontrolling
interests subject to ASC 480-10-S99-3A. Based on the features typically found in the OP
units, we believe a REIT needs to carefully consider the guidance in ASC 480-10-S99-3A
when classifying and measuring noncontrolling OP units in the consolidated financial
statements as part of the adoption of Statement 160.
When a REIT acquires a new property, it may issue redeemable OP units to the seller (OP
units generally are used to defer a taxable event for the sellers). Those sellers become
noncontrolling investors in the OP. The structure of any redemption features within the OP
units, or within the unitholder agreement with the new investor, can vary based on various
legal considerations for the parent REIT and the OP, including the state of incorporation or
organization for the legal entity, interpretations of tax law or other factors. For example,
arrangements can vary as to which entity the investor can redeem the units with
(e.g., directly with the OP only, or directly with the parent REIT only, or with the parent REIT
deciding which entity will redeem the units). Typically the redeeming entity (parent REIT or
OP) will have the choice of the redemption consideration, which could be cash or shares of
the parent REIT. The amount of the redemption could be based on a fixed amount, a
formulaic amount, or most frequently, a fixed exchange ratio of OP units for parent REIT
shares (or the then-current value of those public shares in cash).
As the OP units are redeemable (sometimes called “exchangeable”) at the option of the
investor, the OP units potentially represent redeemable noncontrolling interests in the
consolidated financial statements. Under the guidance in ASC 480-10-S99-3A, if the OP
units may be redeemed for cash outside the control of the reporting entity (the consolidated
Financial reporting developments Noncontrolling interests in consolidated financial statements
13
Chapter 2: Nature and classification of the noncontrolling interest
REIT in this case), then the noncontrolling interests must be classified in the mezzanine
section and measured in accordance with the SEC’s guidance. Therefore, identifying what
settlement alternatives exist and whether they are solely within the control of the
reporting entity is critical.
Based on discussions with the SEC staff, for the consolidated financial statements, we believe
that the parent REIT and OP can be considered essentially a single decision maker in
evaluating the redemption provisions if the following conditions are met:
►
►
the parent REIT is the general partner in the operating partnership and the entities share
the same corporate governance structures, and
the parent REIT can freely exercise all choices afforded it without conflicting with its
fiduciary duties to its shareholders
This will often result in a conclusion that the parent REIT/OP can elect share settlement of
the redemption of the OP units. However, as discussed in ASC 480-10-S99-3A, further
consideration of the guidance in ASC 815-40-25 is needed to evaluate whether the parent
REIT/OP control the actions or events necessary to issue the maximum number of parent REIT
shares that could be required to be delivered under share settlement of the contract. If the
parent REIT/OP controls those actions or events, the OP units would not be within the scope of
the SEC’s guidance. However, if those actions or events are not completely within their
control, the presentation and measurement guidance in ASC 480-10-S99-3A would apply.
There may be separate company SEC reporting requirements for the OP; for example, if the
OP has public debt outstanding. In that case, many of the concepts described above would be
considered in determining the classification of the OP units in the stand-alone financial
statements of the OP. However, it is important to realize that the OP units would be
redeemable equity instruments rather than redeemable noncontrolling interests, and thus
there would be different elements of ASC 480-10-S99-3A to be considered.
2-2
Application of the SEC staff’s views on redeemable equity
securities
(Added March 2010)
Question:
For public companies, should ASC 480-10-S99-3A be applied to redeemable noncontrolling
interests after Statement 160 is adopted? If so, how should ASC 480-10-S99-3A be applied?
Response:
While ASC 810-10 views noncontrolling interest as a component of equity, the SEC’s
guidance in ASC 480-10-S99-3A (formerly known as EITF D-98) still applies after
Statement 160 is adopted.
14
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 2: Nature and classification of the noncontrolling interest
Noncontrolling interests are first accounted for in accordance with ASC 810. Then, for public
companies, if the noncontrolling interest is considered redeemable under the guidance in
ASC 480-10-S99-3A, the redeemable noncontrolling interest is presented in temporary
equity (also called the “mezzanine”) and subsequently measured in accordance with the
SEC guidance. The measurement guidance is not applied in lieu of the accounting for
noncontrolling interest under ASC 810 but rather is an incremental accounting requirement
that is applied after the measurement pursuant to ASC 810 has been determined.
Under ASC 480-10-S99-3A, a security that is currently redeemable is measured at the
current redemption amount. For a security that is not redeemable currently but will become
redeemable in the future, the SEC guidance allows for two methods of adjusting the carrying
amount of the redeemable security. The first is to adjust the carrying amount to what would
be the redemption amount assuming the security was redeemable at the balance sheet date.
The second is to accrete the carrying amount of the redeemable security to the redemption
amount over time, to the date it is probable it will become redeemable, using an appropriate
method (e.g., the interest method). The SEC guidance does not specify which method is
required. Once the method is selected, there may be additional complexities to consider when
applying the selected method after the measurement guidance pursuant to ASC 810 has
been applied. In many cases, the application of the SEC guidance to redeemable
noncontrolling interest will require the use of judgment.
As noted in ASC 480-10-S99-3A paragraph 22, adjustments to the carrying amount of a
noncontrolling interest from the application of the SEC guidance do not impact net income or
comprehensive income in the consolidated financial statements. However, the adjustments
may affect earnings per share. The effect, if any, will depend on a) whether the
noncontrolling interest is represented by the subsidiary’s common shares or preferred shares
and b) for common shares, whether the redemption amount is at the then-current fair value
or some other value.
For noncontrolling interests in the form of common shares, adjustments to the carrying
amount for potential fair value redemptions do not affect earnings per share. However,
adjustments for noncontrolling common shares redeemable at other than fair value (e.g., a
fixed amount or formulaic amount) do affect earnings per share. When adjustments of these
redeemable equity securities affect earnings per share, the SEC notes that some registrants
adjust net income attributable to the parent (as reported on the face of the income
statement) for changes in the carrying amount of the redeemable equity securities. However,
other registrants do not adjust net income attributable to the parent and only consider the
impact of the redemption feature in the calculation of income available to common
stockholders of the parent used in the earnings per share calculation (which is the control
number for earnings per share purposes and may be disclosed on the face of the income
statement under SEC guidance). The adjustments for noncontrolling interests in the form of
common stock instruments are discussed in paragraph 22(b) of ASC 480-10-S99-3A.
Financial reporting developments Noncontrolling interests in consolidated financial statements
15
Chapter 2: Nature and classification of the noncontrolling interest
For redeemable noncontrolling interests issued in the form of preferred shares,
ASC 480-10-S99-3A indicates that the effect of adjustments to the carrying amount on
income available to common stockholders of the parent depends on whether the redemption
feature of the redeemable preferred shares was issued or is guaranteed by the parent. If
the redemption feature was issued or guaranteed by the parent, the adjustment to the
carrying value should reduce or increase income available to common stockholders of the
parent. Otherwise, if the redemption feature is not issued or guaranteed by the parent, the
adjustment should be attributed to the parent and the noncontrolling interest in accordance
with ASC 260-1 — 55-64 through 55-67.
Example
Assume on 1 January 20X9, Company P (a public entity) purchases from Company Y
80% of Subsidiary A’s common stock, leaving Company Y with a 20% noncontrolling
interest at the beginning of Year 20X9. Also assume the 20% noncontrolling interest held
by Company Y is redeemable at Company Y’s option any time at or after the end of the
second year at a formula price based on EBITDA (a non-fair value redemption feature). The
noncontrolling interest balance in Subsidiary A on the consolidated financial statements of
Company P upon the consummation of the acquisition is $500.
Ignoring quarterly reporting (which would be subject to similar considerations), Subsidiary
A’s earnings for Year 20X9 are $1,000. Company P first accounts for noncontrolling
interest pursuant to ASC 810 and determines that the carrying value of noncontrolling
interest at the end of Year 20X9 is $700 ((20% x $1,000) + $500). Since Company P is a
public company, it then must consider the application of ASC 480-10-S99-3A. Since the
20% interest held by Company Y is considered a redeemable noncontrolling interest, it is
classified in temporary equity between the liabilities and equity sections of the balance sheet
pursuant to ASC 480-10-S99-3A. For measurement purposes, Company P evaluates the two
permissible accounting methods pursuant to ASC 480-10-S99-3A and elects to recognize
changes in the redemption value immediately as they occur and adjust the carrying value of
noncontrolling interests to equal the redemption value, if higher than the ASC 810 carrying
value. Based on the formula price at the end of Year 20X9, the redemption value at the end
of Year 20X9 is $900. Accordingly, Company P adjusts the carrying value of its redeemable
noncontrolling interest to its redemption value of $900 with a $200 credit to the
noncontrolling interest and a corresponding adjustment to retained earnings (or if there was
no retained earnings, to additional paid in capital). That $200 debit to retained earnings
would reduce the numerator in the earnings per share calculation. This reduction could be
reflected either as an adjustment on the income statement to derive net income attributable
to the parent or through the calculation of income available to common shareholders when
deriving earnings per share. The manner in which the reduction is treated is an accounting
policy election that should be applied consistently.
16
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 3: Consolidation procedure —
time of acquisition
Chapter 3: Consolidation procedure — time of acquisition
Acquisition through single step
ASC 805, as amended by Statement 141(R), provides guidance when an acquirer obtains
control of an acquiree through a single investment, often referred to as a “single-step
acquisition.” ASC 805 requires an acquirer to recognize the assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree, generally measured at their fair
values as of the acquisition date.
Acquisition through multiple steps
An acquirer may obtain control of an acquiree through a series of acquisitions of investments.
Such a transaction is commonly referred to as a “step acquisition,” and in ASC 805, as
amended by Statement 141(R) as a “business combination achieved in stages.” Subsequent
to the effective date of Statement 160, additional acquisitions of ownership interests of a
controlled business (that is, acquisitions of noncontrolling ownership interests) are accounted
for as transactions between shareholders. Accordingly, neither step acquisition nor business
combination accounting principles will apply to the accounting for such transactions. Instead,
these transactions will be accounted for pursuant to Statement 160.
In general, if the acquirer owns an equity interest in the acquiree immediately before
obtaining control, the acquirer should, under ASC 805, as amended by Statement 141(R),
remeasure that equity interest to fair value as of the acquisition date and recognize any gain
or loss in earnings15. The FASB believes that a change from holding a noncontrolling equity
investment in an entity to obtaining control of that entity is a significant change in the nature
of, and economic circumstances surrounding, that investment. In such a situation, the
acquirer exchanges its status as an owner of an investment in an entity for a controlling
financial interest in all of the underlying assets and liabilities of that entity and the right to
direct how the acquiree and its management use those assets in conducting its operations. In
the FASB’s view, that exchange warrants fair value recognition of all net assets over which
control has been obtained and requires remeasurement through earnings of any previously
held noncontrolling interest.
15
If, before obtaining control through a step acquisition, an acquirer recognized changes in the value of
a noncontrolling investment in the target in other comprehensive income (that is, the investment was
classified as available-for-sale in accordance with ASC 320), the amount recognized in other
comprehensive income as of the acquisition date should be reclassified from other comprehensive
income and included in the recognized remeasurement gain or loss as of the acquisition date.
Financial reporting developments Noncontrolling interests in consolidated financial statements
17
Chapter 4: Attribution of net income
and comprehensive income
Chapter 4: Attribution of net income and comprehensive income
Excerpt from Accounting Standards Codification
Consolidation — Overall
Other Presentation Matters
Attributing Net Income and Comprehensive Income to the Parent and the
Noncontrolling Interest
810-10-45-18
The amount of intra-entity income or loss to be eliminated in accordance with paragraph
810-10-45-1 is not affected by the existence of a noncontrolling interest. The complete
elimination of the intra-entity income or loss is consistent with the underlying assumption
that consolidated financial statements represent the financial position and operating results
of a single economic entity. The elimination of the intra-entity income or loss may be
allocated between the parent and noncontrolling interests.
810-10-45-19
Revenues, expenses, gains, losses, net income or loss, and other comprehensive income
shall be reported in the consolidated financial statements at the consolidated amounts,
which include the amounts attributable to the owners of the parent and the noncontrolling
interest.
810-10-45-20
Net income or loss and comprehensive income or loss, as described in Topic 220, shall be
attributed to the parent and the noncontrolling interest.
810-10-45-21
Losses attributable to the parent and the noncontrolling interest in a subsidiary may exceed
their interests in the subsidiary’s equity. The excess, and any further losses attributable to
the parent and the noncontrolling interest, shall be attributed to those interests. That is, the
noncontrolling interest shall continue to be attributed its share of losses even if that
attribution results in a deficit noncontrolling interest balance.
Interpretive guidance
While ASC 810-10 requires earnings and other comprehensive income to be attributed to the
controlling and noncontrolling interests, it does not prescribe a method for making that
attribution. We generally believe that earnings and other comprehensive income of a partiallyowned subsidiary should be attributed between controlling and noncontrolling interests based
on the terms of a substantive profit-sharing agreement. If such an agreement does not exist,
we generally believe that the relative ownership interests in the subsidiary should be used to
allocate earnings and other comprehensive income. Accordingly, in the latter case, attributing
earnings and other comprehensive income to the controlling and noncontrolling interests may
be as simple as multiplying the GAAP earnings and other comprehensive income of the
partially-owned subsidiary by the relative ownership interests in the subsidiary.
18
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 4: Attribution of net income and comprehensive income
Substantive profit-sharing arrangements
We believe that, if substantive, a contractual arrangement that specifies how earnings and
other comprehensive income are to be attributed among the subsidiary’s owners should be
used for financial reporting purposes. To be substantive, an arrangement should retain its
purported economic outcome over time, and subsequent events should not have the potential
to retroactively affect or “unwind” prior attributions.
Particular care should be exercised when different formulae are used to allocate cash
distributions and liquidating distributions from taxable earnings. In these situations, the tax
allocation should be carefully evaluated to ensure that the basis used for financial reporting
purposes representationally reflects the allocations of earnings agreed by the parties.
ASC 970-323-35-17 provides guidance on this point.
“Specified profit and loss allocation ratios should not be used … if the allocation of cash
distributions and liquidating distributions are determined on some other basis. For
example, if … [an] agreement between two investors purports to allocate all depreciation
expense to one investor and to allocate all other revenues and expenses equally, but
further provides that irrespective of such allocations, distributions to the investors will be
made simultaneously and divided equally between them, there is no substance to the
purported allocation of depreciation expense.”
Determining whether a profit-sharing arrangement is substantive is a matter of individual
facts and circumstances requiring the use of professional judgment.
Business combinations effected after the adoption of Statement 160
As previously described, in the absence of a substantive profit-sharing agreement, earnings
and other comprehensive income should generally be allocated to the controlling and
noncontrolling interests based on relative ownership interests in the subsidiary.
While the allocation of earnings to the controlling and noncontrolling interests will often be as
straightforward as multiplying earnings by the relative ownership percentages, that approach
will not be appropriate for allocating any goodwill impairment. Particular care must be taken
in this instance because a premium is often paid to obtain control of an entity. And, as a
result, the controlling and noncontrolling interests’ bases in acquired goodwill will not be
proportional to ownership interests because the control premium is allocated only to the
controlling interest.
ASC 350-20-35-57A states that if a reporting unit is less than wholly-owned, the fair value of
the reporting unit and the implied fair value of its goodwill shall be determined in the same
manner as it would be determined in a business combination pursuant to ASC 805. Any
goodwill impairment that results from applying step two of the goodwill impairment model
should be attributed to the controlling and noncontrolling interests on a rational basis.
Financial reporting developments Noncontrolling interests in consolidated financial statements
19
Chapter 4: Attribution of net income and comprehensive income
Business combinations effected before the adoption of Statement 160
Because a business combination achieved in stages and accounted for under Statement 141
(codified primarily in ASC 805) followed step acquisition accounting (that is, the
noncontrolling interest was not initially measured at fair value), it is inappropriate to
determine the noncontrolling interest’s basis in the assets and liabilities using its relative
ownership in the subsidiary. Given the prohibition on retroactively applying Statement 141(R),
the controlling and noncontrolling interests’ bases in assets and liabilities should continue to
be respected, even after the adoption of Statement 141(R) and Statement 160.
To illustrate, assume that in an acquisition of a 60%-controlling interest accounted for under
Statement 141, Target has, on the acquisition date, a definite-lived intangible asset with a
$100 fair value, but no book value. Pursuant to Statement 141, Acquirer would measure the
intangible asset in its financial statements at $60 (60% acquired plus carryover basis for the
noncontrolling interest’s ownership in the intangible asset, that is, zero).
Assume at the acquisition date the intangible asset has a 10-year remaining useful life.
Accordingly, acquirer recognizes annual amortization expense of $6 in its consolidated
financial statements. However, because the noncontrolling interest has no basis in the
intangible asset, no amortization expense is allocated to the noncontrolling interest. Further,
because the noncontrolling interest does not have a basis in the intangible asset, if the
intangible asset becomes impaired after the acquisition date, the entire impairment charge
would be allocated to the controlling interest.
As described in ASC 350-20-35-57A, if a reporting unit includes goodwill that is attributable
only to a parent’s basis in a partially-owned subsidiary for which acquisition accounting was
completed pursuant to Statement 141, any goodwill impairment charge (whether recognized
before or after the effective date of Statement 160) would be attributed entirely to the parent.
Attribution of losses
Before Statement 160, losses that otherwise would have been attributed to the
noncontrolling interest were allocated to the controlling interest after the noncontrolling
interest was reduced to zero. If the subsidiary subsequently became profitable, 100% of the
net earnings would have been allocated to the controlling interest until it recovered the losses
that were absorbed.
Importantly, Statement 160 amended ASC 810 to provide that losses are attributed to the
noncontrolling interest, even when the noncontrolling interest’s basis in the partially-owned
subsidiary has been reduced to zero. The FASB reached this conclusion because the
noncontrolling interest is considered equity of the consolidated group and participates in the
risks and rewards of an investment in the subsidiary. Therefore, it should be attributed its
share of losses just like the parent even if the noncontrolling interest balance becomes a
deficit. Accordingly, any excess loss attributed to the noncontrolling interest is reported in
consolidated financial statements as a deficit balance in the noncontrolling interest line in the
equity section.
20
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 4: Attribution of net income and comprehensive income
Statement 160’s recognition and measurement provisions are to be adopted prospectively.
As such, after adopting Statement 160, earnings and other comprehensive income should
be allocated without regard to the fact that losses had been previously allocated to the
controlling interest because the noncontrolling interest had been reduced to zero. That is, the
controlling interest is not able to recoup losses that had been allocated to it because the
noncontrolling interest had been reduced to zero. Instead, if in the year of adoption, an
entity’s consolidated net income attributable to the parent would have been significantly
different had the previous requirement ASC 810-10-45-7 been applied, the entity shall
disclose pro forma consolidated net income attributable to the parent and pro forma earnings
per share as if the previous requirement in paragraph ASC 810-10-45-7 had been applied in
the year of adoption (ASC 810-10-65-1(c)).
The following examples illustrate these concepts.
Example 1
Assume that Company P owns a 60% interest in Company S and that Company P’s
investment in S and the noncontrolling interest balance are $250,000 and $0, respectively,
on 1 January 20X8. Company P adopts Statement 160 on 1 January 20X9. Consolidated
losses of Company S are $(100,000) for the year ended 31 December 20X8 and $(50,000)
for the year ended 31 December 20X9.
Figure 4-1: Attribution of losses
Controlling
interest
$
Noncontrolling
interest
1 January 20X8
Attribution of losses
31 December 20X8
250,000
(100,000)
$ 150,000
$
1 January 20X9
Attribution of losses
31 December 20X9
$
$
$
150,000
(30,000)
120,000
$
$
—
—
—
—
(20,000)
(20,000)
Analysis
Because Statement 160 eliminated the prohibition against reporting a deficit in
noncontrolling interest (in the absence of a separate agreement for the noncontrolling
interest to “provide for” these losses), the noncontrolling interest is allocated 40% of the
reported losses for the year ended 31 December 20X9.
Financial reporting developments Noncontrolling interests in consolidated financial statements
21
Chapter 4: Attribution of net income and comprehensive income
Example 2
Assume the same facts as the example above, except Company S has net income of
$100,000 for the year ended 31 December 20X9.
Figure 4-2: Attribution of earnings
Controlling
interest
Noncontrolling
interest
1 January 20X8
Attribution of losses
31 December 20X8
$
250,000
(100,000)
$ 150,000
$
1 January 20X9
Attribution of earnings
31 December 20X9
$
$
$
150,000
60,000
210,000
—
—
—
$
$
—
40,000
40,000
Analysis
Prior to the adoption of Statement 160, the controlling interest would have been allocated
earnings to the extent of losses it had absorbed that were otherwise allocable to the
noncontrolling interest (and thus all of the subsidiary’s earnings would have been
attributed to the controlling interest). However, because Statement 160’s earnings
allocation provisions are to be applied prospectively, $40,000 is credited to the
noncontrolling interest, but disclosed by the controlling interest as earnings that otherwise
would have been recognized by the controlling interest under prior GAAP.
Income taxes
Statement 160 did not change the accounting for income taxes. However, in certain
instances, an entity’s reported effective tax rate may change after adoption, particularly for
entities that consolidate subsidiaries that pay no income tax, but instead distribute that
taxable income to their respective investors, such as limited liability companies and limited
partnerships. In certain cases, the effective tax rate computed from the amounts included on
the income statement may significantly change, requiring additional disclosure in the notes to
the financial statements.
To illustrate this concept, assume Entity A (a corporation) owns 60% of LP (a limited
partnership) and consolidates LP. Further assume that Entity A’s effective tax rate is 35%,
while LP pays no income tax because it distributes its taxable earnings to its investors. Each
entity has the following standalone financial information.
Entity A
Income before income taxes
Income taxes
Net income
22
$
$
1,000
350
650
LP
$
$
900
—
900
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 4: Attribution of net income and comprehensive income
Portions of Entity A’s consolidated income statements under prior practice and after adopting
Statement 160 follow:
Before the adoption of Statement 160
Income before income taxes and minority interest
Minority interest
Income before income taxes
Income taxes
Net income
$
$
1,900
360
1,540
539
1,001
After the adoption of Statement 160
Income before income taxes
Income taxes
Net income
Net income attributable to noncontrolling interest
Net income attributable to controlling interest
$
$
1,900
539
1,361
360
1,001
Entity A’s effective tax rate under practice prior to Statement 160 would generally be 35.0%
($539 / $1,540). Based on the amounts from the income statement, Entity A’s effective tax
rate after adoption would be 28.4% ($539 / $1,900). This artificial decline occurs because
income before income taxes includes earnings allocable to the noncontrolling interest for
which there is no tax expense provided. We believe that the effect of this change in reporting
on the effective income tax rate is required to be explained in the effective income tax rate
reconciliation disclosed in the footnotes to the consolidated financial statements pursuant to
ASC 740. Example effective income tax rate reconciliations for Entity A before and after the
adoption of Statement 160 follow:
Effective income tax rate reconciliation (Prior to adoption of Statement 160)
Statutory federal income tax rate
Effective tax rate
35.0%
35.0%
Effective income tax rate reconciliation (Post-adoption of Statement 160)
Statutory federal income tax rate
Book income of consolidated partnership attributable to
noncontrolling interest
Effective tax rate for controlling interest
35.0%
(6.6)
28.4%
Financial reporting developments Noncontrolling interests in consolidated financial statements
23
Chapter 4: Attribution of net income and comprehensive income
FAQs
4-1
Accounting for a debt refinancing and distribution of proceeds in
the real estate industry
Question:
What is the accounting under ASC 810 for a subsidiary that distributes to noncontrolling
interest holders proceeds received by refinancing debt supporting real estate?
Response:
A real estate entity often refinances appreciated property and distributes the proceeds to its
owners. Under practice prior to Statement 160, any distributions in excess of the
noncontrolling interest’s carrying value were generally recognized as a loss in earnings (that
is, allocated to the controlling interest).
Subsequent to the adoption of Statement 160, we generally believe that because the
noncontrolling interest balance can be reduced below zero (that is, the noncontrolling
interest can have a debit balance), the controlling interest will no longer be required to
recognize a loss when distributions exceed the noncontrolling interest’s carrying value.
To illustrate, consider a real estate subsidiary with $100 of equity. The parent and
noncontrolling interest own 80% and 20%, respectively, of the entity. The subsidiary’s only
asset is a building with a carrying amount of $100, but with a fair value of $1,100. The
subsidiary refinances the building by mortgaging the building for $1,000, and distributes the
proceeds, proportionately, to its owners.
Prior to the adoption of Statement 160, the noncontrolling interest balance would be reduced
to $0 and a loss of $180 would generally be recognized in consolidated earnings and allocated
to the controlling interest ($20 carrying value of noncontrolling interest less $200 distribution).
After adoption, the noncontrolling interest balance would have a debit balance of $180, and no
loss would be required to be recognized in consolidated earnings.
4-2
Attribution of losses to noncontrolling interests held by
preferred shareholders
(Updated March 2010)
Question:
A consolidated subsidiary may be funded with a combination of common and preferred stock.
For example, Parent may own 100% of the outstanding common stock of Subsidiary, while
Investor owns 100% of Subsidiary’s outstanding convertible preferred stock (which may be
voting or nonvoting, but if voting assume that Parent still has sufficient votes to maintain
control of the Subsidiary).
24
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 4: Attribution of net income and comprehensive income
While the preferred stock in this example does not represent a residual equity interest (that
is, unlike the common stock, the preferred stock is entitled to a liquidation preference, which
generally will include a par amount and, in some cases, cumulative unpaid dividends), that
preferred stock is classified as a noncontrolling interest in the consolidated financial
statements of Parent. Questions arise regarding how to account for this noncontrolling
interest in the consolidated financial statements of Parent and its effect on Parent’s
recognition of losses incurred by the Subsidiary.
Response:
For a noncontrolling interest represented by common stock ownership, we generally believe
that the relative ownership interests in the subsidiary should be used to allocate earnings
and other comprehensive income, absent a substantive profit-sharing agreement.
Additionally, pursuant to ASC 810-10-45-21, losses are attributed to the noncontrolling
interest even when the noncontrolling interest’s basis in the partially owned subsidiary has
been reduced to zero.
As previously indicated, preferred stock normally does not represent a residual equity interest
in the subsidiary. Preferred stock typically is entitled to a share of the subsidiary’s earnings up
to the stated dividend, and losses of the subsidiary typically do not reduce the amount due to
the preferred stockholders in liquidation (although economically a portion of those losses may
be funded by the preferred stock). ASC 810-10-10-1, states that “[t]he purpose of
consolidated financial statements is to present, primarily for the benefit of the owners and
creditors of the parent, the results of operations and the financial position of a parent and all
its subsidiaries as if the consolidated group were a single economic entity.” As a result, we
believe that a noncontrolling interest in a subsidiary that consists of preferred stock should be
accounted for similar to preferred stock issued by the parent (although the preferred stock is
classified as noncontrolling interest). Accordingly, earnings of the subsidiary are allocated to
the noncontrolling interest based on the preferred stock’s stated dividend and liquidation
rights, and losses of the subsidiary normally are not allocated to preferred stock classified as
noncontrolling interest. In other words, the balance of the preferred stock noncontrolling
interest generally should be equal to its liquidation preference.
In some cases, the preferred stock does not have a liquidation preference and truly
represents a residual equity interest in the entity (e.g., the equity interest may be called
preferred stock because it participates disproportionally in returns but otherwise participates
pari passu in losses). In these instances, the interest is tantamount to common stock.
Therefore, in these circumstances, we believe it would be appropriate for a parent to charge
losses against the preferred stock noncontrolling interest, as it would the common interest.
The guidance above only relates to preferred stock and should not necessarily be analogized
to equity interests that provide preferential returns, which are common in partnerships.
Financial reporting developments Noncontrolling interests in consolidated financial statements
25
Chapter 5: Changes in a parent’s
ownership interest in a subsidiary
Chapter 5: Changes in a parent’s ownership interest in a subsidiary
Excerpt from Accounting Standards Codification
Consolidation — Overall
Other Presentation Matters
Changes in a Parent’s Ownership Interest in a Subsidiary
810-10-45-21A
The guidance in paragraphs 810-10-45-22 through 45-24 applies to the following:
a.
Transactions that result in an increase in ownership of a subsidiary
b.
Transactions that result in a decrease in ownership of either of the following while the
parent retains a controlling financial interest in the subsidiary:
1. A subsidiary that is a business or a nonprofit activity, except for either of the
following:
i.
A sale of in substance real estate (for guidance on a sale of in substance real
estate, see Subtopic 360-20 or 976-605)
ii.
A conveyance of oil and gas mineral rights (for guidance on conveyances of oil
and gas mineral rights and related transactions, see Subtopic 932-360).
2. A subsidiary that is not a business or a nonprofit activity if the substance of the
transaction is not addressed directly by guidance in other Topics that include, but
are not limited to, all of the following:
i.
Topic 605 on revenue recognition
ii.
Topic 845 on exchanges of nonmonetary assets
iii. Topic 860 on transferring and servicing financial assets
iv.
Topic 932 on conveyances of mineral rights and related transactions
v.
Topic 360 or 976 on sales of in substance real estate.
810-10-45-22
A parent’s ownership interest in a subsidiary might change while the parent retains its
controlling financial interest in the subsidiary. For example, a parent’s ownership interest in a
subsidiary might change if any of the following occur:
26
a.
The parent purchases additional ownership interests in its subsidiary.
b.
The parent sells some of its ownership interests in its subsidiary.
c.
The subsidiary reacquires some of its ownership interests.
d.
The subsidiary issues additional ownership interests.
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 5: Changes in a parent’s ownership interest in a subsidiary
810-10-45-23
Changes in a parent’s ownership interest while the parent retains its controlling financial
interest in its subsidiary shall be accounted for as equity transactions (investments by
owners and distributions to owners acting in their capacity as owners). Therefore, no gain or
loss shall be recognized in consolidated net income or comprehensive income. The carrying
amount of the noncontrolling interest shall be adjusted to reflect the change in its ownership
interest in the subsidiary. Any difference between the fair value of the consideration
received or paid and the amount by which the noncontrolling interest is adjusted shall be
recognized in equity attributable to the parent. Example 1 (paragraph 810-10-55-4B)
illustrates the application of this guidance.
810-10-45-24
A change in a parent’s ownership interest might occur in a subsidiary that has accumulated
other comprehensive income. If that is the case, the carrying amount of accumulated other
comprehensive income shall be adjusted to reflect the change in the ownership interest in
the subsidiary through a corresponding charge or credit to equity attributable to the parent.
Example 1, Case C (paragraph 810-10-55-4F) illustrates the application of this guidance.
Interpretive guidance
ASC 810, as amended by ASU 2010-02, requires that transactions that result in an increase
in ownership of a subsidiary be accounted for as equity transactions. That is, no purchase
accounting adjustments are made. ASC 810, as amended by ASU 2010-02, further requires
that transactions that result in a decrease in ownership interest while the parent retains its
controlling financial interest in (1) a subsidiary that is a nonprofit activity16 or a business,
except for either a sale of in substance real estate or a conveyance of oil and gas mineral
rights, and (2) a subsidiary that is not a nonprofit activity or a business but the substance of
the transaction is not addressed directly by guidance in other ASC Topics, are to be
accounted for as equity transactions. Neither gains nor losses on those transactions are
recognized in net income, and the carrying values of the subsidiary’s assets (including
goodwill) and liabilities should not be changed.
16
ASC 810-10-20 defines a nonprofit activity as “(a)n integrated set of activities and assets that is
capable of being conducted and managed for the purpose of providing benefits, other than goods or
services at a profit or profit equivalent, as a fulfillment of an entity’s purpose or mission (for example,
goods or services to beneficiaries, customers, or members). As with a not-for-profit entity, a nonprofit
activity possesses characteristics that distinguish it from a business or a for-profit business entity.”
Financial reporting developments Noncontrolling interests in consolidated financial statements
27
Chapter 5: Changes in a parent’s ownership interest in a subsidiary
ASC 810’s guidance, as amended by ASU 2010-02, on accounting for changes in a parent’s
ownership interest while retaining control resolves an outstanding practice issue of how a
parent should account for a change in its investment in a subsidiary when the subsidiary
issues shares. The SEC staff, in SAB 51, had permitted the recognition of gains or losses in
the financial statements when a subsidiary issued its own shares in certain circumstances.
Because transactions with owners acting in their capacity as owners are recognized directly
in equity, SAB 51’s guidance permitting the recognition of gains or losses when a subsidiary
sells its own shares should not be followed after Statement 160 is adopted. In June 2009, the
SEC staff issued SAB 112, which removed SAB 51 from the SEC staff guidance.
Decreases in a parent’s ownership interest in a subsidiary without loss
of control
A parent may decrease its ownership interest in a subsidiary by (1) selling a portion of the
subsidiary’s shares it holds or (2) causing the subsidiary to issue shares. In accounting for such
transactions under ASC 810, as amended by ASU 2010-02, assuming they meet the scope of
ASC 810-10-45-21A(b), the carrying amount of the noncontrolling interest should be
increased to reflect the change in the noncontrolling interest’s ownership in the subsidiary’s
net assets (that is, the amount attributed to the additional noncontrolling interests should
reflect its proportionate ownership percentage in the subsidiary’s net assets acquired).
Any difference between the consideration received (whether by the parent or the subsidiary)
and the adjustment made to the carrying amount of the noncontrolling interest should be
recognized directly in equity attributable to the controlling interest (that is, as an adjustment
to additional paid-in capital).
To illustrate this concept, assume Subsidiary A, a widget manufacturer, has 10,000 shares of
common stock outstanding, all of which are owned by its parent, ABC Co. The carrying amount
of Subsidiary A’s equity is $200,000. ABC Co. sells 2,000 of its shares in Subsidiary A to an
unrelated entity for $50,000 of cash, reducing its ownership interest from 100% to 80%.
Under ASC 810, a noncontrolling interest of $40,000 is recognized ($200,000 x 20%). The
$10,000 excess of the cash received ($50,000) over the adjustment to the carrying amount
of the noncontrolling interest ($40,000) is recognized as an increase in additional paid-in
capital attributable to ABC Co. as follows:
Cash
Additional paid-in capital
Stockholders’ equity — noncontrolling interest
28
$50,000
$10,000
40,000
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 5: Changes in a parent’s ownership interest in a subsidiary
Increases in a parent’s ownership interest in a subsidiary
A parent may increase its ownership interest in a subsidiary by:
►
►
►
Directly purchasing additional outstanding shares of the subsidiary
Causing the subsidiary to reacquire a portion of its outstanding shares (a treasury stock
buy-back)
Causing the subsidiary to issue additional shares to the parent
Under ASC 810, as amended by ASU 2010-02, accounting for an increase in ownership of a
subsidiary is generally similar to accounting for a decrease in ownership interest without a
loss of control. That is, the carrying amount of the noncontrolling interest is adjusted
(decreased in this case) to reflect the noncontrolling interest’s reduced ownership interest in
the subsidiary’s net assets. Any difference between the consideration paid by the parent to a
noncontrolling interest holder (or contributed by the parent to the net assets of the
subsidiary) and the adjustment to the carrying amount of the noncontrolling interest in the
subsidiary is recognized directly in equity attributable to the controlling interest (that is,
additional paid-in capital).
To illustrate this concept, assume Parent owns an 80% interest in Subsidiary, which has net
assets of $4,000. The carrying amount of the noncontrolling interest’s 20% interest in
Subsidiary is $800. Parent acquires an additional 10% interest in Subsidiary from the
noncontrolling interest for $500, increasing its controlling interest to 90%. Under ASC 810,
Parent would account for its increased ownership interest in Subsidiary as a capital
transaction as follows:
Stockholders’ equity — noncontrolling interest
Additional paid-in capital
Cash
$400
100
$500
Accumulated other comprehensive income considerations
When a change in a parent’s ownership interest that does not result in the loss of control occurs
in a subsidiary meeting the scope of ASC 810-10-45-21A that has a balance of accumulated
other comprehensive income (AOCI), the AOCI balance is adjusted to reflect a change in the
parent’s proportionate interest in that AOCI balance by an adjustment to the parent’s
consolidated additional paid-in-capital.
For example, assume Parent owns an 80% interest in Subsidiary, a retailer of children’s toys,
which has net assets of $4,000. The carrying amount of the noncontrolling shareholders’
20% interest in Subsidiary is $800, which includes $200 that represents the noncontrolling
interest’s share of $1,000 of AOCI credits. Parent acquires an additional 10% interest in
Subsidiary for $500, increasing its controlling ownership interest to 90%.
Financial reporting developments Noncontrolling interests in consolidated financial statements
29
Chapter 5: Changes in a parent’s ownership interest in a subsidiary
As a result of this purchase, Parent’s interest in Subsidiary’s AOCI balance increases by
$100 ($1,000 x 10%). Under ASC 810, Parent will account for its increased ownership
interest in Subsidiary as follows:
Stockholders’ equity — noncontrolling interest
Additional paid-in capital
Cash
AOCI
$400
200
$500
100
If a decrease in a parent’s controlling ownership interest occurs in a subsidiary meeting the
scope of ASC 810-10-45-21A(b) that has AOCI, the accounting under ASC 810 is similar to
that described in the example above. That is, a proportionate share of AOCI is attributed to
the noncontrolling interest.
For example, assume Parent owns 100% of Subsidiary, which has net assets of $4,000,
including $1,000 of AOCI. Assume Subsidiary is a business and is in the scope of
ASC 810-10-45-21A(b). Parent sells a 10% interest in Subsidiary for $500, decreasing its
interest to 90%. As a result of the sale, Parent’s interest in Subsidiary’s AOCI balance
decreases by $100 ($1,000 x 10%). Under ASC 810, Parent will account for the change in
its ownership interest in Subsidiary as follows:
Cash
AOCI
Stockholders’ equity — noncontrolling interest
Additional paid-in capital
$500
100
$400
200
Statement 160 amends ASC 830-30-40-2 so that recognition of accumulated foreign
currency translation adjustments as gains or losses on sales of foreign entity shares is
precluded unless accompanied by a loss of control. The amendment was required to align the
accumulated foreign currency translation recognition requirements with the general
principles in ASC 810 pertaining to recognition of other comprehensive income items, as
discussed in this section.
30
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 5: Changes in a parent’s ownership interest in a subsidiary
Summary chart
The following chart summarizes the accounting in the consolidated financial statements
for changes in a parent’s ownership interest in a subsidiary meeting the scope of
ASC 810-10-45-21A while maintaining a controlling financial interest:
Parent
Acquires ownership interest
Sells ownership interest
Reduce noncontrolling interest based on
proportion acquired. APIC adjusted for
difference between that amount and
consideration paid. Adjust accumulated
other comprehensive income with
corresponding adjustment to APIC, as
appropriate.
Increase noncontrolling interest for proportion
of parent’s ownership interest it sold. APIC
adjusted for difference between that amount
and consideration received. Adjust
accumulated other comprehensive income
with corresponding adjustment to APIC, as
appropriate.
Subsidiary
Acquires noncontrolling interest
Issues shares to noncontrolling interest
Reduce noncontrolling interest based on
proportion acquired. APIC adjusted for
difference between that amount and
consideration paid. Adjust accumulated
other comprehensive income with
corresponding adjustment to APIC, as
appropriate.
Calculate shares effectively sold by parent.
Increase noncontrolling interest for proportion
of parent’s ownership interest it effectively
sold. Difference between consideration
received and book value of parent’s shares
reflected in APIC. Adjust accumulated other
comprehensive income with corresponding
adjustment to APIC, as appropriate.
Comprehensive example
The following example illustrates the accounting in consolidation for changes in a parent’s
ownership interest while the parent maintains control of the subsidiary meeting the scope of
ASC 810-10-45-21A. Work paper adjusting entries are numbered sequentially.
Assume on 1 January 20X1, Company P — which is newly formed — raises $45,000 of capital.
Company P issues 1,500 shares of $1 par stock for $36,000 and raises $9,000 by issuing
debt. Company P acquires, for $45,000, 70% of the common stock of Company S, a
distributor of video games qualifying as a business pursuant to ASC 805, as amended by
Statement No. 141(R). Company S’s fair value is $64,286. Company S’s acquisition-date
balance sheet is presented in Figure 5-1. Income taxes have been ignored. This example uses
simplifying assumptions. For example, it would be unusual for no identifiable intangible
assets to be recognized as part of the business combination (and for all the excess
purchase price to be allocated to goodwill). Additionally, this example also assumes there
is no control premium.
Financial reporting developments Noncontrolling interests in consolidated financial statements
31
Chapter 5: Changes in a parent’s ownership interest in a subsidiary
Figure 5-1: Acquisition-date balance sheet for Company S at 1 January 20X1
(all amounts in dollars)
Book value
Fair Value
Cash
Marketable securities (available-for-sale)
Inventory
Buildings and equipment, net
3,000
12,000
30,000
60,000
105,000
3,000
12,000
34,500
85,500
135,000
Accounts payable
Common stock
Accumulated other comprehensive income
75,000
25,000
5,000
105,000
75,000
For illustrative purposes, Company S’s income statement has been made constant for each
year of this example and is presented in Figure 5-2.
Figure 5-2: Income statement for Company S for each year (all amounts in dollars)
Revenues
Cost of revenues
Gross profit
Selling and administrative (including 6,000 of depreciation)
Net income
96,000
42,000
54,000
24,000
30,000
Consolidation at the acquisition date
ASC 805, as amended by Statement 141(R), generally requires the acquirer to measure the
identifiable assets acquired, the liabilities assumed and noncontrolling interest in the acquiree
at their acquisition-date fair values if the acquiree meets ASC 805’s business definition.
(Except for the requirement to recognize goodwill, ASC 805’s provisions are also generally
followed for consolidated variable interest entities, as that term is identified by ASC 810-10’s
variable interest model).
The consolidation procedures illustrated in this example reflect the revaluation of the
subsidiary’s assets and liabilities through the adjustments column of a consolidating work
paper. The subsidiary’s assets and liabilities have not been revalued directly on the subsidiary’s
financial statements. That is, while push-down accounting may be required pursuant to other
literature in certain situations, it is not illustrated here, but is presented in Appendix A.
32
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 5: Changes in a parent’s ownership interest in a subsidiary
Figure 5-3: Acquisition-date consolidating work paper to arrive at consolidated balance
sheet, 1 January 20X1 (all amounts in dollars)
Adjustments
Company P
Cash
Marketable securities
Inventory
Buildings and equipment, net
Investment in Company S
Goodwill
Company S
Debit
Credit
Consolidated
—
—
—
—
45,000
—
3,000
12,000
30,000
60,000
—
—
45,000
105,000
139,286
Accounts payable
Debt
—
9,000
75,000
—
75,000
9,000
Total liabilities
9,000
75,000
84,000
Common stock
Additional paid-in capital
Retained earnings
1,500
34,500
—
30,000
—
—
Total parent shareholders’ equity
Noncontrolling interest
36,000
—
30,000
—
Total equity
36,000
30,000
55,286
Total liabilities and equity
45,000
105,000
139,286
Total assets
(1)
(2)
4,500
25,500
(4)
4,286
(3)
(5)
45,000
30,000
3,000
12,000
34,500
85,500
—
4,286
1,500
34,500
—
(6)
19,286
36,000
19,286
Figure 5-3 illustrates the elimination of Company P’s investment in Company S and allocation
of the purchase price ($45,000) to the acquired assets, liabilities and noncontrolling interest,
as follows:
(1) Inventory is measured at fair value.
(2) Buildings and equipment are measured at fair value.
(3) Company P’s investment in Company S is eliminated.
(4) Goodwill is determined by subtracting the fair value of Company S’s net identifiable assets
from the fair value of Company S’s net assets. As stated above, the fair value of Company S
is $64,286. As the fair value of Company S’s net identifiable assets is $60,000, goodwill is
calculated to be $4,286. For illustrative purposes, 70% and 30% of the goodwill is allocable
to Company P and Company S, respectively, because although not realistic, no control
premium is assumed in this example merely for simplicity (that is, the goodwill is allocated
to the controlling and noncontrolling interests proportionately).
(5) Company S’s common stock is eliminated.
(6) Noncontrolling interest is calculated by subtracting the fair value of Company S’s net
assets acquired by Company P ($45,000) from Company S’s total net assets ($64,286).
As indicated in note (4), no control premium has been assumed.
Financial reporting developments Noncontrolling interests in consolidated financial statements
33
Chapter 5: Changes in a parent’s ownership interest in a subsidiary
Consolidation in year of combination
Assume that on 31 December 20X1, Company S pays cash dividends of $36,000, of which
Company P’s share is $25,200. In addition, the fair value of Company S’s marketable
securities at that date is $17,000. Company S’s income statement for the year ended
31 December 20X1, is presented in Figure 5-2.
Figure 5-4: Consolidating work paper to arrive at consolidated income statement,
year of combination, 31 December 20X1 (all amounts in dollars)
Adjustments
Company P
Company S
Revenues
Cost of revenues
—
—
96,000
42,000
Gross profit
Income from equity method
investment
Selling and administrative
—
54,000
16,065
—
—
24,000
Net income
16,065
30,000
Net income attributable to
noncontrolling interest
—
—
Net income attributable to
controlling interest
16,065
30,000
Debit
(7)
Credit
Consolidated
4,500
96,000
46,500
49,500
(8)
(9)
16,065
2,550
—
26,550
22,950
(10)
6,885
6,885
16,065
Importantly, although Statement 160 did not significantly change the basis for attributing net
income to the controlling and noncontrolling interests, consolidated net income includes the
portion attributable to the noncontrolling interest. Figure 5-4 presents the consolidating
work paper to arrive at the consolidated income statement in the year of combination,
which includes:
(7)
An increase to cost of revenues to reflect the sold inventory’s measurement at fair
value at the acquisition date (this example assumes that all acquisition-date inventory
was sold).
(8)
The elimination of income recognized by Company P under the equity method
($22,950 x 70%). 17
(9)
An increase to selling and administrative expenses to reflect additional depreciation
because buildings and equipment were recognized at fair value at the acquisition date.
The depreciation expense recognized by Company S was $6,000 (on a beginning
balance in buildings and equipment of $60,000). Accordingly, the equipment has a
10-year estimated useful life ($60,000 / $6,000). Applying this useful life to the excess
fair value of buildings and equipment ($25,500) creates additional depreciation
expense of $2,550 ($25,500 / 10).
17
34
Refer to FAQ 9-1 for further discussion of an implementation issue affecting the application of the
equity method.
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 5: Changes in a parent’s ownership interest in a subsidiary
(10)
Because net income is attributed based on outstanding voting interests in this
example, net income attributable to the controlling and noncontrolling interests is
$16,065 ($22,950 x 70%) and $6,885 ($22,950 x 30%), respectively.
Figure 5-5: Consolidating work paper to arrive at consolidated balance sheet,
year of combination, 31 December 20X1 (all amounts in dollars)
Adjustments
Company P
Company S
25,200
—
—
—
39,365
—
3,000
17,000
30,000
54,000
—
—
64,565
104,000
156,436
Accounts payable
Debt
—
9,000
75,000
—
75,000
9,000
Total liabilities
9,000
75,000
84,000
1,500
34,500
30,000
—
(19)
30,000
5,000
(6,000)
(20)
5,000
Cash
Marketable securities
Inventory
Buildings and equipment, net
Investment in Company S
Goodwill
(11)
(12)
Total assets
Common stock
Additional paid-in capital
Accumulated other
comprehensive income
Retained earnings (deficit)
Total parent shareholders’
equity
Noncontrolling interest
(16)
(17)
3,500
16,065
(18)
Debit
(13)
22,950
(15)
4,286
Credit
(14)
Consolidated
39,365
28,200
17,000
30,000
76,950
—
4,286
1,500
34,500
(21)
6,000
3,500
16,065
(22)
16,871
55,565
16,871
55,565
—
29,000
—
Total equity
55,565
29,000
72,436
Total liabilities and equity
64,565
104,000
156,436
Figure 5-5 presents the consolidating work paper to arrive at the 31 December 20X1
consolidated balance sheet, which includes:
(11)
The $25,200 cash dividend received from Company S ($36,000 x 70%).
(12)
The balance of the investment in Company S, adjusted for the earnings and dividends
of the equity method investee
Financial reporting developments Noncontrolling interests in consolidated financial statements
35
Chapter 5: Changes in a parent’s ownership interest in a subsidiary
Beginning balance
Attributed earnings
Attributed other comprehensive income
Attributed dividends
Ending balance
$ 45,000
16,065
3,500
(25,200)
$ 39,365
(13)
Buildings and equipment at fair value, less the current year excess depreciation
($25,500 — $2,550).
(16)
Company P’s proportion of other comprehensive income from the increase in value of
Company S’s marketable securities in accordance with the equity method of
accounting ($5,000 x 70%).10
(17)
Company P’s retained earnings to reflect the attributed earnings (see calculation in
Figure 5-4) from Company S under the equity method of accounting.
(18)
Company S’s retained deficit that reflects net income of $30,000 less cash dividends
of $36,000.
(20)
Elimination of Company S’s accumulated other comprehensive income.
(21)
Elimination of Company S’s retained deficit.
(22)
Noncontrolling interest is rolled forward from 1 January 20X1 (see Figure 5-3),
as follows:
Beginning balance
Attributed earnings
Attributed other comprehensive income
Attributed dividends
Ending balance
$ 19,286
6,885
1,500
(10,800)
$ 16,871
Adjustments (14), (15) and (19) are consistent with the acquisition-date consolidating
balance sheet work paper adjustments.
Consolidation after purchasing an additional interest
Assume on 1 January 20X2, Company P borrows $18,000 and uses that cash plus $21,000
of the cash from the cash dividend received from Company S to purchase, for $39,000, an
additional 20% interest in Company S, bringing its total interest to 90%. The fair value of
Company S’s net assets at the date of the additional investment by Company P is $75,000
(20% of which is $15,000). This example assumes — for purposes of simplicity — that the
consideration paid in excess of the fair value of the net identifiable assets purchased is
attributed to goodwill for purposes of reflecting the parent’s equity in Company S on the
equity method. This assumption is not to be used in practice.10
36
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 5: Changes in a parent’s ownership interest in a subsidiary
Figure 5-6: Consolidating work paper to arrive at consolidated balance sheet,
1 January 20X2 (all amounts in dollars)
Adjustments
Company P
Cash
(23)
Company S
Debit
Credit
Consolidated
4,200
3,000
7,200
Marketable securities
—
17,000
17,000
Inventory
—
30,000
Buildings and equipment, net
—
54,000
78,365
—
Investment in Company S
(24)
Goodwill
Total assets
Accounts payable
Debt
(28)
Total liabilities
Common stock
22,950
76,950
(26)
(27)
78,365
4,286
—
—
—
82,565
104,000
135,436
4,286
—
75,000
75,000
27,000
—
27,000
27,000
75,000
102,000
1,500
30,000
(32)
30,000
1,500
34,500
—
(35)
28,753
5,747
5,000
(33)
5,000
Additional paid-in capital
Accumulated other
comprehensive income
(29)
3,500
Retained earnings (deficit)
(30)
16,065
Total parent shareholders’
equity
30,000
(25)
(31)
(6,000)
(35)
1,000
4,500
(34)
6,000
16,065
(35)
16,871
55,565
29,000
—
—
Total equity
55,565
29,000
33,436
Total liabilities and equity
82,565
104,000
135,436
Noncontrolling interest
27,812
(35)
11,247
5,624
Once control is obtained, subsequent purchases and sales of noncontrolling interests while
control is maintained are accounted for as equity transactions in consolidation. Therefore,
the 1 January 20X2, balance sheet is consolidated in Figure 5-6, as follows:
(23)
The cash balance is calculated as follows:
Beginning balance
Cash received from loan
Cash paid for additional interest
Ending balance
$ 25,200
18,000
(39,000)
$
4,200
Financial reporting developments Noncontrolling interests in consolidated financial statements
37
Chapter 5: Changes in a parent’s ownership interest in a subsidiary
(24)
The investment in Company S is increased for the purchase of an additional interest in
Company S:
Beginning balance
Additional interest purchased
Ending balance
$ 39,365
39,000
$ 78,365
(28)
Company P incurred additional debt of $18,000 to partially fund the purchase of the
additional interest in Company S.
(35)
The 31 December 20X1 balance for noncontrolling interest was $16,871. This
amount represented a 30% interest in Company S. Two-thirds of this interest
($11,247) was purchased by Company P ($16,871 x 2/3). Accordingly, the
noncontrolling interest balance is $5,624 ($16,871 — $11,247).
In addition, accumulated other comprehensive income is adjusted to reflect the
portion of the accumulated other comprehensive income that was purchased
($1,000) from the noncontrolling interest and is now attributable to Company P
($5,000 x 20%).
The 20% additional interest purchased and the adjustment to accumulated other
comprehensive income are reflected as follows:
Noncontrolling interest
Additional paid-in capital
Cash
Additional paid-in capital
Accumulated other comprehensive income
$11,247
27,753
$39,000
$1,000
$1,000
This example calculates the noncontrolling interest based on a rollforward of the
noncontrolling interest balance. Alternatively, a parent company could maintain a
separate ledger for the subsidiary on a push-down basis (which is the approach used
in Appendix A). If this method is used, the controlling interest and noncontrolling
interest should still be tracked separately because in certain situations, income may
be attributed differently from the ownership interests.
Adjustments (25)–(27) and (29)–(34) are consistent with those made in the prior year.
38
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 5: Changes in a parent’s ownership interest in a subsidiary
Consolidation in year 2
Assume on 31 December 20X2, Company S pays cash dividends of $36,000 of which
Company P’s share is $32,400. The current market value of Company S’s marketable
securities has decreased to $15,500.
Figure 5-7: Consolidating work paper to arrive at consolidated income statement for year
ended 31 December 20X2 (all amounts in dollars)
Adjustments
Company P
Company S
Debit
Credit
Consolidated
Revenues
Cost of revenues
—
—
96,000
42,000
96,000
42,000
Gross profit
Income from equity method
investment
Selling and administrative
—
54,000
54,000
24,705
—
—
24,000
Net income
24,705
30,000
Net income attributable to
noncontrolling interest
—
—
Net income attributable to
controlling interest
24,705
30,000
(36)
(37)
24,705
2,550
—
26,550
27,450
(38)
2,745
2,745
24,705
The 31 December 20X2 income statement is consolidated in Figured 3-7, as follows:
(38)
Net income is attributed to the controlling and noncontrolling interests based on
ownership. The controlling and noncontrolling interests own 90% and 10% of the
outstanding stock, respectively. Thus, net income attributable to the controlling and
noncontrolling interests is $24,705 ($27,450 x 90%) and $2,745 ($27,450 x 10%),
respectively.
See Figure 5-4 for descriptions of adjustments (36) and (37).
Financial reporting developments Noncontrolling interests in consolidated financial statements
39
Chapter 5: Changes in a parent’s ownership interest in a subsidiary
Figure 5-8: Consolidating work paper to arrive at consolidated balance sheet, 31 December
20X2 (all amounts in dollars)
Adjustments
Company P
Cash
(39)
Company S
Debit
Credit
Consolidated
36,600
3,000
39,600
Marketable securities
—
15,500
15,500
Inventory
—
30,000
Buildings and equipment, net
—
48,000
69,320
—
Investment in Company S
(40)
Goodwill
Total assets
Accounts payable
Debt
Total liabilities
Common stock
Additional paid-in capital
Accumulated other
comprehensive income
Retained earnings (deficit)
Total parent shareholders’
equity
30,000
(41)
20,400
68,400
(42)
(43)
69,320
—
—
—
105,920
96,500
4,286
157,786
4,286
75,000
—
75,000
27,000
—
27,000
27,000
75,000
102,000
1,500
30,000
(47)
30,000
1,500
34,500
—
(48)
28,753
5,747
(44)
2,150
3,500
(49)
3,500
(45)
40,770
Noncontrolling interest
Total equity
Total liabilities and equity
(46)
(12,000)
(48)
1,000
3,150
(50)
12,000
40,770
(51)
4,619
78,920
21,500
—
—
51,167
78,920
21,500
55,786
105,920
96,500
157,786
4,619
Figure 5-8 presents the consolidating work paper to arrive at the year-end consolidated
balance sheet in the year in which the additional interest was purchased, as follows:
(39)
The parent received $32,400 as a cash dividend from Company S ($36,000 x 90%).
The cash balance is as follows:
Beginning balance
Dividends received
Ending balance
40
$
4,200
32,400
$ 36,600
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 5: Changes in a parent’s ownership interest in a subsidiary
(40)
The investment in Company S was adjusted for the earnings and dividends of the
equity method investee:10
Beginning balance (after purchase of additional interest)
Attributed earnings
Attributed other comprehensive loss
Attributed dividends
Ending balance
$ 78,365
24,705
(1,350)
(32,400)
$ 69,320
(44)
Company P recognized its proportion of other comprehensive loss for the year (from
the decrease in value of Company S’s marketable securities) in accordance with the
equity method of accounting ($1,500 x 90%).10 This amount was subtracted from last
year’s balance of $3,500 ($3,500 — $1,350) to arrive at Company P’s accumulated
other comprehensive income. For this example, Company P has no comprehensive
income other than its proportionate share of Company S’s comprehensive income.
(45)
Retained earnings for Company P reflects the attributed earnings from Company S
under the equity method of accounting. Although a statement of shareholders’ equity
would generally be presented, for illustrative purposes, the statement has been
excluded. A rollforward of retained earnings follows:
Beginning balance
Earnings recognized under the equity method of accounting
Ending balance
(46)
Retained deficit for Company S is rolled forward as follows:
Beginning balance
Net income
Dividends declared
Ending balance
(51)
$ 16,065
24,705
$ 40,770
$
(6,000)
30,000
(36,000)
$ (12,000)
Noncontrolling interest is calculated by rolling forward the balance from 1 January
20X2 (see Figure 5-6), as follows:
Beginning balance
Attributed earnings
Attributed other comprehensive loss
Attributed dividends
Ending balance
$
$
5,624
2,745
(150)
(3,600)
4,619
Adjustments (41)–(43) and (47)–(50) are consistent with those of the prior year.
Financial reporting developments Noncontrolling interests in consolidated financial statements
41
Chapter 5: Changes in a parent’s ownership interest in a subsidiary
Consolidation after selling an interest without loss of control
Assume on 1 January 20X3, Company P sells a 30% interest in Company S for $22,500 cash,
decreasing its total interest to 60%.
Figure 5-9: Consolidating work paper to arrive at consolidated balance sheet, 1 January
20X3 (all amounts in dollars)
Adjustments
Company P
Cash
(52)
Company S
Debit
Credit
Consolidated
59,100
3,000
62,100
Marketable securities
—
15,500
15,500
Inventory
—
30,000
Buildings and equipment, net
—
48,000
46,820
—
—
—
105,920
96,500
180,286
—
75,000
75,000
Investment in Company S
(53)
Goodwill
Total assets
Accounts payable
Debt
Total liabilities
Common stock
Additional paid-in capital
Accumulated other
comprehensive income
Retained earnings (deficit)
Total parent shareholders’
equity
Total liabilities and equity
20,400
68,400
(55)
(56)
46,820
4,286
—
4,286
27,000
—
27,000
27,000
75,000
102,000
1,500
30,000
(60)
30,000
34,500
—
(62)
28,753
(64)
9,693
15,440
(57)
2,150
3,500
(63)
4,550
(62)
1,000
2,100
(58)
40,770
(61)
12,000
40,770
(64)
18,476
(59)
(12,000)
1,500
78,920
21,500
—
—
78,920
21,500
78,286
105,920
96,500
180,286
Noncontrolling interest
Total equity
30,000
(54)
59,810
18,476
Once control is obtained, purchases and sales of noncontrolling interests are accounted for
as equity transactions. Therefore, the 1 January 20X3 balance sheet is consolidated in Figure
5-9, as follows:
(52)
The cash balance rollforward is as follows:
Beginning balance
Cash received from sale
Ending balance
42
$ 36,600
22,500
$ 59,100
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 5: Changes in a parent’s ownership interest in a subsidiary
(53)
The investment in Company S adjusted for the sale of a partial interest in Company S
is as follows:
Beginning balance
Partial interest sold
Ending balance
$ 69,320
(22,500) 18
$ 46,820
(63)
To eliminate the accumulated other comprehensive income of Company S ($3,500),
plus the adjustment related to the sale of the partial interest ($1,050), as discussed in
item 64 below.
(64)
The 31 December 20X2 balance for noncontrolling interest is $4,619. This
represents a 10% interest in Company S. Three times this interest ($13,857), or a
30% interest in Company S, was sold by Company P ($4,619 x 3). Thus, the adjusted
balance for the noncontrolling interest is $18,476 ($4,619 + $13,857).
In addition, accumulated other comprehensive income is adjusted to reflect the
portion of the accumulated other comprehensive income that was sold ($1,050) and
is no longer attributable to Company P ($3,500 x 30%).
The adjusting entries made to reflect the sale of the 30% additional interest and adjust
accumulated other comprehensive income are as follows:
Cash
Noncontrolling interest
Additional paid-in capital
Accumulated other comprehensive income
Additional paid-in capital
$22,500
$13,857
8,643
$1,050
$1,050
This example calculates the noncontrolling interest based on a rollforward of the
noncontrolling interest balance. Alternatively, a parent company could maintain a
separate ledger for the subsidiary on a push-down basis (the approach used in
Appendix A). If this method is used, the controlling interest and noncontrolling
interest should still be tracked separately because in certain situations, income may
be attributed differently from the ownership interests.
Adjustments (54)–(62) are consistent with those of prior years.
18
Under ASC 323 and the equity method of accounting, only the carrying value of the portion of the
investment sold would be deducted from the investment account, with a gain or loss being
recognized for the difference between the fair value of the consideration received and the carrying
value of the investment. For simplicity, the entire fair value of the consideration received has been
deducted from the investment account. If the gain or loss had been recognized, it would be
eliminated in consolidation.
Financial reporting developments Noncontrolling interests in consolidated financial statements
43
Chapter 5: Changes in a parent’s ownership interest in a subsidiary
Consolidation in year 3
On 31 December 20X3, Company S pays cash dividends of $36,000 of which Company P’s
share is $21,600. The fair value of Company S’s marketable securities has increased to
$17,500.
Figure 5-10: Consolidating work paper to arrive at consolidated income statement, for year
ended 31 December 20X3 (all amounts in dollars)
Adjustments
Company P
Revenues
Cost of revenues
Gross profit
Income from equity method
investment
Selling and administrative
Net income
Net income attributable to
noncontrolling interest
Net income attributable to
controlling interest
Company S
Debit
Credit
Consolidated
—
—
—
96,000
42,000
54,000
96,000
42,000
54,000
16,470
—
16,470
—
24,000
30,000
(65)
(66)
16,470
2,550
—
26,550
27,450
—
—
(67)
10,980
10,980
16,470
30,000
16,470
The 31 December 20X3 income statement is consolidated in Figure 5-10, as follows:
(67)
Net income is attributed to the controlling and noncontrolling interest based on
ownership interests. The controlling and noncontrolling interests own 60% and 40% of
the outstanding stock, respectively. Thus, net income attributable to the controlling
and noncontrolling interests is $16,470 ($27,450 x 60%) and $10,980 ($27,450 x
40%), respectively.
See Figure 5-4 for explanations of adjustments (65) and (66).
44
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 5: Changes in a parent’s ownership interest in a subsidiary
Figure 5-11: Consolidating work paper to arrive at consolidated balance sheet,
31 December 20X3 (all amounts in dollars)
Adjustments
Company P
Cash
Marketable securities
Inventory
Buildings and equipment, net
Investment in Company S
Goodwill
Total assets
(68)
Company S
80,700
—
—
—
42,890
—
123,590
3,000
17,500
30,000
42,000
—
—
92,500
Accounts payable
Debt
Total liabilities
—
27,000
27,000
75,000
—
75,000
Common stock
Additional paid-in capital
Accumulated other
comprehensive income
Retained earnings (deficit)
Total parent shareholders’
equity
Noncontrolling interest
Total equity
1,500
34,500
30,000
—
(69)
(73)
(74)
Total liabilities and equity
3,350
57,240
(75)
Debit
(70)
17,850
(72)
4,286
(71)
30,000
28,753
5,500 (78)
(18,000)
6,550
17,500
—
17,500
123,590
92,500
Consolidated
83,700
17,500
30,000
59,850
—
4,286
195,336
42,890
75,000
27,000
102,000
(76)
(77)
96,590
—
96,590
Credit
(79)
9,693
1,500
15,440
(77)
(80)
1,000
18,000
3,300
57,240
(81)
15,856
77,480
15,856
93,336
195,336
The balance sheet is consolidated as of 31 December 20X3 in Figure 5-11, as follows:
(68)
Company P received $21,600 as a cash dividend from Company S ($36,000 x 60%).
The cash balance rollforward is as follows:
Beginning balance
Dividend received
Ending balance
(69)
$ 59,100
21,600
$ 80,700
The rollforward of the investment in Company S, adjusted for the earnings and
dividends of the equity method investee is as follows:10
Beginning balance
Attributed earnings
Attributed other comprehensive income
Attributed dividends
Ending balance
$ 46,820
16,470
1,200
(21,600)
$ 42,890
Financial reporting developments Noncontrolling interests in consolidated financial statements
45
Chapter 5: Changes in a parent’s ownership interest in a subsidiary
(73)
Company P recognized its proportion of other comprehensive income for the year
(from the increase in value of Company S’s marketable securities) in accordance with
the equity method of accounting ($2,000 x 60%),10 which was added to last year’s
balance of $2,150.
(74)
Retained earnings for Company P reflect the attributed earnings from Company S
under the equity method of accounting. Although a statement of shareholders’ equity
would generally be presented, for illustrative purposes, the statement has been
excluded. A rollforward of retained earnings is as follows:
Beginning balance
Earnings recognized under the equity method of accounting
Ending balance
(75)
$ 40,770
16,470
$ 57,240
Retained deficit for Company S is rolled forward as follows:
Beginning balance
Net income
Dividends declared
Ending balance
$ (12,000)
30,000
(36,000)
$ (18,000)
(78)
To eliminate the accumulated other comprehensive income of Company S ($5,500),
as well as last year’s adjustment related to the sale of a partial interest in Company S
($1,050).
(81)
The rollforward of the noncontrolling interest balance from 1 January 20X3 (see
Figure 5-9), as follows:
Beginning balance
Attributed earnings
Attributed other comprehensive income
Attributed dividends
Ending balance
$ 18,476
10,980
800
(14,400)
$ 15,856
Adjustments (70–72), (76–77) and (79-80) are consistent with those of prior years.
46
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 5: Changes in a parent’s ownership interest in a subsidiary
FAQs
5-1
Requirement to allocate goodwill upon change in parent’s
ownership interest
Question:
Should goodwill be reallocated between the controlling and noncontrolling interests to reflect
a change in a parent’s ownership interest in a subsidiary that it still controls?
Response:
Yes. Although the total goodwill balance is not adjusted, for the purposes of testing for
impairment, goodwill should be reallocated between the controlling and noncontrolling
interests based on the changes in ownership interests.
To illustrate this concept, assume Parent acquires 80% of Subsidiary. The business
combination is accounted for under ASC 805, as amended by Statement 141(R), and $100 of
goodwill is recognized ($80 attributable to Parent and $20 attributable to the noncontrolling
interest, assuming no control premium). If Parent acquires an additional 10% interest in
Subsidiary, the consolidated amount of goodwill does not change, but the goodwill balance is
reallocated between Parent and the noncontrolling interest based on the revised percentage
ownership interest (that is, $90 would be attributable to Parent and $10 would be attributable
to the noncontrolling interest).
5-2
Applicability to business combinations effected prior to adoption of
Statement 160
Question:
What guidance should be followed for changes in a parent’s interest while maintaining control
that occur after Statement 160 was adopted, but for which the business combination
occurred prior to Statement 160’s effective date?
Response:
We believe that all subsequent acquisitions or dispositions of ownership interests in
subsidiaries meeting the scope of ASC 810-10-45-21A while the parent maintains control —
including those related to business combinations effected prior to the adoption of Statement
160 — should be accounted for pursuant to Statement 160’s provisions.
Pursuant to ASC 805, as amended by Statement No. 141(R), assets and liabilities that arose
from business combinations whose acquisition dates preceded Statement 141(R)’s effective
date are not to be adjusted upon application of Statement 141(R). Accordingly, acquisitions
of the noncontrolling interest by the parent while it maintains its controlling financial interest
should not be accounted for as step acquisitions. Similarly, a parent’s sales of its ownership
interests in a subsidiary meeting the scope of ASC 810-10-45-21A over which it continues to
maintain control should be accounted for as equity transactions.
Financial reporting developments Noncontrolling interests in consolidated financial statements
47
Chapter 5: Changes in a parent’s ownership interest in a subsidiary
5-3
Gain recognition option in SAB 51
(Updated March 2010)
Question:
When a subsidiary issues shares, if certain conditions are met, SAB 51 provided an option for
a parent either to recognize a gain or loss on the sale of stock by a subsidiary in earnings or
instead account for the issuance as an equity transaction. Should SAB 51’s guidance be
followed after the adoption of Statement 160?
Response:
SAB 51’s option that permits gains or losses on the sale of stock by a subsidiary to be
recognized in earnings under certain circumstances should not be followed after Statement
160’s adoption.19 Furthermore, in June 2009, the SEC staff issued SAB 112, which removed
SAB 51 from the SEC staff guidance.
5-4
Transaction costs
Question:
Once control of a subsidiary is obtained, what is the accounting for transaction costs incurred
in connection with changes in ownership?
Response:
When a transaction is accounted for as a business combination under ASC 805, as amended
by Statement 141(R), specific incremental transaction costs directly attributable to the
acquisition are expensed as incurred. Statement 160 provides that gains or losses should not
be recognized upon changes in a parent’s ownership of a subsidiary meeting the scope of
ASC 810-10-45-21A while control is retained because the entities are considered one
economic entity. Accordingly, we believe that these transactions are analogous to treasury
stock transactions.
Based on this, we believe that specific, direct and incremental costs (but not management
salaries or other general and administrative expenses) related to changes in a parent’s
ownership percentage in a subsidiary meeting the scope of ASC 810-10-45-21A, while
control is maintained, may be accounted for as part of the equity transaction. However, the
provisions of ASC 810-10-40-6, which address multiple arrangements that are to be
considered as a single transaction, should be considered.
19
48
SAB 51’s concepts had been also applicable for investments accounted for under the equity method. On 24
November 2008, the FASB ratified the consensus reached in EITF 08-6 (codified in ASC 323), which requires an
equity method investor to recognize a gain or loss upon the sale of shares by an equity method investee
(ASC 323-10-40-1).
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 5: Changes in a parent’s ownership interest in a subsidiary
We observe that some believe that transaction costs incurred in connection with changes in
ownership of consolidated subsidiaries meeting the scope of ASC 810-10-45-21A while
control is retained are not analogous to treasury stock transactions and, therefore, should be
expensed as incurred. We believe that until further guidance is issued, a reporting enterprise
should adopt and consistently apply an accounting policy for these costs. Readers should
closely monitor developments in this area.
5-5
In-substance real estate transactions
(Added March 2010)
Question:
Are in-substance real estate transactions within the scope of the decrease in ownership
guidance within ASC 810-10?
Response:
According to ASC 810-10-45-21A(b), the decrease in ownership guidance in ASC 810-10
does not apply if a transaction is a sale of in-substance real estate, even if that real estate is
considered a business. Entities should apply the sale of real estate guidance in ASC 360-20
and ASC 976-605 to such transactions. However, guidance on noncontrolling interests in
consolidated financial statements within ASC 810-10 will continue to apply to increases in
ownership of an entity that is in-substance real estate.
5-6
Scope exception for oil and gas conveyances
(Added March 2010)
Question:
What transactions are included in and excluded from the oil and gas conveyance scope
exception?
Response:
The FASB clarified in ASU 2010-02 that any conveyance of an oil and gas mineral right that is
accounted for under the guidance in ASC 932-360-40 is outside the scope of ASC 810’s
derecognition provisions as well as ASC 810’s provisions regarding decrease in ownership in
circumstances in which a controlling interest is retained. Therefore, if a company is conveying
a mineral interest and the transaction would have been accounted for under ASC 932 prior to
the adoption of Statement 160, the transaction would continue to be accounted for under
ASC 932. However, in a transaction in which a company sells all or a portion of a subsidiary
or a group of assets that include oil and gas mineral rights (or contributes it to another
entity), such transaction may be m ore appropriately accounted for under the guidance in
ASC 810. Consideration of the illustrations and guidance in ASC 932 is required to determine
whether a transaction represents a conveyance of a mineral property. If a transaction does
not fall within the guidance of ASC 932, it should be accounted for under ASC 810.
Financial reporting developments Noncontrolling interests in consolidated financial statements
49
Chapter 5: Changes in a parent’s ownership interest in a subsidiary
The following example illustrates a transaction that is not in the scope of ASC 810:
Example 1
Facts
O&G Co. A owns a 100% gas mineral interest in a property in Colorado. O&G Co. A assigns
an operating interest to Drilling Co. A and retains a non-operating interest in the property.
The transaction requires Drilling Co. A to drill, develop and operate the property. O&G Co.
A will participate in the production profits after Drilling Co. A recoups its costs.
Analysis
The accounting for the transaction described above (a pooling of assets in a joint
undertaking) is addressed in ASC 932-360-55-3. Therefore, the transaction should be
accounted for in accordance with ASC 932, not ASC 810.
The following example illustrates a transaction that is in the scope of ASC 810:
Example 2
Facts
O&G Co. A owns an operating subsidiary, Foreign Sub X. Foreign Sub X has oil and gas
mineral properties as well as other energy related operations. Subsequently, O&G Co. A
sells a 55% interest in those operations to O&G Co. B and loses control.
Analysis
In this fact pattern, O&G Co. A is selling 55% of its equity in Foreign Sub X, which results in
the loss of control. 20 Because this transaction does not represent an oil or gas mineral
property conveyance as contemplated in the guidance of ASC 932 or any of ASC 932’s
implementation guidance illustrations, it should be accounted for under the derecognition
guidance in ASC 810.
We believe, in this circumstance, ASC 810 is the most appropriate guidance because this
transaction represents the sale of a business that happens to include oil and gas mineral
properties. This type of transaction is not addressed in the mineral property conveyance
guidance in ASC 932.
20
50
A transaction with the same fact pattern, but in which there is a decrease in ownership without loss of
control (for example, a sale of 20% of the equity), would result in the same conclusion (that is, the
transaction is in the scope of ASC 810).
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 5: Changes in a parent’s ownership interest in a subsidiary
5-7
Decrease in ownership in a subsidiary that is not a business or
nonprofit activity
(Added March 2010)
Question:
How should a decrease in ownership in a subsidiary that is not a business or nonprofit activity
be accounted for?
Response:
If a decrease in ownership occurs in a subsidiary that is not a business or nonprofit activity,
an entity first needs to evaluate the substance of the transaction and identify whether other
applicable literature (e.g., transfers of financial assets as discussed in ASC 860, revenue
recognition as discussed in ASC 605, etc.) may provide relevant guidance. If no such
guidance exists, an entity should apply the guidance in ASC 810-10. For example, if an
enterprise sells the equity securities of a subsidiary, and all of the assets in the subsidiary are
financial assets, the substance of the transaction should first be evaluated under ASC 860.
However, guidance on noncontrolling interests in consolidated financial statements within
ASC 810-10 will continue to apply to increases in ownership of an entity that is not a business
or nonprofit activity.
5-8
Master limited partnership accounting
(Added March 2010)
Question:
How should the provisions of ASC 810-10 be applied to a Master Limited Partnership’s
issuance of preferential limited partnership units?
Response:
A Master Limited Partnership (MLP) is a limited partnership organization whose limited
partnership units are available to investors and traded on public exchanges, just like
corporate stock. MLPs usually involve (1) a general partner (GP), who typically holds a small
percentage (commonly 2%) of the outstanding partnership units and manages the operations
of the partnership, and (2) limited partners (LPs), who provide capital and hold most of the
ownership but have limited influence over the operations. Enterprises that form MLPs
typically do so to take advantage of the special tax treatment of the partnership structure
(although MLPs may also provide an attractive exit strategy for owners of private equity
assets). To qualify for the tax benefits, 90% of an MLPs’ income must be derived from
activities in natural resources, real estate or commodities. As a result, the energy industry
has experienced a dramatic rise in the use of the MLP structure.
The GP frequently consolidates the MLP. For the issuance of LP interests, all sales first should
be evaluated to determine if they represent in-substance sales or partial sales of real estate
under ASC 360-20-15-2 through 15-10 (refer to sections RE1.2 through RE 1.4 in our
Financial reporting developments Noncontrolling interests in consolidated financial statements
51
Chapter 5: Changes in a parent’s ownership interest in a subsidiary
Financial Reporting Developments publication, Real estate sales, for further interpretive
guidance). Assuming the sale is not in-substance a sale or partial sale of real estate, a
consolidated subsidiary that issues shares that decrease the parent’s ownership interest in
the subsidiary while the parent maintains control of the subsidiary should be accounted for as
a capital transaction pursuant to the decrease in ownership guidance.
However, the decrease in ownership guidance may not apply when an MLP issues limited
partnership units that have a preference in distributions or liquidation rights (referred to as the
common LP units). It is common for an MLP partnership agreement to provide that, during a
subordination period, the common LP units will have the right to receive distributions of
available cash each quarter based on a minimum quarterly distribution, plus any arrearages,
before any distributions of available cash may be made on the subordinated LP units.
Furthermore, no arrearages will be paid on the subordinated units. The practical effect of the
subordinated LP units is to increase the likelihood that during the subordination period there
will be available cash to be distributed on the common LP units. When subordinated LP units
are held by the parent/GP of an MLP, common LP units that are issued and that decrease the
parent/GP ownership interest in the MLP would not possess the characteristics of a residual
equity interest given the common LP units’ preference over the subordinated LP units. As
such, we believe that the accounting guidance discussed above (that is, change in a parent’s
ownership interest in a subsidiary) would not apply. Therefore, if the parent/GP owns
subordinated LP units in the MLP, the parent/GP should reflect the proceeds from issuance of
common LP units as noncontrolling interest in its financial statements with no adjustment to
additional paid-in capital. We believe that if the class of security issued by the subsidiary has a
preference in distribution or liquidation rights over any other class of equity security, then it is
analogous to preferred stock. As such, we do not believe the guidance above would apply to
such transactions.
MLP partnership agreements include provisions for the subordination period to expire after a
specific period of time if the minimum quarterly distributions have been made to the holders
of the common LP units. Upon the expiration of the subordination period, all subordinated LP
units held by the parent/GP convert into common LP units with the same distribution and
liquidation rights as the other common LP units. At the time of this conversion, the
noncontrolling interest includes the entire proceeds from previous common LP unit
offering(s), including any excess consideration over the book value of the interest sold (which
might represent deferred gains recorded under SAB 51 prior to the adoption of Statement
160). Although the common LP units previously issued by the MLP to the holders of the
noncontrolling interest no longer have a preference in distributions due to the expiration of
the subordination period, we believe this loss of preference has no immediate accounting
consequences. The accounting for changes in noncontrolling interests only applies to
changes in a parent’s ownership interest in a subsidiary, which includes circumstances in
which, “(a) the parent purchases additional ownership interests in its subsidiary, (b) the
parent sells some of its ownership interests in its subsidiary, (c) the subsidiary reacquires
some of its ownership interests, or (d) the subsidiary issues additional ownership interests”
52
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 5: Changes in a parent’s ownership interest in a subsidiary
(ASC 810-10-45-22). We believe the conversion of subordinated units into common units at
the expiration of the subordination period is not a change in the parent’s ownership interest
in a subsidiary because the conversion of the subordinated units into common units does not
result in a change in ownership interest in the MLP. As such, any excess proceeds above the
book value that were recognized as noncontrolling interests at the time of the sale or
issuance of common LP units because of the existence of subordinated units would continue
to be reflected as noncontrolling interest (that is, no adjustment to additional paid-in capital)
until such time that the parent/GP loses control of the MLP, and the MLP is deconsolidated.
Financial reporting developments Noncontrolling interests in consolidated financial statements
53
Chapter 6: Intercompany eliminations
Chapter 6: Intercompany eliminations
Excerpt from Accounting Standards Codification
Consolidation — Overall
Other Presentation Matters
Procedures
810-10-45-1
In the preparation of consolidated financial statements, intra-entity balances and transactions
shall be eliminated. This includes intra-entity open account balances, security holdings, sales
and purchases, interest, dividends, and so forth. As consolidated financial statements are
based on the assumption that they represent the financial position and operating results of a
single economic entity, such statements shall not include gain or loss on transactions among
the entities in the consolidated group. Accordingly, any intra-entity profit or loss on assets
remaining within the consolidated group shall be eliminated; the concept usually applied for
this purpose is gross profit or loss (see also paragraph 810-10-45-8).
810-10-45-2
The retained earnings or deficit of a subsidiary at the date of acquisition by the parent shall
not be included in consolidated retained earnings.
810-10-45-4
When a subsidiary is initially consolidated during the year, the consolidated financial
statements shall include the subsidiary's revenues, expenses, gains, and losses only from the
date the subsidiary is initially consolidated.
810-10-45-5
Shares of the parent held by a subsidiary shall not be treated as outstanding shares in the
consolidated statement of financial position and, therefore, shall be eliminated in the
consolidated financial statements and reflected as treasury shares.
810-10-45-8
If income taxes have been paid on intra-entity profits on assets remaining within the
consolidated group, those taxes shall be deferred or the intra-entity profits to be eliminated
in consolidation shall be appropriately reduced.
Interpretive guidance
An entity required to consolidate another entity must apply consolidation procedures to
present the results of operations and financial position of the group (that is, the parent and
the entities required to be consolidated) as a single consolidated entity. The separate
financial statements of each entity are combined and adjusted to eliminate intercompany
transactions and ownership interests in order to present transactions and ownership
interests only with parties outside the consolidated group. This is consistent with the
economic entity concept.
54
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 6: Intercompany eliminations
As consolidated financial statements represent the financial position and operating results of
a single economic entity, such financial statements should not include any intercompany
receivables, payables, investments, capital, revenues, costs of sales or profits or losses
between the entities within the consolidated group. Accordingly, any intercompany profit or
loss on assets or liabilities remaining within the consolidated entity should be eliminated,
resulting in the carrying value of the assets and liabilities being adjusted to the historical
carrying value that existed prior to the intercompany transaction.
The elimination of intercompany receivables and payables is not complex if balance sheet
date cut-offs for intercompany transactions are consistent among entities within the
consolidated group. If inventories or other assets of a consolidated group are transferred
between members of the consolidated group, intercompany revenues, cost of sales and profit
or loss recorded by the transferor should be eliminated in consolidation.
The goal of intercompany income elimination is to remove the income (or loss) arising from
transactions between companies within the consolidated entity and to adjust the carrying
amount of the assets to their historical cost basis (as compared with the intercompany asset
transfer price basis) of the transferred asset in the consolidated financial statements. This
practice is continued until the income is realized through a sale to outside parties or in the
case of depreciable assets, the asset is depreciated over its estimated useful life.
Effect of noncontrolling interest on elimination of intercompany amounts
The existence of a noncontrolling interest in the consolidated group creates complexities
related to the elimination of intercompany profits. ASC 810, as amended, provides guidance
for preparing consolidated financial statements, including the treatment of noncontrolling
interest. ASC 810-10-45-18, as amended, states:
“The amount of intra-entity income or loss to be eliminated…is not affected by the
existence of a noncontrolling interest. The complete elimination of the intra-entity income
or loss is consistent with the underlying assumption that consolidated financial
statements represent the financial position and operating results of a single economic
entity. The elimination of the intra-entity income or loss may be allocated between the
parent and noncontrolling interests.”
ASC 810 provides for no distinction between wholly-owned and partially-owned entities with
respect to the need for the elimination of intercompany transactions. In both cases, all
transactions with members of the consolidated group are considered internal transactions
that must be eliminated fully, regardless of the percentage ownership.
Financial reporting developments Noncontrolling interests in consolidated financial statements
55
Chapter 6: Intercompany eliminations
Because individual companies in a consolidated group generally record transactions with
members of the consolidated group in a manner similar to transactions with entities outside of
the group, sales, cost of goods sold and profit may be recognized by the selling entity even
though there has not been a transaction outside of the consolidated group. Because income
cannot be recognized by the consolidated group until it has been realized in a transaction with
a third party, there may be unrealized intercompany profit or loss requiring elimination.
Because noncontrolling interest is a component of equity, transfers of assets between
entities in the consolidated group are accounted for as internal transfers for which no
earnings are recognized until they are realized through an exchange transaction with a party
outside of the consolidated group.
Unrealized intercompany income and losses are always eliminated fully in preparing
consolidated financial statements. While the entire amount must be eliminated, when there is
a noncontrolling interest, in certain circumstances, a determination must be made as to how
that elimination should be allocated between the controlling and noncontrolling interests.
When a sale is from a parent to a subsidiary (downstream transaction), profit or loss is
recognized by the parent. Accordingly, we believe the full amount of the elimination of the
intercompany profit or loss should be against the controlling interest. Otherwise, the parent
would continue to recognize a portion of the unrealized income or loss in income even though
ASC 810-10-45-1 requires intercompany transactions to be eliminated fully.
When a subsidiary sells to the parent (upstream transaction) and intercompany profit or loss
arises, the profit or loss may be eliminated against the controlling and noncontrolling interest
proportionately.
In either case, the amount of profit eliminated from the consolidated carrying amount of the
asset is not affected by the existence of noncontrolling interest in the subsidiary.
Example 1: Parent sells to a majority-owned subsidiary (downstream transaction)
In a transaction in which a parent sells inventory to a majority-owned subsidiary, and some or
all of the inventory remains on hand at a period-end, ASC 810 requires that the full amount
of the profit arising from the intercompany transaction related to the inventory remaining on
hand be eliminated against the parent’s interest and eliminated from the carrying amount of
the asset. That is, because only the parent has recognized the revenues, costs of sale, and
resultant profit and loss in its financial statements, no portion of these items may be allocated
to noncontrolling interests.
56
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 6: Intercompany eliminations
Assumptions:
Company P owns an 80% interest in Company S.
The 1 January 20X6, beginning-of-year balance sheets for Company P and Company S are as
follows (all amounts in dollars):
Company P
Company S
Cash
Inventory
Buildings and equipment, net
Investment in Company S
Total assets
–
200,000
–
400,000
600,000
300,000
50,000
150,000
–
500,000
Current liabilities
Common stock
Retained earnings
Noncontrolling interest
Total liabilities and equity
100,000
200,000
300,000
–
600,000
–
500,000
–
–
500,000
1) During the year, Company P sells inventory to Company S, which remains in Company S’s
inventory at year end. A summary of the effect of the transaction on Company P’s income
statement is as follows:
$ 100,000
70,000
$ 30,000
Revenues
Cost of sales
Gross profit
2) The inventory sale is the only transaction between Company P and Company S
during 20X6.
3) Prior to consolidation, Company P accounts for its investment in Company S using the
cost method.
Figure 6-1: Consolidating work paper to arrive at consolidated income statement, for year
ended 31 December 20X6 (all amounts in dollars)
Adjustments
Revenues
Cost of revenues
Gross profit
Selling and administrative
Net income
Net income attributable to
noncontrolling interest
Net income attributable to
controlling interest
Company P
Company S
Debit
500,000
200,000
300,000
100,000
200,000
270,000
100,000
170,000
20,000
150,000
(1)
—
—
(3)
200,000
150,000
Credit
100,000
(2)
30,000
70,000
Consolidated
670,000
230,000
440,000
120,000
320,000
30,000
290,000
Financial reporting developments Noncontrolling interests in consolidated financial statements
57
Chapter 6: Intercompany eliminations
Figure 6-1 illustrates the elimination of intercompany transactions between Company P and
Company S for the consolidated income statement, as follows:
(1)
Intercompany revenue from the downstream sale is eliminated.
(2)
Intercompany cost of revenues from the downstream sale is eliminated.
(3)
Net income of Company S is attributed to the noncontrolling interest ($150,000 x 20%).
Figure 6-2: Consolidating work paper to arrive at consolidated balance sheet, 31 December
20X6 (all amounts in dollars)
Adjustments
Company P
Company S
Cash
200,000
450,000
Intercompany receivable
100,000
—
(4)
100,000
—
Inventory
200,000
150,000
(5)
30,000
320,000
(6)
400,000
Buildings and equipment, net
Debit
Credit
Consolidated
650,000
—
150,000
Investment in Company S
Total assets
400,000
900,000
—
750,000
Current liabilities
200,000
—
—
100,000
200,000
100,000
Capital stock
200,000
500,000
(7)
500,000
Retained earnings
Total parent shareholders’
equity
500,000
150,000
(8)
180,000
700,000
650,000
—
—
Total equity
700,000
650,000
920,000
Total liabilities and equity
900,000
750,000
1,120,000
Intercompany payable
Total liabilities
Noncontrolling interest
150,000
—
1,120,000
200,000
(4)
100,000
—
200,000
200,000
(9)
120,000
(10)
130,000
590,000
790,000
130,000
Figure 6-2 illustrates the elimination of intercompany transactions between Company P and
Company S for the consolidated balance sheet, as follows:
58
(4)
Intercompany receivable and payable from the downstream sale are eliminated.
(5)
Intercompany profit remaining in inventory at year end from the downstream sale
is eliminated.
(6)
Company P’s investment in Company S is eliminated.
(7)
Company S’s common stock is eliminated.
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 6: Intercompany eliminations
(8)
Company S’s retained earnings balance is eliminated ($150,000) and the
intercompany profit on the downstream sale is eliminated ($30,000).
(9)
Company P recognizes its proportionate share (80%) of income from Company S.
(10)
Noncontrolling interest is recognized at its initial balance of $100,000 ($500,000 x
20%) plus its proportionate share of income from Company S ($30,000).
Under the economic unit concept, 100% of intercompany sales, receivables, payables,
purchases, cost of sales and unrealized intercompany profits and losses are eliminated.
Profits and losses on downstream transactions are eliminated completely against the
controlling interest.
No profit accrues to the stockholders of the selling entity under the economic unit concept
because both the controlling and noncontrolling interests are owners of a single economic
unit (albeit with different claims on the entity’s assets). After incorporating elimination
entries, transfers of inventory are to be accounted for on the same basis as internal transfers
between departments of a single entity at cost.
Example 2: Majority-owned subsidiary sells to parent (upstream transaction)
Assumptions:
Same as Example 1, except for the following:
1)
Rather than a downstream sale from P to S, during the year, S sells inventory to P,
which remains in P’s inventory at year-end. A summary of the result of the
transaction on S’s income statement is as follows:
Revenues
Cost of sales
Gross profit
$ 100,000
70,000
$ 30,000
Under the economic unit concept, the transfer of inventory between a subsidiary and its
parent is viewed as a transfer between departments or divisions/components of a single
entity. When a majority-owned subsidiary sells inventory to its parent, under ASC 810 the
unrealized profit may be proportionately eliminated against the parent’s interest and the
noncontrolling interest.
Financial reporting developments Noncontrolling interests in consolidated financial statements
59
Chapter 6: Intercompany eliminations
Figure 6-3: Consolidating work paper to arrive at consolidated income statement, for year
ended 31 December 20X6 (all amounts in dollars)
Adjustments
Company P
Company S
Debit
Revenues
Cost of revenues
Gross profit
Selling and administrative
Net income
500,000
200,000
300,000
100,000
200,000
270,000
100,000
170,000
20,000
150,000
(11)
Net income attributable to
noncontrolling interest
—
—
(13)
Net income attributable to
controlling interest
200,000
150,000
Credit
100,000
(12)
70,000
24,000
Consolidated
670,000
230,000
440,000
120,000
320,000
24,000
296,000
Figure 6-3 illustrates the elimination of intercompany transactions between Company P and
Company S for the consolidated income statement, as follows:
(13)
Net income of Company S is attributed to the noncontrolling interest, including its
proportionate share of the elimination of the intercompany transaction (($150,000 —
$30,000) x 20%).
For explanations of items (11) and (12), see similar items in Figure 6-1.
Figure 6-4: Consolidating work paper to arrive at consolidated balance sheet, 31 December
20X6 (all amounts in dollars)
Adjustments
60
Company P
Company S
Debit
Cash
Intercompany receivable
Inventory
Building, net
Investment in Company S
Total assets
300,000
—
200,000
—
400,000
900,000
350,000
100,000
150,000
150,000
—
750,000
Current liabilities
Intercompany payable
Total liabilities
100,000
100,000
200,000
100,000
—
100,000
(14)
100,000
Capital stock
Retained earnings
Total parent shareholders’
equity
Noncontrolling interest
Total equity
200,000
500,000
500,000
150,000
(17)
(18)
500,000
150,000
700,000
—
700,000
650,000
—
650,000
Total liabilities and equity
900,000
750,000
Credit
(14)
(15)
100,000
30,000
(16)
400,000
Consolidated
650,000
—
320,000
150,000
—
1,120,000
200,000
—
200,000
(19)
96,000
(20)
124,000
200,000
596,000
796,000
124,000
920,000
1,120,000
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 6: Intercompany eliminations
Figure 6-4 illustrates the elimination of intercompany transactions between Company P and
Company S for the consolidated balance sheet, as follows:
(19)
Company P recognizes its proportionate share (80%) of income from Company S,
including its share of the intercompany profit elimination (($150,000 — $30,000) x
80%).
(20)
Noncontrolling interest is recognized at its initial balance of $100,000 plus its
proportionate share of income from Company S ($24,000, see explanation in income
statement).
For explanations of items (14) — (18), see similar items in Figure 6-2.
The net income attributable to the controlling interest in Example 2 exceeds the net income
attributable to the controlling interest in Example 1 by $6,000 because a portion of the
elimination of the unrealized income, which is reflected in the subsidiary with the
noncontrolling interest, has been allocated to the noncontrolling interest ($30,000 x 20% =
$6,000). Net income of the consolidated entity is the same in both examples because of the
requirement to fully eliminate the intercompany income or loss.
As described in Example 1, under the economic entity concept, 100% of intercompany sales,
receivables, payables, purchases, cost of sales and unrealized intercompany profits and
losses are eliminated. Profits and losses are eliminated in proportion to the interests in the
selling entity.
No profit accrues to the stockholders of the selling entity under the economic entity concept
because both the controlling and noncontrolling interests are owners of a single economic
entity (albeit with different claims on the entity’s net assets). After incorporating elimination
entries, transfers of inventory are to be accounted for on the same basis as internal transfers
between departments of a single entity at cost.
Example 3: Parent makes an intercompany loan to a majority-owned subsidiary and the
interest is expensed
Assumptions:
Same as Example 1, except for the following:
1) During the year, P makes an intercompany loan to S for $1,000,000 with an annual
interest rate of 10%.
2) S expenses the current year interest on the intercompany loan and remits cash to P for
the annual interest incurred on the intercompany loan.
3) The loan is the only transaction between P and S during 20X6 (that is, the intercompany
sales described in Example 1 did not occur).
Financial reporting developments Noncontrolling interests in consolidated financial statements
61
Chapter 6: Intercompany eliminations
Figure 6-5: Consolidating work paper to arrive at consolidated income statement, for year
ended 31 December 20X6 (all amounts in dollars)
Adjustments
Company P
500,000
200,000
300,000
100,000
100,000
—
300,000
Revenues
Cost of revenues
Gross profit
Selling and administrative
Interest income
Interest expense
Net income
Net income attributable to
noncontrolling interest
Net income attributable to
controlling interest
Company S
270,000
100,000
170,000
20,000
—
100,000
50,000
—
—
300,000
50,000
Debit
(21)
Credit
100,000
(21)
(22)
100,000
10,000
Consolidated
770,000
300,000
470,000
120,000
—
—
350,000
10,000
340,000
Figure 6-5 illustrates the elimination of intercompany transactions between Company P and
Company S for the consolidated income statement, as follows:
(21)
Intercompany interest income and expense are eliminated.
(22)
Net income of Company S is attributed to the noncontrolling interest.
Figure 6-6: Consolidating work paper to arrive at consolidated balance sheet, 31 December
20X6 (all amounts in dollars)
Adjustments
Company P
Company S
Cash
Inventory
Buildings and equipment, net
Intercompany loan
Investment in Company S
Total assets
300,000
200,000
—
1,000,000
400,000
1,900,000
1,350,000
150,000
150,000
—
—
1,650,000
Current liabilities
Intercompany loan
Total liabilities
1,100,000
—
1,100,000
100,000
1,000,000
1,100,000
(23)
200,000
600,000
500,000
50,000
(25)
(26)
800,000
—
800,000
550,000
—
550,000
1,900,000
1,650,000
Capital stock
Retained earnings
Total parent shareholders’
equity
Noncontrolling interest
Total equity
Total liabilities and equity
62
Debit
Credit
(23)
(24)
1,000,000
400,000
Consolidated
1,650,000
350,000
150,000
—
—
2,150,000
1,200,000
—
1,200,000
1,000,000
500,000
50,000 (27)
40,000
(28)
110,000
200,000
640,000
840,000
110,000
950,000
2,150,000
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 6: Intercompany eliminations
Figure 6-6 illustrates the elimination of intercompany transactions between Company P and
Company S for the consolidated balance sheet, as follows:
(23)
Intercompany loan is eliminated.
(27)
Company P recognizes its proportionate share (80%) of income from Company S
($50,000 x 80%).
(28)
Noncontrolling interest is recognized at its initial balance of $100,000 plus its
proportionate share of income from Company S ($10,000).
For explanations of items (24) — (26), see similar items in Figure 6-2.
Prior to taking into consideration the noncontrolling interest in S, the elimination of the
intercompany interest income and expense has no effect on the combined net income of P
and S. However, as S has absorbed an expense of $100,000, P receives the benefit of the
interest to the extent of the noncontrolling interest. This benefit is realized immediately as S
recorded the full amount of the interest as a current period expense.
Example 4: Parent makes an intercompany loan to a majority-owned subsidiary and the
interest is capitalized
Assumptions:
Same as Example 1, except for the following:
1) During the year, P makes an intercompany loan to S with a principal of $1,000,000 with
an annual interest rate of 10%. The proceeds of the loan are used to construct a building.
2) S capitalizes the current year interest on the intercompany loan as part of the cost of the
building and remits cash to P for the annual interest incurred on the intercompany loan.
3) The loan is the only transaction between P and S during 20X6 (that is, the intercompany
sales described in Example 1 did not occur).
Financial reporting developments Noncontrolling interests in consolidated financial statements
63
Chapter 6: Intercompany eliminations
Figure 6-7: Consolidating work paper to arrive at consolidated income statement, for year
ended 31 December 20X6 (all amounts in dollars)
Adjustments
Company P
Revenues
Cost of revenues
Gross profit
Selling and administrative
Interest income
Interest expense
Net income
Net income attributable to
noncontrolling interest
Net income attributable to
controlling interest
Company S
500,000
200,000
300,000
100,000
100,000
—
300,000
270,000
100,000
170,000
20,000
— (29)
—
150,000
—
— (30)
300,000
Debit
Credit
Consolidated
770,000
300,000
470,000
120,000
—
—
350,000
100,000
30,000
30,000
150,000
320,000
Figure 6-7 illustrates the elimination of intercompany transactions between Company P and
Company S for the consolidated income statement, as follows:
(29)
Interest income on the intercompany loan recognized by Company P is eliminated.
(30)
Net income of Company S is attributed to the noncontrolling interest ($150,000 x 20%).
Figure 6-8: Consolidating work paper to arrive at consolidated balance sheet, 31 December
20X6 (all amounts in dollars)
Adjustments
Company P
Company S
Cash
Inventory
Buildings and equipment, net
Intercompany loan
Investment in Company S
Total assets
300,000
200,000
—
1,000,000
400,000
1,900,000
350,000
150,000
1,250,000
—
—
1,750,000
Current liabilities
Intercompany loan
Total liabilities
1,100,000
—
1,100,000
100,000
1,000,000
1,100,000
(32)
200,000
600,000
500,000
150,000
(34)
(35)
800,000
—
800,000
650,000
—
650,000
1,900,000
1,750,000
Capital stock
Retained earnings
Total parent shareholders’
equity
Noncontrolling interest
Total equity
Total liabilities and equity
64
Debit
Credit
(31)
(32)
(33)
100,000
1,000,000
400,000
Consolidated
650,000
350,000
1,150,000
—
—
2,150,000
1,200,000
—
1,200,000
1,000,000
500,000
250,000 (36)
120,000
(37)
130,000
200,000
620,000
820,000
130,000
950,000
2,150,000
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 6: Intercompany eliminations
Figure 6-8 illustrates the elimination of intercompany transactions between Company P and
Company S for the consolidated balance sheet, as follows:
(31)
Capitalized interest from outstanding intercompany loan is eliminated.
(32)
The intercompany loan is eliminated.
(35)
The retained earnings of Company S are eliminated ($150,000), and the interest
income recognized by Company P on the intercompany loan is eliminated
($100,000).
(36)
Company P recognizes its proportionate share (80%) of income from Company S
($150,000 x 80%).
(37)
Noncontrolling interest is recognized at its initial balance of $100,000 plus its
proportionate share of income from Company S ($30,000).
For explanations of items (33) and (34), see similar items in Figure 6-2.
As S has capitalized the interest expense paid by the subsidiary as part of the cost of its
building, the interest has not been expensed in the income statement of S. As such, P does
not receive any benefit of the interest income until the expense is recognized which will occur
as the building is depreciated by S.
Year 2
In Year 2, Assume S depreciates the newly constructed building over 10 years which results
in annual depreciation expense of $125,000 ($1,250,000 / 10 years = $125,000) that is
included in S’s cost of revenues. Further, for simplicity, assume (1) P had no other
transactions during Year 2 and (2) S does not incur any additional interest expense in Year 2.
Figure 6-9: Consolidating work paper to arrive at consolidated income statement, for year
ended 31 December 20X7 (all amounts in dollars)
Adjustments
Company P
Revenues
Cost of revenues
Gross profit
Net income
Net income attributable to
noncontrolling interest
Net income attributable to
controlling interest
Company S
—
—
—
—
400,000
250,000
150,000
150,000
—
—
—
150,000
Debit
Credit
(38)
(39)
30,000
10,000
Consolidated
400,000
240,000
160,000
160,000
30,000
130,000
Financial reporting developments Noncontrolling interests in consolidated financial statements
65
Chapter 6: Intercompany eliminations
Figure 6-9 illustrates the elimination of intercompany transactions between Company P and
Company S for the Year 2 consolidated income statement, as follows:
(38)
The excess depreciation from the capitalized interest on the intercompany loan is
eliminated.
(39)
Net income of Company S is attributed to the noncontrolling interest ($150,000 x 20%).
Figure 6-10: Consolidating work paper to arrive at consolidated balance sheet,
31 December 20X7 (all amounts in dollars)
Company P
Company S
Cash
Inventory
Buildings and equipment, net
Intercompany loan
Investment in Company S
Total assets
300,000
200,000
—
1,000,000
400,000
1,900,000
625,000
150,000
1,125,000
—
—
1,900,000
Current liabilities
Intercompany loan
Total Liabilities
1,100,000
—
1,100,000
100,000
1,000,000
1,100,000
Capital stock
Retained earnings
200,000
600,000
500,000
300,000
Total parent shareholders’
equity
Noncontrolling interest
Total equity
800,000
—
800,000
800,000
—
800,000
1,900,000
1,900,000
Total liabilities and equity
Debit
Adjustments
Credit
(40)
90,000
(41) 1,000,000
(42)
400,000
925,000
350,000
1,035,000
—
—
2,310,000
1,200,000
—
1,200,000
(41) 1,000,000
(43)
(44)
(45)
Consolidated
500,000
300,000 (46)
100,000 (47)
120,000
130,000
(48)
160,000
200,000
750,000
950,000
160,000
1,110,000
2,310,000
Figure 6-10 illustrates the elimination of intercompany transactions between Company P and
Company S for the consolidated balance sheet in Year 2, as follows:
66
(40)
Capitalized interest expense from the prior year ($100,000) less current year
depreciation ($10,000) is eliminated.
(45)
Retained earnings is eliminated for the prior year recognition of interest income
($100,000) by Company P.
(46)
Prior year income attributable to the controlling interest ($120,000) is added to
retained earnings.
(47)
Company P recognizes its attributable share of income from Company S (($150,000
+ $10,000) x 80%).
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 6: Intercompany eliminations
(48)
Noncontrolling interest is recognized at its initial balance of $100,000 plus its
proportionate share of income from Company S of $30,000 for both Years 1 and 2.
For explanations of items (41) — (44), see similar items in Figure 6-2 and Figure 6-8.
Example 5: Parent charges subsidiary a management fee
Assumptions:
Same as Example 1, except for the following:
1) During the year, Company P charges Company S a management fee of $1,500 for its
accounting and finance services.
2) The management fee is the result of a contractual arrangement negotiated between
P and S.
3) The management fee is the only transaction between P and S during 20X6 (that is, the
intercompany sales described in Example 1 did not occur).
Figure 6-11: Consolidating work paper to arrive at consolidated income statement, for year
ended 31 December 20X6 (all amounts in dollars)
Adjustments
Revenues
Cost of revenues
Gross profit
Selling and administrative
Intercompany expense
Intercompany revenue
Net income
Net income attributable to
noncontrolling interest
Net income attributable to
controlling interest
Company P
Company S
500,000
200,000
300,000
100,000
—
1,500
201,500
270,000
100,000
170,000
20,000
1,500
—
148,500
—
—
201,500
148,500
Debit
Credit
(49)
(49)
1,500
(50)
29,700
1,500
Consolidated
770,000
300,000
470,000
120,000
—
—
350,000
29,700
320,300
Figure 6-11 illustrates the elimination of intercompany transactions between Company P and
Company S for the consolidated income statement, as follows:
(49)
Intercompany revenue and expense resulting from the management fee of $1,500
paid to Company P are eliminated.
(50)
Net income of Company S is attributed to the noncontrolling interest, including its
attributable share of the management fee (($150,000 — $1,500) x 20%).
Financial reporting developments Noncontrolling interests in consolidated financial statements
67
Chapter 6: Intercompany eliminations
Figure 6-12: Consolidating work paper to arrive at consolidated balance sheet, 31
December 20X6 (all amounts in dollars)
Adjustments
Company P
Company S
200,000
200,000
—
400,000
800,000
450,000
150,000
150,000
—
750,000
Current liabilities
Total liabilities
98,500
98,500
101,500
101,500
Capital stock
Retained earnings
200,000
501,500
500,000 (52)
148,500 (53)
(54)
Total parent shareholders’
equity
Noncontrolling interest
Total equity
701,500
—
701,500
648,500
—
648,500
Total liabilities and equity
800,000
750,000
Cash
Inventory
Buildings and equipment, net
Investment in Company S
Total assets
Debit
Credit
(51)
400,000
Consolidated
650,000
350,000
150,000
—
1,150,000
200,000
200,000
500,000
148,500 (55)
1,500
120,300
(56)
129,700
200,000
620,300
820,300
129,700
950,000
1,150,000
Figure 6-12 illustrates the elimination of intercompany transactions between Company P and
Company S for the consolidated balance sheet, as follows:
(54)
The income recognized by Company P from the management fee is eliminated from
retained earnings.
(55)
Company P recognizes its attributable share of income from Company S, including the
realization of the portion of the management fee attributable to the noncontrolling
interest ($150,000 x 80% + $1,500 x 20%).
(56)
Noncontrolling interest is recognized at its initial balance of $100,000 plus its
proportionate share of income from Company S ($29,700).
For explanations of items (51) — (53), see similar items in Figure 6-2.
68
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 6: Intercompany eliminations
FAQs
6-1
Intercompany losses
Question:
What is the effect on the elimination of intercompany transactions that result in a loss?
Response:
The elimination of intercompany losses should be consistent with the elimination of
intercompany profits. Accordingly, if losses have been recognized on inventory acquired in
an intercompany transaction, those losses must be eliminated to state the inventory in the
consolidated balance sheet at its cost to the consolidated entity. However, careful
consideration should be given to the lower-of-cost-or-market test of inventory for the
purchasing company. The market value of the inventory must not be less than the selling
company’s cost. If the fair value is exceeded by the consolidated inventory cost, the loss that
would have otherwise been eliminated in consolidation should be adjusted downward. That is,
intercompany losses should not be eliminated if they represent a lower-of-cost-or-market
adjustment in value of assets.
Financial reporting developments Noncontrolling interests in consolidated financial statements
69
Chapter 7: Deconsolidation
Chapter 7: Deconsolidation
Excerpt from Accounting Standards Codification
Consolidation — Overall
Derecognition
Deconsolidation of a Subsidiary or Derecognition of a Group of Assets
810-10-40-3A
The deconsolidation and derecognition guidance in this Section applies to the following:
a.
A subsidiary that is a nonprofit activity or a business, except for either of the following:
1. A sale of in substance real estate (for guidance on a sale of in substance real estate,
see Subtopic 360-20 or Subtopic 976-605)
2. A conveyance of oil and gas mineral rights (for guidance on conveyances of oil and
gas mineral rights and related transactions, see Subtopic 932-360).
b.
A group of assets that is a nonprofit activity or a business, except for either of the
following:
1. A sale of in substance real estate (for guidance on a sale of in substance real estate,
see Subtopic 360-20 or Subtopic 976-605)
2. A conveyance of oil and gas mineral rights (for guidance on conveyances of oil and
gas mineral rights and related transactions, see Subtopic 932-360).
c.
A subsidiary that is not a nonprofit activity or a business if the substance of the
transaction is not addressed directly by guidance in other Topics that include, but are
not limited to, all of the following:
1. Topic 605 on revenue recognition
2. Topic 845 on exchanges of nonmonetary assets
3. Topic 860 on transferring and servicing financial assets
4. Topic 932 on conveyances of mineral rights and related transactions
5. Topic 360 or 976 on sales of in substance real estate.
810-10-40-4
A parent shall deconsolidate a subsidiary or derecognize a group of assets specified in the
preceding paragraph as of the date the parent ceases to have a controlling financial interest
in that subsidiary or group of assets. See paragraph 810-10-55-4A for related
implementation guidance.
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Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 7: Deconsolidation
Implementation Guidance and Illustrations
Deconsolidation of a Subsidiary
810-10-55-4A
All of the following are circumstances that result in deconsolidation of a subsidiary under
paragraph 810-10-40-4:
a.
A parent sells all or part of its ownership interest in its subsidiary, and as a result, the
parent no longer has a controlling financial interest in the subsidiary.
b.
The expiration of a contractual agreement that gave control of the subsidiary to the
parent.
c.
The subsidiary issues shares, which reduces the parent’s ownership interest in the
subsidiary so that the parent no longer has a controlling financial interest in the
subsidiary.
d.
The subsidiary becomes subject to the control of a government, court, administrator, or
regulator.
Derecognition
Deconsolidation of a Subsidiary
810-10-40-5
If a parent deconsolidates a subsidiary or derecognizes a group of assets through a
nonreciprocal transfer to owners, such as a spinoff, the accounting guidance in Subtopic
845-10 applies. Otherwise, a parent shall account for the deconsolidation of a subsidiary or
derecognition of a group of assets specified in paragraph 810-10-40-3A by recognizing a
gain or loss in net income attributable to the parent, measured as the difference between:
a.
The aggregate of all of the following:
1. The fair value of any consideration received
2. The fair value of any retained noncontrolling investment in the former subsidiary or
group of assets at the date the subsidiary is deconsolidated or the group of assets is
derecognized
3. The carrying amount of any noncontrolling interest in the former subsidiary
(including any accumulated other comprehensive income attributable to the
noncontrolling interest) at the date the subsidiary is deconsolidated.
b.
The carrying amount of the former subsidiary’s assets and liabilities or the carrying
amount of the group of assets.
Financial reporting developments Noncontrolling interests in consolidated financial statements
71
Chapter 7: Deconsolidation
810-10-40-6
A parent may cease to have a controlling financial interest in a subsidiary through two or
more arrangements (transactions). Circumstances sometimes indicate that the multiple
arrangements should be accounted for as a single transaction. In determining whether
to account for the arrangements as a single transaction, a parent shall consider all of
the terms and conditions of the arrangements and their economic effects. Any of the
following may indicate that the parent should account for the multiple arrangements as a
single transaction:
a.
They are entered into at the same time or in contemplation of one another.
b.
They form a single transaction designed to achieve an overall commercial effect.
c.
The occurrence of one arrangement is dependent on the occurrence of at least one
other arrangement.
d.
One arrangement considered on its own is not economically justified, but they are
economically justified when considered together. An example is when one disposal is
priced below market, compensated for by a subsequent disposal priced above market.
Interpretive guidance
A parent company deconsolidates a subsidiary or derecognizes a group of assets when
that parent company no longer controls the subsidiary or group of assets specified in
ASC 810-10-40-3A. When control is lost, the parent-subsidiary relationship no longer exists
and the parent derecognizes the assets and liabilities of the qualifying subsidiary or group
of assets. The FASB concluded that the loss of control and the related deconsolidation of
a subsidiary or derecognition of a group of assets specified in ASC 810-10-40-3A is a
significant economic event that changes the nature of the investment held in the subsidiary
or group of assets.
Based on this consideration, a gain or loss is recognized upon the deconsolidation of a
subsidiary or derecognition of a group of assets. In a significant change from prior practice,
any remaining ownership interest in the subsidiary or entity acquiring the group of assets
specified in ASC 810-10-40-3A (which would then be classified as a noncontrolling interest) is
measured at its fair value. That ownership interest is subsequently accounted for in
accordance with ASC 320, ASC 323 or other applicable GAAP. (If the retained noncontrolling
interest is accounted for pursuant to the equity method, the investor would be required to
perform a purchase price allocation pursuant to ASC 323. While the underlying assets and
liabilities are not recognized by the investor, the investor must perform the purchase price
allocation to properly account for any differences between its bases in the underlying assets
and liabilities of the investee and the bases recognized by the investee).
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Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 7: Deconsolidation
Loss of control
Several events may lead to a loss of control of a subsidiary specified in ASC 810-10-40-3A,
and not all events are the direct result of actions taken by the parent company. The simplest
example of the loss of control of a subsidiary is when a parent company decides to sell all of
its interest in a subsidiary. Actions of the subsidiary also can cause a loss of control. When a
subsidiary issues shares to third parties, the parent’s interest is diluted, potentially to the
point where the parent no longer controls the subsidiary. A loss of control can also result if
a government, court, administrator or regulator takes legal control of a subsidiary or a
group of assets specified in ASC 810-10-40-3A . We believe that the above guidance applies
to the loss of control and deconsolidation of any subsidiary or group of assets specified in
ASC 810-10-40-3A, regardless of the manner in which control was lost.
Nonreciprocal transfers to owners
Statement 160’s provisions do not apply to spinoffs or other nonreciprocal transactions with
owners. A spinoff occurs when a parent company transfers the subsidiary’s stock or a group
of assets that it owns to its own shareholders. Spinoffs should be accounted for in accordance
with ASC 845.
Gain/loss recognition
When a subsidiary or a group of assets specified in ASC 810-10-40-3A is deconsolidated or
derecognized, the carrying values of the previously consolidated subsidiary’s assets and
liabilities or a group of assets are removed from the consolidated balance sheet. Generally, a
gain or loss is recognized as the difference between:
1) The sum of the fair value of any consideration received, the fair value of any retained
noncontrolling investment in the former subsidiary or group of assets at the date the
subsidiary is deconsolidated or the group of assets is derecognized, and the carrying
amount of any noncontrolling interest in the former subsidiary (including any
accumulated other comprehensive income attributable to the noncontrolling interest) at
the date the subsidiary is deconsolidated, and
2) The carrying amount of the former subsidiary’s assets and liabilities or the carrying
amount of the group of assets.
Financial reporting developments Noncontrolling interests in consolidated financial statements
73
Chapter 7: Deconsolidation
Importantly, because the loss of control is deemed to be a significant economic event, when
an entity loses control of a subsidiary or a group of assets specified in ASC 810-10-40-3A but
retains a noncontrolling interest in the former subsidiary or entity that acquired the group of
assets, that retained interest is measured at fair value and is included in the calculation of the
gain/loss on deconsolidation of the subsidiary or the derecognition of a group of assets.
In recognizing a gain, Topic 5-E (as amended by SAB 112 as of June 2009) states that an
entity should identify all of the elements of the divesture arrangement and allocate the
consideration exchanged to each of those elements. For example, if the divesture
arrangement included elements of guarantees and promissory notes, the entity would
recognize the guarantees at fair value in accordance with ASC 460 and recognize the
promissory notes in accordance with ASC 835, ASC 470 and ASC 310.
As indicated in ASC 810-10-40-5, gain/loss calculation is impacted by the carrying amount
of any noncontrolling interest in the former subsidiary specified in ASC 810-10-40-3A.
Since adjustments to the carrying amount of a redeemable noncontrolling interest from
the application of ASC 480-10-S99-3A do not initially enter into the determination of net
income, the SEC staff believes that the carrying amount of the noncontrolling interest that is
referred to in ASC 810-10-40-5 similarly should not include any adjustments made to that
noncontrolling interest from the application of ASC 480-10-S99-3A(14) through S993(A)(16). Rather, previously recorded adjustments to the carrying amount of a
noncontrolling interest from the application of ASC 480-10-S99-3A(14) through S993(A)(16) should be eliminated in the same manner in which they were initially recorded (that
is, by recording a credit to equity of the parent).
To illustrate the gain/loss recognition concept, assume Company A has a 90% controlling
interest in Company B, a public retailer of athletic wear. On 31 December 20X6, the carrying
value of Company B’s net assets is $100 million, and the carrying amount attributable to the
noncontrolling interest in Company B (including the noncontrolling interest’s share of
accumulated other comprehensive income) is $10 million. On 1 January 20X7, Company A
sells 80% of Company B to a third party for cash proceeds of $120 million. As a result of the
sale, Company A loses control of Company B but retains a 10% noncontrolling interest in
Company B. The fair value of the retained interest on that date is $12 million. 21
21
74
This number is assumed (and cannot be determined based on the acquisition of the 80% interest
because that price includes a control premium).
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 7: Deconsolidation
The gain on sale of the 80% interest in Company B is calculated as follows (in millions):
$
Cash proceeds
Fair value of retained interest
Carrying value of the nonredeemable noncontrolling interest
Less:
Carrying value of Company B’s net assets
Gain
$
120
12
10
142
100
42
The journal entry to record Company B’s deconsolidation follows:
Cash
Investment in Company B
Noncontrolling interest
Net assets of Company B
Gain on sale
$
120
12
10
$
100
42
Company A subsequently accounts for its retained interest as an available-for-sale or
trading security pursuant to ASC 320 (with a cost basis of $12). If Company A’s
noncontrolling interest were to be accounted for pursuant to the equity method, Company A
would be required to perform a purchase price allocation pursuant to ASC 323. While the
underlying assets and liabilities are not recognized by the investor, the investor must perform
the purchase price allocation to properly account for any differences between its bases in the
underlying assets and liabilities of the investee and the bases recognized by the investee.
Accumulated other comprehensive income
As described in Chapter 5, accumulated other comprehensive income (AOCI) of a subsidiary
or group of assets specified in ASC 810-10-40-3A is attributed to both the controlling and
noncontrolling interests. As part of deconsolidation, the parent should derecognize any
portion of AOCI attributable to the noncontrolling interest as the underlying asset or liability
of the subsidiary or group of assets specified in ASC 810-10-40-3A that generated the AOCI
is no longer recorded on the books of the parent. While ASC 810 does not specify the
treatment of the AOCI attributable to the parent, we believe that the reversal of any AOCI
attributable to the parent should be included in the gain or loss recognized on
deconsolidation. The basis for this conclusion is that the assets or liabilities of the former
subsidiary or group of assets specified in ASC 810-10-40-3A that generated the amounts in
AOCI have been derecognized upon the loss of control.
Financial reporting developments Noncontrolling interests in consolidated financial statements
75
Chapter 7: Deconsolidation
Accordingly, any related AOCI also must be derecognized. The fair value of any retained
interest is its new carrying amount and, if that investment is accounted for under the equity
method, the fair value is in turn allocated to the underlying assets and liabilities of the
investee in a purchase price allocation (Note: While the underlying assets and liabilities are
not recognized by the investor, the investor must perform the purchase price allocation to
properly account for any differences between its bases in the underlying assets and liabilities
of the investee and the bases recognized by the investee). Because the investment (as well as
the underlying assets and liabilities of an equity method investment) is recognized with a new
basis, no AOCI is recognized upon deconsolidation. However, subsequent accounting for the
investment (for example, pursuant to ASC 320) or the underlying assets and liabilities
(pursuant to ASC 323) may generate AOCI after deconsolidation.
Deconsolidation through multiple arrangements
As previously described and with certain exceptions, changes in ownership interests while
maintaining control are to be accounted for as equity transactions, while a loss of control
event gives rise to the recognition of a gain or loss. The FASB recognized that, because of
these accounting differences, transactions might be structured to achieve a specific
accounting result. Consequently, ASC 810-10-40-6 provides the following considerations
when determining whether multiple arrangements or transactions should be considered a
single transaction:
1) They are entered into at the same time or in contemplation of one another.
2) They form a single transaction designed to achieve an overall commercial effect.
3) The occurrence of one arrangement is dependent on the occurrence of at least one other
arrangement.
4) One arrangement considered on its own is not economically justified but they are
economically justified when considered together. An example is when one disposal is
priced below market, compensated for by a subsequent disposal priced above market.
We believe that assessing whether multiple transactions should be considered as a single
transaction is a matter of facts and circumstances requiring the use of professional judgment.
Such a determination should be clearly documented contemporaneously.
Comprehensive example
The comprehensive example in this chapter which describes the accounting for a loss of
control continues from the comprehensive example presented in Chapter 5. For reference,
the consolidating work paper to arrive at the balance sheet as of 31 December 20X3 is
presented in Figure 7-1.
76
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 7: Deconsolidation
Figure 7-1: Consolidating work paper to arrive at consolidated balance sheet, 31 December
20X3 (all amounts in dollars)
Adjustments
Company P
Company S
80,700
—
—
—
42,890
—
123,590
3,000
17,500
30,000
42,000
—
—
92,500
Accounts payable
Debt
Total liabilities
—
27,000
27,000
75,000
—
75,000
Common stock
Additional paid-in capital
Accumulated other
comprehensive income
Retained earnings
Total parent shareholders’
equity
Noncontrolling interest
Total equity
1,500
34,500
30,000
—
3,350
57,240
5,500
(18,000)
96,590
—
96,590
17,500
—
17,500
Total liabilities and equity
123,590
92,500
Cash
Marketable securities
Inventory
Buildings and equipment, net
Investment in subsidiary
Goodwill
Total assets
Debit
Credit
17,850
42,890
4,286
Consolidated
83,700
17,500
30,000
59,850
—
4,286
195,336
75,000
27,000
102,000
30,000
28,753
6,550
9,693
1,500
15,440
1,000
18,000
3,300
57,240
15,856
77,480
15,856
93,336
195,336
Deconsolidation by selling entire interest
Assume on 1 January 20X4, Company P sells its remaining 60% interest in Company S for
$60,000 of cash and repays its outstanding debt.
Company P no longer has a controlling financial interest in the subsidiary through the sale of
its entire interest in Company S. Once control is lost, a parent deconsolidates the subsidiary
or derecognizes a group of assets specified in ASC 810-10-40-3A, and a gain or loss should
be recognized based on the difference between:
(1) The aggregate of the fair value of consideration received, the fair value of any retained
noncontrolling interest in the former subsidiary or group of assets at the date the
subsidiary is deconsolidated or the group of assets is derecognized, and the carrying
amount of any noncontrolling interest in the former subsidiary (including any
accumulated other comprehensive income attributable to the noncontrolling interest) at
the date the subsidiary is deconsolidated, and
(2) The carrying amount of the former subsidiary’s assets and liabilities or the carrying
amount of the group of assets.
Financial reporting developments Noncontrolling interests in consolidated financial statements
77
Chapter 7: Deconsolidation
Company P’s gain is calculated as follows:
$ 60,000
15,856
3,300
79,156
(39,636)
$ 39,520
Cash proceeds
Carrying value of the noncontrolling interest
AOCI attributable to Company P
Carrying amount of Company S’s net assets
Gain
On a consolidated basis, Company S’s assets, liabilities and noncontrolling interest should be
derecognized, and the cash proceeds and gain should be recognized through the following
journal entry:
$ 60,000
Cash
15,856
Noncontrolling interest
75,000
Accounts payable
3,300
AOCI
$ 3,000
Cash
17,500
Marketable securities
30,000
Inventory
59,850
Buildings and equipment, net
4,286
Goodwill
39,520
Gain on sale of investment
Alternatively, on a parent-only basis, the investment in Company S and accumulated other
comprehensive income are derecognized, and the gain and cash proceeds are recognized. In
addition, the adjustments to additional paid-in capital made while Company S was
consolidated would be recognized on the parent’s books and are derived from the example in
Chapter 5.
Cash
Additional paid-in capital
AOCI
Investment in Company S
Gain on sale of investment
$ 60,000
19,060
3,350
$ 42,890
39,520
Figure 7-2 presents Company P’s balance sheet at 1 January 20X4, after the sale of
Company S.
78
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 7: Deconsolidation
Figure 7-2: Company P balance sheet, 1 January 20X4, entire interest sold (all amounts in
dollars)
Company P
Cash
(1)
Total assets
113,700
Common stock
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings
(3)
(2)
(4)
Total parent shareholders’ equity
Noncontrolling interest
Total equity
(1)
113,700
1,500
15,440
—
96,760
113,700
—
113,700
Cash is rolled forward as follows:
Beginning balance
Proceeds from sale
Repayment of debt
Ending balance
$ 80,700
60,000
(27,000)
$ 113,700
(2)
The investment, debt and accumulated other comprehensive income are zero after
the sale of Company S and the repayment of Company P’s debt.
(3)
Additional paid-in capital was reduced to reflect the adjustments made during
consolidation relating to the purchase/sale of interests in Company S while control
was maintained (accounted for as equity transactions).
(4)
The rollforward of the retained earnings balance is as follows:
Beginning balance
Gain from sale of investment
Ending balance
$ 57,240
39,520
$ 96,760
Financial reporting developments Noncontrolling interests in consolidated financial statements
79
Chapter 7: Deconsolidation
Deconsolidation by selling a partial interest
Assume that instead of selling its entire interest in Company S on 1 January 20X4, Company
P sells a 30% interest in Company S (leaving Company P with a remaining 30% interest) for
$24,000 cash. The fair value of the remaining 30% interest is also $24,000. Company P uses
the proceeds to extinguish its outstanding debt.
In this example, Company P’s investment in Company S is recognized at fair value and is
reflected as part of the sales proceeds.
Company P’s gain is calculated as follows:
$ 24,000
24,000
15,856
3,300
67,156
(39,636)
$ 27,520
Proceeds
Fair value of retained noncontrolling interest
Carrying value of noncontrolling interest
AOCI attributable to Company P
Carrying amount of Company S’s net assets
Gain
On a consolidated basis, Company S’s assets, liabilities and noncontrolling interest should be
derecognized, and the cash proceeds, gain and retained interest in Company S should be
recognized through the following journal entry:
Cash
Noncontrolling interest
Accounts payable
AOCI
Investment in Company S
Cash
Accounts receivable
Inventory
Buildings and equipment, net
Goodwill
Gain on sale of investment
$ 24,000
15,856
75,000
3,300
24,000
$
3,000
17,500
30,000
59,850
4,286
27,520
Alternatively, on a parent-only basis, the investment in Company S is reduced to $24,000,
the accumulated other comprehensive income balance is derecognized, and the gain and
cash proceeds are recognized. In addition, the adjustments to paid-in capital made while
Company S was consolidated would be recognized on the parent’s books and are derived
from the example in Chapter 5.
80
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 7: Deconsolidation
Cash
Additional paid-in capital
AOCI
Investment in Company S
Gain on sale of investment
$ 24,000
19,060
3,350
$ 18,890
27,520
Figure 7-3 presents Company P’s balance sheet at 1 January 20X4, reflecting the sale of
Company S.
Figure 7-3 Company P balance sheet, 1 January 20X4, partial interest sold
(all amounts in dollars)
Company P
Cash
Investment in Company S
(5)
(6)
Total assets
101,700
Common stock
Paid-in capital
Accumulated other comprehensive income
Retained earnings
Total parent shareholders’ equity
Noncontrolling interest
(5)
77,700
24,000
(8)
(7)
(9)
1,500
15,440
—
84,760
101,700
—
Total equity
101,700
Total liabilities and equity
101,700
The rollforward of cash is as follows:
Beginning balance
Proceeds from sale
Repayment of debt
Ending balance
$ 80,700
24,000
(27,000)
$ 77,700
(6)
The investment in Company S account was adjusted to equal the fair value of the
retained interest in Company S at the date of deconsolidation ($24,000).
(7)
The debt and accumulated other comprehensive income are zero after the sale of
Company S and the repayment of Company P’s debt.
Financial reporting developments Noncontrolling interests in consolidated financial statements
81
Chapter 7: Deconsolidation
(8)
Additional paid-in capital was reduced to reflect the adjustments made during
consolidation relating to the purchase/sale of interests in Company S while control
was maintained (accounted for as equity transactions).
(9)
The rollforward of retained earnings is as follows:
Beginning balance
Gain from sale of investment
Ending balance
FAQs
7-1
$ 57,240
27,520
$ 84,760
Accounting for retained ownership interest subsequent to
deconsolidation
Question:
If an entity continues to hold an ownership interest in a previously consolidated subsidiary or
entity acquiring the group of assets specified in ASC 810-10-40-3A after deconsolidation or
derecognition, how does the entity account for that ownership interest subsequent to initial
recognition at fair value?
Response:
After the subsidiary or group of assets specified in ASC 810-10-40-3A is deconsolidated or
derecognized, any retained ownership interest is initially recognized at fair value as described
above. After initial recognition, the retained ownership interest is subject to other existing
accounting literature, as appropriate.
If the investor exercises significant influence over the investee, as defined in ASC 323-10-15-6
through 15-8, then the investment should be accounted for under the equity method. The fair
value of the investment at the date of deconsolidation should be allocated to the individual
assets and liabilities acquired under ASC 323’s purchase price allocation (Note: While the
underlying assets and liabilities are not recognized by the investor, the investor must perform
the purchase price allocation to properly account for any differences between its bases in the
underlying assets and liabilities of the investee and the bases recognized by the investee).
If it is determined that the investor is not able to exercise significant influence over the
investee, the investment is accounted for as an equity security, generally in accordance with
ASC 320 or at cost, as appropriate.
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Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 7: Deconsolidation
7-2
Accounting for retained creditor interest in deconsolidation
Question:
How should an entity account for a loan to a subsidiary specified in ASC 810-10-40-3A upon
deconsolidation?
Response:
The FASB concluded that the loss of control and the related deconsolidation of a subsidiary or
derecognition of a group of assets specified in ASC 810-10-40-3A is a significant economic
event that changes the nature of the investment held in the subsidiary or group of assets.
Upon deconsolidation, an entity is required to record any remaining noncontrolling
investment in the subsidiary or a group of assets specified in ASC 810-10-40-3A at fair value.
Consistent with this approach, we believe that a loan to the former subsidiary should also be
measured at fair value at the deconsolidation date. Thus, any difference between the carrying
value of the loan to the subsidiary and the fair value should be included in the gain/loss
calculation upon deconsolidation of the subsidiary.
7-3
Effect of Statement 160 on Topic 5-E
(Deleted March 2010)
7-4
Contingent consideration
(Updated March 2010)
Question:
In certain instances, a transaction resulting in the loss of a controlling interest in a subsidiary
involves contingent consideration. For example, an acquirer of a controlling interest may
promise to deliver cash, additional equity interests or other assets to former holders of an
acquired controlling interest after the acquisition date if certain specified events occur or
conditions are met in the future. These contingencies frequently are based on earnings or
instrument price changes (e.g., changes in market price of stock) over specified periods after
the date of acquisition; however, they might be based on other factors (e.g., components of
earnings, product development milestones, cash flow levels or the successful completion of
third-party contract negotiations). Buyers and sellers commonly use these arrangements
when they cannot agree on the purchase price of the controlling interest.
How should contingent consideration be evaluated in determining the gain or loss to be
recognized in conjunction with the deconsolidation of a subsidiary? Also, how should
contingent consideration be evaluated for recognition and measurement subsequent to
deconsolidation of a subsidiary?
Financial reporting developments Noncontrolling interests in consolidated financial statements
83
Chapter 7: Deconsolidation
Response:
If contingent consideration meets the definition of a derivative, it should be accounted for
pursuant to ASC 815, Derivatives and Hedging. In circumstances in which contingent
consideration does not meet the definition of a derivative, the ASC does not provide detailed
guidance regarding the recognition and measurement of contingent consideration. We
believe the basis for recognition and measurement of contingent consideration receivable by
the seller is an accounting policy choice that should be applied on a consistent basis.
Initial measurement at fair value
ASC 810-10-40-5 requires that the measurement of any gain or loss on deconsolidation of a
subsidiary include the fair value of “any consideration received.” We believe the reference to
“any consideration received” in ASC 810-10-40-5 could be interpreted to include contingent
consideration. Thus, we believe that the seller may initially recognize an asset from the buyer
equal to the fair value of any contingent consideration received upon deconsolidation. We
note that this view is consistent with ASC 805, as amended by Statement 141(R)’s
requirement that an acquirer recognize contingent consideration obligations as of the
acquisition date as part of consideration transferred in exchange for an acquired business. If
a seller elects to initially recognize an asset equal to the fair value of the contingent
consideration, we believe the seller also must elect an accounting policy to subsequently
measure the contingent consideration under either of the following approaches:
(a) Subsequent remeasurement at fair value by electing the fair value option provided in
ASC 825-10-25
(b) Recognize increases in the carrying value of the asset using the gain contingency
guidance in ASC 450-30 and recognize impairments based on the guidance in
ASC 450-20-25-2.
Initial measurement as gain contingency
We also believe it is reasonable to conclude that contingent consideration has not been
received, and, therefore, initial recognition at fair value is not required. In that circumstance,
we believe initial and subsequent recognition and measurement based on the gain
contingency model pursuant to ASC 450-20 is acceptable.
84
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 7: Deconsolidation
7-5
Discontinued operations
(Added March 2010)
Question:
Assume an entity had presented the results of its discontinued operations net of earnings
attributable to the noncontrolling interest prior to the adoption of Statement 160. Once
Statement 160 is adopted, should the entity adjust its presentation for all periods presented?
For example, assume a calendar-year entity classified a majority-owned subsidiary as a
discontinued operation in 2008. In its 2008 financial statements, the entity presented the
results of its discontinued operations at $800, which was net of $200 that was attributable to
the noncontrolling interest. Consequently, the entity’s consolidated net income on its 2008
financial statements was net of earnings attributable to the noncontrolling interest. Once
Statement 160 is adopted, should the entity adjust its consolidated net income to include the
earnings attributable to the noncontrolling interest for all periods presented? In other words,
should the entity report $1,000 as the result of its discontinued operation and then
separately record $200 as net income attributable to the noncontrolling interest below the
consolidated net income balance?
Response:
Yes. ASC 810-10-65-1 provides that “… The presentation and disclosure requirements shall be
applied retrospectively for all periods presented.” Furthermore, ASC 810-10-65-1(b)(2)
states, “Consolidated net income shall be adjusted to include the net income attributable to
the noncontrolling interest.” Therefore, if an entity had presented the results of its
discontinued operations net of earnings attributable to the noncontrolling interest prior to the
adoption of Statement 160, the entity should adjust its consolidated net income for all periods
presented upon adoption to include the net income attributable to the noncontrolling interest.
For the above example, the entity should report $1,000 as the result of its discontinued
operation which is included in the computation of consolidated net income. The entity should
then separately present $200 as net income attributable to the noncontrolling interest below
the consolidated net income balance.
Financial reporting developments Noncontrolling interests in consolidated financial statements
85
Chapter 7: Deconsolidation
7-6
Gain/loss classification and presentation on deconsolidation of
a subsidiary
(Added March 2010)
Question:
What is the appropriate classification and presentation of a gain/loss on the income
statement upon deconsolidation of a subsidiary?
Response:
ASC 810-10-40-5 states that a parent should account for the deconsolidation of a subsidiary
by recognizing a gain or loss in net income attributable to the parent. However, it does not
provide further guidance on the classification of the gain/loss on deconsolidation in the
income statement.
We believe a gain/loss on deconsolidation of a subsidiary would in many cases be most
appropriately presented as part of non-operating income because, in most cases, the
deconsolidation will not be a part of an entity’s primary revenue- and expense-generating
activities. Before the issuance of Statement 160, the SEC staff’s view articulated in SAB
Topic 5-H was that “gains (or losses) arising from issuances by a subsidiary of its own stock, if
recorded in income by the parent, should be presented as a separate line item in the
consolidated income statement without regard to materiality and clearly be designated as
non-operating income.” While SAB Topic 5-H was removed after the issuance of Statement
160 and addressed a circumstance in which a gain or loss may have been recognized while
control was maintained (which is no longer acceptable after the adoption of Statement 160),
and the decrease in the parent’s ownership percentage was due to the direct issuance of
unissued shares by a consolidated subsidiary, we believe its guidance on the classification of
resulting gains or losses is consistent with the notion that these transactions are generally
not an entity’s primary revenue- and expense-generating activity.
We believe an entity should clearly disclose the income statement classification of significant
gains or losses resulting from deconsolidation of a subsidiary. Entities should carefully
evaluate the nature of the deconsolidation to appropriately determine the proper
classification and presentation of related gain/loss and should consistently apply that
evaluation. For example, it would not be appropriate to classify gains in operating income and
losses in non-operating income for similar transactions.
Note that if a gain or loss is recognized from a deconsolidation that relates to a discontinued
operation, that gain or loss should be included and presented as part of the income (loss)
from discontinued operations.
86
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 8: Combined financial
statements
Chapter 8: Combined financial statements
Excerpt from Accounting Standards Codification
Consolidation — Overall
Implementation Guidance and Illustrations
Combined Financial Statements
810-10-55-1B
To justify the preparation of consolidated financial statements, the controlling financial
interest shall rest directly or indirectly in one of the entities included in the consolidation.
There are circumstances, however, in which combined financial statements (as
distinguished from consolidated financial statements) of commonly controlled entities are
likely to be more meaningful than their separate financial statements. For example,
combined financial statements would be useful if one individual owns a controlling financial
interest in several entities that are related in their operations. Combined financial
statements might also be used to present the financial position and results of operations of
entities under common management.
Other Presentation Matters
810-10-45-10
If combined financial statements are prepared for a group of related entities, such as a group
of commonly controlled entities, intra-entity transactions and profits or losses shall be
eliminated, and noncontrolling interests, foreign operations, different fiscal periods, or
income taxes shall be treated in the same manner as in consolidated financial statements.
Interpretive guidance
Control is the primary basis for presentation of consolidated financial statements. There are,
however, certain circumstances when the presentation of financial statements of individual
entities is not as meaningful as the presentation of combined financial statements for related
entities. Combined financial statements may be needed to present related entities under
common control or related entities with common management. Combined financial statements
are often presented for filings in accordance with various statutory or regulatory requirements.
The fundamental difference between combined and consolidated financial statements is that
there is no controlling financial interest present between or among the combined entities.
The procedures applied to combining entities are the same as those applied when preparing
consolidated financial statements. All transactions between the entities in the combined
presentation and the related profit and loss must be eliminated. In addition, the accounting in
combined financial statements for noncontrolling interests, 22 foreign operations, different
fiscal periods and income taxes is the same as that used in consolidated financial statements.
22
We believe the reference to noncontrolling interests in ASC 810-10-45-10 relates to the
noncontrolling interests in each of the combining entities’ subsidiaries as reflected in the individual
combining entities’ financial statements.
Financial reporting developments Noncontrolling interests in consolidated financial statements
87
Chapter 8: Combined financial statements
FAQs
8-1
Combined financial statements concept
Question:
Assume that Company S has 2,000 common shares and 1,000 preferred shares outstanding.
The preferred shareholders have the same rights as the common shareholders, except the
right to vote. Of the 2,000 common shares outstanding, 1,000 shares are owned by
Company P, and 1,000 shares are owned by an individual who also owns all of the outstanding
common shares of Company P. The preferred shares of Company S are owned by an outside
party. Should Company P consolidate Company S for financial reporting purposes?
Response:
ASC 810 states that to “justify the preparation of consolidated statements, the controlling
financial interest should rest directly or indirectly in one of the companies included in the
consolidation.” In this situation, Company P does not control Company S directly or indirectly,
and, therefore, consolidation is not appropriate. Combined financial statements could be
presented as long as the circumstances are such that combined financial statements of
Company S and Company P are more meaningful than separate financial statements.
8-2
Common management
Question:
What is the definition of common management as used in the requirement for combined
financial statements?
Response:
We believe that the determination of whether entities are under common management is a
determination to be made based on individual facts and circumstances. To justify combined
presentation, we would expect evidence to exist that indicates that the subsidiaries are not
operated as if they were autonomous. This evidence could include:
►
A common CEO
►
Common facilities and costs
►
Commitments, guarantees or contingent liabilities among the entities
►
Commonly financed activities
This list is not all-inclusive, and there could be other factors relevant to the determination of
whether or not subsidiaries are under common management.
88
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 8: Combined financial statements
8-3
Presentation of noncontrolling interests in combined financial
statements
(Added March 2010)
Question:
In the preparation of combined financial statements, should interests held by parties outside
of the control group in each of the respective combining entities be reclassified as
noncontrolling interests?
Response:
No. We believe interests held by parties outside of the control group in each of the
respective combining entities would not constitute noncontrolling interests in the combined
financial statements. The fundamental difference between combined and consolidated
financial statements is that there is no direct controlling financial interest present between
or among the combined entities. Therefore, we believe equity holdings in each of the
combining entities regardless of who holds such equity (that is, whether they are held by
parties outside of the control group or not) should be reflected as ownership interests in the
combined financial statements.
We believe the reference to noncontrolling interests in ASC 810-10 -45-10 relates to the
noncontrolling interests in each of the combining entities’ subsidiaries as reflected in the
individual combining entities’ financial statements.
Example
Assume Company P consolidates less-than-wholly-owned Subsidiaries A, B and C. If
combined financial statements were to be prepared for Subsidiaries A and B, interests
held by parties other than Company P in Subsidiaries A and B would not constitute
noncontrolling interests in the combined financial statements. Only the noncontrolling
interests that would be reflected in Subsidiaries A and B’s individual financial statements,
if any, would be reflected as such in the combined financial statements. For example, if
Subsidiary A has an 80%-owned subsidiary (Subsidiary A1), the 20% noncontrolling interest
held by a third party in Subsidiary A1 would be reflected as noncontrolling interest in the
combined financial statements.
Financial reporting developments Noncontrolling interests in consolidated financial statements
89
Chapter 9: Parent-company financial
statements
Chapter 9: Parent-company financial statements
Excerpt from Accounting Standards Codification
Consolidation — Overall
Other Presentation Matters
Parent Entity Financial Statements
810-10-45-11
In some cases parent-entity financial statements may be needed, in addition to consolidated
financial statements, to indicate adequately the position of bondholders and other creditors
or preferred shareholders of the parent. Consolidating financial statements, in which one
column is used for the parent and other columns for particular subsidiaries or groups of
subsidiaries, often are an effective means of presenting the pertinent information. However,
consolidated financial statements are the general-purpose financial statements of a parent
having one or more subsidiaries; thus, parent-entity financial statements are not a valid
substitute for consolidated financial statements.
Interpretive guidance
ASC 810 permits the presentation of parent-company financial statements but clarifies that
such financial statements may not be issued as the primary financial statements of the
reporting entity and are not a valid substitute for consolidated financial statements.
Certain SEC registrants must present condensed parent-company financial information
pursuant to Regulation S-X, Rule 12-04, “Condensed Financial Information of Registrant,” in
Schedule I of their Form 10-K. This schedule is required whenever restricted net assets of
consolidated subsidiaries exceed 25% of consolidated net assets at the end of the fiscal year.
Registrants are required to present information required by Rule 12-04 as a separate
schedule or in the notes to the financial statements.
The equity method generally is used to account for investments in subsidiaries in parentcompany financial statements. (Investments accounted for at cost or under the equity
method in consolidated financial statements should follow that same basis in the parentcompany financial statements. Moreover, their carrying amounts should generally be the
same between the parent-company financial statements and the consolidated financial
statements.) When parent-company financial statements are presented as other than the
primary financial statements of the reporting entity, the notes to the financial statements
should include a statement to that effect. In addition, the accounting policy note should
describe the policy used. The following is an example of such a note.
Note A — Accounting Policies
Basis of Presentation. In the parent-company financial statements, the Company’s
investment in subsidiaries is stated at cost plus equity in undistributed earnings of
subsidiaries since the date of acquisition. The Company’s share of net income of its
unconsolidated subsidiaries is included in consolidated income using the equity method.
Parent-company financial statements should be read in conjunction with the Company’s
consolidated financial statements.
90
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 9: Parent-company financial statements
Not-for-profit entities23 such as health care providers occasionally prepare parent-company
financial statements. Accordingly, Statement 160 does not change the reporting practices of
these entities. Consolidation with respect to not-for-profit entities is addressed in ASC 958.
FAQs
9-1
Parent-company financial statements and the equity method
Question:
What effect does Statement 160 have on the presentation of parent-company financial
statements?
Response:
Parent-company financial statements are presented in various situations and are required
under certain circumstances by SEC Regulation S-X. Parent-company financial statements
present the parent company’s investment in consolidated subsidiaries under the equity
method in accordance with ASC 323. In practice, this presentation is often made by showing
the net assets of the consolidated subsidiaries, inclusive of any noncontrolling interest, as the
amount of the equity investment because the equity method was often viewed as a “one-line
consolidation.”
After the adoption of Statement 160, additional investment activity in consolidated
subsidiaries that does not result in loss of control is accounted for as an equity transaction.
That is, the step-acquisition method is no longer applicable for the presentation of
consolidated financial statements after Statement 160’s adoption.
Importantly, because ASC 323 retains step-acquisition accounting, basis differences may
exist between the application of the equity method and the parent’s proportion of the
subsidiary’s equity. While it is not clear in the literature, we believe that parents that have
determined the value of their equity method investments in parent-company financial
statements at an amount equal to the value of its net controlling interest should continue this
practice after adopting Statement 160. Otherwise, the equity and earnings of the parent
company in the parent-company financial statements may differ from the corresponding
amounts in the consolidated financial statements.
23
ASC 810-10-20 defines a not-for-profit entity as “(a)n entity that possesses the following
characteristics, in varying degrees, that distinguish it from a business entity: (a) contributions of
significant amounts of resources from resource providers who do not expect commensurate or
proportionate pecuniary return, (b) operating purposes other than to provide goods or services at a
profit, (c) absence of ownership interests like those of business entities. Entities that clearly fall
outside this definition include the following: (a) all investor-owned entities and (b) entities that provide
dividends, lower costs or other economic benefits directly and proportionately to their owners,
members or participants, such as mutual insurance entities, credit unions, farm and rural electric
cooperatives and employee benefit plans. “
Financial reporting developments Noncontrolling interests in consolidated financial statements
91
Chapter 10: Disclosures
Chapter 10: Disclosures
Excerpt from Accounting Standards Codification
Consolidation — Overall
Disclosure
Consolidation Policy
810-10-50-1
Consolidated financial statements shall disclose the consolidation policy that is being
followed. In most cases this can be made apparent by the headings or other information in
the financial statements, but in other cases a footnote is required.
Parent with a Less-than-Wholly-Owned Subsidiary
810-10-50-1A
A parent with one or more less-than-wholly-owned subsidiaries shall disclose all of the
following for each reporting period:
a.
Separately, on the face of the consolidated financial statements, both of the following:
1. The amounts of consolidated net income and consolidated comprehensive income
2. The related amounts of each attributable to the parent and the noncontrolling
interest.
b.
Either in the notes or on the face of the consolidated income statement, amounts
attributable to the parent for any of the following, if reported in the consolidated
financial statements:
1. Income from continuing operations
2. Discontinued operations
3. Extraordinary items.
c.
Either in the consolidated statement of changes in equity, if presented, or in the notes
to consolidated financial statements, a reconciliation at the beginning and the end of
the period of the carrying amount of total equity (net assets), equity (net assets)
attributable to the parent, and equity (net assets) attributable to the noncontrolling
interest. That reconciliation shall separately disclose all of the following:
1. Net income
2. Transactions with owners acting in their capacity as owners, showing separately
contributions from and distributions to owners
3. Each component of other comprehensive income.
92
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 10: Disclosures
d.
In notes to the consolidated financial statements, a separate schedule that shows the
effects of any changes in a parent’s ownership interest in a subsidiary on the equity
attributable to the parent.
Example 2 (see paragraph 810-10-55-4G) illustrates the application of the guidance in this
paragraph.
Deconsolidation of a Subsidiary
810-10-50-1B
In the period that either a subsidiary is deconsolidated or a group of assets is derecognized in
accordance with paragraph 810-10-40-3A, the parent shall disclose all of the following:
a.
The amount of any gain or loss recognized in accordance with paragraph 810-10-40-5
b.
The portion of any gain or loss related to the remeasurement of any retained
investment in the former subsidiary or group of assets to its fair value
c.
The caption in the income statement in which the gain or loss is recognized unless
separately presented on the face of the income statement
d.
A description of the valuation technique(s) used to measure the fair value of any direct
or indirect retained investment in the former subsidiary or group of assets
e.
Information that enables users of the parent’s financial statements to assess the inputs
used to develop the fair value in item (d)
f.
The nature of continuing involvement with the subsidiary or entity acquiring the group
of assets after it has been deconsolidated or derecognized
g.
Whether the transaction that resulted in the deconsolidation or derecognition was with
a related party
h.
Whether the former subsidiary or entity acquiring a group of assets will be a related
party after deconsolidation.
Interpretive guidance
Presentation
Prior to the issuance of Statement 160, net income attributable to the noncontrolling interest
was typically included as a deduction in arriving at consolidated net income. The FASB
concluded that this presentation was not consistent with the overall objective of presenting
the results of the economic entity. Statement 160, therefore, required that net income of the
consolidated entity include the revenues, expenses, gains and losses from both the parent
and the noncontrolling interest. This requirement will cause a change in net income
presented for all consolidated entities with less-than-wholly-owned subsidiaries.
Financial reporting developments Noncontrolling interests in consolidated financial statements
93
Chapter 10: Disclosures
While the FASB concluded that it is appropriate to include all amounts related to the
consolidated entity in the determination of consolidated net income, it also concluded that
consolidated financial statements are more relevant if the user is able to distinguish between
amounts attributable to both the owners of the parent company and the noncontrolling
interest. For the user to make that determination, the amounts of net income allocable to
both the parent’s owners and the noncontrolling interest should be presented on the face of
the financial statements. In addition, the amounts attributable to the parent for income from
continuing operations, discontinued operations and extraordinary items should be disclosed
either on the face of the income statement or in the notes to the consolidated financial
statements. Earnings per share will continue to be calculated based on net income allocable
to the parent’s owners.
Statement 160 also required a reconciliation of the carrying amount of total equity from the
beginning of the period to the end of the period. This reconciliation includes total equity,
equity allocable to the parent and equity allocable to the noncontrolling interest. For SEC
registrants, this requirement is satisfied with the inclusion of equity allocable to the
noncontrolling interest in the statement of changes in equity (see also FAQ 10-4). Entities not
registered with the SEC are not required to include a statement of changes in equity;
therefore, the disclosure requirements related to this reconciliation can be satisfied by the
inclusion of a statement of changes in equity or with the inclusion of the required information
in the notes to the consolidated financial statements.
The reconciliation of the carrying amount of total equity includes a reconciliation of
accumulated other comprehensive income in total, other comprehensive income allocable to
the parent and other comprehensive income allocable to the noncontrolling interest. In
addition to the reconciliation of the carrying amount of equity, the effect of any changes in
the parent’s ownership interest in a subsidiary on equity allocable to the parent should be
disclosed in the notes to the consolidated financial statements.
Disclosure
Statement 160 also required disclosure of any gain/loss recognized on the deconsolidation
of a subsidiary or derecognition of a group of assets. The amount of any gain/loss and the
classification of the gain/loss in the income statement (see FAQ 7-6) are disclosed in the
notes to the consolidated financial statements along with the amount of the gain/loss
related to the remeasurement of any retained interest in the deconsolidated subsidiary or
group of assets.
94
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 10: Disclosures
ASU 2010-02 further expanded the disclosure requirements about fair value measurements
relating to retained investments in a deconsolidated subsidiary or group of assets. The
ASU requires disclosure of a description of the valuation technique(s) used to measure the
fair value of any direct or indirect retained investment in the former subsidiary or group of
assets (e.g., a discounted cash flow approach). Disclosure is also required of the information
that enables users of the parent’s financial statements to assess the inputs used to develop
the fair value measurements used to measure the retained interest in the former subsidiary
or group of assets.
For example, for a discounted cash flow approach, disclosures may include information on
discount rates and the assumed capital structure, capitalization rates for terminal cash flows,
assumptions about expected growth in revenues, expected profit margins, expected capital
expenditures, expected depreciation and amortization, expected working capital
requirements and other assumptions that may have a significant effect on the valuation, such
as discounts for lack of marketability or lack of control, as applicable. For a market approach,
disclosures may include information on the valuation multiples used in the analysis, a
description of the population of the guideline companies or similar transactions from which
the multiples were derived, the timeliness of the market data used, the method by which the
multiples were selected (e.g., use of the median, use of an average, the extent to which the
financial performance of the subject company was compared to the relative performance of
the guideline companies), discounts for lack of marketability and lack of control, as applicable.
An entity also is required to disclose the valuation techniques used to measure an equity
interest in an acquiree held by the entity immediately before the acquisition date in a
business combination achieved in stages.
Furthermore, disclosure must be provided about the nature of continuing involvement with
the subsidiary or entity acquiring the group of assets after it has been deconsolidated and
whether a related party relationship exists. This disclosure is intended to highlight
circumstances in which a gain or loss is recognized, but the continuing relationship may affect
the ultimate amounts realized from the sale and resulting relationship.
Financial reporting developments Noncontrolling interests in consolidated financial statements
95
Chapter 10: Disclosures
Disclosure example
To illustrate Statement 160’s presentation and quantitative disclosure requirements,
following are the financial statements and selected notes for Company P, which are based on
the comprehensive example illustrated in chapters 5 and 7. Note that the qualitative
disclosure requirements of ASC 810-10-50-1B(d)-(h) are not included in the following
comprehensive example.
Company P
Consolidated Statement of Financial Position
(all amounts in dollars)
December 31,
20X3
20X2
83,700
17,500
30,000
59,850
4,286
39,600
15,500
30,000
68,400
4,286
Total assets
195,336
157,786
Liabilities:
Accounts payable
Debt
75,000
27,000
75,000
27,000
102,000
102,000
Equity:
Company P shareholders’ equity:
Common stock
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings
1,500
15,440
3,300
57,240
1,500
5,747
3,150
40,770
Total Company P shareholders’ equity
Noncontrolling interest
77,480
15,856
51,167
4,619
Assets:
Cash
Marketable securities
Inventory
Buildings and equipment, net
Goodwill
Total liabilities
Total equity
Total liabilities and equity
93,336
55,786
195,336
157,786
In the consolidated statement of financial position, Company P separately identifies Company
P’s shareholders’ equity and the noncontrolling interest. In addition, the noncontrolling
interest is recognized as a component of equity, not as a mezzanine item.
96
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 10: Disclosures
The income attributable to the noncontrolling interest is not deducted to arrive at
consolidated net income. Instead, consolidated net income is attributed to the controlling and
noncontrolling interests on the face of the income statement.
Company P
Consolidated Statement of Income
(all amounts in dollars, except share amounts)
Year Ended December 31,
20X3
20X2
20X1
Revenues
Cost of revenues
96,000
42,000
96,000
42,000
96,000
46,500
Gross profit
Selling and administrative
54,000
26,550
54,000
26,550
49,500
26,550
Consolidated net income
Less: Net income attributable to noncontrolling interest
27,450
10,980
27,450
2,745
22,950
6,885
Net income attributable to Company P
16,470
24,705
16,065
Earnings per share — basic and diluted:
Net income attributable to Company P common shareholders
10.98
16.47
10.71
Weighted-average shares outstanding
1,500
1,500
1,500
Company P
Consolidated Statement of Comprehensive income
(all amounts of dollars)
Year Ended December 31,
20X3
20X2
Net income
27,450
27,450
Other comprehensive income, net of tax:
Unrealized holding gain (loss) on available-for-sale securities,
net of tax
2,000
(1,500)
Total other comprehensive income, net of tax
2,000
(1,500)
25,950
20X1
22,950
5,000
5,000
Comprehensive income
Less: Comprehensive income attributable to noncontrolling
interest
29,450
27,950
11,780
2,595
8,385
Comprehensive income attributable to Company P
17,670
23,355
19,565
The consolidated statement of shareholders’ equity includes an additional column
representing the changes in noncontrolling interest.
Financial reporting developments Noncontrolling interests in consolidated financial statements
97
Chapter 10: Disclosures
98
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 10: Disclosures
Financial reporting developments Noncontrolling interests in consolidated financial statements
99
Chapter 10: Disclosures
100
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 10: Disclosures
Company P also discloses the effects of changes in Company P’s ownership interest in its
subsidiary on Company P’s equity. This schedule would be presented as a note in the
company’s financial statements, as follows.
Company P
Notes to Consolidated Financial Statements
Years Ended December 31, 20X3, 20X2, 20X1
(all amounts in dollars)
Net Income Attributable to Company P and Transfers (to) from the Noncontrolling Interest
Net income attributable to Company P
Transfers (to) from the noncontrolling interest
Increase in Company P’s paid-in capital for sale of 9,000 Company S
common shares
Decrease in Company P’s paid-in capital for purchase of 6,000 Company S
common shares
Net transfers (to) from noncontrolling interest
Change from net income attributable to Company P and transfers (to) from
noncontrolling interest
FAQs
10-1
20X3
20X2
20X1
16,470
24,705
16,065
9,693
—
—
—
(28,753)
—
9,693
(28,753)
—
26,163
(4,048)
16,065
Statement of cash flow presentation of cash flows relating to
noncontrolling interests
(Added April 2009)
Question:
How does the adoption of Statement 160 affect statement of cash flow presentation for
transactions with noncontrolling interest holders (for example, dividends and purchases/sales
of noncontrolling interests while control is maintained)?
Response:
While ASC 230 does not provide specific guidance on the statement of cash flow presentation
for transactions with noncontrolling interest holders, ASC 230-10-45-14 and 45-15 state
that “proceeds from issuing equity instruments” and “payment of dividends and other
distributions to owners, including outlays to reacquire the enterprise’s equity instruments”
are financing activities. We believe that transactions with noncontrolling interest holders,
while control is maintained, should generally be reported as financing activities in the
statement of cash flows. This view is consistent with Statement 160’s conclusion that all
residual economic interest holders have an equity interest in the consolidated entity, even if
the residual interest is relative to a subsidiary, and the requirement to present noncontrolling
interests in the consolidated statement of financial position as a separate component of
equity. Further, this view is consistent the requirement for changes in a parent’s ownership
interest in a subsidiary meeting the scope of ASC 810-10-45-21A while the parent retains a
controlling financial interest to be accounted for as equity transactions.
Financial reporting developments Noncontrolling interests in consolidated financial statements
101
Chapter 10: Disclosures
10-2
Statement of cash flow presentation — starting point for
indirect method
(Added March 2010)
Question:
Subsequent to the adoption of Statement 160, what is the starting point for the statement of
cash flow presentation when applying the indirect method? Net income or income
attributable to the parent?
Response:
Statement 160 did not amend ASC 230. Therefore, entities should continue to start with net
income in their statement of cash flow presentation when applying the indirect method. It is
important to note that Statement 160’s transition provisions require retrospective
application of its presentation and disclosure requirements. As a result, net income amounts
presented for prior periods may change. The statement of cash flows for prior years should
begin with net income inclusive of an adjustment to net income related to Statement 160’s
retrospective presentation requirements.
To illustrate, assume Company A’s net income for the years ended 31 December 2009 and
2008 were $1,200 and $1,000, respectively. Also assume net income attributable to the
noncontrolling interests were $240 and $200 for the years ended 31 December 2009 and
2008, respectively (that is, net income attributable to Company A was $960 and $800 for
years ended 31 December 2009 and 2008, respectively). In preparing the statement of cash
flows under the indirect method, Company A would begin with net income inclusive of
income attributable to the noncontrolling interests. Therefore, Company A would begin with
net income amounts of $1,200 and $1,000 for the years ended 31 December 2009 and
2008, respectively.
10-3
Equity reconciliation — interim reporting period requirements
(Added March 2010)
Question:
ASC 810-10-50-1A(c) requires that a reporting entity provide a reconciliation of the carrying
amount of total equity (net assets), equity (net assets) attributable to the parent and equity
(net assets) attributable to the noncontrolling interest from the beginning to the end of the
period. Must this reconciliation be presented for interim reporting periods? If so, should a
reporting entity provide the equity reconciliation on a year-to-date basis or on a quarter-todate basis or both?
Response:
ASC 810-10-50-1A(c) ’s introduction indicates that “a parent with one or more less-thanwholly-owned subsidiaries shall disclose … for each reporting period (emphasis added)…”
Thus, this provision requires that the equity reconciliation be provided for interim reporting
periods. Some reporting entities may choose to present this reconciliation in the form of a
102
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 10: Disclosures
consolidated statement of changes in equity. If a consolidated statement of changes in equity
is not presented on an interim basis, a reporting entity must provide the disclosure in the
notes to the consolidated financial statements.
We believe that the reconciliation of the carrying amount of total equity (net assets), equity
(net assets) attributable to the parent and equity (net assets) attributable to the
noncontrolling interest should be presented on a year-to-date basis. This approach is
consistent with the presentation requirements for the statement of cash flows, which
provides information about the activity of balance sheet amounts (that is, cash and cash
equivalents) between periods.
However, it would also be acceptable for a registrant to provide a reconciliation of the
relevant equity amounts on a quarter-to-date basis in addition to the year-to-date disclosures.
10-4
Equity reconciliation and redeemable noncontrolling interests —
applicable to public companies
(Added March 2010)
Question:
Can registrants with redeemable noncontrolling interests (that is, classified in the mezzanine)
include these items in any caption titled “total equity” in the reconciliation of equity required
pursuant to ASC 480-10-S99-3A?
Response:
No. Registrants with redeemable noncontrolling interests (that is, mezzanine equity) should
not include these items in any caption titled “total equity” in the reconciliation of equity
required under ASC 810-10-50-1A(c).
ASC 810-10-50-1A(c) and the SEC’s technical amendments to Regulation S-X Rule 3-04
require registrants to reconcile total equity at the beginning of the period to total equity at
the end of the period. ASC 480-10-S99-3A specifies that securities that are redeemable at
the option of the holder or outside the control of the issuer are to be presented outside
permanent equity (in the “mezzanine” section of the balance sheet) and prohibits such
instruments from being included in any caption titled “total equity.”
The SEC staff has identified two potentially acceptable means of presentation to satisfy the
requirements of both ASC 480-10-S99-3A and ASC 810-10-50-1A(c):
►
Provide a column for redeemable noncontrolling interests in the equity reconciliation but
exclude the related amounts from any “total” column.
For example, this column could be presented separately to the right of the column
reconciling total equity. In that case, the reconciliation could include a row for net income
or a supplemental table identifying the allocation of net income among controlling
interests, noncontrolling interests and redeemable noncontrolling interests.
Financial reporting developments Noncontrolling interests in consolidated financial statements
103
Chapter 10: Disclosures
►
Exclude redeemable noncontrolling interests from the equity reconciliation but provide a
supplemental table, reconciling the beginning and ending balance of redeemable
noncontrolling interests.
The supplemental table may be in either the notes to the financial statements or the
“statement of changes in equity and noncontrolling interests.”
In this case, the caption “net income” in the equity reconciliation could note
parenthetically the amount related to redeemable noncontrolling interests.
The SEC staff acknowledged that other means of presenting the reconciliation of total equity
may be acceptable and that the appropriateness of such presentation would be evaluated
based on the specific facts and circumstances.
10-5
“Total parent shareholders’ equity” subtotal on the balance sheet
(Added March 2010)
Question:
Is an entity required to present a “total parent shareholders’ equity” subtotal on the face of
the balance sheet?
Response:
Yes. Although ASC 810 does not explicitly require that a subtotal for “total parent
shareholders’ equity” be presented on the face of the balance sheet, we believe that,
based upon the example in ASC 810-10-55-41, such presentation should be made.
ASC 810-10-50-1A(c) requires that an entity disclose a reconciliation at the beginning and
the end of the period of the carrying amount of equity attributable to the parent, either in
the consolidated statement of changes in equity, if presented, or in the notes to the
consolidated financial statements. The illustrative example in ASC 810-10-55-4I presents
a subtotal for the total parent shareholders’ equity. Therefore, we believe that an entity
should present a subtotal for the total parent shareholders’ equity on the face of the balance
sheet separately from noncontrolling interest and before arriving at total equity.
104
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 11: Effective date and
transition
Chapter 11: Effective date and transition
Excerpt from Accounting Standards Codification
Consolidation — Overall
Transition and Open Effective Date Information
Transition Related to FASB Statement No. 160, Noncontrolling Interests in Consolidated
Financial Statements — an amendment of ARB No. 51, and No. 164, Not-for-Profit
Entities: Mergers and Acquisitions
810-10-65-1
The following represents the transition and effective date information related to FASB
Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements — an
amendment of ARB No. 51 , and No. 164, Not-for-Profit Entities: Mergers and Acquisitions:
a.
Except as noted in item (d), the pending content that links to this paragraph is effective
for fiscal years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. Earlier adoption is prohibited.
b.
The pending content that links to this paragraph shall be applied prospectively as of the
beginning of the fiscal year in that content is initially adopted, except for the
presentation and disclosure requirements. The presentation and disclosure
requirements shall be applied retrospectively for all periods presented, as follows:
1. The noncontrolling interest shall be reclassified to equity in accordance with
paragraph 810-10-45-16.
2. Consolidated net income shall be adjusted to include the net income attributed to
the noncontrolling interest.
3. Consolidated comprehensive income shall be adjusted to include the comprehensive
income attributed to the noncontrolling interest.
4. The disclosures in paragraphs 810-10-50-1A through 50-1B shall be provided.
c.
Paragraph 810-10-45-21 requires that the noncontrolling interest continue to be
attributed its share of losses even if that attribution results in a deficit noncontrolling
interest balance. If, in the year of adoption, an entity’s consolidated net income
attributable to the parent would have been significantly different had the prior
requirement in paragraph 810-10-45-7 been applied, the entity shall disclose pro forma
consolidated net income attributable to the parent and pro forma earnings per share as
if the previous prior requirement in paragraph 810-10-45-7 had been applied in the
year of adoption.
Financial reporting developments Noncontrolling interests in consolidated financial statements
105
Chapter 11: Effective date and transition
d.
Not-for-profit entities (NFPs) shall apply the pending text that links to this paragraph
prospectively in the first set of initial or annual financial statements for a reporting
period beginning on or after December 15, 2009.
e.
The pending content linked to this paragraph may amend or supersede either
nonpending content or other pending content with different or the same effective
dates. If a paragraph contains multiple pending content versions of that paragraph, it
may be necessary to refer to the transition paragraphs of all such pending content to
determine the paragraph that is applicable to a particular fact pattern.
Transition Related to Accounting Standards Update No. 2010-02, Consolidation
(Topic 810): Accounting and Reporting for Decreases in Ownership of a Subsidiary —
a Scope Clarification
810-10-65-3
The following represents the transition and effective date information related to Accounting
Standards Update No. 2010-02, Consolidation (Topic 810): Accounting and Reporting for
Decreases in Ownership of a Subsidiary — a Scope Clarification:
a.
The following applies to all entities except for not-for-profit entities:
1. An entity has not adopted the pending content that links to paragraph 810-10-651, the pending content that links to this paragraph shall be effective for fiscal years,
and interim periods within those years, beginning on or after December 15, 2008.
2. An entity has adopted the pending content that links to paragraph 810-10-65-1,
the pending content that links to this paragraph shall be effective for interim and
annual reporting periods ending on or after December 15, 2009.
3. An entity that is applying the transition guidance in (a)(2) shall:
b.
i.
Retrospectively apply the pending content that links to this paragraph to interim
and annual reporting periods beginning on or after December 15, 2008
ii.
Provide the disclosures in paragraphs 250-10-50-1 through 50-3 when
presenting the period that the entity adopts the pending content that links to
this paragraph.
The following applies to not-for-profit entities:
1. The pending content that links to this paragraph shall be effective for the first set of
initial or annual financial statements for a reporting period beginning on or after
December 15, 2009.
106
Financial reporting developments Noncontrolling interests in consolidated financial statements
Chapter 11: Effective date and transition
Interpretive guidance
Statement 160 (which is to be adopted concurrently with Statement 141(R)) is effective
for the first annual reporting period beginning on or after 15 December 2008 (that is,
1 January 2009, for calendar year-end companies). Early adoption is prohibited.
Statement 160 is required to be adopted prospectively with two significant exceptions
affecting presentation and disclosure:
1) Noncontrolling interests are to be reclassified to equity for all periods presented. (Prior to
adoption, noncontrolling interest was presented in the “mezzanine” separate from both
liabilities and equity.)
2) Net income is to be presented inclusive of amounts attributable to both the parent and
the noncontrolling interest for all periods. That is, retrospectively, the noncontrolling
interest’s share of a consolidated subsidiary’s income or loss should not be presented in
the income statement as “minority interest” expense or income, respectively. The
noncontrolling interest’s share of subsidiary income or losses should be reported as a part
of consolidated net income (loss) with disclosure of the attribution of consolidated net
income (loss) to the controlling and noncontrolling interests on the face of the
consolidated income statement.
Pursuant to ASU 2010-02, for all entities except for not-for-profit entities, if the entity has not
yet adopted Statement 160, Statement 160, as amended by ASU 2010-02, will be effective
for fiscal years, and interim periods within those years, beginning on or after 15 December
2008. If the entity has adopted Statement 160, the amendments in ASU 2010-02 will be
effective for interim and annual reporting periods ending on or after 15 December 2009.
When doing so, an entity should apply the guidance in ASU 2010-02 on a retrospective basis
back to the date that Statement 160 was first applied. Furthermore, an entity should
provide the disclosures in ASC 250-10-50-1 through 50-3 in the period the entity adopts
Statement 160, as amended by ASU 2010-02. For not-for-profit entities, Statement 160,
as amended by ASU 2010-02, will be effective for the first set of initial or annual financial
statements for a reporting period beginning on or after 15 December 2009.
Statement 160 prohibits the recasting of prior “excess losses” allocated to the controlling
interest (that is, losses incurred by a partially-owned subsidiary and allocated to the
controlling interest because such losses exceeded the noncontrolling interest’s accounting
basis in a parent’s consolidated financial statements). However, in the year of adoption,
companies are required to disclose the effect of the adoption on the current year earnings
attributable to the controlling shareholders for subsidiaries that have incurred excess losses if
the effect is significant.
That is, pro-forma disclosure is required of the controlling interest’s earnings that would have
been reported if Statement 160 had not been issued. (Statement 160 prohibits the
controlling interest from recouping losses it previously recognized that were otherwise
allocable to the noncontrolling interest.)
Financial reporting developments Noncontrolling interests in consolidated financial statements
107
Chapter 11: Effective date and transition
Example
To illustrate this concept, assume that Company P owns 80% of Company S. Prior to
adopting Statement 160, Company S incurred losses that had exceeded the noncontrolling
interest in Company S. These “excess losses” (assume $100) were absorbed by Company P.
In the year of adoption, assume that Company S has earnings of $100. While ASC 810
would permit Company P to be credited to the extent of losses previously absorbed, in
accordance with Statement 160, $80 (80% x $100) of the earnings would be attributable
to the controlling interest, and $20 (20% x $100) of the earnings would be attributable
to the noncontrolling interest. Company P would provide pro-forma disclosure of the
$20 of income it would have recognized had ASC 810’s provisions, prior to adoption of
Statement 160, continued to be applied.
108
Financial reporting developments Noncontrolling interests in consolidated financial statements
Appendix A: Comprehensive example
Appendix A: Comprehensive example
This appendix provides a comprehensive example of the concepts described in this booklet:
1) Control resulting from an increase in ownership interest
2) Changes in a parent’s ownership interest while the parent maintains control of the
subsidiary meeting the scope of ASC 810-10-45-21A
3) The elimination of intercompany transactions
4) Deconsolidation of subsidiary
Work paper consolidating entries are numbered sequentially. While there are different ways
to apply consolidation procedures, this comprehensive example illustrates consolidation
based on push-down accounting to the subsidiary which is a retailer of luxury handbags
qualifying as a business pursuant to ASC 805, as amended by Statement No. 141(R). The
other examples in this publication attributed the purchase price in consolidation.
Year 20X2
Assumptions:
1) As of 31 December 20X1, Company P (P) owns 40% of Company S (S), which is a retailer
of luxury handbags and a voting interest entity, with net assets of $650,000. The
carrying amount of Company P’s 40% investment in Company S is $260,000.
2) P purchases an additional 40% of the common stock of S on 1 January 20X2 for
$400,000, increasing its ownership interest to 80% (assume no control premium). The fair
value of S is $1,000,000, and the fair value of the identifiable net assets of S is $800,000.
3) During the year, S sells inventory to P (upstream transaction) which P holds at year end.
A summary of the effect of the transaction on S’s income statement is as follows:
Revenues
Cost of revenues
Gross profit
$ 100,000
70,000
$ 30,000
4) During the year, P sells inventory to S (downstream transaction) which S holds at year
end. A summary of the effect of the transaction on P’s income statement is as follows:
Revenues
Cost of revenues
Gross profit
$ 150,000
80,000
$ 70,000
5) During the year, P makes an intercompany loan to S with principal of $1,000,000 and an
annual interest rate of 10%. S capitalizes the current year’s interest on the intercompany
loan as part of the cost to construct a building and remits cash to P for the annual interest
incurred on the intercompany loan.
Financial reporting developments Noncontrolling interests in consolidated financial statements
109
Appendix A: Comprehensive example
6) During the year, P charges S a management fee of $1,500 for management services.
7) Company S has other comprehensive income of $25,000 from unrealized gains on
available-for-sale securities for the year.
8) The remaining useful life of the buildings and equipment at 1 January 20X2 is 10 years.
9) Assume inventory held by S at the beginning of the year and affected by the step up to
fair value on 1 January 20X2 is sold in the current year.
10) S pays cash dividends of $50,000 during the year, of which P’s share is $40,000.
Figure A-1: Balance sheet for Company P, 31 December 20X1 (all amounts in dollars)
Cash
Accounts receivable
Inventory
Buildings and equipment, net
Investment in Company S
640,000
190,000
184,000
220,000
260,000
1,494,000
Accounts payable
Other liabilities
Common stock
Additional paid-in capital
Retained earnings
125,000
250,000
200,000
500,000
419,000
1,494,000
Figure A-2: Acquisition-date balance sheet for Company S, 1 January 20X2
(all amounts in dollars)
110
Book value
Fair value
Cash
Available-for-sale securities
Accounts receivable
Inventory
Buildings and equipment, net
250,000
100,000
100,000
150,000
200,000
800,000
250,000
100,000
100,000
200,000
300,000
950,000
Accounts payable
Common stock
150,000
650,000
800,000
150,000
Financial reporting developments Noncontrolling interests in consolidated financial statements
Appendix A: Comprehensive example
Figure A-3: Acquisition-date consolidating work paper to arrive at consolidated balance
sheet, 1 January 20X2 (all amounts in dollars)
Company
P
Cash
Available-for-sale securities
Accounts receivable
Inventory
Buildings and equipment, net
Investment in Company S
Goodwill
(3)
Total assets
Accounts payable
Other liabilities
Total liabilities
Common stock
Additional paid-in capital
Retained earnings
(6)
240,000
—
190,000
184,000
220,000
800,000
—
(1)
(2)
(4)
Debit
250,000
100,000
100,000
200,000
300,000
—
200,000
Credit
(5)
800,000
Consolidated
490,000
100,000
290,000
384,000
520,000
—
200,000
1,634,000
1,150,000
1,984,000
125,000
250,000
150,000
—
275,000
250,000
375,000
150,000
525,000
200,000
500,000
559,000
Total parent shareholders’
equity
Noncontrolling interest
1,259,000
—
Total equity
Total liabilities and equity
Adjustments
Company
S
(7)
800,000
—
—
(9)
800,000
200,000
500,000
559,000
800,000
200,000
1,259,000
200,000
1,259,000
1,000,000
1,459,000
1,634,000
1,150,000
1,984,000
(8)
Figure A-3 illustrates the consolidating entries between P and S for the 1 January 20X2
business combination.
(1)
Inventory of S is adjusted to fair value.
(2)
Buildings and equipment of S are adjusted to fair value.
(3)
The $400,000 investment purchased on 1 January 20X2 is added to the book value
of the original investment ($260,000). In addition, a gain is recognized on the original
investment to increase it to fair value. This gain on investment of $140,000 is
calculated as the fair value of the original 40% investment ($400,000) less the book
value of the original investment.
(4)
Goodwill is determined by subtracting the fair value of S’s net identifiable assets
acquired ($800,000) from the fair value of S’s net assets ($1,000,000). In push-down
accounting, the goodwill is recorded on the books of S.
(5)
P’s investment in S is eliminated.
Financial reporting developments Noncontrolling interests in consolidated financial statements
111
Appendix A: Comprehensive example
(6)
Retained earnings includes the original retained earnings of P ($419,000) and the
gain on the investment in S ($140,000).
(7)
In push-down accounting, the basis of the equity is increased to equal the fair value of
the net assets less the noncontrolling interest.
(8)
Noncontrolling interest is calculated by taking the fair value of S’s net assets
($1,000,000) and subtracting the fair value of P’s 80% investment in S ($800,000).
For illustrative purposes, no control premium is assumed. In push-down accounting,
the noncontrolling interest is recorded on the books of S.
(9)
S’s common stock is eliminated.
Figure A-4: Work paper of consolidated income statement, for year ended 31 December
20X2 (all amounts in dollars)
Adjustments
Company P
Revenues
500,000
Cost of revenues
200,000
Gross profit
300,000
Debit
Company S
300,000 (13)
(10)
250,000
145,000
Consolidated
550,000
(14)
150,000
195,000
155,000
355,000
60,000
120,000
Depreciation expense
60,000
Selling and administrative
40,000
3,500
Management fee expense
—
1,500
Management fee revenue
1,500
—
(15)
1,500
—
Interest income
100,000
—
(16)
100,000
—
Dividend income
40,000
—
(17)
40,000
Gain on investment
140,000
—
140,000
Net income
481,500
90,000
331,500
Net income attributable to
noncontrolling interest
—
Net income attributable to controlling
interest
(11)
Credit
(12)
43,500
(15)
18,000 (18)
481,500
72,000
Company P
Company S
1,500
—
—
6,000
12,000
319,500
Adjustments
Net income
481,500
90,000 (19)
Debit
Credit
391,500 (19)
151,500
Consolidated
331,500
Other comprehensive income:
Unrealized gain on available-for-sale
securities
Comprehensive income
112
—
25,000
25,000
481,500
115,000
356,500
Comprehensive income attributable
to noncontrolling interest
—
Comprehensive income attributable
to controlling interest
341,500
(20)
23,000 (19)
175,000
6,000
17,000
339,500
Financial reporting developments Noncontrolling interests in consolidated financial statements
Appendix A: Comprehensive example
Figure A-4 illustrates the consolidating entries between P and S for the year ended 31
December 20X2.
(10)
The cost of revenues includes the fair value adjustment made to inventory at the
beginning of the year because the inventory was sold during the year.
(11)
Depreciation expense includes 20X2 depreciation of $10,000 ($100,000 / 10 years)
related to the step up in fair value at 1 January 20X2.
(12)
Net income attributable to the noncontrolling interest on a push-down basis is based
on the percentage ownership interest of the noncontrolling interest (20%) and
calculated as a percentage of S’s income on a push-down basis ($90,000 x 20%).
(13)
Intercompany revenues from the upstream ($100,000) and downstream ($150,000)
sales are eliminated.
(14)
Intercompany cost of revenues from the upstream ($70,000) and downstream
($80,000) sales are eliminated.
(15)
Intercompany revenue and expense for the management fee charged to S is
eliminated.
(16)
Interest income on the outstanding intercompany loan is eliminated.
(17)
The income recognized by P from the dividends received from S is eliminated.
(18)
The intercompany profits from the upstream sale are eliminated in items (13) and
(14). A proportionate share of the upstream elimination is attributed to the
noncontrolling interest ($30,000 x 20%). The elimination of the downstream sale is
100% attributable to the parent.
(19)
Adjustments to net income from the income statement. See prior explanations of
eliminations.
(20)
Comprehensive income attributable to the noncontrolling interest on a push-down
basis is based on the percentage ownership interest of the noncontrolling interest
(20%) and calculated as a percentage of S’s comprehensive income on a push-down
basis ($115,000 x 20%).
Financial reporting developments Noncontrolling interests in consolidated financial statements
113
Appendix A: Comprehensive example
Figure A-5: Consolidating work paper to arrive at consolidated balance sheet, 31 December
20X2 (all amounts in dollars)
Adjustments
Cash
Available-for-sale securities
Accounts receivable
Intercompany receivable
Inventory
Buildings and equipment, net
Intercompany loan
Investment in Company S
Goodwill
Total assets
Accounts payable
Intercompany payable
Intercompany loan
Other liabilities
Total liabilities
Company P
Company S
200,000
—
104,000
(21) 150,000
106,000
340,000
(22) 1,000,000
800,000
—
2,700,000
125,000
125,000
135,000
100,000
245,000
1,410,000
—
—
200,000
2,340,000
(21)
Common stock
Additional paid-in capital
Retained earnings
(28)
Accumulated other
comprehensive income
Total parent shareholders’
equity
Noncontrolling interest
Total equity
Total liabilities and equity
279,000
100,000
—
720,500
1,099,500
(21)
(21)
(22)
125,000
150,000
1,000,000
—
1,275,000
200,000
500,000
900,500
(29)
800,000
—
32,000
—
(30)
20,000
(31)
1,600,500
852,000
213,000
1,065,000
2,700,000
2,340,000
1,600,500
Debit
Credit
(23)
(24)
(25)
(26)
(27)
(23)
(26)
250,000
1,000,000
(32)
800,000
(33)
240,000
250,000
100,000
100,000
1,000,000
800,000
Consolidated
325,000
125,000
239,000
—
251,000
1,650,000
—
—
200,000
2,790,000
404,000
—
—
720,000
1,124,500
(34)
(35)
200,000
500,000
738,500
40,000
6,000
20,000
(35)
6,000
1,458,500
207,000
1,665,500
2,790,000
The balance sheet is consolidated in Figure A-5, as follows:
114
(21)
Intercompany receivables and payables are recorded from the sales transactions
between P and S.
(22)
An intercompany loan was made to finance the construction of a new building for S.
(23)
Intercompany receivables and payables from the upstream ($100,000) and
downstream ($150,000) sales are eliminated.
(24)
Intercompany profit remaining in inventory at year end from the upstream ($30,000)
and downstream ($70,000) sales is eliminated.
(25)
Interest capitalized from the intercompany loan is eliminated.
(26)
Outstanding intercompany loan is eliminated.
Financial reporting developments Noncontrolling interests in consolidated financial statements
Appendix A: Comprehensive example
(27)
P’s investment in S is eliminated.
(28)
P’s retained earnings are rolled forward as follows:
31 December 20X1 balance
Current year income
31 December 20X2 balance
(29)
$ 419,000
481,500
$ 900,500
S’s retained earnings are rolled forward as follows. In push-down accounting, only
the earnings and dividends attributable to the controlling interest are recorded in
retained earnings.
31 December 20X1 balance
Income attributable to controlling interest
Dividends declared
31 December 20X2 balance
$
–
72,000
(40,000)
$ 32,000
(30)
In push-down accounting, only the other comprehensive income attributable to the
controlling interest is recorded by S ($25,000 x 80%).
(31)
Noncontrolling interest, on a push-down basis, is rolled forward as follows:
31 December 20X1
Creation of noncontrolling interest
Attributed net income
Attributed other comprehensive income
Dividends received
31 December 20X2 balance
$
–
200,000
18,000
5,000
(10,000)
$ 213,000
(32)
The common stock of S is eliminated.
(33)
Net adjustments to net income from income statement. See items in income
statement for explanations of adjustments.
(34)
The intercompany dividend is eliminated from S’s retained earnings.
(35)
The intercompany profit from the upstream sale is proportionately eliminated from
the noncontrolling interest. For illustrative purposes, this entry has been made as a
consolidation entry; however, it typically would be made directly to the retained
earnings and noncontrolling interest on S’s books.
Financial reporting developments Noncontrolling interests in consolidated financial statements
115
Appendix A: Comprehensive example
Year 20X3
Assumptions:
1) P sells a 20% interest in S on 1 January 20X3 for $300,000.
2) During the year, S sells inventory to P, which P holds at year end. A summary of the
effect of the transaction on S’s income statement is as follows:
Revenues
$ 130,000
Cost of revenues
50,000
Gross profit
$ 80,000
3) During the year, P sells inventory to S, which S holds at year end. A summary of the effect
of the transaction on P’s income statement is as follows:
Revenues
$ 100,000
Cost of revenues
60,000
Gross profit
$ 40,000
4) The intercompany loan of $1,000,000 remains outstanding. Construction on the building
is complete, so S does not capitalize the interest payment for the current year.
Depreciation begins on the completed building (including the depreciation of the
previously capitalized interest). The useful life of the building is ten years.
5) During the year, P charges S a management fee of $1,500 for management services.
6) S has other comprehensive income for the year of $15,000 from unrealized gains on
available-for-sale securities.
7) All inventory held by S and P at 31 December 20X2 resulting from upstream and
downstream intercompany sales is sold to a nonaffiliated party.
8) S pays cash dividends of $50,000 during the year, of which P’s share is $30,000.
116
Financial reporting developments Noncontrolling interests in consolidated financial statements
Appendix A: Comprehensive example
Figure A-6: Work paper of consolidated income statement for year ended 31 December
20X3 (all amounts in dollars)
Company P
Company S
Revenues
Cost of revenues
600,000
200,000
400,000
125,000
Gross profit
Depreciation expense
Selling and administrative
Management fee expense
Management fee revenue
Dividend income
Interest income
Interest expense
Gain on sale of investment
Net income
Net income (loss) attributable to
noncontrolling interest
Net income attributable to controlling
interest
400,000
70,000
30,000
—
1,500
30,000
100,000
—
100,000
531,500
275,000
125,000
3,500
1,500
—
—
—
100,000
—
45,000
—
(36)
531,500
45,000
—
531,500
15,000
60,000
531,500
230,000
(38)
(39)
110,000
100,000
(40)
10,000
(41)
1,500
(43)
100,000
32,000 (46)
12,000
(41)
(42)
(43)
1,500
30,000
100,000
(44)
100,000
(45)
(48)
24,000
Consolidated
770,000
115,000
655,000
185,000
33,500
—
—
—
—
—
—
436,500
(2,000)
438,500
Company S
531,500
—
(37)
Adjustments
Credit
27,000
Company P
Net income
Other comprehensive income:
Unrealized gain on available-for-sale
securities
Comprehensive income
Comprehensive income attributable
to noncontrolling interests
Comprehensive income attributable
to controlling interest
18,000
Debit
Debit
(47)
Adjustments
Credit
461,500 (47)
321,500
Consolidated
436,500
15,000
451,500
(47)
32,000 (47)
12,000
36,000
4,000
447,500
Figure A-6 illustrates the consolidating entries between P and S for the year ended
31 December 20X3.
(36)
Net income attributable to the noncontrolling interest on a push-down basis is based
on the new percentage ownership interest of the noncontrolling interest (40%) and
calculated as a percentage of S’s income on a push-down basis ($45,000 x 40%).
(37)
Intercompany revenues from the upstream ($130,000) and downstream ($100,000)
sales are eliminated.
(38)
Intercompany cost of revenues from the upstream ($50,000) and downstream
($60,000) sales is eliminated.
Financial reporting developments Noncontrolling interests in consolidated financial statements
117
Appendix A: Comprehensive example
118
(39)
Reversal of elimination of intercompany profit in inventory held by S and P at
31 December 20X2 to cost of revenues as inventory is sold to a nonaffiliated party
during the first inventory turn of the year.
(40)
Excess depreciation of $10,000 ($100,000 / 10 years) due to capitalized interest in
the prior year is eliminated.
(41)
Intercompany revenue and expense for the management fee charged to S is
eliminated.
(42)
The income recognized by P from the dividends received from S is eliminated.
(43)
Interest income and expense from the intercompany loan are eliminated.
(44)
P recognized a gain on its investment in S (on its stand alone financial statements),
calculated as the excess of cash received ($300,000) over the carrying value of the
portion of the investment sold ($200,000). This gain is eliminated.
(45)
The intercompany profits from the upstream sale are eliminated in items (37) and
(38). A proportionate share of the upstream elimination is attributed to the
noncontrolling interest ($80,000 x 40%). The elimination of the downstream sale is
100% attributable to the parent.
(46)
The intercompany profit from 20X2 on the upstream sale is realized in the current
year because the inventory was sold to a nonaffiliated party. A proportionate share of
the profit is attributable to the noncontrolling interest ($30,000 x 40%).
(47)
Adjustments to net income from the income statement. See items above for
explanations of adjustments.
(48)
Comprehensive income attributable to the noncontrolling interest on a push-down
basis is based on the percentage ownership interest of the noncontrolling interest
(40%) and calculated as a percentage of S’s comprehensive income on a push-down
basis ($60,000 x 40%).
Financial reporting developments Noncontrolling interests in consolidated financial statements
Appendix A: Comprehensive example
Figure A-7: Consolidating work paper to arrive at consolidated balance sheet, 31 December
20X3 (all amounts in dollars)
Adjustments
Cash
Available-for-sale securities
Accounts receivable
Intercompany receivable
Inventory
Buildings and equipment, net
Intercompany loan
Investment in Company S
Goodwill
Total assets
(49)
Accounts payable
Intercompany payable
Intercompany loan
Other liabilities
Total liabilities
Common stock
Additional paid-in capital
Retained earnings
Accumulated other
comprehensive income
Total parent shareholders’
equity
Noncontrolling interest
Total equity
Total liabilities and equity
Company P
Company S
310,000
—
230,000
100,000
300,000
500,000
1,000,000
600,000
—
3,040,000
330,000
140,000
160,000
130,000
260,000
1,285,000
—
—
200,000
2,505,000
190,000
130,000
—
588,000
908,000
(55)
330,000
100,000 (50)
1,000,000 (53)
—
1,430,000
Debit
Credit
(50)
(51)
(52)
(53)
(54)
230,000
120,000
90,000
1,000,000
600,000
593,000 (60)
—
35,000 (62)
(64)
(66)
593,000
— (58)
29,000 (61)
5,000
2,132,000
— (59)
2,132,000
657,000
418,000 (65)
1,075,000
32,000
3,040,000
2,505,000
250,000
90,000
12,000
640,000
140,000
390,000
—
440,000
1,695,000
—
—
200,000
3,505,000
520,000
—
—
588,000
1,108,000
230,000
1,000,000
200,000 (56)
500,000
1,432,000 (57)
Consolidated
(61)
(63)
(65)
98,000
30,000
32,000
200,000
598,000
1,177,000
24,000
(66)
12,000
1,999,000
398,000
2,397,000
3,505,000
The balance sheet is consolidated in Figure A-7, as follows:
(49)
P sold 20% of S (25% of its investment in S). The investment was reduced by 25%
($200,000) to $600,000.
(50)
Intercompany receivables and payables from the upstream ($130,000) and
downstream ($100,000) sales are eliminated.
(51)
Intercompany profit remaining in inventory at year end from the upstream ($80,000)
and downstream ($40,000) sales is eliminated.
(52)
Interest capitalized in 20X2 from the intercompany loan is eliminated ($100,000),
less current year excess depreciation ($10,000).
(53)
Outstanding intercompany loan is eliminated.
Financial reporting developments Noncontrolling interests in consolidated financial statements
119
Appendix A: Comprehensive example
(54)
P’s investment in S is eliminated.
(55)
P’s retained earnings are rolled forward as follows:
31 December 20X2 balance
Current year income
31 December 20X3 balance
900,500
531,500
$ 1,432,000
(56)
P sold a 20% interest in S for $300,000 on 1 January 20X3. On that date, the
noncontrolling interest’s carrying value was $207,000, which represented a 20%
interest in S. Thus, an additional 20% interest ($207,000) was transferred from S’s
common stock to the noncontrolling interest.
(57)
S’s retained earnings are rolled forward as follows. In push-down accounting, only the
earnings and dividends attributable to the controlling interest are recorded in retained
earnings.
31 December 20X2 balance
Noncontrolling interest profit elimination
from 20X2 booked to S
Income attributable to controlling interest
Dividends paid
31 December 20X3 balance
(58)
(59)
6,000
27,000
(30,000)
$ 35,000
$ 20,000
9,000
$ 29,000
Noncontrolling interest, on a push-down basis, is rolled forward as follows:
31 December 20X2 balance
Noncontrolling interest profit from 20X2
elimination booked to S
Additional interest sold by P
Current year income
Current year other comprehensive income
Dividends received
31 December 20X3 balance
(60)
$ 32,000
Accumulated other comprehensive income is rolled forward as follows:
31 December 20X2 balance
Comprehensive income attributable to controlling interest
31 December 20X3 balance
120
$
$ 213,000
(6,000)
207,000
18,000
6,000
(20,000)
$ 418,000
The common stock of S is eliminated.
Financial reporting developments Noncontrolling interests in consolidated financial statements
Appendix A: Comprehensive example
(61)
P sold a 20% interest in S for $300,000 on 1 January 20X3. This sale is treated as an
equity transaction with no gain or loss recognized. The difference between the cash
received and carrying value of the interest sold ($207,000) is recorded as an
adjustment to APIC.
In addition, AOCI is adjusted to reallocate AOCI for the interest sold by P. The
31 December 20X2 balance in AOCI was $25,000. Since a 20% interest in S was sold,
$5,000 (20% x $25,000) was transferred out of AOCI and recorded as an adjustment
to APIC.
(62)
Net adjustments to net income from income statement. See items in income
statement for explanations of adjustments.
(63)
The intercompany dividend is removed from S’s retained earnings.
(64)
Interest income recognized by P in 20X2 is eliminated ($100,000), less current year
depreciation ($10,000).
(65)
The intercompany profit from the upstream sale is proportionately removed from the
noncontrolling interest. For illustrative purposes, this entry has been made as a
consolidation entry; however, it ordinarily would be made directly to the retained
earnings and noncontrolling interest on S’s books.
(66)
The intercompany profit from Year 20X2 on the upstream sale is realized in the
current year because the inventory was sold externally. A proportionate share of the
profit is attributable to the noncontrolling interest ($30,000 x 40%).
Year 20X4
As of 31 December 20X3, P owns 60% of S, which has net assets of $945,000. The carrying
amount of the noncontrolling interest’s 40% interest in Company S is $398,000, which
includes $16,000 of accumulated other comprehensive income.
Assumptions:
1) P sells an additional 15% of its ownership for $300,000, assuming no control premium on
Company S, on 1 January 20X4, resulting in a loss of control and deconsolidation of S on
1 January 20X4. The fair value of the retained 45% interest in S is $900,000.
2) The fair value of the intercompany loan on 1 January 20X4 is $1,000,000.
Financial reporting developments Noncontrolling interests in consolidated financial statements
121
Appendix A: Comprehensive example
Figure A-8: Consolidating work paper to arrive at consolidated balance sheet, 1 January
20X4 (all amounts in dollars)
Adjustments
Company P
Cash
Accounts receivable
Intercompany receivable
Inventory
Buildings and equipment, net
Intercompany loan
Investment in Company S
Total assets
(67)
310,000
230,000
100,000
300,000
500,000
1,000,000
600,000
3,040,000
Accounts payable
Intercompany payable
Intercompany loan
Other liabilities
Total liabilities
190,000
130,000
—
588,000
908,000
Common stock
200,000
Debit
(68)
(69)
Credit
Consolidated
300,000
100,000
(71)
300,000
(69)
130,000
(69)
(70)
100,000
80,000
(69)
130,000
(72)
(74)
98,000
677,000
610,000
330,000
—
220,000
500,000
1,000,000
900,000
3,560,000
320,000
—
—
588,000
908,000
200,000
598,000
1,854,000
Additional paid-in capital
Retained earnings
500,000
1,432,000
Accumulated other comprehensive
income
Total parent shareholders’ equity
Noncontrolling interest
Total equity
—
2,132,000
—
2,132,000
—
2,652,000
—
2,652,000
3,040,000
3,560,000
Total liabilities and equity
(73)
255,000
Figure A-8 illustrates the deconsolidating entries between P and S, as follows:
122
(67)
The creditor interest in S would be adjusted to fair value. For illustrative purposes, the
carrying value of the intercompany loan is equal to the fair value of the intercompany
loan at the date of deconsolidation.
(68)
Cash is received on the sale of 15% interest.
(69)
Intercompany receivable and payable are reclassified to accounts receivable and
accounts payable.
(70)
The intercompany profit included in inventory held by P at 1 January 20X4 is
eliminated.
(71)
The retained 45% interest in S is adjusted to fair value.
Financial reporting developments Noncontrolling interests in consolidated financial statements
Appendix A: Comprehensive example
(72)
APIC is adjusted for the sale of a 20% interest in S in 20X3, treated as an equity
transaction.
(73)
Retained earnings of P is adjusted for all prior intercompany adjustments and
earnings of S.
(74)
Company P’s gain is calculated as follows:
Proceeds
Fair value of retained interest
Carrying value of noncontrolling interest
AOCI attributable to P
$
300,000
900,000
398,000
24,000
1,622,000
(945,000)
$ 677,000
Carrying amount of S’s net assets
Gain
On a consolidated basis, Company S’s assets, liabilities and noncontrolling interest
should be derecognized, and the cash proceeds and gain should be recognized
through the following journal entry:
Cash
Noncontrolling interest
Accounts payable
Intercompany loan
Intercompany payable
AOCI
Investment in Company S
Cash
Available-for-sale securities
Accounts receivable
Intercompany receivable
Inventory
Buildings and equipment, net
Goodwill
Gain
$ 300,000
398,000
330,000
1,000,000
100,000
24,000
900,000
$ 330,000
140,000
160,000
130,000
220,000
1,195,000
200,000
677,000
Financial reporting developments Noncontrolling interests in consolidated financial statements
123
Appendix B: Comparison of ASC 810 as
amended to prior practice and IAS 27(R)
Appendix B: Comparison of ASC 810 as amended to prior practice and IAS 27(R)
The following table summarizes the significant changes in accounting for a noncontrolling
interest before and after Statement 160’s effective date. Additionally, the table compares
certain aspects of the major tenets of ASC 810 and IAS 27(R), Consolidated and Separate
Financial Statements, which is effective 1 July 2009, with early adoption permitted. The table
below only addresses consolidated financial statements (that is, it does not address parentonly financial statements).
Prior to adoption of
Statement 160
After adoption of
Statement 160
IAS 27 (R)
Valuation of
noncontrolling
interest in a
partial or step
acquisition at
date of control
Noncontrolling interest’s share of
identifiable net assets recognized
at carryover value
Noncontrolling interest’s share of
identifiable net assets recognized
at fair value at date control is
obtained. Step acquisitions/
disposals are to be accounted for
as equity transactions while control
is maintained.
Redeemable noncontrolling
interest is measured pursuant to
ASC 480-10-S99-3A for SEC
registrants
Companies may elect to recognize
the noncontrolling interest at fair
value (consistent with current
ASC 810) or its proportionate
share of the fair value of
identifiable net assets. If the fair
value method is elected, 100% of
the goodwill is recognized in the
parent’s consolidated financial
statements (consistent with
Statement 160). If the
proportionate share method
is elected, only the controlling
interest’s share of goodwill
is recognized
Reporting
noncontrolling
interest in the
consolidated
statement of
financial position
Noncontrolling interest is generally Noncontrolling interest is reported
as a separate component of
reported as a “mezzanine” item
consolidated stockholder’s equity.
between liabilities and equity
Redeemable noncontrolling
interest is classified pursuant to
ASC 480-10-S99-3A for SEC
registrants
Consistent with current ASC 810,
except for redeemable
noncontrolling interest
Reporting the
noncontrolling
interest in the
consolidated
income
statement
The portion of a subsidiary’s
income (loss) attributable to
noncontrolling interests is
reported as (expense) income in
the determination of consolidated
net income
Amounts that are attributed to the Consistent with current ASC 810
noncontrolling interest are to be
reported as part of consolidated
net income and not as a separate
component of income or expense.
Disclosure of the attribution
between controlling and
noncontrolling interests on the face
of the income statement is required
Earnings and comprehensive
income are generally attributed
based on relative ownership
interests, with exceptions
Consistent with current ASC 810
Earnings and comprehensive
income are attributed to the
controlling and noncontrolling
interests based on relative
ownership interests unless
(1) there are contractual
arrangements that specify
attribution among owners or
(2) the relative basis in a particular
asset or liability is not equal to the
relative ownership interests
Losses that are otherwise
attributable to the noncontrolling
interests are generally allocated to
the controlling interest once the
noncontrolling interest in the
equity capital of the subsidiary has
been reduced to zero
Consistent with current ASC 810
Losses are allocated to the
noncontrolling interests even if the
losses exceed the noncontrolling
interests’ basis in the equity capital
of the subsidiary, thus resulting in
a contra-equity (that is, deficit)
balance
Financial reporting developments Noncontrolling interests in consolidated financial statements
125
Appendix B: Comparison of ASC 810 as amended to prior practice and IAS 27(R)
Prior to adoption of
Statement 160
After adoption of
Statement 160
Step-acquisition accounting
applies when a parent’s ownership
interest in a subsidiary increases.
The parent recognizes a gain or
loss (or records an adjustment
directly to equity in certain cases)
when its ownership interest in a
subsidiary is decreased
Transactions that result in
decreases in a parent’s ownership
interest in a subsidiary in either of
the following without a loss of
control are accounted for as equity
transactions in the consolidated
entity (that is, no gain or loss is
recognized):
1. A subsidiary that is a business
or a nonprofit activity, except
for either of the following:
a. A sale of in substance
real estate
b. A conveyance of oil and gas
mineral rights
2. A subsidiary that is not a
business or a nonprofit activity
if the substance of the
transaction is not addressed
directly by other ASC Topics
Consistent with US GAAP, except
that this guidance applies to all
subsidiaries under IAS 27(R), even
those that are not businesses or
nonprofit activities or those that
involve sales of in substance real
estate or conveyance of oil and
gas mineral rights. IAS 27(R) also
does not address whether that
guidance should be applied to
transactions involving
nonsubsidiaries that are
businesses or nonprofit activities.
Loss of control of No adjustments are made to the
a subsidiary
carrying amount of the retained
noncontrolling equity investment
(if any) upon loss of control of a
subsidiary. That is, any retained
noncontrolling investment is
carried at its relative,
proportionate historical basis. Gain
or loss recognition is limited to the
gain or loss on the ownership
interest sold
In certain transactions that result
in a loss of control of a subsidiary
or a group of assets, any retained
noncontrolling investment in the
former subsidiary or group of
assets is remeasured to fair value
on the date control is lost. The gain
or loss on remeasurement is
included in income along with the
gain or loss on the ownership
interest sold.
This accounting is limited to the
following transactions:
1. Loss of control of a subsidiary
that is a business or a nonprofit
activity, except for either of the
following:
a. A sale of in substance real
estate
b. A conveyance of oil and gas
mineral rights
2. Loss of control of a subsidiary
that is not a business or a
nonprofit activity if the
substance of the transaction is
not addressed directly by other
ASC Topics
3. The derecognition of a group of
assets that is a business or a
nonprofit activity, except for
either of the following:
a. A sale of in substance real
estate
b. A conveyance of oil and gas
mineral rights
Consistent with US GAAP, except
that this guidance applies to all
subsidiaries under IAS 27(R), even
those that are not businesses or
nonprofit activities or those that
involve sales of in substance real
estate or conveyance of oil and
gas mineral rights. IAS 27(R) also
does not address whether that
guidance should be applied to
transactions involving
nonsubsidiaries that are
businesses or nonprofit activities.
IAS 27(R) does not address the
derecognition of assets outside the
loss of control of a subsidiary.
Changes in
ownership
interest in a
subsidiary
without loss of
control
126
IAS 27 (R)
Financial reporting developments Noncontrolling interests in consolidated financial statements
Appendix C: Abbreviations used in this
publication
Appendix C: Abbreviations used in this publication
Abbreviation
FASB Accounting Standards Codification
ASC 230
FASB ASC Topic 230, Statement of Cash Flows
ASC 250
FASB ASC Topic 250, Accounting Changes and Error Corrections
ASC 310
FASB ASC Topic 310, Receivables
ASC 320
FASB ASC Topic 320, Investments — Debt and Equity Securities
ASC 323
FASB ASC Topic 323, Investments –Equity Method and Joint Ventures
ASC 350
FASB ASC Topic 350, Intangibles — Goodwill and Other
ASC 360
FASB ASC Topic 360, Property, Plant, and Equipment
ASC 450
FASB ASC Topic 450, Contingencies
ASC 460
FASB ASC Topic 460, Guarantees
ASC 470
FASB ASC Topic 470, Debt
ASC 480
FASB ASC Topic 480, Distinguishing Liabilities from Equity
ASC 505
FASB ASC Topic 505, Equity
ASC 605
FASB ASC Topic 605, Revenue Recognition
ASC 718
FASB ASC Topic 718, Compensation — Stock Compensation
ASC 740
FASB ASC Topic 740, Income Taxes
ASC 805
FASB ASC Topic 805, Business Combinations
ASC 810
FASB ASC Topic 810, Consolidation
ASC 815
FASB ASC Topic 815, Derivatives and Hedging
ASC 820
FASB ASC Topic 820, Fair Value Measurements and Disclosures
ASC 830
FASB ASC Topic 830, Foreign Currency Matters
ASC 835
FASB ASC Topic 835, Interest
ASC 845
FASB ASC Topic 845, Nonmonetary Transactions
ASC 860
FASB ASC Topic 860, Transfers and Servicing
ASC 932
FASB ASC Topic 932, Extractive Activities — Oil and Gas
ASC 958
FASB ASC Topic 958, Not-for-Profit Entities
ASC 970
FASB ASC Topic 970, Real Estate — General
ASC 976
FASB ASC Topic 976, Real Estate — Retail Land
ASU 2010-02
Accounting Standards Update No. 2010-02, Accounting and Reporting
for Decreases in Ownership of a Subsidiary — a Scope Clarification
Financial reporting developments Noncontrolling interests in consolidated financial statements
127
Appendix C: Abbreviations used in this publication
128
Abbreviation
Other Authoritative Standards
ASR 268
SEC Accounting Series Release No. 268, Presentation in Financial
Statements of “Redeemable Preferred Stocks”
Concepts
Statement 6
FASB Statement of Financial Accounting Concepts No. 6, Elements
of Financial Statements
IAS 27
International Accounting Standards No. 27, Consolidated and
Separate Financial Statements
Rule 12-04
SEC Regulation S-X, Rule 12-04, “Condensed Financial Information
of Registrant”
SAB 51
SEC Staff Accounting Bulletin No. 51, Accounting for Sales of Stock
by a Subsidiary
SAB 112
SEC Staff Accounting Bulletin No. 112
Topic D-98
EITF Topic No. D-98, “Classification and Measurement of
Redeemable Securities”
Topic 5-E
Codified Staff Accounting Bulletins, Topic 5-E, Accounting For
Divesture Of A Subsidiary Or Other Business Operation
Abbreviation
Non-Authoritative Standards
ARB 51
Accounting Research Bulletin No. 51, Consolidated Financial Statements
EITF 00-4
EITF Issue No. 00-4, “Majority Owner's Accounting for a Transaction
in the Shares of a Consolidated Subsidiary and a Derivative Indexed
to the Minority Interest in That Subsidiary”
EITF 00-6
EITF Issue No. 00-6, “Accounting for Freestanding Derivative
Financial Instruments Indexed to, and Potentially Settled in, the
Stock of a Consolidated Subsidiary”
EITF 08-6
EITF Issue No. 08-6, “Equity Method Investment Accounting
Considerations”
EITF 08-8
EITF Issue No. 08-8, “Accounting for an Instrument (or an
Embedded Feature) with a Settlement Amount That Is Based on the
Stock of an Entity’s Consolidated Subsidiary”
Statement 109
FASB Statement No. 109, Accounting for Income Taxes
Statement 141(R)
FASB Statement No. 141(R), Business Combinations
Statement 150
FASB Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity
Statement 160
FASB Statement No. 160, Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51
Financial reporting developments Noncontrolling interests in consolidated financial statements
Appendix D: Index of ASC references in
this publication
Appendix A: Comprehensive example
ASC Paragraph
230-10-45-14 and 45-15
250-10-50-1 through 50-3
323-10-15-6 through 15-8
323-10-40-1
Section
10
11
7
5
350-20-35-57A
360-20
4
5
450-20
480-10-30-1
7
2
480-10-30-3
2
480-10-55-5
2
480-10-55-53 through 55-62
2
480-10-65-1
2
480-10-S99-1
2
480-10-S99-3A
2
810-10-10-1
810-10-15-8
810-10-15-10 through 15-12
810-10-25-1 through 25-14
810-10-25-60 through 25-81
810-10-20
1
1
1
1
1
2
810-10-45-14
810-10-45-15 through 45-17A
1
2
810-10-45-18 through 45-21
4
810-10-45-21A through 45-24
5
810-10-50-1 through 50-1B
810-10-55-1
810-10-55-1B
810-10-55-4A
10
1
8
7
Disclosures
Effective date and transition
Deconsolidation
Changes in a parent’s ownership interest in a
subsidiary
Attribution of net income and comprehensive income
Changes in a parent’s ownership interest in a
subsidiary
Deconsolidation
Nature and classification of the noncontrolling
interest
Nature and classification of the noncontrolling
interest
Nature and classification of the noncontrolling
interest
Nature and classification of the noncontrolling
interest
Nature and classification of the noncontrolling
interest
Nature and classification of the noncontrolling
interest
Nature and classification of the noncontrolling
interest
Consolidation policy
Consolidation policy
Consolidation policy
Consolidation policy
Consolidation policy
Nature and classification of the noncontrolling
interest
Consolidation policy
Nature and classification of the noncontrolling
interest
Attribution of net income and comprehensive income
Changes in a parent’s ownership interest in a
subsidiary
Disclosures
Consolidation policy
Combined financial statements
Deconsolidation
Financial reporting developments Noncontrolling interests in consolidated financial statements
129
Appendix D: Index of ASC references in this publication
ASC Paragraph
Section
810-10-55-4I
810-10-65-1
810-10-65-1-(b)(2)
810-10-65-1(c)
810-10-65-1(d)
810-10-65-2
815-10-15-74(a)
130
10
11
7
4
9
11
2
815-10-15-99
2
810-20
1
815-40
2
815-40-15-5
2
815-40-15-5C
2
815-40-15-6 through 15-8
2
815-40-25-1 through 25-43
2
815-40-55-1 through 55-48
2
830-30-40-2
5
932-360-40
5
932-360-55-3
5
946
970-323-35-17
976-605
1
4
5
Disclosures
Effective date and transition
Deconsolidation
Attribution of net income and comprehensive income
Parent-company financial statements
Effective date and transition
Nature and classification of the noncontrolling
interest
Nature and classification of the noncontrolling
interest
Consolidation policy
Nature and classification of the noncontrolling
interest
Nature and classification of the noncontrolling
interest
Nature and classification of the noncontrolling
interest
Nature and classification of the noncontrolling
interest
Nature and classification of the noncontrolling
interest
Nature and classification of the noncontrolling
interest
Changes in a parent’s ownership interest in a
subsidiary
Changes in a parent’s ownership interest in a
subsidiary
Changes in a parent’s ownership interest in a
subsidiary
Consolidation policy
Attribution of net income and comprehensive income
Changes in a parent’s ownership interest in a
subsidiary
Financial reporting developments Noncontrolling interests in consolidated financial statements
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