Chapter 1 — Overview
Chapter 1 — Overview
1.1 Introduction
The objective of accounting for noncontrolling interests is to
present users of the consolidated financial statements with a clear depiction of the
portion of a subsidiary’s net assets, net income, and comprehensive income that is
attributable to holders of equity-classified ownership interests other than the
parent. In practice, the combination of complex capital structures, multiple sources
of authoritative guidance on accounting for noncontrolling interests, and multiple
policy elections available to reporting entities can make this objective difficult
to achieve.
The sections below give an overview of the framework for
classifying, measuring, and presenting noncontrolling interests. The topics
summarized in those sections are further discussed and illustrated in Chapters 3
through 9 of this Roadmap.
1.2 Scope
ASC 810-10-20 defines a noncontrolling interest as the “portion of equity (net
assets) in a subsidiary not attributable, directly
or indirectly, to a parent.” Consequently,
noncontrolling interests are presented only in the
consolidated financial statements of a parent
whose holdings include a controlling interest in
one or more subsidiaries it partially owns.
Noncontrolling interests in a partially owned
subsidiary are not recognized in the subsidiary’s
own financial statements (see Section
3.2).
Since a noncontrolling interest is defined as a specific “portion of equity” (emphasis added), the
first step in the identification of a
noncontrolling interest is to establish whether
such ownership interest in the subsidiary is
appropriately classified in the equity section of
either the subsidiary’s balance sheet or the
parent’s consolidated balance sheet (see Section
3.3).
1.3 Intercompany Matters With Noncontrolling Interest Implications
Noncontrolling interests arise because a parent and its subsidiaries represent
separate and distinct legal entities. Accordingly, each legal entity may separately
prepare its own set of financial statements. Through the consolidation process, the
financial statements are combined to present the parent and its subsidiaries as if
they were a single economic entity. In recognition of their separate identities, it
is possible for a parent and its subsidiaries to have different fiscal-year-end
dates, the presence of which must be considered in the preparation of consolidated
financial statements (see Sections
4.2 and 4.2.1).
While the separate financial statements of a parent and its subsidiaries must
reflect the changes in each entity’s financial position as a result of intercompany
transactions (see Section
4.3.1) and intercompany ownership interests (see Section 4.3.2), such
transactions and ownership interests must be eliminated in consolidation so that the
consolidated financial statements are presented as if the parent and its
subsidiaries were a single economic entity. The process of eliminating such
transactions and ownership interests can be more complex in circumstances involving
noncontrolling interests.
1.4 Initial Recognition and Measurement of Noncontrolling Interests
Since a noncontrolling interest represents the portion of a subsidiary that is
not attributable to its parent, it is typical for noncontrolling interests to be
recognized for the first time upon the occurrence of any of the following:
-
The initial consolidation of a subsidiary not wholly owned by the parent.
-
The parent’s sale of shares in a wholly owned subsidiary over which the parent retains control after the sale.
-
A subsidiary’s issuance of additional ownership interests to third parties, resulting in the dilution of the parent’s ownership interest while the parent still maintains control.
Chapter 5 of this
Roadmap provides interpretive guidance on the initial recognition and measurement of
noncontrolling interests arising when a parent first consolidates a partially owned
subsidiary (see Section
5.2) or the parent sells shares in a wholly owned subsidiary over
which the parent retains control after the sale (see Section 5.3).
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).
1.6 Changes in a Parent’s Ownership Interest
Changes in a parent’s ownership interest in a subsidiary after the initial recognition of noncontrolling interests trigger the need to “rebalance” the equity accounts reported on the parent’s consolidated balance sheet between controlling and noncontrolling interests. Decreases in ownership of subsidiaries may arise from transactions outside the scope of ASC 810-10 whose substance is addressed by other U.S. GAAP (see Section 7.1.1). Such transactions include, but are not limited to:
- Revenue transactions (ASC 606).
- Exchanges of nonmonetary assets (ASC 845).
- Transfers of financial assets (ASC 860).
- Conveyances of mineral rights and related transactions (ASC 932).
-
Gains and losses from derecognition of nonfinancial assets (ASC 610-20).
The rebalancing of equity accounts between controlling and noncontrolling
interests that results from changes in a parent’s ownership interest in a subsidiary
while the parent maintains control is generally achieved through a five-step process
(see Section 7.1.2).
However, the extent to which each step is applicable will depend on whether the
change in ownership arises as a result of (1) the parent’s purchase or sale of
subsidiary shares (see Sections
7.1.2.1 and 7.1.2.6) or (2) the direct acquisition or issuance of shares by the
subsidiary (see Sections
7.1.2.2 and 7.1.2.7).
Other changes in ownership that warrant special consideration include:
-
Downstream merger transactions in which a partially owned subsidiary obtains control of its parent. See Section 7.1.2.3.
- Increases in ownership of a partially owned subsidiary that result from a business combination with a noncontrolling interest holder. See Section 7.1.2.4.
- Acquisition of additional ownership interests in a subsidiary when the parent obtained control before adopting FASB Statement 160 (codified in ASC 810). See Section 7.1.2.5.
- Changes in preferred-share ownership. See Section 7.1.2.8.
-
Establishment of a noncontrolling interest in conjunction with an asset acquisition or business combination. See Section 7.1.2.10.
- Accounting for the tax effects of transactions with noncontrolling shareholders. See Section 7.1.3.
- Changes in ownership with an accompanying change in control. See Section 7.2.
1.7 Presentation and Disclosure
The issuance of FASB Statement 160 (codified in ASC 810) clarified that a
noncontrolling interest in a subsidiary is an ownership interest in the consolidated
entity that should be reported as equity in the consolidated financial statements. Before FASB Statement 160 was issued, there was only limited guidance on how noncontrolling interests should be reported. FASB Statement 160 clarified that
noncontrolling interests should “be reported in the consolidated statement of
financial position within equity (net assets), separately from the parent’s equity
(or net assets)”1 (see Sections 8.1
and 8.2). To provide
additional clarity to common shareholders of the consolidated entity regarding their
claim on the net assets of the consolidated entity, ASC 810-10 requires:
-
Separate presentation of consolidated net income and consolidated comprehensive income on the face of the consolidated financial statements. Additional detail must also be provided about the portions of each of these totals that are attributable to the parent and the noncontrolling interests, respectively (see Section 8.3).
-
Reconciliations of changes in stockholders’ equity that detail changes attributable to the parent and the noncontrolling interests, respectively (see Sections 8.5 and 8.5.1).
-
Disclosure of reallocations of AOCI between the parent and the noncontrolling interests (see Section 8.5.3).
Each of the presentation and disclosure requirements summarized above ultimately arises from the desire to clearly articulate for users of financial statements how changes in a reporting entity’s net assets affect the parent and noncontrolling interest holders.
While ASC 810-10 provides extensive presentation and disclosure guidance aimed
at clearly depicting a noncontrolling interest holder’s claim on the net assets, net
income, and comprehensive income of a consolidated subsidiary, no such presentation
and disclosure requirements exist for the consolidated statement of cash flows (see
Section 8.4).
Footnotes
1
Quoted from ASC 810-10-45-16.
1.8 Redeemable Noncontrolling Interests
Common and preferred shares of a consolidated subsidiary are sometimes subject to redemption rights held by the noncontrolling shareholder. Accounting for a redeemable noncontrolling interest is one of the more complex aspects of U.S. GAAP to apply because the reporting entity’s accounting may be affected by a multitude of factors that are specific to the redeemable instrument itself and to policy elections made by the reporting entity.
Nearly all of the guidance on accounting for redeemable noncontrolling interests
resides in ASC 480-10-S99-3A and originated with the SEC staff’s views in EITF Topic
D-98. Accordingly, this guidance must be applied by all SEC registrants. While
reporting entities other than SEC registrants are not subject to the guidance in ASC
480-10-S99-3A, they may elect to apply it.
When applied, ASC 480-10-S99-3A is essentially an “overlay” that is applied
after the application of ASC 810-10. That is, a
reporting entity must apply the provisions of ASC
810-10, including the guidance on attributing
subsidiary income to controlling and
noncontrolling interests, before applying the
provisions of ASC 480-10-S99-3A, which primarily
focus on subsequent measurement and balance sheet
presentation issues that arise from the existence
of a redemption feature (see Sections
9.3 and 9.4.3.1).
A redeemable noncontrolling interest within the scope of ASC 480-10-S99-3A is
classified outside of permanent equity, in a
section of the balance sheet typically referred to
as “temporary” equity (see Section
9.4.1). A redeemable noncontrolling
interest’s initial measurement is typically equal
to its fair value (see Section 9.4.2).
Subsequent measurement depends on multiple
factors, including whether:
-
The redeemable noncontrolling interest is redeemable at fair value or at other than fair value (see Sections 9.4.4.1 through 9.4.4.2.1.3).
-
The instrument is currently redeemable, or it is probable that the instrument will become redeemable (see Sections 9.4.3.2 and 9.4.3.3).
The impact of subsequent measurement adjustments on the parent’s consolidated
income statement and EPS computation will be
driven by the unique combination of all of the following:
-
The redeemable noncontrolling interest’s form — specifically, common-share versus preferred-share (see Sections 9.4 and 9.4.4).
-
The instrument’s redemption price (see Sections 9.2 and 9.4).
-
The reporting entity’s policy election for classifying the offsetting entry for measurement adjustments required under ASC 480-10-S99-3A (see Section 9.4.4).
While much of ASC 480-10-S99-3A focuses on the accounting for a redeemable
noncontrolling interest from the time of issuance,
the actual redemption of a common-share or
preferred-share redeemable noncontrolling interest
is accounted for as an equity transaction. In
cases involving the redemption of a
preferred-share redeemable noncontrolling
interest, if the price at which the redeemable
noncontrolling interest is ultimately redeemed
differs from the price stated in the redemption
feature, an additional EPS impact may result (see
Sections 9.4.5 and 9.4.5.2).
If a redemption feature expires unexercised, the carrying amount of the
noncontrolling interest is reclassified into
permanent equity of the parent, and reversal of
prior measurement adjustments is not permitted
(see Section
9.4.6).
As discussed in Sections
8.5 and 8.5.1, ASC
810-10 requires certain entities to present
reconciliations of changes in stockholders’ equity
that detail changes attributable to the parent and
noncontrolling interest holders. Redeemable
noncontrolling interests remain subject to the
disclosure and reconciliation requirements of ASC
810-10-50-1A(c) and SEC Regulation S-X, Rule 3-04,
even if such interests are classified in the
temporary equity section of the reporting entity’s
balance sheet (see Section
9.5.1).
Section 9.5
discusses additional considerations related to the
presentation of temporary equity in the
reconciliation of changes in stockholders’ equity,
as well as the effect of changes in a parent’s
ownership interest in subsidiaries (without an
accompanying change in control) on redeemable
noncontrolling interests.