9.2 Examples of Redeemable Noncontrolling Interests
Redemption of a noncontrolling interest can occur through mechanisms such as put option rights, a combination of put and call option rights, or a contingent forward purchase (sale) agreement (collectively, “redemption features”). Examples of redemption features embedded in noncontrolling interests include, but are not limited to:
- Unilateral rights held by noncontrolling interest holders to require the controlling interest holder to repurchase the subsidiary’s shares (e.g., put option) on some future date.
- Redemption features that may be triggered by the occurrence (or, in some instances, nonoccurrence) of a contingent event (e.g., the occurrence of a debt downgrade or the nonoccurrence, by a specified date, of an IPO). Typically, the contingent event is outside the control of the noncontrolling interest holder, issuer, and controlling interest holder, and its occurrence (or nonoccurrence) triggers either (1) exercisability of a put option held by the noncontrolling interest holder or (2) settlement of a forward purchase agreement (referred to as a contingent put option or contingent forward).
Redeemable noncontrolling interests usually specify one of the following three methods (or some combination thereof) for determining the redemption price of the noncontrolling interest:
- Redemption-date fair value — The redemption price is based on the fair value of the noncontrolling interest at redemption and is determined through a third-party appraisal or other fair value measurement technique.Example 9-1Company A is the parent of Subsidiary B. Entity X holds a 20 percent noncontrolling interest in B, and X’s noncontrolling interest is puttable to A at fair value on the redemption date. On June 15, 20X7, X invokes its ability to put its 20 percent interest in B to A. As a condition of the redemption feature, A and X hire an appraiser to determine the current fair value of the 20 percent interest in B. Company A will then purchase the interest from X at the appraised fair value as of the redemption date.
- Fixed price — The redemption price is fixed at a specified amount upon issuance of the redeemable noncontrolling interest.Example 9-2Company C is the parent of Subsidiary D, and Entity Y purchases a 15 percent noncontrolling interest in D from C. Company C and Entity Y agree that Y can sell its 15 percent interest in D back to C for a fixed amount ($1 million) at any time during the next three years.
- Specified formula — The redemption price is calculated on the basis of redemption-date inputs incorporated into a formula specified at inception of the redeemable noncontrolling interest. With limited exceptions, redemption features that are based on a prespecified formula do not ensure that the security will be redeemed at its fair value at the time of redemption. Footnote 18 of ASC 480-10-S99-3A states that “[c]ommon stock that is redeemable based on a specified formula is considered to be redeemable at fair value if the formula is designed to equal or reasonably approximate fair value. The SEC staff believes that a formula based solely on a fixed multiple of earnings (or other similar measure) is not considered to be designed to equal or reasonably approximate fair value.” Entities should use judgment when determining whether the formula is designed to equal or reasonably approximate fair value.Example 9-3Company E is the parent of Subsidiary F, and Entity Z holds a 25 percent noncontrolling interest in F. Entity Z’s noncontrolling interest is puttable to E at a price that Z calculates by using a prespecified formula on the redemption date. In this case, the prespecified formula redemption feature is 10 times trailing 12 months’ earnings before interest, taxes, depreciation, and amortization (EBITDA) as of the redemption date. On September 1, 20X7, Z invokes its ability to put its 25 percent interest in F to E. Company E must purchase the 25 percent interest in F from Z at an amount computed on the basis of the prespecified formula on the redemption date. The prespecified formula in this example does not ensure that the noncontrolling interest will be redeemed at its fair value because the EBITDA multiple was set at inception and will not necessarily be the market multiple at the time the put is exercised. Therefore, this noncontrolling interest should be accounted for as a noncontrolling interest redeemable at other than fair value.
As further explored in Section
9.4.4, there are two models for
subsequently measuring common-share redeemable
noncontrolling interests. One model applies to
common-share redeemable noncontrolling interests
that are redeemable at fair value. The other model
applies to common-share redeemable noncontrolling
interests that are redeemable at other than fair
value (i.e., both noncontrolling interests that
are redeemable at a fixed price and noncontrolling
interests that are redeemable at a specified
formula value). The reporting considerations
related to noncontrolling interests that are
redeemable at other than fair value are
significantly different from, and more complex
than, those related to noncontrolling interests
that are redeemable at fair value.