F.3 Parent’s Accounting Upon a Loss of Control Over a Subsidiary or Group of Assets
ASC 810-10-40-5 provides a formula for calculating the parent’s gain or loss on deconsolidation, which includes a remeasurement to fair value of the parent’s retained noncontrolling interest in the former subsidiary, if any. The parent’s relationship with the former subsidiary after the transaction, as described below, determines the applicable accounting.
F.3.1 Parent Retains Significant Influence Through Noncontrolling Interest
If the parent ceases to have a controlling financial interest in a subsidiary
but still retains an investment that will be accounted for
under the equity method in accordance with ASC 323-10, the
parent should deconsolidate the subsidiary and recognize a
gain or loss in accordance with ASC 810-10-40-5 (see
computation in
Example F-5). As of the date the loss of
control occurs, the former parent remeasures, at fair value,
its retained investment and includes any resulting
adjustments as part of the gain or loss recognized on
deconsolidation.
The parent must apply the equity method of accounting prospectively from the
date control over the subsidiary is relinquished and should
not revise its presentation of prior-period balances.
Similarly, application of the equity method of accounting as
if the loss of control occurred at the beginning of the
current fiscal period or year is prohibited. This position
was reiterated by an SEC staff member, Associate Chief
Accountant Stephanie Hunsaker, in a speech at the 2007 AICPA
Conference on Current SEC and PCAOB Developments. The
remaining investment after the deconsolidation should be
reflected in the balance sheet at the end of the period as a
single line item.
The parent should perform an assessment under
ASC 205-20 to determine whether the deconsolidated
subsidiary qualifies as a discontinued operation (see
Deloitte’s Roadmap Impairments and Disposals
of Long-Lived Assets and Discontinued
Operations for additional details
related to this assessment). If the deconsolidated
subsidiary qualifies as a discontinued operation, the parent
should present the gain or loss on deconsolidation in income
from discontinued operations. If the deconsolidated
subsidiary does not qualify for discontinued operations
treatment, the parent should present the gain or loss on
deconsolidation in income from continuing operations,
typically as nonoperating income.
Example F-4
Investor A is a calendar-year-end company and is the general partner of a limited partnership, Entity B. Entity C, unrelated to A, is the limited partner of B and does not have substantive kick-out rights or substantive participating rights. In accordance with the VIE model, A has historically consolidated B.
On August 1, 20X7, A granted substantive kick-out rights and substantive participating rights to C. Therefore, A is no longer deemed to have control of B and will use the equity method to account for its investment in B. Effective August 1, 20X7, A is required to prospectively apply the equity method of accounting for its investment in B. Note that A’s results of operations and cash flows for the seven-month period ended July 31, 20X7, will continue to present B as a consolidated subsidiary.
F.3.2 Parent Retains Noncontrolling Interest but Does Not Have Significant Influence
If the parent retains an investment in, but is unable to exercise significant
influence over, a former subsidiary after it ceases to have
a controlling financial interest in that subsidiary, the
parent should deconsolidate the subsidiary and recognize a
gain or loss in accordance with ASC 810-10-40-5. As of the
date the loss of control occurs, the former parent
remeasures, at fair value, its retained investment and
includes any resulting adjustments as part of the gain or
loss recognized on deconsolidation.
The parent must account for its retained interest prospectively as an investment, including presentation as a single line item in the balance sheet, from the date control over the subsidiary is relinquished.
Example F-5
Parent owns 80 percent of its subsidiary that has a book value of $100. Assume that (1) the carrying amounts of the controlling interest (Parent) and noncontrolling interest are $80 and $20, respectively; (2) Parent reduces its interest in the former subsidiary to 10 percent by selling stock for $105; and (3) the fair value of 100 percent of the subsidiary is $150 and the fair value of 10 percent is $15.
The gain on the sale would be computed as follows (ignoring income taxes):
In addition to disclosing other information required by ASC 810-10-50-1B, Parent must disclose the portion of the $40 gain related to the remeasurement of its retained 10 percent interest to fair value.
F.3.3 Parent Does Not Retain a Noncontrolling Interest
If the parent ceases to have a controlling financial interest in a subsidiary and does not retain an investment in that subsidiary, the parent should deconsolidate the subsidiary and recognize a gain or loss in accordance with ASC 810-10-40-5.
F.3.4 Seller’s (Parent’s) Accounting for Contingent Consideration Upon Deconsolidation of a Subsidiary or Derecognition of a Group of Assets That Is a Business
Under a typical contingent consideration arrangement, a buyer is obligated to transfer additional consideration to a seller as part of the exchange for control of the acquiree if a specified future event occurs or a condition is met. Reporting entities must evaluate the nature of each arrangement to determine whether contingent future payments are (1) part of the exchange for control (i.e., contingent consideration) or (2) a separate transaction. Examples of contingent payment arrangements that are separate transactions include, but are not limited to, payments related to compensation for services, consulting contracts, profit-sharing agreements, property lease agreements, and executory contracts.
This discussion does not address contingent payment arrangements that are separate transactions. That is, it only discusses arrangements in which the payment is contingent consideration. Further, it is assumed in this discussion that the seller has determined that the arrangement does not meet the definition of a derivative instrument. If the arrangement met the definition of a derivative, it would be accounted for under ASC 815.
Accounting for contingent consideration was discussed in EITF 09-4. At its
September 9–10, 2009, meeting, the EITF considered two
approaches for a seller’s accounting for a contingent
consideration arrangement upon deconsolidation of a
subsidiary or derecognition of a group of assets that meets
the definition of a business; however, the Task Force did
not reach a consensus on this Issue. Accordingly, there has
been diversity in practice related to a seller’s accounting
for a contingent consideration arrangement. Nevertheless,
reporting entities should establish an accounting policy for
the initial and subsequent measurement of these types of
arrangements. The seller should apply the chosen policy
option to all future transactions. In addition, if a
reporting entity believes it can support an alternative
accounting treatment for a specific contingent consideration
arrangement (other than the two approaches described below),
it should consult with independent accountants. The two
approaches are as follows:
-
Approach 1 — The seller includes the initial fair value of any contingent consideration arrangement as part of the overall gain or loss on deconsolidation of a subsidiary. Supporters of this approach point to ASC 810-10-40-5, which states that the seller (parent) should include the “fair value of any consideration received” when calculating the gain or loss on deconsolidation of a subsidiary (emphasis added). Accordingly, the “consideration received” should include the fair value of any contingent consideration arrangements between the seller and buyer. Under this approach, the seller would recognize a contingent consideration receivable for the future amounts due from the buyer.If the seller adopts this approach to initially account for a contingent consideration agreement, it should elect an accounting policy to (1) subsequently remeasure the contingent consideration at fair value as of the end of each reporting period or (2) subsequently apply the gain contingency guidance in ASC 450-30.
-
Approach 2 — The seller accounts for the contingent consideration arrangement as a gain contingency in accordance with ASC 450. This approach is consistent with the accounting that entities applied to such transactions before the FASB issued Statement 160 (codified in ASC 810). Under this approach, the seller typically recognizes the contingent consideration receivable in earnings after the contingency is resolved. Accordingly, to determine the initial gain or loss on deconsolidation of a subsidiary, the seller would not include an amount related to the contingent consideration arrangement as part of the consideration received unless the recognition criteria in ASC 450 are met. Supporters of this approach believe that the FASB did not intend to change practice when it issued Statement 160 (codified in ASC 810).If the seller selects this approach to initially account for a contingent consideration agreement, it should continue to apply this approach in subsequent periods until the contingency is resolved.Example F-6Parent A has a wholly owned subsidiary with a carrying amount of $100. Parent A decides to sell 100 percent of this subsidiary to Company B, a third-party buyer. As part of the purchase agreement, B agrees to pay A (1) $150 upon the close of the transaction and (2) an additional $50 if the subsidiary’s earnings exceed a specified level for the 12-month period after the close of the transaction. Upon the close of the transaction, A calculates the fair value of the contingent consideration portion of the arrangement to be $30. In addition, the arrangement does not meet the definition of a derivative and is not a separate transaction.Parent A would compute its initial gain on the sale, which would be recognized upon the close of the transaction, under the two approaches as follows: