6.9 Noncontrolling Interests in Pass-Through Entities — Income Tax Financial Reporting Considerations
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 810-10-45-19 requires reporting entities to report earnings attributed to noncontrolling interests as part of consolidated earnings and not as a separate component of income or expense. Thus, the income tax expense recognized by the consolidating entity will include the total income tax expense of the consolidated entity. When there is a noncontrolling interest in a subsidiary, the amount of income tax expense that is consolidated by the parent will depend on whether the subsidiary is a pass-through (e.g., a U.S. partnership) or taxable entity (e.g., a U.S. C corporation).
ASC 810-10 does not affect how entities determine income tax expense under ASC 740. Typically, no income tax expense is attributable to a pass-through entity; rather, such expense is attributable to its owners. Therefore, a parent with an interest in a subsidiary that is a pass-through entity should recognize income taxes on only its controlling interest in the pass-through entity’s pretax income. In the consolidated income tax expense, the parent should not include the income taxes on the pass-through entity’s pretax income attributed to the noncontrolling interest holders.
Example 6-15
Company X has a 90 percent controlling interest in Subsidiary Y (a limited liability corporation). Subsidiary Y is
a pass-through entity and is not subject to income taxes in any jurisdiction in which it operates. Company X’s
pretax income for 20X9 is $100,000. Subsidiary Y has pretax income of $50,000 for the same period. Company
X has a tax rate of 25 percent. For simplicity, this example assumes that there are no temporary differences.
Given the facts above, X would report the following in its consolidated income statement for 20X9:
In this example, ASC 810-10 does not affect how X determines income tax expense under ASC 740 since X
recognizes income tax expense for only its controlling interest in the income of Y. However, ASC 810-10 does
affect the effective tax rate (ETR) of X. Given the impact of ASC 810-10, X’s ETR is 24.2 percent ($36,250 ÷
150,000). If X is a public entity and the reconciling item is significant, X should disclose the tax effect of the
amount of income from Y attributed to the noncontrolling interest in its numerical reconciliation from expected
to actual income tax expense.