Chapter 6 — Attribution of Income, Other Comprehensive Income, and Cumulative Translation Adjustment Balances

6.7 Attribution of Other Comprehensive Income or Loss

ASC 810-10

45-20 Net income or loss and comprehensive income or loss, as described in Topic 220, shall be attributed to the parent and the noncontrolling interest.

As stated in ASC 810-10-45-20, OCI or other comprehensive loss must also be attributed to the parent and noncontrolling interest. This paragraph was added to ARB 51 by FASB Statement 160 to address ambiguities that existed in ARB 51 before the adoption of FASB Statement 160 and to eliminate the diversity in practice that arose when some reporting entities did not attribute OCI or other comprehensive loss to noncontrolling interests.

6.7.1 Impact of FASB Statement 160 Transition Method on Attribution of OCI in Subsequent Periods

ASC 220-10

45-5 Paragraph 810-10-50-1A(a) states that, if an entity has an outstanding noncontrolling interest, amounts for both net income and comprehensive income attributable to the parent and net income and comprehensive income attributable to the noncontrolling interest in a less-than-wholly-owned subsidiary shall be reported in the financial statement(s) in which net income and comprehensive income are presented in addition to presenting consolidated net income and comprehensive income. For more guidance, see paragraph 810-10-50-1A(c).

45-15 Reclassification adjustments shall be made to avoid double counting of items in comprehensive income that are presented as part of net income for a period that also had been presented as part of other comprehensive income in that period or earlier periods. For example, gains on investment securities that were realized and included in net income of the current period that also had been included in other comprehensive income as unrealized holding gains in the period in which they arose must be deducted through other comprehensive income of the period in which they are included in net income to avoid including them in comprehensive income twice (see paragraph 320-10-40-2). Example 3 (see paragraphs 220-10-55-18 through 55-27) illustrates the presentation of reclassification adjustments in accordance with this paragraph.

Although adoption of FASB Statement 160 was required for fiscal years beginning on or after December 15, 2008, decisions made at the time that guidance was adopted may continue to affect attributions of items of comprehensive income that originated before adoption when such items are recognized in the income statement (i.e., reclassified from AOCI to income) in subsequent reporting periods. Specifically, before the adoption of FASB Statement 160, two methods of attributing OCI or other comprehensive loss were prevalent in practice:

Method 1 — Attribute items of comprehensive income or loss solely to the controlling interest.
Method 2 — Attribute items of comprehensive income or loss to the controlling and noncontrolling interests, but limit attribution if the carrying amount of the noncontrolling interest had been reduced to $0.

Although FASB Statement 160 did not provide transition guidance for reporting entities that had historically applied Method 1, we believe that there were two acceptable transition alternatives:

Transition Alternative 1 — Apply the provisions in ASC 810-10-45-20 and ASC 220-10-45-5, both added by FASB Statement 160, retrospectively as if OCI or other comprehensive loss had been attributed to the noncontrolling interests in all prior periods.
Transition Alternative 2 — Apply the provisions in ASC 810-10-45-20 and ASC 220-10-45-5, both added by FASB Statement 160, prospectively.

Entities that chose Transition Alternative 2 should have a policy in place for attributing future reclassification adjustments described in ASC 220-10-45-15 to the controlling and noncontrolling interests. For example, such a policy should address how previously unrealized holding gains from available-for-sale securities that were reported in OCI and were attributed solely to the parent (Method 1) should be reclassified into net income and attributed to the controlling and noncontrolling interests once the gain is realized.

The flowchart below illustrates the application of the guidance discussed in this section to the current-period reclassification (to net income) of items that had previously been recorded as OCI before adoption of FASB Statement 160.

6.7.2 Foreign Currency Translation Adjustments

ASC 220-10

45-10A Items of other comprehensive income include the following:

a. Foreign currency translation adjustments (see paragraph 830-30-45-12) . . . .

ASC 810-10

45-19 Revenues, expenses, gains, losses, net income or loss, and other comprehensive income shall be reported in the consolidated financial statements at the consolidated amounts, which include the amounts attributable to the owners of the parent and the noncontrolling interest.

ASC 830-30

45-17 Accumulated translation adjustments attributable to noncontrolling interests shall be allocated to and reported as part of the noncontrolling interest in the consolidated reporting entity.

In accordance with ASC 830-30, to allow for combination or consolidation of a subsidiary that is a foreign entity, all elements of the foreign currency financial statements must be translated to the reporting currency. The cumulative impact of such translation is recorded as a cumulative translation adjustment (CTA) in AOCI. The cumulative translation gains and losses are reclassified out of AOCI and into earnings upon the sale or substantially complete liquidation of the investment in the foreign entity. (For information on what constitutes a substantially complete liquidation of an investment in a foreign entity, see Section 5.4.1 of Deloitte’s Roadmap Foreign Currency Matters.) To the extent that a CTA is attributable to a noncontrolling interest, ASC 830-30-45-17 requires the CTA to be attributed to and reported as part of the noncontrolling interest in the consolidated financial statements.

When determining whether a CTA can be attributed to noncontrolling interest holders, the reporting entity should note that the CTA exists at the consolidated level as a result of differences between the subsidiary’s functional currency and the reporting currency. Accordingly, the CTA is directly related to the parent entity’s reporting currency and may not reflect the reporting currency of the noncontrolling interest holders.

In light of these factors, we believe that in a manner consistent with the guidance in ASC 830-30-45-17 and the attribution guidance in ASC 810-10, a CTA should be attributed to the partially owned subsidiary’s noncontrolling interest that gives rise to the adjustment. That is, the objective of a noncontrolling interest is to give investors of the consolidated entity visibility into how their claim on the net assets of a partially owned subsidiary changes from period to period.

Accordingly, we believe that it would be misleading to allocate to the controlling interest 100 percent of a CTA associated with a foreign, partially owned subsidiary that reflects the impact of changing currency rates on the subsidiary’s total net assets. Thus, it would be appropriate to allocate a proportionate amount of the CTA to the noncontrolling interest.

Example 6-11

Company M is a multinational financial services company with global operations whose functional currency is the U.S. dollar. Company M holds a controlling interest of 60 percent in Subsidiary ABC. The remaining 40 percent is held by an unrelated third party, Entity DEF, and represents a noncontrolling interest.

Subsidiary ABC, which is located in Germany and operates there, uses the euro as its functional currency. Company M has determined that ABC is a foreign entity. There are no agreements in place that would otherwise govern allocations of ABC’s income, loss, or OCI between M and DEF in a manner that differs from their proportionate ownership interests.

At the end of 20X1, the translation of ABC’s assets, liabilities, and operations from the euro to the U.S. dollar results in a CTA of $100 million. Of the $100 million, $40 million is allocated to the noncontrolling interest in M’s consolidated financial statements.

6.7.3 Impact of Changes to OCI or AOCI Resulting From Transition Adjustments or Changes in Accounting Principle

ASC 220-10

ASC 250-10

45-5 An entity shall report a change in accounting principle through retrospective application of the new accounting principle to all prior periods, unless it is impracticable to do so. Retrospective application requires all of the following:

The cumulative effect of the change to the new accounting principle on periods prior to those presented shall be reflected in the carrying amounts of assets and liabilities as of the beginning of the first period presented.
An offsetting adjustment, if any, shall be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period.
Financial statements for each individual prior period presented shall be adjusted to reflect the period-specific effects of applying the new accounting principle.

45-6 If the cumulative effect of applying a change in accounting principle to all prior periods can be determined, but it is impracticable to determine the period-specific effects of that change on all prior periods presented, the cumulative effect of the change to the new accounting principle shall be applied to the carrying amounts of assets and liabilities as of the beginning of the earliest period to which the new accounting principle can be applied. An offsetting adjustment, if any, shall be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period.

45-7 If it is impracticable to determine the cumulative effect of applying a change in accounting principle to any prior period, the new accounting principle shall be applied as if the change was made prospectively as of the earliest date practicable. See Example 1 (paragraphs 250-10-55-3 through 55-11) for an illustration of a change from the first-in, first-out (FIFO) method of inventory valuation to the last-in, first-out (LIFO) method. That Example does not imply that such a change would be considered preferable as required by paragraph 250-10-45-12.

45-8 Retrospective application shall include only the direct effects of a change in accounting principle, including any related income tax effects. Indirect effects that would have been recognized if the newly adopted accounting principle had been followed in prior periods shall not be included in the retrospective application. If indirect effects are actually incurred and recognized, they shall be reported in the period in which the accounting change is made.

ASC 810-10

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.

The guidance in ASC 250-10-45-5 through 45-8 prescribes how changes in an accounting principle should be applied and often requires entities to record an offsetting adjustment to retained earnings (or other appropriate components of equity) in the period of adoption.

In certain instances, an ASU may specify that the offsetting transition adjustment should be recorded as a component of OCI. Similarly, an adjustment to OCI could arise from a reporting entity’s accounting for a change in accounting principle. When a parent initially records its consolidating entries, it should record 100 percent of the change to its subsidiary’s OCI within its own OCI in a manner consistent with the guidance in ASC 810-10-45-19. Recognizing that the parent’s OCI should ultimately reflect its activities as well as the timing and magnitude of its future cash flows, the parent should then record a second entry to reclassify the noncontrolling interest holder’s portion of the OCI transition adjustment to the noncontrolling interest account, which is presented as a separate component of stockholders’ equity in accordance with ASC 810-10-45-16.

We believe that a similar concept applies when a transition adjustment or change in accounting principle requires the reporting entity to record an adjusting entry directly to the balance of AOCI. For example, ASU 2018-02 allows a reclassification from AOCI to retained earnings of “stranded” tax effects that arise from the December 22, 2017, tax legislation commonly known as the Tax Cuts and Jobs Act (the “Act”). Stranded tax effects arise from the tax effects of transactions that were initially recognized directly in OCI at tax rates in existence before the Act. Before adoption of ASU 2018-02, when the underlying transaction is reclassified out of AOCI in periods after enactment of the Act, amounts in AOCI related to the income tax rate differential (i.e., the difference between tax rates in effect before and after enactment of the Act) would be stranded in AOCI. When a parent initially records its consolidating entries upon adoption of ASU 2018-02, it should record 100 percent of the change in its subsidiary’s AOCI balance within its own AOCI and then record a second entry to reclassify the noncontrolling interest holder’s portion of the AOCI adjustment to the noncontrolling interest account.

Example 6-12

Subsidiary Y is a consolidated subsidiary of Company X because X’s 90 percent ownership of Y gives X a controlling financial interest in Y.

On December 22, 2017, the Act is enacted, generally reducing the U.S. federal corporate income tax rate from 35 percent to 21 percent.

Before the enactment date of the Act, Y recognizes a $1,000 loss in OCI in connection with a derivative used in cash flow hedging activities. Because there is no tax basis in the derivative, Y also recognizes a $350 deferred tax asset (DTA) and records a corresponding entry to OCI. No other changes in the fair value of the hedge occur after its initial recognition, and the forecasted transaction would not occur until 2018.

On the enactment date, Y reflects the effect of the change to the tax rate by reducing the DTA by $140 (equal to the temporary difference of $1,000 multiplied by the 14 percent rate reduction) and recognizing a corresponding increase in income tax expense.

Before the issuance of X’s 2017 consolidated financial statements, X and Y adopt ASU 2018-02 (which, as noted above, allows a reclassification from AOCI to retained earnings of stranded tax effects related to the Act) and apply it to their respective 2017 financial statements.

The entries related to the transactional activity described above, as reflected in Y’s separate financial statements, are summarized in the table below.

Next, X evaluates what the impact will be on its consolidated financial statements. To reflect the change to Y’s AOCI balance upon adoption of ASU 2018-02 (highlighted in red in the table above), X performs the following steps:

Step 1 — Record 100 percent of the $140 change to Y’s AOCI balance as a result of the adoption of ASU 2018-02.
Step 2 — Reclassify the noncontrolling interest holder’s portion (i.e., 10 percent) of Y’s AOCI adjustment to the noncontrolling interest account.

To perform these steps, X records the following consolidating journal entries to its consolidated financial statements:

Step 1:

Step 2:

Confidential and Proprietary — for Use Solely by Authorized Personnel

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.