1.5 Attribution of Income, Other Comprehensive Income, and Cumulative Translation Adjustment Balances
Attributing income of a partially owned subsidiary to a parent and the
subsidiary’s noncontrolling interest holders is easy in theory but
can prove difficult in practice. A simple starting point would be to
allocate the subsidiary’s net income (loss) between the parent and
the noncontrolling interest holders in proportion to their ownership
interests. However, the presence of different classes of equity
interests, the existence of contractual arrangements that serve to
shift rights to receive benefits or obligations to absorb losses
between different equity holders, or financial reporting
requirements of other FASB Accounting Standards Codification
(“Codification”) topics can result in the need to attribute a
subsidiary’s net income (loss) in a manner that is disproportionate
to each party’s ownership interest (see Sections 6.2 through
6.3).
The presence of intercompany transactions and the accompanying need to eliminate
(for purposes of preparing consolidated financial statements) the
profit or loss arising from such transactions also affects the
allocation of a subsidiary’s net income between a parent and
noncontrolling interest holders. In addition, the attribution of
eliminating entries arising from intercompany transactions is
affected by (1) the subsidiary’s status as a variable interest
entity (VIE) or voting interest entity (as defined or described in
ASC 810-10), (2) the nature of the transaction (i.e., upstream vs.
downstream transactions), and (3) the policy elected by the parent
for attributing the eliminating entry to the parent and the
noncontrolling interests (in the case of an upstream transaction).
See Sections 6.4
through 6.5.
The presence of reciprocal interests (subsidiary ownership of parent shares) is
another factor that affects the attribution of net income to a
parent and noncontrolling interests. While there are two acceptable
approaches for determining the impact of reciprocal interests on the
attribution of earnings (i.e., the treasury stock method and the
simultaneous equations method), each approach will generate the same
end result. The approach selected as the entity’s accounting policy
can simplify (or significantly complicate) the actual process of
attributing the subsidiary’s earnings (and may also make it
necessary to dust off the algebra textbook that has been sitting on
your bookshelf for a decade or two). For further discussion, see
Section
6.6.
Other matters that entities must consider when attributing income to a parent and noncontrolling interests include:
- Attribution of (1) other comprehensive income (OCI) or other comprehensive loss and (2) foreign currency translation adjustments (see Section 6.7).
- The presentation of preferred dividends of a subsidiary (see Section 6.8).
- Income tax financial reporting considerations related to noncontrolling interests in pass-through entities (see Section 6.9).
- The impact of income attribution on the parent’s consolidated EPS computation (see Section 6.10).