9.3 Scope of ASC 480-10-S99-3A and Interaction With ASC 810-10
As stated previously, we have presumed in this chapter that the
equity classification of a redeemable noncontrolling interest has already been
determined to be appropriate. The decision tree above illustrates how to evaluate
the redemption features included in a contract with a noncontrolling interest
holder, or embedded in the noncontrolling interest, when the noncontrolling interest
itself has already been determined to be appropriately classified as equity.
If a noncontrolling interest’s redemption feature is freestanding (i.e., not embedded
in the noncontrolling interest), the redemption feature should be evaluated under
ASC 480 and other applicable GAAP. However, if the redemption feature is embedded in
the noncontrolling interest and does not require bifurcation under ASC 815-15, the
redemption feature does not require separate evaluation under ASC 480 since the
redemption feature is not a separate freestanding financial instrument. Rather, the
noncontrolling interest, inclusive of the embedded redemption feature, would be
analyzed for equity classification.
While the authoritative guidance applicable to all noncontrolling interests
resides primarily in ASC 810-10, ASC 480-10-S99-3A contains an SEC staff
announcement that provides guidance for SEC registrants on the classification and
measurement of redeemable securities, including redeemable noncontrolling interests.
The guidance in ASC 480-10-S99-3A arises from SEC staff interpretations of ASR 268.
ASR 268 establishes that SEC registrants should “highlight the future cash
obligations attached to redeemable [shares] through appropriate balance sheet
presentation and footnote disclosure.”
When a redeemable security is within the scope of ASC 810-10, the parent entity should first apply the accounting and disclosure guidance in ASC 810-10 to the noncontrolling interest in its consolidated financial statements. In addition to applying this guidance, a parent entity that is an SEC registrant or a parent entity that has elected to apply guidance applicable to SEC registrants must also consider whether the noncontrolling interest is a redeemable equity security within the scope of ASC 480-10-S99-3A.
Noncontrolling interests that include a redemption feature (e.g., that are
puttable to the issuing entity, its parent entity, or a consolidated subsidiary of
its parent entity) are within the scope of ASC 480-10-S99-3A provided that all three
of the following conditions are met:
-
The parent entity is an SEC registrant or has elected to apply guidance applicable to SEC registrants.
-
The redemption feature is not considered a freestanding financial instrument. (If the redemption feature is considered a freestanding financial instrument, the parent entity would continue to apply the guidance in ASC 810-10 to the noncontrolling interest, but not to the freestanding redemption feature. Rather, the freestanding redemption feature would be evaluated and accounted for under the guidance in ASC 480-10 and ASC 815, as applicable.)
-
The redemption feature is not solely within the control of the issuer. (ASC 480-10-S99-3A(10) and (11) discuss circumstances in which the redemption of noncontrolling interests may be within the control of the issuer.)
In the separate financial statements of the consolidated subsidiary, ASC 480-10-S99 need not be applied if either of the following conditions is met:
- The subsidiary is not required, and has not elected, to apply the guidance applicable to SEC registrants.
- Upon the redemption of an equity security, the parent entity, but not the subsidiary, is required to pay the redemption price. That is, in recognition that the objective of ASR 268 (as incorporated into ASC 480-10-S99-1) is to “highlight the future cash obligations attached to redeemable [shares],” ASC 480-10-S99-3A does not apply to a subsidiary’s separate financial statements when the redemption price is paid by the parent entity since a requirement for the parent to pay the redemption price does not represent a cash obligation of the reporting entity (i.e., the subsidiary).
In summary, if a reporting entity determines that the redeemable noncontrolling interest is within the scope of ASC 480-10-S99-3A, the accounting and disclosure guidance in ASC 480-10-S99-3A should be applied after the application of the accounting and disclosure guidance in ASC 810-10. A reporting entity’s application of ASC 480-10-S99-3A does not relieve the entity of the requirements of the accounting and disclosure guidance in ASC 810-10.
Connecting the Dots
Although permitted, application of the guidance in ASC 480-10-S99-3A is not
required for entities that are not SEC registrants. When an entity that is
not an SEC registrant has previously elected not to apply SEC guidance, the
entity’s subsequent adoption of ASC 480-10-S99-3A (either as a voluntary
policy election or in anticipation of becoming an SEC registrant) does not
constitute the correction of an accounting error under ASC 250. Rather, the
adoption of ASC 480-10-S99-3A in such instances would be considered a change
in accounting principle as defined in ASC 250. Further, financial statements
that have been revised to reflect the adoption of ASC 480-10-S99-3A in
anticipation that they will be filed with the SEC are not considered
restated. However, if an error is identified in previously issued financial
statements (e.g., the reporting entity previously elected a policy of
applying the guidance in ASC 480-10-S99-3A but applied it incorrectly) and
is corrected in conjunction with or in anticipation of the filing of the
financial statements with the SEC, the reporting entity should consider the
disclosure requirements in ASC 250-10-50 related to the correction of an
error.