3.2 Portion of a Subsidiary Not Attributable to the Parent
ASC 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.
45-16
The noncontrolling interest shall be reported in the
consolidated statement of financial position within equity
(net assets), separately from the parent’s equity (or net
assets). 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. A not-for-profit entity shall report
the effects of any donor-imposed restrictions, if any, in
accordance with paragraph 958-810-45-1.
A noncontrolling interest arises in the consolidated financial statements of a reporting entity (a parent) that consolidates a legal entity (a subsidiary) it does not wholly own. For the user(s) of the parent’s consolidated financial statements, this differentiates the portion of the net assets in such statements that ultimately accrues to the parent (and the parent’s shareholders) from the portion that accrues to third-party investors in the subsidiary.
The example below illustrates how a reporting entity would identify noncontrolling interests.
Example 3-1
Company B is a public reporting entity that manufactures corn chips and matches.
Equity ownership of B is widely distributed since B’s common
stock is traded on a public exchange. Company B has expanded
as a result of the organic growth of Subsidiary J, a corn
chip manufacturer that B wholly owns. In addition, B has
acquired an 80 percent equity interest in Subsidiary X, a
match manufacturer, and a 50 percent equity interest in
Joint Venture Z, another match manufacturer.
Company B has a controlling financial interest in J and X and, in accordance
with ASC 810-10, consolidates these subsidiaries. The equity
interests issued by J and X are appropriately classified in
the equity section of B’s consolidated financial statements.
While B holds a 50 percent interest in Z, it does not have a
controlling financial interest in Z and therefore does not
consolidate Z. A summary of B’s equity interests is
presented below.
To identify the noncontrolling interest when preparing its consolidated financial statements, B should first identify its consolidated subsidiaries. As stated above, J and X are consolidated by B.
Company B should then determine whether other parties hold ownership interests in its consolidated subsidiaries and, if so, whether such interests are classified as equity in the subsidiaries’ financial statements. While J is a wholly owned subsidiary, 20 percent of the equity interest in X is held by an unrelated third party and is classified as equity in X’s financial statements. As a result, B must present the 20 percent interest in X that is held by the third party as a noncontrolling interest in B’s consolidated financial statements since this presentation differentiates B’s 80 percent equity interest in X from the 20 percent equity interest in X that is held by the third party.
Note that even though an unrelated third party owns 50 percent of Z, because B does not consolidate Z, it will not present the interests of the third party as a noncontrolling interest.
3.2.1 Noncontrolling Interest in a Subsidiary Owned by the Parent or Affiliate of a Reporting Entity
In a consolidated group that includes multiple levels of reporting entities
(e.g., a consolidated group that comprises a parent,1 a first-tier subsidiary2 wholly or partially owned by the parent, and a second-tier subsidiary
wholly or partially owned by the first-tier subsidiary), additional complexities
may arise with regard to the recognition and measurement of the noncontrolling
interests in the financial statements of each individual reporting entity (i.e.,
the parent and first-tier subsidiary in this instance).
Specifically, when preparing its consolidated financial statements, a reporting entity must first identify its controlling interests in all of its subsidiaries, recognizing that its controlling interests might be held directly or indirectly by one or more entities in the same consolidated group. All interests classified in equity that are not directly or indirectly considered part of the controlling interest will be separately recognized and measured as noncontrolling interests. The examples below illustrate the complexities that can arise in the identification of controlling and noncontrolling interests in multitiered legal entity structures.
Example 3-2
Assume the same facts as in Example 3-1,
except that Subsidiary J holds a 60 percent controlling
equity interest in Subsidiary N and consolidates N. A
summary of B’s equity interests in J, X, Z, and N is
presented below.
If J is the reporting entity, it must present noncontrolling interests in its consolidated financial statements to differentiate between its 60 percent controlling equity interest in N and the 40 percent equity interest held by third parties.
If B is the reporting entity, there are no noncontrolling interests in J since B wholly owns the equity of that specific legal entity. However, B must classify the 40 percent equity interest in N held by third parties as a noncontrolling interest when preparing B’s consolidated financial statements because B’s wholly owned subsidiary J does not itself wholly own N.
Example 3-3
Assume the same facts as in the example above, except that the remaining 40
percent equity interest in Subsidiary N that is not
owned by Subsidiary J is directly owned by Company B.
The diagram below illustrates the equity interests of B
and J.
As indicated in Section
3.2, ASC 810-10-45-15 defines
noncontrolling interests as the “ownership interests in
the subsidiary that are held by owners other than the
parent.” We believe that since J is the first-tier
parent of N, it is appropriate for J to present B’s 40
percent equity interest in N as a noncontrolling
interest in J’s consolidated financial statements. For
users of J’s consolidated financial statements, such
presentation differentiates J’s direct 60 percent equity
interest in N from the 40 percent equity interest in N
that is held by B. That is, the presentation of B’s
direct 40 percent equity interest in N as a
noncontrolling interest in J’s consolidated financial
statements signals to users of J’s financial statements
(which could include stakeholders other than equity
investors) that J’s claim on the net assets of N is
limited to J’s 60 percent equity interest.6
In contrast, when preparing its own consolidated financial statements, B would not identify any noncontrolling interest in N since B holds 100 percent of the equity interests in N as a result of (1) B’s 40 percent direct equity interest in N and (2) B’s 60 percent indirect equity interest in N through B’s ownership of J. Such presentation signals to users of B’s consolidated financial statements that B is entitled to 100 percent of N’s net assets as a result of the aggregation of B’s direct and indirect equity interests in N.
Example 3-4
Assume the same facts as in Example 3-2,
except for the following:
-
Company B owns 90 percent of Subsidiary J, and the remaining 10 percent ownership interest in J is held by Unrelated Third-Party Investor 1.
-
Company B, J, and Unrelated Third-Party Investor 2 hold direct ownership interests in Subsidiary N of 60 percent, 25 percent, and 15 percent, respectively.
The diagram below illustrates the ownership interests of the various entities.
As indicated in Section
3.2, ASC 810-10-45-15 defines
noncontrolling interests as the “ownership interests in
the subsidiary that are held by owners other than the
parent.” When preparing its consolidated financial
statements, B may identify a noncontrolling interest of
17.5 percent in N (10 percent noncontrolling interest in
J multiplied by J’s 25 percent equity interest in N,
plus the 15 percent noncontrolling interest held by
Unrelated Third-Party Investor 2). Such presentation
would signal to users of B’s consolidated financial
statements that B is entitled to 82.5 percent of N’s net
assets as a result of the aggregation of B’s direct and
indirect equity interests in N.
Connecting the Dots
An ultimate parent may hold equity interests in a second-tier subsidiary (1)
directly, (2) indirectly through a first-tier subsidiary that is the
immediate parent of the second-tier subsidiary, or (3) indirectly
through another first-tier subsidiary that is an affiliate (e.g., a
sister company) of the immediate parent. We believe that in a manner
consistent with Example 3-3, the
equity owned by the ultimate parent or the affiliate of the immediate
parent should be presented in the immediate parent’s consolidated
financial statements as a separate component of the immediate parent’s
stockholders’ equity that is classified and measured as a noncontrolling
interest. The ultimate parent’s or affiliate’s share of the immediate
parent’s consolidated net income (arising from the ultimate parent’s or
affiliate’s direct interest in the second-tier subsidiary) is shown in
net income attributable to the noncontrolling interest, which is a
single line item presented below the immediate parent’s net income.
For instance, assume the same facts as in Example 3-3, except that the
remaining 40 percent equity interest in N that is not owned by J is
directly owned by X. In J’s consolidated financial statements, the 40
percent interest held by X would be presented in J’s equity as a
noncontrolling interest, and X’s share of N’s net income would be shown
in net income attributable to noncontrolling interests.
Footnotes
1
May also be referred to as the ultimate parent.
2
May also be referred to as the immediate parent of the
second-tier subsidiary.
3
Second-tier subsidiary’s
ultimate parent.
4
Second-tier subsidiary’s
immediate parent.
5
Second-tier subsidiary.
6
Although an alternative
presentation of a parent’s or affiliate’s
noncontrolling interest may be used under specific
facts and circumstances, the SEC staff may
question that presentation. SEC registrants that
are considering the use of an alternative
presentation are encouraged to preclear it with
the SEC staff before issuing their financial
statements.