Chapter 5 — Initial Recognition and Measurement

5.2 Initial Measurement of Noncontrolling Interests When a Reporting Entity First Consolidates a Partially Owned Subsidiary

The conclusion that a reporting entity should consolidate a partially owned legal entity and simultaneously recognize and measure a noncontrolling interest for the first time can result from a business combination (see Section 5.2.1) or an asset acquisition (see Section 5.2.2).

5.2.1 Noncontrolling Interests Recognized Concurrently With a Business Combination

If a reporting entity acquires a controlling financial interest in a legal entity that meets the definition of a business, it should account for the transaction as a business combination under ASC 805. That guidance generally1 requires an acquiring entity to initially recognize the assets and liabilities of, and noncontrolling interests in, the acquired business at fair value. Regardless of whether all assets or liabilities are recognized at fair value, noncontrolling interests recognized as the result of a business combination are always measured initially at fair value.

A business combination can arise in any of the following ways:

Through a single transaction.
In stages.
When a reporting entity becomes the primary beneficiary of a VIE.

The initial measurement concept is unaffected by how the business combination arose.

5.2.2 Noncontrolling Interests Recognized Concurrently With an Asset Acquisition

If a reporting entity acquires a controlling financial interest in a legal entity that does not meet the definition of a business, it should account for the transaction as an asset acquisition.

The accounting for noncontrolling interests recognized in an asset acquisition depends on whether the subsidiary is a VIE — that is, whether the voting interest entity model or the VIE model is applicable:

Voting interest entity model — An asset acquisition in which the legal entity acquired is not a VIE is accounted for in accordance with the “Acquisition of Assets Rather Than a Business” subsections of ASC 805-50. Specifically, a reporting entity would account for such an asset acquisition by using a cost accumulation model under which the cost of the acquisition, including certain transaction costs, is allocated to the assets acquired on the basis of relative fair values, with some exceptions. If the reporting entity acquires less than 100 percent of the legal entity’s net assets, it should recognize a noncontrolling interest at an amount equal to the noncontrolling interest’s proportionate share of the relative fair value of any assets and liabilities acquired.
VIE model —An asset acquisition in which the legal entity acquired is a VIE is accounted for in accordance with ASC 810-10-30-4. In an asset acquisition in which a reporting entity acquires less than 100 percent of the net assets of a legal entity that is a VIE, the reporting entity should recognize a noncontrolling interest at fair value.

5.2.3 Initial Measurement of Noncontrolling Interests When an Acquired Subsidiary Has Retained Earnings or a Deficit

ASC 810-10

45-2 The retained earnings or deficit of a subsidiary at the date of acquisition by the parent shall not be included in consolidated retained earnings.

Because the initial measurement of a noncontrolling interest in a business combination or asset acquisition accompanies allocation of the consideration transferred by the reporting entity to all acquired or assumed elements (including the noncontrolling interest itself), it is inappropriate upon initial consolidation for the reporting entity to recognize any preacquisition retained earnings (deficit) of its newly acquired subsidiary or to attribute such items to controlling and noncontrolling interests.

5.2.4 Difference Between Noncontrolling Interests’ Fair Value and Their Claims on Net Assets on the Acquisition Date

As noted in Sections 5.2.1 and 5.2.2, the initial measurement of noncontrolling interests in a legal entity in which the reporting entity acquired a controlling financial interest depends on whether the legal entity meets the definition of a business. If the legal entity meets the definition of a business, the reporting entity should account for the transaction as a business combination under ASC 805 and recognize the noncontrolling interests at fair value.If the legal entity is not a VIE and does not meet the definition of a business, the reporting entity should account for the transaction as an asset acquisition under ASC 805-50 and recognize the noncontrolling interests at their proportionate share of the relative fair value of the assets (and liabilities) acquired. However, if the legal entity is a VIE and does not meet the definition of a business, the reporting entity should account for the transaction as an asset acquisition under ASC 810-10-30-4 and recognize the noncontrolling interests at fair value.

A reporting entity’s initial recognition of the noncontrolling interests at either fair value (for noncontrolling interests recognized either in a business combination or in an asset acquisition that results from the consolidation of a VIE) or the noncontrolling interests’ proportionate share of the relative fair value (for noncontrolling interests recognized in an asset acquisition that results from the consolidation of a subsidiary that is not a VIE) may result in a difference between the noncontrolling interest holders’ claims on net assets based on the terms and conditions of contractual arrangements on the acquisition date and the amounts initially recognized for the equity interests on the acquisition date.

We believe that the reporting entity should not recognize this difference at the initial recognition of the noncontrolling interests on the acquisition date. Rather, the reporting entity should measure the noncontrolling interests under ASC 805 (or, if applicable, ASC 810-10-30-4) at amounts that would be either fair value or relative fair value.

See Sections 6.1 and 7.1.2 for subsequent accounting considerations.

Footnotes

ASC 805 contains certain exceptions to the fair value measurement principle related to business combinations.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.