Chapter 9 — Redeemable Noncontrolling Interests

9.4 Accounting for Redeemable Noncontrolling Interests

A redemption feature in a noncontrolling interest could potentially affect the following:

Classification of the noncontrolling interest in the equity section of the balance sheet.
Subsequent measurement of the noncontrolling interest.
Attribution of the subsidiary’s net income between the controlling and noncontrolling interests.
The parent’s EPS computation.

Specifically:

Redeemable noncontrolling interests are typically classified outside of permanent equity, in a separate component of equity typically referred to as “temporary” equity (see Section 9.4.1).
Subsequent measurement of a redeemable noncontrolling interest is driven by the nature of the redemption feature (contingent vs. noncontingent) and the policy elected for measuring noncontrolling interests when they are not currently redeemable but it is probable that they will become redeemable (see Section 9.4.3).
The amount of a subsidiary’s net income that is attributed to noncontrolling interests on the face of the consolidated reporting entity’s income statement is affected by classification of the offsetting entry (hereafter referred to as the ASC 480 offsetting entry) arising from ASC 480 adjustments to the redeemable noncontrolling interest’s carrying amount (hereafter referred to as the ASC 480 measurement adjustments). Classification of the ASC 480 offsetting entry is affected, in turn, by a cascading series of variables. The first gating variable is related to the form of the redeemable noncontrolling interest (common-share vs. preferred-share). For a common-share redeemable noncontrolling interest, the next variable is related to the nature of the redemption price (fair value vs. other than fair value). For a common-share redeemable noncontrolling interest that is redeemable at other than fair value, the final gating variable is related to classification of the ASC 480 offsetting entry, which is driven by the reporting entity’s policy election for recording such adjustments (income attributable to noncontrolling interests vs. retained earnings). It is this series of cascading variables that makes the accounting for redeemable noncontrolling interests one of the more complex aspects of U.S. GAAP to apply (see Section 9.4.4).
The implications of a redeemable noncontrolling interest on the parent’s EPS computation are driven by:
- The parent’s policy for classifying the ASC 480 offsetting entry as either a component of equity or a component of net income attributable to noncontrolling interests.
- The form of the redeemable noncontrolling interest (common-share vs. preferred-share).
- The nature of the redemption price (fair value vs. other than fair value) for a common-share redeemable noncontrolling interest.
- The entity’s policy for incorporating into its EPS calculation the fair value component of changes in a redemption price that is valued at other than fair value.
These topics are addressed in Sections 9.4.4 through 9.4.4.3.

The table below summarizes the impacts of the various forms of redeemable noncontrolling interests on the parent’s financial statements. These impacts are further discussed in subsequent sections of this chapter.

Form of Noncontrolling Interest/Redemption Price	Classification/ Initial Measurement	Subsequent Measurement	Impact on Attribution of Earnings	Impact on EPS Calculation
Preferred-share/any price	Temporary equity/typically fair value (see Sections 9.4.1 and 9.4.2)	Measure in accordance with ASC 480-10-S99-3A if applicable	Depends on ASC 480 offsetting entry policy election (see Section 9.4.4.3 and Example 9-9)	Direct or indirect (see Section 9.4.4.3 and Example 9-9)
Common-share/fair value	Temporary equity/typically fair value (see Sections 9.4.1 and 9.4.2)	Measure at higher of: Carrying amount after applying ASC 810-10 Carrying amount after applying ASC 480-10-S99-3A (if applicable) (See Sections 9.4.3 through 9.4.3.4)	None (see Section 9.4.4.1)	None (see Section 9.4.4.1)
Common-share/other than fair value	Temporary equity/typically fair value (see Sections 9.4.1 and 9.4.2)	Measure at higher of: Carrying amount after applying ASC 810-10 Carrying amount after applying ASC 480-10-S99-3A (if applicable) (See Sections 9.4.3 through 9.4.3.4)	Depends on ASC 480 offsetting entry policy election (see Section 9.4.4.2 and Examples 9-6 through 9-8)	Direct or indirect (see Section 9.4.4.2 and Examples 9-6 through 9-8)

9.4.1 Classification of Redeemable Noncontrolling Interests

ASC 480-10 — SEC Materials — SEC Staff Guidance

SEC Staff Announcement: Classification and Measurement of Redeemable Securities

S99-3A(2) ASR 268 requires preferred securities that are redeemable for cash or other assets to be classified outside of permanent equity if they are redeemable (1) at a fixed or determinable price on a fixed or determinable date, (2) at the option of the holder, or (3) upon the occurrence of an event that is not solely within the control of the issuer. As noted in ASR 268, the Commission reasoned that “[t]here is a significant difference between a security with mandatory redemption requirements or whose redemption is outside the control of the issuer and conventional equity capital. The Commission believes that it is necessary to highlight the future cash obligations attached to this type of security so as to distinguish it from permanent capital.”

A reporting entity should classify, outside of permanent equity (i.e., in temporary equity), all equity securities that are within the scope of ASC 480-10-S99-3A, including common-share and preferred-share redeemable noncontrolling interests. The reporting entity should also consider that it is unnecessary for a feature to explicitly provide for settlement in cash or other assets to be within the scope of ASC 480-10-S99-3A. For example, if an issuer is not solely in control of share settlement of a share-settled feature (e.g., a conversion feature), temporary equity classification may be required. See Section 9.4.6 of Deloitte’s Roadmap Distinguishing Liabilities From Equity for further discussion.

9.4.2 Initial Measurement of Redeemable Noncontrolling Interests

ASC 480-10 — SEC Materials — SEC Staff Guidance

SEC Staff Announcement: Classification and Measurement of Redeemable Securities

S99-3A(12) Initial measurement. The SEC staff believes the initial carrying amount of a redeemable equity instrument that is subject to ASR 268 should be its issuance date fair value, except as follows: . . .

c. For noncontrolling interests, the initial amount presented in temporary equity should be the initial carrying amount of the noncontrolling interest pursuant to Section 805-20-30. . . .

Establishing the initial measurement amount for a redeemable noncontrolling interest is important because, in certain instances, after ASC 810-10 attribution of a subsidiary’s earnings to noncontrolling interests (hereafter referred to as the ASC 810-10 attribution adjustment), the reporting entity must record an ASC 480 measurement adjustment to accurately reflect potential claims on the reporting entity’s net assets that are held by redeemable noncontrolling interest holders. It therefore follows that establishing the correct initial carrying amount for a redeemable noncontrolling interest ensures that subsequent ASC 480 measurement adjustments accurately isolate reporting-period changes in redemption-related claims on the subsidiary’s net assets. As explained in more detail in Chapter 5 of this Roadmap, the initial measurement of noncontrolling interests is typically at fair value, subject to certain exceptions provided in ASC 805.

In addition to ASC 805, ASC 810-10 provides guidance on the initial recognition of noncontrolling interests. While ASC 810-10 follows the general principle of requiring that noncontrolling interests be initially recognized at fair value, ASC 810-10-30-1 and ASC 810-10-30-7 through 30-8C provide for certain exceptions to this principle when noncontrolling interests in a subsidiary are recognized concurrently with the parent’s initial consolidation of the subsidiary. Specifically:

When a VIE and its primary beneficiary are under common control, the primary beneficiary of the VIE should initially recognize the assets, liabilities, and noncontrolling interests of the VIE at their carryover basis (see ASC 810-10-30-1).
When a primary beneficiary first consolidates a VIE, the noncontrolling interest should be initially measured at its “carrying amount” if earlier consolidation was prevented because of a lack of information (see ASC 810-10-30-7).
The term “carrying amount” is defined by ASC 810-10 as the amount at which the noncontrolling interest would have been carried in the primary beneficiary’s financial statements if the information required to consolidate the VIE had always been available. Under ASC 810-10-30-7 through 30-8C, if determining the carrying amount is not practicable, initial measurement at fair value is an acceptable alternative.

Incremental to the exceptions described above, an additional exception to recognizing noncontrolling interests at fair value may arise when a parent experiences a change in ownership in an existing (as opposed to newly consolidated) subsidiary without an accompanying loss of control (see Chapter 7). In such situations, the noncontrolling interest is initially recognized at an amount equal to the fair value of the consideration received in exchange for establishment of the noncontrolling interest. An immediate adjustment to the carrying amount of the noncontrolling interest may result from the five-step process outlined in Section 7.1.2 that is required to rebalance the subsidiary’s equity accounts between controlling and noncontrolling interests. In such circumstances, the carrying amount of a redeemable noncontrolling interest after application of that five-step process (which may not equal fair value) represents the initial carrying amount of the redeemable noncontrolling interest to which all subsequent ASC 810-10 attribution adjustments and ASC 480 measurement adjustments will be applied.

9.4.3 Subsequent Measurement of Redeemable Noncontrolling Interests

ASC 480-10 — SEC Materials — SEC Staff Guidance

SEC Staff Announcement: Classification and Measurement of Redeemable Securities

S99-3A(14) If an equity instrument subject to ASR 268 is currently redeemable (for example, at the option of the holder), it should be adjusted to its maximum redemption amount at the balance sheet date. If the maximum redemption amount is contingent on an index or other similar variable (for example, the fair value of the equity instrument at the redemption date or a measure based on historical EBITDA), the amount presented in temporary equity should be calculated based on the conditions that exist as of the balance sheet date (for example, the current fair value of the equity instrument or the most recent EBITDA measure). The redemption amount at each balance sheet date should also include amounts representing dividends not currently declared or paid but which will be payable under the redemption features or for which ultimate payment is not solely within the control of the registrant (for example, dividends that will be payable out of future earnings).FN13

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FN13 See also Section 260-10-45.

S99-3A(15) If an equity instrument subject to ASR 268 is not currently redeemable (for example, a contingency has not been met), subsequent adjustment of the amount presented in temporary equity is unnecessary if it is not probable that the instrument will become redeemable. If it is probable that the equity instrument will become redeemable (for example, when the redemption depends solely on the passage of time), the SEC staff will not object to either of the following measurement methods provided the method is applied consistently:

Accrete changes in the redemption value over the period from the date of issuance (or from the date that it becomes probable that the instrument will become redeemable, if later) to the earliest redemption date of the instrument using an appropriate methodology, usually the interest method. Changes in the redemption value are considered to be changes in accounting estimates.
Recognize changes in the redemption value (for example, fair value) immediately as they occur and adjust the carrying amount of the instrument to equal the redemption value at the end of each reporting period. This method would view the end of the reporting period as if it were also the redemption date for the instrument.

S99-3A(16) The following additional guidance is relevant to the application of the SEC staff’s views in paragraphs 14 and 15: . . .

e. [R]egardless of the accounting method applied in paragraphs 14 and 15, the amount presented in temporary equity should be no less than the initial amount reported in temporary equity for the instrument. That is, reductions in the carrying amount of a redeemable equity instrument from the application of paragraphs 14 and 16 are appropriate only to the extent that the registrant has previously recorded increases in the carrying amount of the redeemable equity instrument from the application of paragraphs 14 and 15.

9.4.3.1 Sequencing of ASC 810-10 Attribution and ASC 480 Measurement Adjustments

A reporting entity with a common-share redeemable noncontrolling interest within the scope of ASC 480-10-S99-3A (see Section 9.3) should first apply the subsequent measurement guidance in ASC 810-10 and then apply the subsequent measurement guidance in ASC 480-10-S99-3A. As a result, the noncontrolling interest will be recorded at the higher of (1) the cumulative amount that would result from applying the measurement guidance in ASC 810-10 (i.e., initial carrying amount, increased or decreased for the noncontrolling interest’s share of net income or loss, OCI or other comprehensive loss, and dividends) or (2) the redemption price. Sometimes, this sequencing may result in the need to subsequently reverse all or part of a prior-period ASC 480 measurement adjustment (e.g., recording the ASC 810-10 attribution adjustment in the current period may increase the carrying amount of the redeemable noncontrolling interest to an amount greater than both (1) and (2), making it necessary to reverse all or part of a prior-period ASC 480 measurement adjustment).

9.4.3.2 Methods of Determining ASC 480 Measurement Adjustment Amount

While ASC 480-10-S99-3A(14) through (16) are written in the context of redeemable equity interests (as opposed to being written specifically in the context of redeemable noncontrolling interests), these paragraphs are instructive for determining the subsequent measurement of a redeemable noncontrolling interest. After applying the measurement guidance in ASC 810-10 to a noncontrolling interest that is redeemable currently, an entity is required to adjust the noncontrolling interest’s carrying amount as of each balance sheet date to its current redemption price.2

When it is probable that noncontrolling interests that are not currently redeemable will become redeemable, a reporting entity may elect, in accordance with ASC 480-10-S99-3A(15), a policy of applying either of the following methods of determining the amount of the ASC 480 measurement adjustment after applying the measurement guidance in ASC 810-10:

Accretion method — “Accrete changes in the redemption [price of the instrument] over the period from the date of issuance (or from the date that it becomes probable that the instrument will become redeemable, if later) to the earliest redemption date of the instrument using an appropriate methodology.”
Immediate method — “Recognize changes in the redemption [price] immediately as they occur.”

The policy elected should be consistently applied to all similar redeemable equity instruments of the reporting entity. For example, some reporting entities choose to apply the accretion method to all redeemable noncontrolling interests that are redeemable at a fixed price while applying the immediate method to all redeemable noncontrolling interests that are redeemable at fair value or a formula.

Connecting the Dots

While ASC 480-10-S99-3A(16)(e) states that “the amount presented in temporary equity should be no less than the initial amount reported in temporary equity for the instrument,” this guidance is not intended to preclude the attribution of a subsidiary’s losses to a redeemable noncontrolling interest (in accordance with ASC 810-10-45-19 through 45-21) from reducing the carrying amount of the redeemable noncontrolling interest below the instrument’s initial carrying amount. That is, while ASC 480-10-S99-3A(16)(e) does not allow for cumulative “negative” ASC 480 measurement adjustments to be applied to the carrying amount of a redeemable noncontrolling interest, it does not preclude cumulative “negative” ASC 810-10 attribution adjustments from being recorded. Note that if the carrying amount of a redeemable noncontrolling interest after the ASC 810-10 attribution adjustment is less than the redeemable noncontrolling interest’s redemption price, a subsequent ASC 480 measurement adjustment should be recorded to adjust the redeemable noncontrolling interest’s carrying amount to its redemption price. This concept is illustrated in the years ended 20X9 and 20Y0 in Example 9-5.

9.4.3.3 Impact of an IPO-Triggered Mandatory Conversion Feature

Sometimes, a reporting entity that is not yet public may issue redeemable equity instruments that mandatorily convert to the entity’s common shares upon an IPO. The existence of an IPO-triggered mandatory conversion feature can affect the entity’s assessment of whether it is probable that the interest will become redeemable. Reporting entities that are party to such instruments should refer to Section 9.5.4.3 of Deloitte’s Roadmap Distinguishing Liabilities From Equity, which contains guidance on the impact of an IPO-triggered mandatory conversion feature on a reporting entity’s redemption probability assessment.

9.4.3.4 Illustrative Examples of Subsequent Measurement of Redeemable Noncontrolling Interests

Example 9-4

Assume the following:

Company A owns all of the outstanding common shares and is the parent of Subsidiary B.
Subsidiary B issued a preferred-share noncontrolling interest to Entity C on January 1, 20X7, for $1 million. The interest represents all of B’s outstanding preferred securities.
The preferred securities are not entitled to dividends but are redeemable by A at the security holder’s option for $1.25 million beginning on December 31, 20X8 (two years after issuance).
Company A has elected to apply the accretion method and uses the interest method to accrete the redeemable noncontrolling interest to the interest’s redemption price.

The parties’ interests are illustrated in the diagram below.

Company A has determined that an effective interest rate of 11.803 percent results in the redeemable noncontrolling interest being fully accreted to its redemption price by December 31, 20X8. Company A subsequently measures the noncontrolling interest at the following amounts:

December 31, 20X7 — $1,118,034

December 31, 20X8 — $1,250,000

The ASC 480 measurement adjustments that A records for 20X7 and 20X8 to measure the noncontrolling interest at the amounts above will affect A’s EPS computation. The exact impact on A’s EPS computation will depend on A’s policy elections for classifying the offsetting entry to its ASC 480 measurement adjustment (see Section 9.4.4.3 and Example 9-9).

Example 9-5

Assume the following:

Company X is the parent of Subsidiary Y.
Entity Z holds a 20 percent noncontrolling interest in the common shares of Y. Entity Z acquired that noncontrolling interest from X on January 1, 20X7, for $1 million (which is the initial carrying amount of the noncontrolling interest).

The parties’ interests are illustrated in the diagram below.

Further assume the following:

The noncontrolling interest is redeemable at the option of Z at any time for a price equal to fair value.3
When X recorded its ASC 810-10 attribution adjustment for the years ended December 31 of 20X7, 20X8, 20X9, and 20Y0, respectively, it attributed portions of Y’s net income (loss) to Z’s redeemable noncontrolling interest in Y as follows:
- Year ended December 31, 20X7 — $100,000.
- Year ended December 31, 20X8 — $128,000.
- Year ended December 31, 20X9 — ($500,000).
- Year ended December 31, 20Y0 — ($75,000).
Company X had a valuation of Z’s redeemable noncontrolling interest in Y performed for the years ended December 31 of 20X7, 20X8, 20X9, and 20Y0, respectively. On the basis of that valuation, X determined that the fair value of the redeemable noncontrolling interest was as follows:
- As of December 31, 20X7 — $1.25 million.
- As of December 31, 20X8 — $1.2 million.
- As of December 31, 20X9 — $718,000.
- As of December 31, 20Y0 — $675,000.

The table below shows, as of each of those year-ends, the (1) ASC 810-10 attribution adjustment, (2) cumulative ASC 810-10 attribution adjustments, (3) appraised fair value of the redeemable noncontrolling interest, and (4) carrying amount of the redeemable noncontrolling interest after application of ASC 810-10 and ASC 480-10-S99-3A.

Year Ended December 31	ASC 810-10 Attribution Adjustment	Cumulative ASC 810-10 Attribution Adjustments	Appraised Fair Value	Carrying Amount After Application of ASC 810- 10 and ASC 480-10-S99-3A	Comments
20X7	$100,000	$100,000	$1,250,000	$1,250,000	Carried at fair value (ASC 480 value) since this is higher than the carrying amount after cumulative ASC 810-10 attribution adjustments (i.e., $1,100,000).
20X8	$128,000	$228,000	$1,200,000	$1,228,000	Carried at amount equal to initial measurement of $1 million plus cumulative ASC 810-10 attribution adjustments since this is higher than fair value. Reversal of prior ASC 480 measurement adjustment will be required in current period.
20X9	($500,000)	($272,000)	$718,000	$728,000	Carried at amount equal to initial measurement of $1 million plus cumulative ASC 810-10 attribution adjustments of ($272,000) since this is higher than fair value. Carrying amount below initial temporary equity measurement of $1 million is required since this is a result of the application of ASC 810-10 (as opposed to a cumulative “negative” ASC 480 measurement adjustment).
20Y0	($75,000)	($347,000)	$675,000	$675,000	Carried at amount equal to fair value since this is higher than initial measurement of $1 million plus cumulative ASC 810-10 attribution adjustments (losses) of $347,000. Carrying amount below initial temporary equity measurement of $1 million is required since the $653,000 carrying amount of the redeemable noncontrolling interest after the ASC 810-10 attribution adjustments is less than the fair value redemption price. Note that the subsequent ASC 480 measurement adjustment of $22,000, while still resulting in a noncontrolling interest carrying amount below the initial temporary equity measurement of $1 million, is required since it increases the redeemable noncontrolling interest’s carrying amount after the ASC 810-10 attribution adjustment to reflect the impact of the fair value redemption option.

As explained in more detail in the next section, the ASC 480 measurement adjustments (if any) that X records to measure the noncontrolling interest at the amount indicated in the fourth column of the table above will not affect the parent’s EPS computation because the common-share noncontrolling interest is redeemable at fair value.

9.4.4 Determining the Offsetting Entry and the EPS Impact of ASC 480 Measurement Adjustments

ASC 480-10 — SEC Materials — SEC Staff Guidance

SEC Staff Announcement: Classification and Measurement of Redeemable Securities

S99-3A(21) Common stock instruments issued by a parent (or single reporting entity). Regardless of the accounting method selected in paragraph 15, the resulting increases or decreases in the carrying amount of redeemable common stock should be treated in the same manner as dividends on nonredeemable stock and should be effected by charges against retained earnings or, in the absence of retained earnings, by charges against paid-in capital. However, increases or decreases in the carrying amount of a redeemable common stock should not affect income available to common stockholders. Rather, the SEC staff believes that to the extent that a common shareholder has a contractual right to receive at share redemption (in other than a liquidation event that meets the exception in paragraph 3(f)) an amount that is other than the fair value of the issuer’s common shares, then that common shareholder has, in substance, received a distribution different from other common shareholders. Under Paragraph 260-10-45-59A, entities with capital structures that include a class of common stock with different dividend rates from those of another class of common stock but without prior or senior rights, should apply the two-class method of calculating earnings per share. Therefore, when a class of common stock is redeemable at other than fair value, increases or decreases in the carrying amount of the redeemable instrument should be reflected in earnings per share using the two-class method.FN17 For common stock redeemable at fair value, the SEC staff would not expect the use of the two-class method, as a redemption at fair value does not amount to a distribution different from other common shareholders. [Footnotes 18 and 19 omitted]

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FN17 The two-class method of computing earnings per share is addressed in Section 260-10-45. The SEC staff believes that there are two acceptable approaches for allocating earnings under the two-class method when a common stock instrument is redeemable at other than fair value. The registrant may elect to: (a) treat the entire periodic adjustment to the instrument’s carrying amount (from the application of paragraphs 14–16) as being akin to a dividend or (b) treat only the portion of the periodic adjustment to the instrument’s carrying amount (from the application of paragraphs 14–16) that reflects a redemption in excess of fair value as being akin to a dividend. Under either approach, decreases in the instrument’s carrying amount should be reflected in the application of the two-class method only to the extent they represent recoveries of amounts previously reflected in the application of the two-class method.

S99-3A(22) Noncontrolling interests. Paragraph 810-10-45-23 indicates that changes in a parent’s ownership interest while the parent retains control of its subsidiary are accounted for as equity transactions, and do not impact net income or comprehensive income in the consolidated financial statements. Consistent with Paragraph 810-10-45-23, an adjustment to the carrying amount of a noncontrolling interest from the application of paragraphs 14–16 does not impact net income or comprehensive income in the consolidated financial statements. Rather, such adjustments are treated akin to the repurchase of a noncontrolling interest (although they may be recorded to retained earnings instead of additional paid-in capital). The SEC staff believes the guidance in paragraphs 20 and 21 should be applied to noncontrolling interests as follows:

Noncontrolling interest in the form of preferred stock instrument. The impact on income available to common stockholders of the parent arising from adjustments to the carrying amount of a redeemable noncontrolling interest other than common stock depends upon whether the redemption feature in the equity instrument was issued, or is guaranteed, by the parent. If the redemption feature was issued, or is guaranteed, by the parent, the entire adjustment under paragraph 20 reduces or increases income available to common stockholders of the parent. Otherwise, the adjustment is attributed to the parent and the noncontrolling interest in accordance with Paragraphs 260-10-55-64 through 55-67.
Noncontrolling interest in the form of common stock instrument. Adjustments to the carrying amount of a noncontrolling interest issued in the form of a common stock instrument to reflect a fair value redemption feature do not impact earnings per share. Adjustments to the carrying amount of a noncontrolling interest issued in the form of a common stock instrument to reflect a non-fair value redemption feature do impact earnings per share; however, the manner in which those adjustments reduce or increase income available to common stockholders of the parent may differ.FN20 If the terms of the redemption feature are fully considered in the attribution of net income under Paragraph 810- 10-45-21, application of the two-class method is unnecessary. If the terms of the redemption feature are not fully considered in the attribution of net income under Paragraph 810-10-45-20, application of the two-class method at the subsidiary level is necessary in order to determine net income available to common stockholders of the parent.

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FN20 Subtopic 810-10 does not provide detailed guidance on the attribution of net income to the parent and the noncontrolling interest. The SEC staff understands that when a noncontrolling interest is redeemable at other than fair value some registrants consider the terms of the redemption feature in the calculation of net income attributable to the parent (as reported on the face of the income statement), while others only consider the impact of the redemption feature in the calculation of income available to common stockholders of the parent (which is the control number for earnings per share purposes).

As explained in Section 9.4, classification of the ASC 480 offsetting entry is driven by the nature of the redemption price (fair value vs. other than fair value) and, for common-share redeemable noncontrolling interests that are redeemable at other than fair value and all preferred-share redeemable noncontrolling interests, the entity’s policy for recording the ASC 480 measurement adjustments and for incorporating them into the parent’s EPS computation.

9.4.4.1 Common-Share Noncontrolling Interests Redeemable at Fair Value

When the redemption price of a common-share redeemable noncontrolling interest exceeds the noncontrolling interest’s ASC 810-10 carrying amount (i.e., its carrying amount after the attribution of income or loss to the noncontrolling interest), a reporting entity that is within the scope of ASC 480-10- S99-3A should record an ASC 480 measurement adjustment in accordance with that guidance. Although a fair value redemption feature provides the holder of the instrument with an important source of liquidity, some believe that the ASC 480 offsetting entry should be classified in APIC because fair value redemption features do not convey value to their holder that is incremental to what could be achieved in a transaction conducted at fair value with an unrelated marketplace participant. This view is consistent with the guidance in ASC 810-10-45-23 that requires changes in a parent’s ownership interest in a subsidiary over which the parent retains a controlling financial interest to be accounted for as equity transactions. Others believe that the guidance in ASC 480-10-S99-3A(21) on classifying ASC 480 offsetting entries for redeemable parent common shares indicates that the ASC 480 offsetting entry for the common-share redeemable noncontrolling interest should be classified in retained earnings (or APIC in the absence of retained earnings). We believe that either approach is acceptable as long as the classification is consistently applied to similar instruments. Regardless of classification, for a common-share redeemable noncontrolling interest that is redeemable at fair value, the ASC 480 offsetting entry has no impact on consolidated net income of the parent, net income attributable to the parent, or income available to common stockholders of the parent.

9.4.4.2 Common-Share Noncontrolling Interests Redeemable at Other Than Fair Value

The ASC 480 measurement adjustment for a common-share noncontrolling interest redeemable at other than fair value is intended, in part, to reflect the liquidity being provided to the redeemable noncontrolling interest holder for the entire redemption price and to also identify the noncontrolling interest’s potential to convey value to its holder that is incremental to the value that the holder of a nonredeemable common-share noncontrolling interest could receive in a transaction conducted at fair value with an unrelated marketplace participant. The multiple financial reporting objectives of the ASC 480 measurement adjustment, coupled with the accepted diversity in practice for achieving these objectives, makes classification of the ASC 480 offsetting entry one of the more complex aspects of U.S. GAAP to apply to redeemable noncontrolling interests.

To set the stage for the ensuing discussion and illustration of the various approaches that we believe are acceptable for achieving these financial reporting objectives, we note that a reporting entity must answer the following threshold questions before it can determine the impact of the ASC 480 measurement adjustment on its consolidated financial statements:

To what extent does the reporting entity wish the ASC 480 measurement adjustment to affect net income attributable to the parent, the parent’s reported EPS, or both? The reporting entity may elect one of the following approaches:
- Have the entire amount of the reporting period’s ASC 480 measurement adjustment affect net income attributable to the parent, the parent’s reported EPS, or both.
- Limit the impact of the reporting period’s ASC 480 measurement adjustment to the portion of the ASC 480 measurement adjustment necessary to ensure that on a cumulative basis, net income attributable to the parent, the parent’s reported EPS, or both has been reduced by the amount, if any, that the redeemable noncontrolling interest’s redemption price exceeds both (1) the redeemable noncontrolling interest’s fair value and (2) the redeemable noncontrolling interest’s ASC 810-10 carrying amount. This portion is hereafter referred to as the excess portion of the ASC 480 measurement adjustment or the excess portion of the ASC 480 offsetting entry.
  The remaining portion of the ASC 480 measurement adjustment necessary to ensure that the redeemable noncontrolling interest’s period-end carrying amount equals the greater of its ASC 810-10 carrying amount or its redemption price is hereafter referred to as the base portion of the ASC 480 measurement adjustment or the base portion of the ASC 480 offsetting entry. On a cumulative basis, this will be the amount, if any, by which the redeemable noncontrolling interest’s current redemption price is equal to or less than fair value but greater than the redeemable noncontrolling interest’s ASC 810-10 carrying amount. This portion of the ASC 480 measurement adjustment does not affect net income attributable to the parent, the parent’s reported EPS, or both.
Note that while the latter approach may reduce the impact of the ASC 480 measurement adjustment on net income attributable to the parent, the parent’s reported EPS, or both (as illustrated in the diagram and table below), it is also significantly more complex to apply. This is because the focus of the latter approach is on ensuring that the cumulative impact of the redemption feature is isolated to the amount by which the redemption price exceeds both the redeemable noncontrolling interest’s fair value and its ASC 810-10 carrying amount. Consequently, classification of each period’s ASC 480 measurement adjustment is affected by both (1) the noncontrolling interest’s redemption price, its ASC 810-10 carrying amount, and its fair value in the current period and (2) the amount and treatment of the ASC 480 measurement adjustment recognized in prior periods. As a result of this approach’s focus on the cumulative impact of redeemable noncontrolling interests on net income attributable to the parent, the parent’s reported EPS, or both, the ASC 480 measurement adjustment may comprise a positive base portion and a negative excess portion (or a negative base portion and a positive excess portion) in any given reporting period.
If the reporting entity elects to have the entire amount of the ASC 480 measurement adjustment affect net income attributable to the parent, the parent’s reported EPS, or both, how does the reporting entity wish to classify the entire ASC 480 offsetting entry?
If the reporting entity elects to limit the impact of the ASC 480 measurement adjustment to the excess portion of the ASC 480 measurement adjustment, how does the reporting entity wish to classify:
- The base portion of the ASC 480 measurement adjustment?
- The excess portion of the ASC 480 measurement adjustment?

The following approaches are acceptable for reflecting in consolidated financial reporting the ASC 480 measurement adjustment for common-share redeemable noncontrolling interests redeemable at other than fair value and represent the possible responses to the threshold questions above:

Income classification — entire adjustment method — Use net income (loss) attributable to noncontrolling interests to classify the entire ASC 480 offsetting entry. Because net income (loss) attributable to noncontrolling interests directly affects net income attributable to the parent’s common shareholders, which is the control number used for the parent’s EPS computation, use of this method does not require the reporting entity to make additional adjustments to the control number of the parent’s EPS computation to accurately reflect the impact of the redemption feature (see Example 9-6).
Equity classification — entire adjustment method — Use retained earnings to classify the entire ASC 480 offsetting entry. Because adjustments to retained earnings are not directly considered in net income attributable to the parent’s common shareholders, the parent must first apply the two-class method of calculating EPS (as discussed in ASC 260) at the subsidiary level, treating the entire amount of the ASC 480 offsetting entry as an adjustment to the control number of the subsidiary’s EPS computation. The resulting EPS amount determined at the subsidiary level for the class of subsidiary shares owned by the parent should then be used for determining the amount of subsidiary income that must be incorporated into the control number of the parent’s own EPS computation (see Example 9-6).
Income classification — excess adjustment method — Use net income (loss) attributable to noncontrolling interests to classify only the excess portion of the ASC 480 offsetting entry. The base portion of the ASC 480 offsetting entry may be consistently classified in either of the following:
- Retained earnings (or APIC in the absence of retained earnings) — The guidance in ASC 480-10-S99-3A(21) on classifying ASC 480 offsetting entries for redeemable parent common shares in retained earnings (or APIC in the absence of retained earnings) informs the acceptability of this approach for classifying in retained earnings the base portion of the ASC 480 offsetting entry (see Example 9-7).
- APIC — The guidance in ASC 810-10-45-23 that requires changes in a parent’s ownership interest to be accounted for as equity transactions informs the acceptability of this approach for classifying in APIC the base portion of the ASC 480 offsetting entry (see Example 9-7).
Because the income classification — excess adjustment method appropriately incorporates into net income (loss) attributable to the parent’s common shareholders the excess portion of the ASC 480 offsetting entry, the reporting entity does not need to make additional adjustments to the control number of the parent’s EPS computation to accurately reflect the impact of the redemption feature.
Equity classification — excess adjustment method — Always use retained earnings (or APIC in the absence of retained earnings) to classify the excess portion of the ASC 480 offsetting entry. The base portion of the ASC 480 offsetting entry may be consistently classified as either:
- Retained earnings (or APIC in the absence of retained earnings) — As noted above in the description of the income classification — excess adjustment method, ASC 480-10-S99-3A(21) informs the acceptability of this approach for classifying in retained earnings the base portion of the ASC 480 offsetting entry (see Example 9-8).
- APIC — As noted above in the description of the income classification —excess adjustment method, ASC 810-10-45-23 informs the acceptability of this approach for classifying in APIC the base portion of the ASC 480 offsetting entry (see Example 9-8).
As would be the case under the equity classification — entire adjustment method, because adjustments to retained earnings are not directly considered in net income attributable to the parent’s common shareholders, the parent must first apply the two-class method at the subsidiary level when using the equity classification — excess adjustment method, treating the excess portion of the ASC 480 offsetting entry as an adjustment to the control number of the subsidiary’s EPS computation. The resulting EPS amount determined at the subsidiary level (for the class of subsidiary shares owned by parent) should then be used for determining the amount of subsidiary income that must be incorporated into the control number of the parent’s own EPS computation.

The first two approaches are driven by the parent’s election (in accordance with footnote 17 of ASC 480-10-S99-3A) to reflect the entire amount of the ASC 480 measurement adjustment as being akin to a dividend that directly (income classification — entire adjustment method) or indirectly (equity classification — entire adjustment method) affects the parent’s EPS computation. The second two main approaches are driven by the parent’s election (in accordance with footnote 17 of ASC 480-10-S99-3A) to reflect only the excess portion of the ASC 480 measurement adjustment as being akin to a dividend that directly (income classification — excess adjustment method) or indirectly (equity classification — excess adjustment method) affects the parent’s EPS computation. Each of the excess adjustment methods has acceptable subpolicies that must be elected to clarify what component of stockholders’ equity (retained earnings or APIC) is used to classify the base portion of the ASC 480 measurement adjustment.

While we believe that the approaches above are acceptable alternatives, we would generally expect a reporting entity to consistently apply (and appropriately disclose) the same method across its entire portfolio of less than wholly owned subsidiaries. Further, as previously noted, although the excess adjustment methods could potentially reduce the cumulative impact of a redeemable noncontrolling interest on net income attributable to the parent or the parent’s reported EPS, the cumulative focus of these approaches makes them significantly more complex to apply (which is why many reporting entities elect to apply one of the entire adjustment methods in practice). Given the significance of both net income attributable to the parent and net income attributable to the parent’s common shareholders (the control number of the parent’s EPS computation), reporting entities that elect to apply one of the excess adjustment methods should ensure that they have adequate internal control over financial reporting to minimize the risk of a material misstatement.

Entities may find the diagram and table below helpful when evaluating the potential application of the above concepts.

Does the interest’s redemption price exceed its ASC 810-10 carrying amount4 after attribution of current-period earnings?	On a cumulative basis, has the reporting entity recorded any ASC 480-10 measurement adjustments through the end of the prior period?	Is a portion of the cumulative ASC 480-10 measurement adjustments recorded in prior periods related to a redemption price that exceeded the noncontrolling interest’s then fair value? That is, were any of the interest’s cumulative ASC 480-10 measurement adjustments classified as excess portion?	Does the interest’s redemption price exceed its fair value in the current period?	What is the current-period ASC 480-10 measurement adjustment classification?	Comments
No	No	N/A	N/A	None	ASC 480-10 does not permit a redeemable noncontrolling interest’s carrying amount to be reduced below its ASC 810-10 carrying amount (see Section 9.4.3.2). Further, there is no cumulative prior-period ASC 480-10 measurement adjustment that would require reversal in the current period.
No	Yes	No	N/A	Base portion	Because the interest’s redemption price does not exceed its period-end ASC 810-10 carrying amount, the reporting entity’s cumulative ASC 480-10 measurement adjustments should equal zero. Since the reporting entity on a cumulative basis has previously recorded ASC 480-10 measurement adjustments classified as base portion, the current-period ASC 480-10 measurement adjustment that is required to adjust the interest to its ASC 810-10 carrying amount (i.e., the reversing entry) will be classified as base portion. Consequently, the current-period ASC 480-10 measurement adjustment will have no direct or indirect impact on the parent’s EPS computation.
No	Yes	Yes	N/A	Base portion, excess portion, or both	Because the interest’s redemption price does not exceed its period-end ASC 810-10 carrying amount, the reporting entity’s cumulative ASC 480-10 measurement adjustments should equal zero. Since the reporting entity has previously recorded on a cumulative basis ASC 480-10 measurement adjustments classified as base portion, excess portion, or both, the current-period ASC 480-10 measurement adjustment that is required to adjust the interest to its ASC 810-10 carrying amount (i.e., the reversing entry) will be classified as base portion, excess portion, or both in amounts that equal and offset the cumulative amounts classified as such in prior periods.5,6 Only the excess portion (if any) of the current-period ASC 480-10 measurement adjustment will have a direct or indirect impact on the parent’s EPS computation.
Yes	No	N/A	No	Base portion	Because the interest’s redemption price exceeds its period-end ASC 810-10 carrying amount, the reporting entity’s cumulative ASC 480-10 measurement adjustments should equal the excess of the interest’s redemption price over its ASC 810-10 carrying amount. Since the reporting entity has not previously recorded on a cumulative basis any ASC 480-10 measurement adjustments and the interest’s redemption price is less than its fair value, the current-period ASC 480-10 measurement adjustment that is required to adjust the interest to its redemption price will be classified as base portion and will not have a direct or indirect impact on the parent’s EPS computation.5,6
Yes	No	N/A	Yes	Base portion, excess portion, or both	Because the interest’s redemption price exceeds its period-end ASC 810-10 carrying amount, the reporting entity’s cumulative ASC 480-10 measurement adjustments should equal the excess of the interest’s current-period redemption price over its current-period ASC 810-10 carrying amount. Since the reporting entity has not previously recorded on a cumulative basis any ASC 480-10 measurement adjustments and the interest’s redemption price exceeds its fair value, the current-period ASC 480-10 measurement adjustment that is required to adjust the interest to its redemption price will be classified as base portion, excess portion, or both.5,6 Only the excess portion (if any) will have a direct or indirect impact on the parent’s EPS computation.
Yes	Yes	No	No	Base portion	Because the interest’s redemption price exceeds its period-end ASC 810-10 carrying amount, the reporting entity’s cumulative ASC 480-10 measurement adjustments should equal the excess of the interest’s current-period redemption price over its current-period ASC 810-10 carrying amount. The redemption price’s status below the interest’s fair value requires the reporting entity’s ASC 480-10 measurement adjustments to be classified entirely as base portion on a cumulative basis. Since the reporting entity has not classified on a cumulative basis any portion of its ASC 480-10 measurement adjustments as excess portion, 100 percent of the current-period ASC 480-10 measurement adjustment that is required to adjust the interest to its redemption price will be classified as base portion. Consequently, the current-period ASC 480-10 measurement adjustment will have no direct or indirect impact on the parent’s EPS computation.
Yes	Yes	No	Yes	Base portion, excess portion, or both	Because the interest’s redemption price exceeds its period-end ASC 810-10 carrying amount, the reporting entity’s cumulative ASC 480-10 measurement adjustments should equal the excess of the interest’s current-period redemption price over its current-period ASC 810-10 carrying amount. The redemption price’s status above the interest’s fair value requires the reporting entity’s ASC 480-10 measurement adjustments to be classified on a cumulative basis as base portion and excess portion.5,6 The reporting entity will classify the portion of its current-period ASC 480-10 measurement adjustments as base portion, excess portion, or both in the amounts necessary to ensure that cumulative classification is correct. Only the excess portion (if any) of the current-period ASC 480-10 measurement adjustment will have a direct or indirect impact on the parent’s EPS computation.
Yes	Yes	Yes	No	Base portion, excess portion, or both	Because the interest’s redemption price exceeds its period-end ASC 810-10 carrying amount, the reporting entity’s cumulative ASC 480-10 measurement adjustments should equal the excess of the interest’s current-period redemption price over its current-period ASC 810-10 carrying amount. The redemption price’s status below the interest’s fair value requires the reporting entity’s ASC 480-10 measurement adjustments to be classified on a cumulative basis as only base portion.5 The reporting entity will classify the portion of its current-period ASC 480-10 measurement adjustments as base portion, excess portion, or both in the amounts necessary to ensure that cumulative classification is correct.6 Only the excess portion (if any) of the current-period ASC 480-10 measurement adjustment will have a direct or indirect impact on the parent’s EPS computation.
Yes	Yes	Yes	Yes	Base portion, excess portion, or both	Because the interest’s redemption price exceeds its period-end ASC 810-10 carrying amount, the reporting entity’s cumulative ASC 480-10 measurement adjustments should equal the excess of the interest’s current-period redemption price over its current-period ASC 810-10 carrying amount. The redemption price’s status above the interest’s fair value requires the reporting entity’s ASC 480-10 measurement adjustments to be classified on a cumulative basis as base portion and excess portion.5 The reporting entity will classify the portion of its current-period ASC 480-10 measurement adjustments as base portion, excess portion, or both in the amounts necessary to ensure that cumulative classification is correct.6 Only the excess portion (if any) of the current-period ASC 480-10 measurement adjustment will have a direct or indirect impact on the parent’s EPS computation.

We believe that the acceptability of the income classification and equity classification methods (provided that the method selected is consistently applied across the parent’s entire portfolio of less than wholly owned subsidiaries) is consistent with the diversity in practice acknowledged by the SEC staff in footnote 20 of ASC 480-10-S99-3A, which states, in part:

The SEC staff understands that when a noncontrolling interest is redeemable at other than fair value some registrants consider the terms of the redemption feature in the calculation of net income attributable to the parent (as reported on the face of the income statement), while others only consider the impact of the redemption feature in the calculation of income available to common stockholders of the parent (which is the control number for earnings per share purposes).

Note that unless otherwise indicated, all of the adjustment methods, as well as Examples 9-6 through 9-8, presume that the common-share noncontrolling interest is redeemable by the subsidiary itself (as opposed to being redeemable or guaranteed by the parent). In a manner consistent with this presumption, and as illustrated in Examples 9-6 through 9-8, the financial statements of Subsidiary H are directly affected by the ASC 480 measurement adjustment that is used to record the redemption feature held by Entity I (the noncontrolling interest holder). Once recorded by H, the entire impact of the ASC 480 measurement adjustment is attributed to Company G as the sole holder of H’s nonredeemable common shares (i.e., G’s controlling interest in H). If I’s common-share noncontrolling interest were redeemable directly by the parent, H’s financial statements would not be affected by the ASC 480 measurement adjustment; rather, the entire amount of such adjustment would be directly attributed to G as a consolidating entry. Thus, although the mechanics may be different, we would expect the accounting outcomes to be the same on a consolidated basis when the adjustment methods illustrated in Examples 9-6 through 9-8 are applied, regardless of whether the common-share noncontrolling interest is redeemable by the subsidiary itself or by the parent.

Connecting the Dots

As noted in Chapter 3, noncontrolling interests exist only from the perspective of the parent that prepares consolidated financial statements. Accordingly, classification of ASC 480 offsetting entries in net income attributable to the parent, retained earnings, or APIC under any of the adjustment methods outlined above refers to the accounts presented in the parent’s consolidated financial statements. Further, the EPS discussion that accompanies the description of each adjustment method presumes that the common-share noncontrolling interest is redeemable by the subsidiary that issued the interest (as opposed to the subsidiary’s parent). As with all consolidated reporting, achieving the outcomes summarized above depends on a combination of the subsidiary’s own accounting policies and the subsequent consolidation and eliminating entries applied during the consolidation process to achieve the consolidated financial reporting results described in the illustrative examples below. Preparers looking for guidance applicable to the preparation of the subsidiary’s stand-alone financial statements should refer to ASC 480-10-S99-3A(15) and ASC 480-10-S99-3A(21).

9.4.4.2.1 Illustrative Examples of Adjustment Methods

9.4.4.2.1.1 Application of Entire Adjustment Methods Related to Income Classification and Equity Classification, Respectively

Example 9-6

Assume the following:

Company G is the parent of Subsidiary H.
Entity I holds a 20 percent noncontrolling interest in the common shares of H, which it acquired from G on January 1, 20X6, for $1.1 million (which is the initial carrying amount of the noncontrolling interest).
The noncontrolling interest is redeemable at the option of I at a formulaic redemption price that does not equal fair value.
Company G has elected to use the immediate method to record ASC 480 measurement adjustments.
Company G determines the fair value of I’s noncontrolling interest at the end of each reporting period.
Neither G nor H has any outstanding securities other than those described above.
There are no intercompany transactions between G and H that require the elimination of intercompany profit or loss.
Company G has sufficient retained earnings to cover any portion of ASC 480 offsetting entries that are classified in retained earnings.
To classify its ASC 480 offsetting entry and calculate EPS, G applies either (1) the income classification — entire adjustment method or (2) the equity classification — entire adjustment method.

The parties’ respective interests are illustrated in the diagram below.

The following amounts will be relevant to G’s financial reporting for the periods ended 20X6, 20X7, 20X8, and 20X9 (all numbers in thousands):

20X6

ASC 810-10 Attribution Adjustment/ASC 480 Measurement Adjustment/Offsetting Entry

For the period ended December 31, 20X6, G uses the journal entries below to subsequently measure I’s noncontrolling interest in H.

EPS Impact

Income Classification — Entire Adjustment Method

For the period ended December 31, 20X6, and each subsequent period presented in this example, because net income (loss) attributable to the noncontrolling interest directly affects net income attributable to G’s common shareholders, use of the income classification — entire adjustment method does not require additional adjustments to the control number of G’s EPS computation. Company G will report net income attributable to G of $1,797,000, as shown in the table below.

Equity Classification — Entire Adjustment Method

Company G first applies the two-class method at the subsidiary level, recognizing the entire amount of the ASC 480 offsetting entry as an adjustment to the control number in H’s EPS computation. Company G then uses the resulting EPS amount determined at the subsidiary level for the class of H shares owned by G to determine the amount of H’s income that must be incorporated into the control number of G’s own EPS computation. Company G will report net income attributable to G’s common shareholders (the control number for G’s EPS computation) of $1,797,000, as shown in the table below.

For this period and all subsequent reporting periods, application of the two-class method at the subsidiary level has been simplified by the lack of any other participating securities or common-share equivalents at the subsidiary or parent level.

20X7

ASC 810-10 Attribution Adjustment/ASC 480 Measurement Adjustment/Offsetting Entry

For the period ended December 31, 20X7, G uses the journal entries below to subsequently measure I’s noncontrolling interest in H.

EPS Impact

Income Classification — Entire Adjustment Method

Company G will report net income attributable to G of $2,133,000, as shown in the table below.

Equity Classification — Entire Adjustment Method

Company G will report net income attributable to G’s common shareholders (the control number for G’s EPS computation) of $2,133,000, as shown in the table below.

20X8

ASC 810-10 Attribution Adjustment/ASC 480 Measurement Adjustment/Offsetting Entry

For the period ended December 31, 20X8, G uses the journal entries below to subsequently measure I’s noncontrolling interest in H.

EPS Impact

Income Classification — Entire Adjustment Method

Company G will report net income attributable to G of $2,585,000, as shown in the table below.

Equity Classification — Entire Adjustment Method

Company G will report net income attributable to G’s common shareholders (the control number for G’s EPS computation) of $2,585,000, as shown in the table below.

20X9

ASC 810-10 Attribution Adjustment/ASC 480 Measurement Adjustment/Offsetting Entry

For the period ended December 31, 20X9, G uses the journal entries below to subsequently measure I’s noncontrolling interest in H.

EPS Impact

Income Classification — Entire Adjustment Method

Company G will report net income attributable to G of $2,060,000, as shown in the table below.

Equity Classification — Entire Adjustment Method

Company G will report net income attributable to G’s common shareholders (the control number for G’s EPS computation) of $2,060,000, as shown in the table below.

9.4.4.2.1.2 Application of Income Classification — Excess Adjustment Method (Additional Paid-In Capital or Retained Earnings)

Example 9-7

Assume the same facts as in Example 9-6, except that Company G has elected to apply the income classification — excess adjustment method, including one of the method’s required subpolicies (APIC or retained earnings). This illustrative example highlights the financial reporting and EPS impact of applying the method and each subpolicy. For ease of reference, we have repeated the facts and figures that will be relevant to G’s financial reporting for the periods ended 20X6, 20X7, 20X8, and 20X9.

In this example:

Subsidiary H has 1 million common shares outstanding, of which G holds 800,000 and Entity I holds 200,000.
Subsidiary H has no securities outstanding other than those described above.

Key figures associated with G, H, and the noncontrolling interest that I holds in H are as follows (all numbers in thousands):

20X6

ASC 810-10 Attribution Adjustment/ASC 480 Measurement Adjustment/Offsetting Entry

For the period ended December 31, 20X6, G uses the journal entries below to subsequently measure I’s noncontrolling interest in H under the income classification — excess adjustment method (APIC/retained earnings).

EPS Impact

Because G has elected to apply the income classification — excess adjustment method (including one of the method’s required subpolicies), net income attributable to G’s common shareholders will be directly affected by the portion of the ASC 480 offsetting entry that reflects the cumulative excess (if any) of the noncontrolling interest’s redemption price over the instrument’s fair value. Accordingly, regardless of G’s classification (APIC or retained earnings) of the portion of the ASC 480 offsetting entry arising from redemption prices below fair value, no additional adjustment to net income attributable to G’s common shareholders (the control number for G’s EPS computation) is required. Specific to this period, because 100 percent of the ASC 480 measurement adjustment is related to a redemption price that is less than fair value, none of the ASC 480 offsetting entry is classified in net income attributable to noncontrolling interests. Accordingly, G reports net income attributable to G of $1,820,000 for 20X6, as shown in the table below.

For this period and in all subsequent reporting periods, application of the two-class method at the subsidiary has been simplified by the lack of any other participating securities or common-share equivalents.

20X7

ASC 810-10 Attribution Adjustment/ASC 480 Measurement Adjustment Offsetting Entry

For the period ended December 31, 20X7, G uses the journal entries below to subsequently measure I’s noncontrolling interest in H.

EPS Impact

The 20X7 period-end carrying amount of the noncontrolling interest is solely related to the noncontrolling interest’s initial measurement ($1,100,000) plus cumulative attribution of earnings to the noncontrolling interest ($345,000) since this amount ($1,445,000) exceeds the noncontrolling interest’s redemption price ($1,414,000). Consequently, 100 percent of the ASC 480 measurement adjustment for 20X7 reflects a reversal of the 20X6 ASC 480 measurement adjustment. Because the 20X6 ASC 480 measurement adjustment arose from a 20X6 redemption price ($1,278,000) that was less than the noncontrolling interest’s 20X6 fair value ($1,350,000), the 20X6 ASC 480 measurement adjustment was classified in equity under the income classification — excess adjustment method and did not affect net income attributable to noncontrolling interests. As a result, the entire amount of the 20X7 ASC 480 measurement adjustment is also classified in equity and does not affect net income attributed to G. Otherwise, G would be provided with an EPS benefit in 20X7 related to the reversal of a 20X6 item that did not itself negatively affect the 20X6 EPS calculation. Accordingly, for 20X7, G reports net Income attributable to G of $2,110,000, as shown in the table below.

20X8

ASC 810-10 Attribution Adjustment/ASC 480 Measurement Adjustment/Offsetting Entry

For the period ended December 31, 20X8, G uses the journal entries below to subsequently measure I’s noncontrolling interest in H.

EPS Impact

Because 100 percent of the ASC 480 measurement adjustment for 20X8 arises from a redemption price that exceeds the redeemable noncontrolling interest’s fair value, all of the ASC 480 offsetting entry is classified in net income attributable to noncontrolling interests. Accordingly, G reports net income attributable to G of $2,585,000, as shown in the table below.

20X9

ASC 810-10 Attribution Adjustment/ASC 480 Measurement Adjustment/Offsetting Entry

For the period ended December 31, 20X9, G uses the journal entries below to subsequently measure I’s noncontrolling interest in H.

EPS Impact

Of the ASC 480 measurement adjustment for 20X9, $23,000 is related to the amount necessary to recognize (on a cumulative basis) in net income attributable to noncontrolling interests the excess of the redemption price over the redeemable noncontrolling interest’s fair value. The remaining $17,000 of the ASC 480 offsetting entry is classified in APIC or retained earnings (depending on G’s policy election). Accordingly, for 20X9, the parent reports net income attributable to G of $2,077,000, as shown in the table below.

9.4.4.2.1.3 Application of Equity Classification — Excess Adjustment Method (Additional Paid-In Capital or Retained Earnings)

Example 9-8

Assume the same facts as in Example 9-6, except that Company G has elected to apply the equity classification — excess adjustment method, including one of the method’s required subpolicies (APIC or retained earnings). This illustrative example highlights the financial reporting and EPS impact of applying the method and each subpolicy. For ease of reference, we have repeated the facts and figures that will be relevant to G’s financial reporting for the periods ended 20X6, 20X7, 20X8, and 20X9.

In this example:

Subsidiary H has 1 million common shares outstanding, of which G holds 800,000 and Entity I holds 200,000.
Subsidiary H has no securities outstanding other than those described above.

Key figures associated with G, H, and the noncontrolling interest that I holds in H are as follows (all numbers in thousands):

20X6

ASC 810-10 Attribution Adjustment/ASC 480 Measurement Adjustment/Offsetting Entry

For the period ended December 31, 20X6, G uses the journal entries below to subsequently measure I’s noncontrolling interest in H under the equity classification — excess adjustment method (APIC/retained earnings).

EPS Impact

Because G has elected to apply the equity classification — excess adjustment method (including one of the method’s subpolicies), net income attributable to G’s common shareholders will not be directly affected by the portion of the ASC 480 offsetting entry that reflects the excess (if any) of the noncontrolling interest’s redemption price over the instrument’s fair value. Accordingly, G recognizes the excess portion of the ASC 480 offsetting entry as an adjustment to the control number of H’s EPS computation. Company G then uses the resulting EPS amount determined at the subsidiary level for the class of H shares owned by G to determine the amount of H’s income that must be incorporated into the control number of G’s own EPS computation. Company G will report net income attributable to G’s common shareholders (the control number for G’s EPS computation) of $1,820,000, as shown in the table below.

20X7

ASC 810-10 Attribution Adjustment/ASC 480 Measurement Adjustment/Offsetting Entry

For the period ended December 31, 20X7, G uses the journal entries below to subsequently measure I’s noncontrolling interest in H.

EPS Impact

The 20X7 period-end carrying amount of the noncontrolling interest is solely related to the noncontrolling interest’s initial measurement ($1,100,000) plus the cumulative attribution of earnings to the noncontrolling interest ($345,000) since this amount ($1,445,000) exceeds the noncontrolling interest’s redemption price ($1,414,000). Consequently, 100 percent of the ASC 480 measurement adjustment for 20X7 reflects a reversal of the 20X6 ASC 480 measurement adjustment. Because the 20X6 ASC 480 measurement adjustment arose from a 20X6 redemption price ($1,278,000) that was less than the noncontrolling interest’s 20X6 fair value ($1,350,000), the 20X6 ASC 480 measurement adjustment under the equity classification — excess adjustment method did not affect (reduce) the net income (of H) attributable to G’s shareholders. As a result, the entire amount of the 20X7 ASC 480 measurement adjustment is excluded from the net income (of H) attributable to G’s shareholders. Otherwise, G would be provided with an EPS benefit in 20X7 related to the reversal of a 20X6 item that did not itself negatively affect the 20X6 EPS calculation. Accordingly, for 20X7, G reports net income attributable to G’s shareholders of $2,110,000, as shown in the table below.

20X8

ASC 810-10 Attribution Adjustment/ASC 480 Measurement Adjustment/Offsetting Entry

For the period ended December 31, 20X8, G uses the journal entries below to subsequently measure I’s noncontrolling interest in H.

For 20X8, all of the 20X8 ASC 480 offsetting entry is classified in retained earnings under either subpolicy of the equity classification — excess adjustment method. This is because under that method, retained earnings (or APIC in the absence of retained earnings) are used to classify the excess portion of the ASC 480 offsetting entry and for 20X8, there is no base portion of the ASC 480 offsetting entry. Further, as stated in the facts, G has sufficient retained earnings to absorb the $15,000 debit arising from the ASC 480 measurement adjustment.

EPS Impact

For 20X8, the entire ASC 480 offsetting entry arises from a redemption price in excess of the redeemable noncontrolling interest’s fair value. Accordingly, 100 percent of the ASC 480 offsetting entry is incorporated as an adjustment to the subsidiary’s two-class calculation. Further, G reports net income attributable to G’s common shareholders (the control number for G’s EPS computation) of $2,585,000 for 20X8, as shown in the table below.

20X9

ASC 810-10 Attribution Adjustment/ASC 480 Measurement Adjustment/Offsetting Entry

For the period ended December 31, 20X9, G uses the journal entries below to subsequently measure I’s noncontrolling interest in H.

Of the ASC 480 measurement adjustment for 20X9, $23,000 is related to the amount necessary to recognize (on a cumulative basis) in net income attributable to noncontrolling interests the amount by which the redemption price exceeds the redeemable noncontrolling interest’s fair value. Under the equity classification — excess adjustment method, this amount (i.e., the excess portion of the ASC 480 measurement adjustment) must be classified in retained earnings. The remaining $17,000 of the ASC 480 offsetting entry (i.e., the base portion of the ASC measurement adjustment) is classified in APIC or retained earnings (depending on G’s policy election).

EPS Impact

For 20X9, $23,000 of ASC 480 offsetting entry is the amount necessary to recognize in retained earnings (on a cumulative basis) the excess of the redemption price over the redeemable noncontrolling interest’s fair value. This amount must also be incorporated as an adjustment to the subsidiary’s two-class calculation. In 20X9, G reports net income attributable to G’s common shareholders (the control number of G’s EPS computation) of $2,077,000, as shown in the table below.

9.4.4.3 Preferred-Share Redeemable Noncontrolling Interests

Like the ASC 480 measurement adjustment used for common-share redeemable noncontrolling interests, the ASC 480 measurement adjustment for preferred-share redeemable noncontrolling interests is partly intended to reflect the liquidity provided by such features and the potential for the interests to convey value to their holder in excess of their initial carrying amount and any associated dividend rights. A reporting entity should classify ASC 480 offsetting entries for preferred-share redeemable noncontrolling interest by applying the same classification policy it elected for recording preferred dividends of a subsidiary in the parent’s financial statements (see Section 6.8). However, unlike in situations involving ASC 480 offsetting entries for common-share redeemable noncontrolling interests, it is not appropriate to bifurcate the periodic measurement adjustment for preferred-share redeemable noncontrolling interests into components corresponding to changes in redemption price in excess of fair value (i.e., the excess portion) and changes less than fair value (i.e., the base portion). Rather, the entire amount of the ASC 480 offsetting entry is recorded in a manner akin to the recording of a dividend to reflect that changes in the redemption price of preferred-share redeemable noncontrolling interests ultimately affect net assets that would otherwise be available to common shareholders of the parent. The following classification methods may be used:

Preferred-share income classification method — Use net income (loss) attributable to preferred-share noncontrolling interests to classify the entire ASC 480 offsetting entry.
Preferred-share equity classification method — Classify the ASC 480 offsetting entry as an adjustment to retained earnings (or APIC in the absence of retained earnings).

The method applied must be used for all preferred-share redeemable noncontrolling interests. Under either classification method, ASC 480-10-S99-3A(22) requires that “[i]f the redemption feature was issued, or is guaranteed, by the parent, the entire [ASC 480 offsetting entry] reduces or increases income available to common stockholders of the parent. Otherwise, the adjustment is attributed to the parent and the noncontrolling interest.”

The example below illustrates the application of the two classification methods to preferred-share noncontrolling interests that are redeemable by the parent.

Example 9-9

Recall the following facts from Example 9-4:

Company A owns all of the outstanding common shares of Subsidiary B.
On January 1, 20X7, Subsidiary B issued a preferred-share noncontrolling interest to Entity C, an unrelated third party, for $1 million. The interest represents all of B’s outstanding preferred securities.
The preferred securities are not entitled to dividends but are redeemable by A at their holder’s option for $1.25 million beginning on December 31, 20X8 (two years after issuance).
Company A has elected to apply the accretion method and uses the interest method to accrete the redeemable noncontrolling interest to the interest’s redemption price.

Company A has determined that an effective interest rate of 11.803 percent results in the redeemable noncontrolling interest’s being fully accreted to its redemption price by December 31, 20X8. Company A subsequently measures the noncontrolling interest at the following amounts:

Assume also that:

Company A and Subsidiary B report the following net income for 20X7 and 20X8:
For A, the amounts reported are exclusive of A’s investment in B.
Company A and its subsidiary have no intercompany transactions that require elimination.
Company A has sufficient retained earnings to cover ASC 480 offsetting entries that are classified in retained earnings.

ASC 480 Measurement Adjustment/Offsetting Entry

Company A uses the journal entries below to subsequently measure C’s noncontrolling interest in B.

EPS Impact

Preferred-Share Income Classification Method

For the periods ended December 31, 20X7, and December 31, 20X8, the income classification method will directly affect net income attributable to A, which is the starting point of A’s EPS computation. As shown in the tables below, A will report net income attributable to A of $14,318,966 and $16,455,034 in 20X7 and 20X8, respectively.

Preferred-Share Equity Classification Method

For the periods ended December 31, 20X7, and December 31, 20X8, the equity classification method will not directly affect net income attributable to A, which is the starting point of A’s EPS computation. Consequently, even in the absence of a common-share noncontrolling interest, A will be required to record an adjustment to net income attributable to A to arrive at net income attributable to A’s common shareholders. As shown in the tables below, A will report net income attributable to A of $14,437,000 and $16,587,000 in 20X7 and 20X8, respectively, and net income attributable to A’s common shareholders of $14,318,966 and $16,455,034 for the same periods.

Connecting the Dots

As previously discussed, a reporting entity can use either an entire adjustment method or an excess adjustment method to classify a common-share redeemable noncontrolling interest’s ASC 480 offsetting entry and determine the EPS impact of a common-share redeemable noncontrolling interest’s ASC 480 measurement adjustment. However, we believe that in circumstances such as those in Example 9-9 that involve a preferred-share redeemable noncontrolling interest, it is not acceptable to bifurcate the ASC 480 offsetting entry into an excess portion and a base portion. Rather, the entire amount of the preferred-share redeemable noncontrolling interest’s ASC 480 measurement adjustment should affect the parent’s EPS calculation directly (through application of the income classification method) or indirectly (through application of the equity classification method and an accompanying adjustment to net income attributable to the parent’s common shareholders).

Example 9-9 assumes that the preferred-share noncontrolling interest held by Entity C is redeemable by Company A, the 100 percent owner of Subsidiary B’s common shares. Consequently, 100 percent of the ASC 480 measurement adjustment has been attributed to A as the counterparty to the redemption feature. If the preferred-share noncontrolling interest held by C were redeemable by B itself, the resulting impact of the ASC 480 measurement adjustment would be attributed to B’s common shareholder(s). Although the mechanics may differ, because A is the sole common shareholder of B, we would expect the accounting outcome to be the same on a consolidated basis regardless of whether the preferred-share noncontrolling interest is redeemable by the subsidiary itself or by the parent. If, on the other hand, B’s common shares were held by multiple investors (rather than by A alone) and there were no other contractual arrangements that could shift the allocation of income or loss between the common shareholders, the impact of the ASC 480 measurement adjustment would be attributed to the parent and the common-share noncontrolling interest holders on the basis of their common-share ownership percentages.

9.4.4.4 Additional SEC Reporting Considerations

In accordance with SAB Topic 6.B, an SEC registrant that elects to use an equity classification method must present earnings attributable to common stockholders on the face of the consolidated statement of income “when [those earnings are] materially different in quantitative terms from reported net income or loss [attributable to the parent] or when [those earnings are] indicative of significant trends or other qualitative considerations.” Otherwise, an SEC registrant that elects to use an equity classification method can present such amounts in the footnotes to the consolidated financial statements.

Footnote 2 of SAB Topic 6.B states that “absent concerns about trends or other qualitative considerations, the [SEC] staff generally will not insist on the reporting of income or loss applicable to common stock if the amount differs from net income or loss by less than ten percent.” In accordance with SAB Topic 6.B, if adjustments between net income attributable to the parent and net income attributable to the common stockholders are material, the adjustments between the two amounts should be included on the face of the consolidated statement of income. Such adjustments, including any applicable ASC 480 measurement adjustment that has not already been recognized as a component of net income or loss attributable to the noncontrolling interest holders, should be presented on separate lines on the face of the consolidated statement of income as adjustments to reported net income attributable to the parent. The adjustments are necessary to reconcile net income attributable to the parent to net income attributable to the parent’s common stockholders, which is the control number for EPS purposes. This presentation is consistent with the presentation under the equity classification method in Example 9-9.

9.4.5 Redemption Accounting

An entity should apply the guidance in ASC 810-10-45-23 to account for the acquisition of a noncontrolling interest. ASC 810-10-45-23 states, in part, that “[c]hanges in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary shall be accounted for as equity transactions.” Step acquisition accounting no longer applies. Refer to Sections 7.1.2 through 7.1.2.8 for additional details on accounting for changes in a parent’s ownership interest.

9.4.5.1 Redemptions of Common-Share Noncontrolling Interests

Specifically with respect to redemptions of noncontrolling interests in the form of common shares, we observe that reporting entities may apply different accounting policies to reflect the actual repurchase of such interests. Some reporting entities that apply the equity classification adjustment methods first reverse ASC 480 measurement adjustments that were previously recognized in retained earnings before accounting for the actual redemption. Other reporting entities choose not to make such reversing entries. These alternative policies only affect whether the excess (shortfall) of the repurchase price over (below) the initial amount recorded to equity is reflected as a reduction (increase) in retained earnings or a reduction (increase) in APIC. For an entity that applies a reversal policy (i.e., reverses previously recorded ASC 480 measurement adjustments in retained earnings before reflecting the redemption), the reversing entry should be limited to amounts previously recognized in retained earnings that did not affect EPS.

For more information about these equity classification adjustment methods and to understand the extent to which they affect the reporting entity’s EPS calculation, refer to the discussion of common-share noncontrolling interests redeemable at fair value (Section 9.4.4.1) and the discussion of common-share noncontrolling interests redeemable at other than fair value (Section 9.4.4.2).

9.4.5.2 Redemptions of Preferred-Share Noncontrolling Interests

Specifically with respect to redemptions of noncontrolling interests in the form of preferred shares, ASC 260-10-S99-2 states, in part:

The SEC staff believes that the difference between the fair value of the consideration transferred to the holders of the preferred stock and the carrying amount of the preferred stock in the registrant’s balance sheet represents a return to (from) the preferred stockholder that should be treated in a manner similar to the treatment of dividends paid on preferred stock.

Thus, if the price at which the preferred shares are redeemed differs from the price stated in the redemption feature (which would already have been properly reflected in the application of the subsequent measurement guidance discussed in Sections 9.4.3 and 9.4.4), the reporting entity should:

Rebalance the equity accounts between the controlling and noncontrolling interests (as discussed in Section 7.1.2.8).
Apply the accounting guidance in ASC 260-10-S99-2 to determine whether there is an additional EPS impact related to the difference in price.

9.4.6 Accounting for the Expiration of a Redemption Feature

If the redemption feature embedded in the noncontrolling interest expires without being exercised, the carrying amount of the noncontrolling interest should be reclassified into permanent equity of the parent. The previously recorded excess amounts should not be reversed. Specifically, ASC 480-10-S99- 3A(18) states, in part:

[T]he existing carrying amount of the equity instrument should be reclassified to permanent equity at the date of the event that caused the reclassification. Prior financial statements are not adjusted. Additionally, the SEC staff believes that it would be inappropriate to reverse any adjustments previously recorded to the carrying amount of the equity instrument (pursuant to paragraphs 14–16) in conjunction with such reclassifications.

9.4.7 Accounting for the Deconsolidation of a Subsidiary

ASC 480-10 — SEC Materials — SEC Staff Guidance

SEC Staff Announcement: Classification and Measurement of Redeemable Securities

S99-3A(19) Section 810-10-40 provides guidance on the measurement of the gain or loss that is recognized in net income when a parent deconsolidates a subsidiary. As indicated in Paragraph 810-10-40-5, that gain or loss calculation is impacted by the carrying amount of any noncontrolling interest in the former subsidiary. Since adjustments to the carrying amount of a noncontrolling interest from the application of paragraphs 14–16 do not initially enter into the determination of net income, the SEC staff believes that the carrying amount of the noncontrolling interest that is referred to in Paragraph 810-10-40-5 should similarly not include any adjustments made to that noncontrolling interest from the application of paragraphs 14–16. Rather, previously recorded adjustments to the carrying amount of a noncontrolling interest from the application of paragraphs 14–16 should be eliminated in the same manner in which they were initially recorded (that is, by recording a credit to equity of the parent).

When a subsidiary with a redeemable noncontrolling interest is deconsolidated, the issuer reverses any previous adjustments to the carrying amount of the noncontrolling interest that it has made in accordance with the temporary equity guidance. Any gain or loss on deconsolidation under ASC 810 is calculated on the basis of the carrying amount of the noncontrolling interest after previous temporary equity adjustments have been eliminated against equity. An entity is required to disclose the amount credited to equity of the parent upon the deconsolidation of the subsidiary in accordance with ASC 480-10-S99-3A(19).

Footnotes

As required under ASC 480-10-S99-3A(14), the “redemption amount at each balance sheet date should also include amounts representing dividends not currently declared or paid but which will be payable under the redemption features or for which ultimate payment is not solely within the control of the registrant (for example, dividends that will be payable out of future earnings).”

Since the noncontrolling interest is currently redeemable, once the ASC 810-10 attribution adjustment is recorded (Chapter 6), the noncontrolling interest should be adjusted to the maximum redemption amount (if higher) after dividends payable upon redemption are taken into account (ASC 480-10-S99-3A(14)).

As used in this table, “ASC 810-10 carrying amount” refers to the interest’s carrying amount after the cumulative attribution of earnings under ASC 810-10 but exclusive of any ASC 480-10 measurement adjustments.

Cumulative classification of ASC 480-10 measurement adjustments as base portion, excess portion, or both depends on the interest’s (1) current-period ASC 810-10 carrying amount as compared with its redemption price and (2) fair value.

Classification of an individual reporting period’s ASC 480-10 measurement adjustment will be determined by comparing amounts classified (on a cumulative basis) as base portion or excess portion through the end of the prior reporting period with amounts required to be so classified (on a cumulative basis) at the end of the current reporting period. Consequently, amounts classified as base portion, excess portion, or both may be positive or negative in any given reporting period.

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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.