Chapter 2 — Glossary of Selected Terms

The purpose of the glossary below is to briefly explain key terms that are further discussed in subsequent chapters of this Roadmap. The definition of any term defined in the Codification is reproduced from the appropriate ASC subtopic (typically ASC 810-10) or the ASC master glossary.

As discussed in Section 9.4.3.2 of this Roadmap, the accretion method represents one of the two acceptable methods under ASC 480-10-S99-3A(15) for subsequently measuring noncontrolling interests when (1) the noncontrolling interests are not currently redeemable but (2) it is probable that they will become redeemable. Under this method, reporting entities “[a]ccrete changes in the redemption value [price of the instrument] over the period from the date of issuance (or from the date that it becomes probable that the instrument will become redeemable, if later) to the earliest redemption date of the instrument using an appropriate methodology, usually the interest method.” For information about the other alternative, refer to the definition of the immediate method (Section 2.18).

As described in Sections 9.4.3 through 9.4.3.2, an adjustment is recorded in accordance with ASC 480-10-S99-3A(14) through (16) when a noncontrolling interest’s redemption price exceeds its ASC 810-10 carrying amount (i.e., its carrying amount after the attribution of income or loss to the noncontrolling interest in accordance with ASC 810-10). There are two methods of recording an ASC 480 measurement adjustment: the accretion method (defined in Section 2.2) and the immediate method (defined in Section 2.18).

As described in Section 9.4, an ASC 480 offsetting entry accompanies any ASC 480 measurement adjustment recorded by a reporting entity. This entry has no impact on consolidated net income of the parent. However, it may affect the amount of net income attributable to noncontrolling interests on the face of the reporting entity’s consolidated income statement and may also affect (directly or indirectly) the amount of net income attributable to the parent’s common shareholders, which is the starting point for the parent’s EPS computation. The extent to which the ASC 480 offsetting entry affects net income attributable to noncontrolling interests or net income attributable to the parent’s common shareholders will depend on various policy elections made by the reporting entity for classifying this entry, as described in Sections 9.4.4 and 9.4.4.2.

As discussed in Section 2.7 and Chapter 6, a portion of a partially owned subsidiary’s earnings is typically attributed to noncontrolling interests in accordance with ASC 810-10. The amount of the subsidiary’s earnings (loss) attributed to noncontrolling interests generates a corresponding increase (decrease) in the noncontrolling interests’ carrying amount. As described in Section 9.4.2, the ASC 810-10 attribution adjustment must be recorded before the reporting entity records an ASC 480 measurement adjustment.

The ASC 810-10 carrying amount is the amount at which redeemable noncontrolling interests are carried on the reporting entity’s consolidated balance sheet after attribution of the subsidiary’s earnings under ASC 810-10 but exclusive of any ASC 480 measurement adjustments (as defined in Section 2.3).

Although not specifically defined in ASC 810-10-20, “attribution” as used in ASC 810-10 (and therefore as used in this Roadmap) is the process of allocating (comprehensive) net income or loss between the parent and the noncontrolling interest holders on the basis of relevant terms, including ownership percentages and contractual provisions. Refer to Chapter 6 for further discussion of attribution.

As discussed in Section 9.4.4.2, the cumulative base portion of the ASC 480 measurement adjustment, which does not affect net income attributable to the parent, the parent’s reported EPS, or both on a cumulative basis, equals the portion, if any, of the redeemable noncontrolling interest’s current redemption price that is equal to or less than fair value but greater than the redeemable noncontrolling interest’s ASC 810-10 carrying amount. The current period’s base portion of the ASC 480 measurement adjustment, if any, represents the cumulative base portion of the ASC 480 measurement adjustment on the reporting date less the cumulative base portion of the ASC 480 measurement adjustment at the beginning of the reporting period.

A downstream transaction is a parent company’s sale of goods or services to one of its subsidiaries. To the extent that the transaction involves goods that are sold for more (less) than the parent’s cost basis in such goods, a profit (loss) will be recorded in the parent-only financial statements. Any profit (loss) is deferred until the goods are ultimately sold to a third party. The elimination of 100 percent of all profit (loss) is attributed to the parent (see Section 6.4.1). Refer to Example 6-7 for an illustration of the accounting for downstream transactions in circumstances involving noncontrolling interests. Another example of a downstream transaction is a downstream merger. Refer to Section 7.1.2.3 for additional information on accounting for downstream merger transactions.

As discussed in Section 9.4.4.2, the cumulative excess portion of the ASC 480 measurement adjustment equals the portion, if any, of the redeemable noncontrolling interest’s current redemption price that is greater than both (1) the redeemable noncontrolling interest’s fair value and (2) the redeemable noncontrolling interest’s ASC 810-10 carrying amount. The current period’s excess portion of the ASC 480 measurement adjustment, if any, represents the cumulative excess portion of the ASC 480 measurement adjustment on the reporting date less the cumulative excess portion of the ASC 480 measurement adjustment at the beginning of the reporting period.

Hypothetical liquidation at book value (HLBV) represents a method for allocating the period’s (comprehensive) income or loss between controlling and noncontrolling interest at the end of each reporting period. Under the HLBV method, changes in an owner’s claim on the net assets of a reporting entity’s subsidiary that would result from the period-end hypothetical liquidation of the subsidiary at book value form the basis for allocating the subsidiary’s (comprehensive) income or loss between its controlling and noncontrolling interest holders. Refer to Section 6.2.1 for further discussion of the HLBV method.

As discussed in Section 9.4.3.2 of this Roadmap, the immediate method represents one of the two acceptable methods under ASC 480-10-S99-3A(15) for subsequently measuring noncontrolling interests when (1) the noncontrolling interests are not currently redeemable but (2) it is probable that they will become redeemable. Under this method, companies “[r]ecognize changes in the redemption [price] immediately as they occur.” For information about the other alternative, refer to the definition of the accretion method (Section 2.2).

The parent/noncontrolling interest attribution method is an attribution model specific to upstream transactions under which the income deferral arising from the eliminating entry (pending the ultimate sale of the goods to third parties) is attributed to the parent and noncontrolling interests. When applying this method, the reporting entity attributes the income deferral to the parent and noncontrolling interest holders in proportion to their ownership interests in the absence of any identified contractual arrangements that specify otherwise (see Section 6.4.2). Refer to Example 6-8 for an illustration of accounting for upstream transactions in circumstances involving noncontrolling interests.

The parent-only attribution method is an attribution model specific to upstream transactions under which the income deferral arising from the eliminating entry (pending the ultimate sale of the goods to third parties) is attributed to the parent. When this method is used, 100 percent of the deferred income (loss) reduces (increases) net income attributable to the parent (see Section 6.4.2). Refer to Example 6-8 for an illustration of accounting for upstream transactions in circumstances involving noncontrolling interests.

In practice, the term “reciprocal interests” is used to refer to cross holdings between a parent and one of its subsidiaries when the parent holds equity interests in the subsidiary and the subsidiary holds equity interests in the parent.

A redeemable noncontrolling interest comprises common or preferred shares held by a noncontrolling shareholder in a consolidated subsidiary that are subject to redemption rights (e.g., a put option). Refer to Section 9.3 for a discussion of the conditions that must be met for redeemable noncontrolling interests to be within the scope of ASC 480-10-S99-3A, which contains special presentation and measurement requirements related to such interests.

Although not specifically defined in ASC 810-10-20, the term “reporting entity” as used in ASC 810-10 refers to the entity that performs the consolidation analysis (i.e., the party potentially consolidating a legal entity).

The simultaneous equations method (as the term is used in this Roadmap) is relevant in the context of reciprocal interests (defined in Section 2.23) when a subsidiary owns equity of its parent. It is one of the two methods of allocating earnings of a consolidated subsidiary between third-party shareholders of the subsidiary’s parent and the subsidiary’s noncontrolling interest holders. This method is complex and is not as commonly applied as the treasury stock method (defined in Section 2.29). Refer to Example 6-10 for an illustration of this method’s application.

The treasury stock method (as the term is used in this Roadmap) is relevant in the context of reciprocal interests (defined in Section 2.23) when a subsidiary owns equity of its parent. It is one of the two methods of allocating earnings of a consolidated subsidiary between third-party shareholders of the subsidiary’s parent and the subsidiary’s noncontrolling interest holders. This method is commonly applied because of the complexity of the alternative approach, which is the simultaneous equations method (defined in Section 2.27). Refer to Example 6-10 for an illustration of this method’s application.

An upstream transaction is a subsidiary’s sale of goods or services to its parent. To the extent that the transaction involves goods that are sold for more (less) than the subsidiary’s cost basis in such goods, a profit (loss) will be recorded in the subsidiary’s financial statements. There are two acceptable methods for eliminating profit (loss) on such sales until the parent sells the goods to a third party: the parent-only attribution method and the parent/noncontrolling interest attribution method (see Section 6.4.2). Refer to Example 6-8 for an illustration of the accounting for upstream transactions in circumstances involving noncontrolling interests.