5.3 Noncontrolling Interests Recognized When the Reporting Entity Sells Shares in a Wholly Owned Subsidiary and Retains Control
While a noncontrolling interest may initially result from a business combination
(see Section
5.2.1) or asset acquisition (see Section
5.2.2), it may also result from the dilution of a
reporting entity’s equity interest in a wholly owned subsidiary over
which the reporting entity retains control.
Example 5-1
On June 30, 20X7, Company A acquires Subsidiary B, a wholly owned subsidiary. Company A’s ownership interest in B as of the acquisition date is illustrated in the diagram below.
As of June 30, 20X7:
On July 15, 20X9, A seeks to raise capital and issues shares of common equity in B to an unrelated third party, Entity G. As a result, A’s ownership interest in B is diluted from 100 percent to 90 percent. The respective ownership interests of A and G are illustrated in the diagram below.
As of July 15, 20X9:
Upon the sale of the equity to G, A should initially recognize the
noncontrolling interest (i.e., the 10 percent
ownership interest that A no longer holds in B) in
an amount equal to G’s new ownership interest of
10 percent multiplied by the net assets of B. See
Section 7.1.2.6 for discussion of how
to account for a parent’s selling of interests in
a subsidiary directly to a noncontrolling interest
holder.
In addition, the size of a noncontrolling interest can increase as a result of a
parent’s sale of equity in its subsidiary. Such a sale remains an
equity transaction, with no gain or loss recognized in the financial
statements of the parent or subsidiary, as long as the parent
retains control over the subsidiary both before and after the
transaction. See Sections 7.1 through 7.1.2.8 for a discussion of
changes in a parent’s ownership interest without an accompanying
change in control.
Gain or loss recognition may be appropriate if the change in the reporting
entity’s ownership interest is accompanied by a loss of control and
therefore requires deconsolidation. See Appendix F of Deloitte’s
Roadmap Consolidation — Identifying a Controlling
Financial Interest for a discussion
of considerations related to such deconsolidation.