Deloitte’s Roadmap: Noncontrolling Interests

Preface

On the Radar

Once a reporting entity concludes that it is appropriate to consolidate another legal entity, the reporting entity must evaluate the accounting for equity instruments that are not owned by the parent. Only equity-classified instruments that are not owned by the parent are noncontrolling interests.

The objective of accounting for noncontrolling interests is to present users of the consolidated financial statements with a clear depiction of the portion of a less than wholly owned subsidiary’s net assets, net income, and net comprehensive income that is attributable to holders of equity-classified ownership interests other than the parent. In practice, the combination of complex capital structures, multiple sources of authoritative guidance on accounting for noncontrolling interests, and multiple policy elections available to reporting entities can make this objective difficult to achieve.

ASC 810-10-20 defines a noncontrolling interest as the “portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent” and further states that a “noncontrolling interest is sometimes called a minority interest.” This definition applies to all entities that prepare consolidated financial statements.

Although the accounting principles related to noncontrolling interests have been in place for many years, they can be difficult to apply. The relatively brief guidance on nonredeemable noncontrolling interests (ASC 810-10) has resulted in diversity in practice, while the guidance on redeemable noncontrolling interests (ASC 480-10-S99-1 and ASC 480-10-S99-3A) is highly prescriptive and contains multiple policy elections. For these reasons, accounting for noncontrolling interests is a particularly challenging aspect of U.S. GAAP.

The decision tree below illustrates how to determine whether a reporting entity has any noncontrolling interests.

Since a noncontrolling interest is defined as a specific “portion of equity” (emphasis added), the first step in the identification of a noncontrolling interest is to establish whether such ownership interest in the subsidiary is appropriately classified in the equity section of the subsidiary’s balance sheet and the parent’s consolidated balance sheet.

For simple capital structures involving only equity-classified common stock, the noncontrolling interest is the portion of the subsidiary’s equity not owned by the parent. For more complex capital structures, a reporting entity will need to use considerable judgment when determining whether an ownership interest represents a noncontrolling interest. While a legal-form liability is never considered a noncontrolling interest, not all equity instruments may be considered noncontrolling interests. Interests that require judgment include, but are not limited to, the following:

It is important to note that the scope of the noncontrolling interest literature begins with the identification of an instrument as an equity interest and the instrument’s classification as such on the balance sheet.

Attribution of Income (Loss) and Other Comprehensive Income (Loss)

The measurement of noncontrolling interests on the reporting entity’s balance sheet is affected, in part, by the manner in which elements of a subsidiary’s income and other comprehensive income or loss are attributed to the parent’s controlling interest and the noncontrolling interests held by parties other than the parent.

While ASC 810-10 requires a reporting entity to allocate a subsidiary’s income or loss and comprehensive income or loss between the controlling and noncontrolling interests, it does not prescribe a specific means for doing so. Although attribution of income or loss and comprehensive income or loss is commonly performed on the basis of the relative ownership interests of the parent and noncontrolling interests, there are many instances in which it would be inappropriate to attribute income or loss solely on the basis of relative ownership percentages.

When assessing an appropriate attribution method, companies should consider (1) the attribution when contracts specify allocations of profits and losses, costs and expenses, or distributions that differ from investors’ relative ownership percentages, (2) the attribution of losses in excess of the investee’s carrying value, (3) the attribution of eliminated income or loss (both for entities consolidated under the variable interest entity model and for those that are not), (4) the attribution of income in the presence of reciprocal interests, and (5) the attribution of other comprehensive income or loss.

Redeemable Noncontrolling Interests

Common and preferred shares of a consolidated subsidiary are sometimes subject to redemption rights held by the noncontrolling shareholder. Accounting for a redeemable noncontrolling interest is one of the more complex aspects of U.S. GAAP to apply because the reporting entity’s accounting may be affected by a multitude of factors that are specific to the redeemable instrument itself and to policy elections made by the reporting entity. Such factors include the following:

Nearly all of the guidance on accounting for redeemable noncontrolling interests is codified in ASC 480-10-S99-3A and originated with the SEC staff’s interpretations of ASR 268 in EITF Topic D-98. Accordingly, this guidance must be applied by all SEC registrants. While reporting entities other than SEC registrants are not subject to the guidance in ASC 480-10-S99-3A, they may elect to apply it.

When applied, ASC 480-10-S99-3A is essentially an “overlay” that is applied after the application of ASC 810-10. That is, a reporting entity must apply the provisions of ASC 810-10, including the guidance on attributing subsidiary income to controlling and noncontrolling interests, before applying the provisions of ASC 480-10-S99-3A, which primarily focus on subsequent measurement and balance sheet presentation issues that arise from the existence of a redemption feature. A redeemable noncontrolling interest may also affect a reporting entity’s earnings per share (EPS) computation.

The decision tree below 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.

Changes in a Parent’s Ownership Interest

An entity’s ownership structure is often fluid. For instance:

A parent may directly purchase additional ownership interests in its subsidiary from a third party, or it may sell some or all of its current ownership interests in the subsidiary to a third party.
Alternatively, a subsidiary may issue (purchase) additional ownership interests to (from) third parties, thereby diluting (concentrating) the parent’s ownership interest.

Irrespective of the events that lead to changes in ownership interests in the subsidiary, if control has not changed, a parent accounts for such changes in ownership as equity transactions. Generally, the parent should neither recognize a gain or loss on sales or issuances of subsidiary shares nor step up to fair value the portion of the subsidiary’s net assets that corresponds to the additional interests acquired. Rather, any difference between consideration paid or received and the change in noncontrolling interest is typically recorded in equity. As part of equity transaction accounting, the reporting entity must also reallocate the subsidiary’s accumulated other comprehensive income (AOCI) between the parent and the noncontrolling interest.

To properly reflect these principles when accounting for changes in ownership interest (within the scope of ASC 810-10) without an accompanying change in control, a reporting entity should perform the following five steps:

Presentation and Disclosure

ASC 810-10 Requires:
Separate presentation of consolidated net income and consolidated comprehensive income on the face of the consolidated financial statements. Additional detail must also be provided about the portions of each of these totals that are attributable to the parent and the noncontrolling interests, respectively.
Reconciliations of changes in stockholders’ equity that detail changes attributable to the parent and the noncontrolling interests, respectively.
Disclosure of reallocations of AOCI between the parent and the noncontrolling interests.

Each of the presentation and disclosure requirements summarized above ultimately arises from the desire to clearly articulate for users of financial statements how changes in a reporting entity’s net assets affect the parent and noncontrolling interest holders.

While ASC 810-10 provides extensive presentation and disclosure guidance aimed at clearly depicting a noncontrolling interest holder’s claim on the net assets, net income, and comprehensive income of a consolidated subsidiary, no such presentation and disclosure requirements exist for the consolidated statement of cash flows. Redeemable noncontrolling interests remain subject to the disclosure and reconciliation requirements of ASC 810-10-50-1A(c) and SEC Regulation S-X, Rule 3-04, even if such interests are classified in the temporary equity section of the reporting entity’s balance sheet.

This Roadmap comprehensively discusses the accounting guidance on noncontrolling interests, primarily that in ASC 810-10 and ASC 480-10-S99-3A. For extensive analysis of whether a reporting entity should consolidate another legal entity, see Deloitte’s Roadmap Consolidation — Identifying a Controlling Financial Interest. Entities should also consider Deloitte’s Roadmap Distinguishing Liabilities From Equity, which provides extensive interpretive guidance on the appropriate classification of equity instruments, including noncontrolling interests, within or outside of the equity section of a reporting entity’s balance sheet.

Contacts

Chapter 1 — Overview

1.5 Attribution of Income, Other Comprehensive Income, and Cumulative Translation Adjustment Balances

Attributing income of a partially owned subsidiary to a parent and the subsidiary’s noncontrolling interest holders is easy in theory but can prove difficult in practice. A simple starting point would be to allocate the subsidiary’s net income (loss) between the parent and the noncontrolling interest holders in proportion to their ownership interests. However, the presence of different classes of equity interests, the existence of contractual arrangements that serve to shift rights to receive benefits or obligations to absorb losses between different equity holders, or financial reporting requirements of other FASB Accounting Standards Codification (“Codification”) topics can result in the need to attribute a subsidiary’s net income (loss) in a manner that is disproportionate to each party’s ownership interest (see Sections 6.2 through 6.3).

The presence of intercompany transactions and the accompanying need to eliminate (for purposes of preparing consolidated financial statements) the profit or loss arising from such transactions also affects the allocation of a subsidiary’s net income between a parent and noncontrolling interest holders. In addition, the attribution of eliminating entries arising from intercompany transactions is affected by (1) the subsidiary’s status as a variable interest entity (VIE) or voting interest entity (as defined or described in ASC 810-10), (2) the nature of the transaction (i.e., upstream vs. downstream transactions), and (3) the policy elected by the parent for attributing the eliminating entry to the parent and the noncontrolling interests (in the case of an upstream transaction). See Sections 6.4 through 6.5.

The presence of reciprocal interests (subsidiary ownership of parent shares) is another factor that affects the attribution of net income to a parent and noncontrolling interests. While there are two acceptable approaches for determining the impact of reciprocal interests on the attribution of earnings (i.e., the treasury stock method and the simultaneous equations method), each approach will generate the same end result. The approach selected as the entity’s accounting policy can simplify (or significantly complicate) the actual process of attributing the subsidiary’s earnings (and may also make it necessary to dust off the algebra textbook that has been sitting on your bookshelf for a decade or two). For further discussion, see Section 6.6.

Other matters that entities must consider when attributing income to a parent and noncontrolling interests include:

Attribution of (1) other comprehensive income (OCI) or other comprehensive loss and (2) foreign currency translation adjustments (see Section 6.7).
The presentation of preferred dividends of a subsidiary (see Section 6.8).
Income tax financial reporting considerations related to noncontrolling interests in pass-through entities (see Section 6.9).
The impact of income attribution on the parent’s consolidated EPS computation (see Section 6.10).

1.7 Presentation and Disclosure

The issuance of FASB Statement 160 (codified in ASC 810) clarified that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Before FASB Statement 160 was issued, there was only limited guidance on how noncontrolling interests should be reported. FASB Statement 160 clarified that noncontrolling interests should “be reported in the consolidated statement of financial position within equity (net assets), separately from the parent’s equity (or net assets)”1 (see Sections 8.1 and 8.2). To provide additional clarity to common shareholders of the consolidated entity regarding their claim on the net assets of the consolidated entity, ASC 810-10 requires:

Separate presentation of consolidated net income and consolidated comprehensive income on the face of the consolidated financial statements. Additional detail must also be provided about the portions of each of these totals that are attributable to the parent and the noncontrolling interests, respectively (see Section 8.3).
Reconciliations of changes in stockholders’ equity that detail changes attributable to the parent and the noncontrolling interests, respectively (see Sections 8.5 and 8.5.1).
Disclosure of reallocations of AOCI between the parent and the noncontrolling interests (see Section 8.5.3).

Footnotes

Quoted from ASC 810-10-45-16.

Chapter 2 — Glossary of Selected Terms

2.10 Controlling Financial Interest

ASC 810-10

Objectives — General

10-1 The purpose of consolidated financial statements is to present, primarily for the benefit of the owners and creditors of the parent, the results of operations and the financial position of a parent and all its subsidiaries as if the consolidated group were a single economic entity. There is a presumption that consolidated financial statements are more meaningful than separate financial statements and that they are usually necessary for a fair presentation when one of the entities in the consolidated group directly or indirectly has a controlling financial interest in the other entities.

A reporting entity that consolidates another legal entity holds a “controlling financial interest” in that legal entity. Such legal entities are not limited to VIEs. Rather, a parent that consolidates any legal entity is said to have a controlling financial interest in the consolidated legal entity.

Under the voting interest entity model, a reporting entity with ownership of a majority of the voting interests in a legal entity is generally considered to have a controlling financial interest in the legal entity. However, the VIE model was established for situations in which control may be demonstrated other than by possession of voting rights in a legal entity. Accordingly, the evaluation of whether a reporting entity has a controlling financial interest in a VIE focuses on the “power to direct the activities of a VIE that most significantly impact the VIE’s economic performance” and the “obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.”1

The reporting entity that has a controlling financial interest in a VIE is referred to as the primary beneficiary of the VIE and is sometimes the same party that holds a majority of the voting interests. See Deloitte’s Roadmap Consolidation — Identifying a Controlling Financial Interest for further discussion about the voting interest entity model, the VIE model, and how a reporting entity should assess whether it has a controlling financial interest in a VIE.

Footnotes

Quoted from ASC 810-10-25-38A.

Chapter 3 — Scope

3.3 Only Equity Interests Can Be Noncontrolling Interests

ASC 810-10

45-16A Only either of the following can be a noncontrolling interest in the consolidated financial statements:

A financial instrument (or an embedded feature) issued by a subsidiary that is classified as equity in the subsidiary’s financial statements
A financial instrument (or an embedded feature) issued by a parent or a subsidiary for which the payoff to the counterparty is based, in whole or in part, on the stock of a consolidated subsidiary, that is considered indexed to the entity’s own stock in the consolidated financial statements of the parent and that is classified as equity.

45-17 A financial instrument issued by a subsidiary that is classified as a liability in the subsidiary’s financial statements based on the guidance in other Subtopics is not a noncontrolling interest because it is not an ownership interest. For example, Topic 480 provides guidance for classifying certain financial instruments issued by a subsidiary.

45-17A An equity-classified instrument (including an embedded feature that is separately recorded in equity under applicable GAAP) within the scope of the guidance in paragraph 815-40-15-5C shall be presented as a component of noncontrolling interest in the consolidated financial statements whether the instrument was entered into by the parent or the subsidiary. However, if such an equity-classified instrument was entered into by the parent and expires unexercised, the carrying amount of the instrument shall be reclassified from the noncontrolling interest to the controlling interest.

For a portion of a subsidiary’s net assets and net income to be attributable to an entity other than the parent, the other entity must hold an equity ownership interest in the subsidiary. That is, noncontrolling interests are strictly interests that are classified in equity. As noted in ASC 810-10-45-16A through 45-17A, liabilities (including equity instruments classified as liabilities under U.S. GAAP) cannot be considered noncontrolling interests. This distinction is important given the prevalence of equity instruments that may not qualify for equity classification (e.g., mandatorily redeemable preferred stock).

Freestanding put and call options on a subsidiary’s common stock.
Embedded put and call options on a subsidiary’s common stock.
Shares of preferred stock issued by a subsidiary.
Freestanding put and call options on a subsidiary’s preferred stock.
Embedded put and call options on a subsidiary’s preferred stock.
Financial instruments indexed to a subsidiary’s own equity.
Share-based payment awards.
Units issued by a subsidiary that is a limited liability company or limited partnership.

Although the classification of these interests is not the subject of this Roadmap, it is important to note that the scope of the noncontrolling interest literature begins with the identification of an instrument as an equity interest and the instrument’s classification as such on the balance sheet.

Certain equity interests, although legal-form equity, must be classified outside of the equity section of the balance sheet on the basis of their specific characteristics; see Deloitte’s Roadmaps Distinguishing Liabilities From Equity and Share-Based Payment Awards for guidance on the proper classification of legal-form equity instruments and share-based payment awards as either liabilities or equity on the reporting entity’s balance sheet. Other equity interests that contain certain redemption features may require classification within the “temporary” equity section of the balance sheet. Temporary equity classification does not preclude such interests from being included within the scope of the noncontrolling interest literature; however, there are additional classification and measurement considerations related to such interests. Chapter 9 of this Roadmap discusses those considerations.

Example 3-5

Company A has a 90 percent controlling common equity interest in Subsidiary Z. The remaining 10 percent common equity interest in Z is held by unrelated third parties. The common equity interests are classified as equity on Z’s balance sheet. Subsidiary Z has outstanding debt obligations held by Entity G, an unrelated party, and has issued mandatorily redeemable preferred stock to Entity B, an unrelated party. This mandatorily redeemable preferred stock is classified as a liability on Z’s balance sheet.

The diagram and table below summarize how the various debt and equity interests in Z would be classified in Z’s stand-alone financial statements and A’s consolidated financial statements.

Interest	Classification in Z’s Stand-Alone Financial Statements	Classification in A’s Consolidated Financial Statements
90% common shares held by A	Equity	Equity — controlling interest
10% common shares held by unrelated third parties	Equity	Equity — noncontrolling interest
Mandatorily redeemable preferred stock held by B	Liability under ASC 480	Liability7
Debt obligations held by G	Liability under ASC 470	Liability8

3.3.1 Other Equity Interests — Carried Interests or Profits Interests

Certain interests participate in returns after other investors have achieved a specified return on their investments. Two common examples of these interests are carried interests and profits interests (referred to collectively in this section as “other equity interests”).9 Carried interests are often held by private equity, hedge fund, and other investment managers, while profits interests are often held by employees. When the issuer of other equity interests is consolidated by a reporting entity, the reporting entity should classify and measure those interests in the consolidated financial statements on the basis of the interests’ economic substance. Often, other equity interests are legal-form equity instruments that also have the characteristics of a substantive class of equity.10 In such cases, those interests would be appropriately classified as noncontrolling interests in the reporting entity’s financial statements.

If other equity interests are legal-form equity but do not have the characteristics of a substantive class of equity, classification as noncontrolling interests would not be appropriate. For example, in certain circumstances, classification and measurement of carried interests as a compensatory arrangement may be warranted. In these instances, because the equity instrument is not an equity interest in substance, the reporting entity would classify the instrument as a profit-sharing or liability arrangement rather than as a noncontrolling interest. This might often be the case, for example, when an employee’s continued service is required for the employee to receive distributions on his or her other equity interests.

The same economic participation in profits described above may result from the execution of a contractual arrangement not in the form of legal equity that provides an incentive fee. Because the instrument in such a case is not legal-form equity, the instrument can never be classified as a noncontrolling interest.

Footnotes

The mandatorily redeemable preferred stock held by B does not qualify for classification as a noncontrolling interest because it is classified as a liability under ASC 480 in Z’s stand-alone financial statements.

The debt obligations do not qualify for classification as a noncontrolling interest because they are classified as a liability under ASC 470 in Z’s stand-alone financial statements.

See Section 6.2.3 for a discussion about the attribution of carried interests.

At the December 2006 AICPA Conference on Current SEC and PCAOB Developments, Joseph Ucuzoglu, then a professional accounting fellow in the SEC’s Office of the Chief Accountant, delivered a speech that we believe would be appropriate for an entity to consider when determining whether other equity interests have the characteristics of a substantive class of equity. For a relevant excerpt of this speech, see Section 2.6 of Deloitte’s Roadmap Share-Based Payment Awards.

Chapter 4 — Intercompany Matters With Noncontrolling Interest Implications

4.2 Multiple Legal Entities Representing a Single Reporting Entity

Through consolidation, a parent and its subsidiary form a single reporting entity for accounting purposes while remaining separate legal entities for operational purposes. Sometimes, a parent and its subsidiary may not have been formed in contemplation of each other and may not share common management. The disparate ownership interests and management structures that exist in a parent and its subsidiary can give rise to certain complexities when the separate financial statements of the two entities are combined into one set of consolidated financial statements.

4.2.1 Parent and Subsidiary With Different Fiscal-Year-End Dates

ASC 810-10

45-12 It ordinarily is feasible for the subsidiary to prepare, for consolidation purposes, financial statements for a period that corresponds with or closely approaches the fiscal period of the parent. However, if the difference is not more than about three months, it usually is acceptable to use, for consolidation purposes, the subsidiary’s financial statements for its fiscal period; if this is done, recognition should be given by disclosure or otherwise to the effect of intervening events that materially affect the financial position or results of operations.

Under ASC 810-10-45-12, a parent and its subsidiary are not required to share a fiscal-year-end date. However, the difference in fiscal-year-end dates should not be more than approximately three months.1 See Section 11.1.3 of Deloitte’s Roadmap Consolidation — Identifying a Controlling Financial Interest for a comprehensive discussion of reporting and disclosure considerations that arise when a parent and its subsidiary have different fiscal-year-end dates, including (1) the effect of material intervening events, (2) reporting in the initial quarter after the parent’s acquisition of the subsidiary, and (3) classification of the subsidiary’s loan payable.

4.2.2 Parent and Subsidiary Accounting Policies

Financial statements are more transparent and relevant if the policies used to account for similar assets, liabilities, operations, and transactions are the same. Therefore, in the absence of justification for differences between them, the accounting policies of a parent and its subsidiaries should be conformed in the parent’s consolidated financial statements.

If an adjustment is made to conform the accounting policies of a subsidiary to those of the consolidated group, the entire adjustment should be allocated retrospectively among the controlling and noncontrolling interests. This view is consistent with the underlying assumption that consolidated financial statements represent the financial position and operating results of a single business unit.

See Section 11.1.5 of Deloitte’s Roadmap Consolidation — Identifying a Controlling Financial Interest for further discussion.

Footnotes

In U.S. GAAP, the specific number of days is not provided. Entities should use judgment in determining whether a period on the margin of three months (e.g., 94 days or 89 days) is appropriate.

Chapter 5 — Initial Recognition and Measurement

5.2 Initial Measurement of Noncontrolling Interests When a Reporting Entity First Consolidates a Partially Owned Subsidiary

The conclusion that a reporting entity should consolidate a partially owned legal entity and simultaneously recognize and measure a noncontrolling interest for the first time can result from a business combination (see Section 5.2.1) or an asset acquisition (see Section 5.2.2).

5.2.1 Noncontrolling Interests Recognized Concurrently With a Business Combination

If a reporting entity acquires a controlling financial interest in a legal entity that meets the definition of a business, it should account for the transaction as a business combination under ASC 805. That guidance generally1 requires an acquiring entity to initially recognize the assets and liabilities of, and noncontrolling interests in, the acquired business at fair value. Regardless of whether all assets or liabilities are recognized at fair value, noncontrolling interests recognized as the result of a business combination are always measured initially at fair value.

A business combination can arise in any of the following ways:

Through a single transaction.
In stages.
When a reporting entity becomes the primary beneficiary of a VIE.

The initial measurement concept is unaffected by how the business combination arose.

5.2.2 Noncontrolling Interests Recognized Concurrently With an Asset Acquisition

If a reporting entity acquires a controlling financial interest in a legal entity that does not meet the definition of a business, it should account for the transaction as an asset acquisition.

The accounting for noncontrolling interests recognized in an asset acquisition depends on whether the subsidiary is a VIE — that is, whether the voting interest entity model or the VIE model is applicable:

Voting interest entity model — An asset acquisition in which the legal entity acquired is not a VIE is accounted for in accordance with the “Acquisition of Assets Rather Than a Business” subsections of ASC 805-50. Specifically, a reporting entity would account for such an asset acquisition by using a cost accumulation model under which the cost of the acquisition, including certain transaction costs, is allocated to the assets acquired on the basis of relative fair values, with some exceptions. If the reporting entity acquires less than 100 percent of the legal entity’s net assets, it should recognize a noncontrolling interest at an amount equal to the noncontrolling interest’s proportionate share of the relative fair value of any assets and liabilities acquired.
VIE model —An asset acquisition in which the legal entity acquired is a VIE is accounted for in accordance with ASC 810-10-30-4. In an asset acquisition in which a reporting entity acquires less than 100 percent of the net assets of a legal entity that is a VIE, the reporting entity should recognize a noncontrolling interest at fair value.

5.2.3 Initial Measurement of Noncontrolling Interests When an Acquired Subsidiary Has Retained Earnings or a Deficit

ASC 810-10

45-2 The retained earnings or deficit of a subsidiary at the date of acquisition by the parent shall not be included in consolidated retained earnings.

Because the initial measurement of a noncontrolling interest in a business combination or asset acquisition accompanies allocation of the consideration transferred by the reporting entity to all acquired or assumed elements (including the noncontrolling interest itself), it is inappropriate upon initial consolidation for the reporting entity to recognize any preacquisition retained earnings (deficit) of its newly acquired subsidiary or to attribute such items to controlling and noncontrolling interests.

5.2.4 Difference Between Noncontrolling Interests’ Fair Value and Their Claims on Net Assets on the Acquisition Date

As noted in Sections 5.2.1 and 5.2.2, the initial measurement of noncontrolling interests in a legal entity in which the reporting entity acquired a controlling financial interest depends on whether the legal entity meets the definition of a business. If the legal entity meets the definition of a business, the reporting entity should account for the transaction as a business combination under ASC 805 and recognize the noncontrolling interests at fair value.If the legal entity is not a VIE and does not meet the definition of a business, the reporting entity should account for the transaction as an asset acquisition under ASC 805-50 and recognize the noncontrolling interests at their proportionate share of the relative fair value of the assets (and liabilities) acquired. However, if the legal entity is a VIE and does not meet the definition of a business, the reporting entity should account for the transaction as an asset acquisition under ASC 810-10-30-4 and recognize the noncontrolling interests at fair value.

A reporting entity’s initial recognition of the noncontrolling interests at either fair value (for noncontrolling interests recognized either in a business combination or in an asset acquisition that results from the consolidation of a VIE) or the noncontrolling interests’ proportionate share of the relative fair value (for noncontrolling interests recognized in an asset acquisition that results from the consolidation of a subsidiary that is not a VIE) may result in a difference between the noncontrolling interest holders’ claims on net assets based on the terms and conditions of contractual arrangements on the acquisition date and the amounts initially recognized for the equity interests on the acquisition date.

We believe that the reporting entity should not recognize this difference at the initial recognition of the noncontrolling interests on the acquisition date. Rather, the reporting entity should measure the noncontrolling interests under ASC 805 (or, if applicable, ASC 810-10-30-4) at amounts that would be either fair value or relative fair value.

See Sections 6.1 and 7.1.2 for subsequent accounting considerations.

Footnotes

ASC 805 contains certain exceptions to the fair value measurement principle related to business combinations.

5.3 Noncontrolling Interests Recognized When the Reporting Entity Sells Shares in a Wholly Owned Subsidiary and Retains Control

While a noncontrolling interest may initially result from a business combination (see Section 5.2.1) or asset acquisition (see Section 5.2.2), it may also result from the dilution of a reporting entity’s equity interest in a wholly owned subsidiary over which the reporting entity retains control.

Example 5-1

On June 30, 20X7, Company A acquires Subsidiary B, a wholly owned subsidiary. Company A’s ownership interest in B as of the acquisition date is illustrated in the diagram below.

As of June 30, 20X7:

On July 15, 20X9, A seeks to raise capital and issues shares of common equity in B to an unrelated third party, Entity G. As a result, A’s ownership interest in B is diluted from 100 percent to 90 percent. The respective ownership interests of A and G are illustrated in the diagram below.

As of July 15, 20X9:

Upon the sale of the equity to G, A should initially recognize the noncontrolling interest (i.e., the 10 percent ownership interest that A no longer holds in B) in an amount equal to G’s new ownership interest of 10 percent multiplied by the net assets of B. See Section 7.1.2.6 for discussion of how to account for a parent’s selling of interests in a subsidiary directly to a noncontrolling interest holder.

In addition, the size of a noncontrolling interest can increase as a result of a parent’s sale of equity in its subsidiary. Such a sale remains an equity transaction, with no gain or loss recognized in the financial statements of the parent or subsidiary, as long as the parent retains control over the subsidiary both before and after the transaction. See Sections 7.1 through 7.1.2.8 for a discussion of changes in a parent’s ownership interest without an accompanying change in control.

Gain or loss recognition may be appropriate if the change in the reporting entity’s ownership interest is accompanied by a loss of control and therefore requires deconsolidation. See Appendix F of Deloitte’s Roadmap Consolidation — Identifying a Controlling Financial Interest for a discussion of considerations related to such deconsolidation.

5.4 Other Considerations Related to the Initial Recognition of a Noncontrolling Interest

5.4.1 Accounting for the Issuance of a Noncontrolling Interest With Ownership Tax Benefits

Some consolidated entities are pass-through entities (e.g., partnerships). Often, the equity interests issued by pass-through entities entitle their holder to receive tax credits and other tax benefits (e.g., accelerated pass-through tax losses) that arise from the pass-through entities’ activities. Since only ownership interests that are “classified as equity” should be classified as noncontrolling interests, the first step is to consider whether the instrument should be classified outside of equity in accordance with ASC 480, which may be the case if the instrument is mandatorily redeemable.

In most instances, this form of equity interest will be appropriately classified in equity as a noncontrolling interest. Because of the complexity of attributing earnings to the noncontrolling interest, the parent will generally apply the HLBV method to subsequently attribute (comprehensive) income and loss to the noncontrolling interest (see Section 6.2.1).

This type of interest may have certain provisions that could result in the redemption of the equity interest outside the control of the parent. In such a case, the SEC requires classification of the instrument in temporary equity and a subsequent potential adjustment to the redemption amount (see Chapter 9 for additional information on accounting for redeemable noncontrolling interests).

5.4.1.1 Separating the Benefits of Tax Credits From the Substantive Noncontrolling Interest

The U.S. federal government encourages private capital investment in various projects (e.g., affordable housing or rehabilitation of historic buildings) by allowing investors in those projects to claim tax credits on their federal income tax returns. Projects that qualify for tax credits are usually undertaken by limited liability entities (typically, either limited partnerships or limited liability companies) to limit an investor’s financial risk exposure while still allowing the tax credits generated from the project to pass through to the investor.

In many limited partnership structures that generate tax credits, the general partner has an insignificant equity interest in the partnership but receives a fee for its decision-making responsibilities in the limited partnership. This fee is embedded in the general partnership interest and is a capital allocation of the general partner in the limited partnership. The limited partners typically hold essentially all of the equity interests; and in a tax equity structure, the price paid by the limited partners to acquire their equity interests is generally a function of the estimated tax benefits to be earned as well as any other rights to income and cash.

Sometimes, a limited partnership that generates tax credits is considered a VIE and, despite not having made a substantial equity investment in the partnership, the general partner will meet both of the characteristics of a controlling financial interest and thus will consolidate the limited partnership.2

If the general partner consolidates the legal entity that generates tax credits (i.e., the limited partnership), the parent (i.e., the general partner) recognizes the limited partner’s capital contributions on its balance sheet in accordance with the noncontrolling interest guidance. In general, such amounts are not mandatorily redeemable, in which case the general partner would not classify the noncontrolling interest entirely as a liability in its financial statements. However, questions have arisen about whether it would be appropriate for the parent to bifurcate the limited partner’s capital contribution (i.e., the noncontrolling interest) into separate liability (e.g., deferred revenue) and equity components. Some have asserted that as general partner of the limited partnership, the reporting entity has effectively “sold” the tax credits to the limited partner(s) in a manner akin to the transfer of goods or services in a revenue transaction.

However, in at least one instance, the SEC staff indicated that ownership interests in a low-income housing tax credit (LIHTC) partnership structure that provide limited partners with substantive and contractually specified rights to receive allocations of the partnership’s economic benefits should be classified as noncontrolling interests in the parent’s consolidated financial statements. In conjunction with this observation, the SEC staff objected to the bifurcation of limited partners’ noncontrolling interests into separate liability and equity components in the general partner’s consolidated balance sheet. While the SEC staff’s views were specific to tax credits for LIHTC partnership structures, this accounting framework should be applied to other forms of partnerships that generate tax credits.

Footnotes

For additional information about the analysis of a limited partnership structure as a VIE and the subsequent determination of its primary beneficiary, see Chapters 5 and 7 of Deloitte’s Roadmap Consolidation — Identifying a Controlling Financial Interest.

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

6.1 Overview

ASC 810-10

45-2 The retained earnings or deficit of a subsidiary at the date of acquisition by the parent shall not be included in consolidated retained earnings.

45-4 When a subsidiary is initially consolidated during the year, the consolidated financial statements shall include the subsidiary’s revenues, expenses, gains, and losses only from the date the subsidiary is initially consolidated.

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

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

As defined in the ASC master glossary, a noncontrolling interest represents the “portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent.” It follows then that the measurement of noncontrolling interests on the reporting entity’s balance sheet is affected, in part, by the manner in which elements of a subsidiary’s income and comprehensive income are attributed to the parent’s controlling interest and the noncontrolling interests held by parties other than the parent.

While ASC 810-10 requires a reporting entity to allocate a subsidiary’s income or loss and comprehensive income or loss between the controlling and noncontrolling interests, it does not prescribe a specific means for doing so. That lack of detail was acknowledged by the FASB in paragraph B38 of the Background Information and Basis for Conclusions of FASB Statement 160:

[E]ntities were making attributions before [FASB Statement 160] was issued and . . . those attributions generally were reasonable and appropriate. Therefore, the Board decided that detailed guidance was not needed.

Although items of income or loss and comprehensive income or loss are commonly attributed on the basis of the relative ownership interests of the parent and noncontrolling interests, there are many instances, as explained in Sections 6.2.1 through 6.3, in which it would be inappropriate to attribute income or loss solely on the basis of relative ownership percentages.

6.4 Attribution of Eliminated Income or Loss (Other Than VIEs)

ASC 810-10

45-1 In the preparation of consolidated financial statements, intra-entity balances and transactions shall be eliminated. This includes intra-entity open account balances, security holdings, sales and purchases, interest, dividends, and so forth. As consolidated financial statements are based on the assumption that they represent the financial position and operating results of a single economic entity, such statements shall not include gain or loss on transactions among the entities in the consolidated group. Accordingly, any intra-entity profit or loss on assets remaining within the consolidated group shall be eliminated; the concept usually applied for this purpose is gross profit or loss (see also paragraph 810-10-45-8).

45-18 The amount of intra-entity income or loss to be eliminated in accordance with paragraph 810-10-45-1 is not affected by the existence of a noncontrolling interest. The complete elimination of the intra-entity income or loss is consistent with the underlying assumption that consolidated financial statements represent the financial position and operating results of a single economic entity. The elimination of the intra-entity income or loss may be allocated between the parent and noncontrolling interests.

As discussed in Section 10.2.1 of Deloitte’s Roadmap Consolidation — Identifying a Controlling Financial Interest, ASC 810-10-45-1 and ASC 810-10- 45-18 require intercompany balances and transactions to be eliminated in their entirety. The amount of profit or loss eliminated is not affected by the existence of a noncontrolling interest (e.g., intra-entity open accounts balances, security holdings, sales and purchases, interest, or dividends). Since consolidated financial statements are based on the assumption that they represent the financial position and operating results of a single economic entity, the consolidated statements do not include any gain or loss transactions between the entities in the consolidated group.

Some companies record all intercompany transactions at cost. However, other companies that operate each component entity as a profit center may measure profitability for each entity and thus may record intercompany transactions at fair value. This is likely to be the case if the subsidiary is not wholly owned. In any event, intercompany profits not realized through transactions with third parties are to be eliminated upon consolidation; that is, if products are sold between a parent and a subsidiary at a price in excess of the cost to the transferor, the unrealized intercompany profit in the transferee’s inventory should be eliminated upon consolidation.8 Although full elimination of intercompany profit is required for all subsidiaries, the elimination of intercompany profit may be allocated proportionately between the parent and the noncontrolling interest.

If there are other charges between a parent and subsidiary (e.g., for management services or for interest on intercompany advances), those charges also should be eliminated in consolidation. However, an intercompany charge that is capitalized as part of fixed assets (e.g., direct labor costs incurred in preparing a piece of equipment for its intended use) or included as overhead in inventory should not be eliminated if the charge is simply a pass-through of the cost of an item incurred by the transferor or paid by an entity within the consolidated group to an outside third party that would have been considered an asset in the accounts of the originating company.

As summarized in the table below, attribution of the eliminating entry depends on (1) the nature of the intercompany transaction (downstream vs. upstream) and (2) the accounting policy elected by the parent (for upstream transactions only).

Acceptable Eliminating Entry Attribution Methods for Intercompany Transactions With Partially Owned Subsidiaries
Transaction	Intercompany Profit (Loss) Elimination	Attribution of Eliminating Entry	Notes
Downstream Transaction Sale from parent to partially owned subsidiary	Fully eliminate all intercompany profit (loss)	Eliminating entry is attributed to parent; 100 percent of eliminated income (loss) reduces (increases) net income attributed to controlling interests.
Upstream Transaction Sale from partially owned subsidiary to parent	Fully eliminate all intercompany profit (loss)	Policy Election Must be consistently applied to all consolidated, partially owned subsidiaries.
		Parent-Only Attribution Method Eliminating entry is attributed to parent; 100 percent of eliminated income (loss) reduces (increases) net income attributable to controlling interests.	Consolidated net income will be the same as that under the parent/noncontrolling interest attribution method. In periods in which net income on an upstream transaction is being deferred (eliminated), net income attributable to controlling interests will be lower than that under the parent/noncontrolling interest attribution method. In the same period, the noncontrolling interest holder’s ownership interest in net assets of subsidiary will be higher than that under the parent/noncontrolling interest attribution method.
		Parent/Noncontrolling Interest Attribution Method Eliminating entry is attributed to parent and noncontrolling interests; eliminated income (loss) attributed to noncontrolling interests increases (decreases) net income attributable to controlling interests.	Consolidated net income will be the same as that under the parent-only attribution method. In periods in which net income on an upstream transaction is being deferred (eliminated), net income attributable to controlling interest will be higher than that under the parent-only attribution method. In the same period, the noncontrolling interest holder’s ownership interest in net assets of the subsidiary will be lower than that under the parent-only attribution method.

6.4.1 Eliminating Profit (Loss) on Downstream Transactions

In a downstream transaction, a parent sells goods (or services) to a subsidiary. To the extent that the goods are sold for more (less) than the parent’s cost basis in such goods, a profit (loss) will be recorded in the parent-only financial statements. In a manner consistent with the single economic entity concept articulated in ASC 810-10-45-1 and ASC 810-10-45-18, this type of transaction must be eliminated in the consolidated financial statements. Any associated profit or loss is deferred until the goods are ultimately sold to a third party. We believe that 100 percent of the eliminating entry arising from downstream transactions should be attributed to the parent’s controlling interest regardless of the parent’s ultimate ownership interest in the subsidiary because, in the absence of any contractual arrangements identified in step 1 of the three-step process described in Section 6.2, holders of noncontrolling interests in the subsidiary will never participate economically in the profit or loss associated with downstream intercompany transactions. Consequently, attributing any portion of the deferral (or recognition in subsequent periods) of such profit or loss to the noncontrolling interest holders would ignore the substance of the transactions. However, because all of the subsidiary’s shareholders (which include the parent) will participate in any subsequent profit (loss) arising from the subsidiary’s ultimate sale of the goods to third parties for amounts greater (less) than the purchase price the subsidiary paid to the parent, incremental profits or losses arising from the subsidiary’s ultimate sale of the goods to third parties are attributed to controlling and noncontrolling interests in accordance with steps 2 and 3.

Some reporting entities apply the equity method of accounting in their parent-only financial statements when accounting for the parent’s investment in a subsidiary. Others use the cost method, under which the parent-only financial statements include subsidiary income only to the extent that a dividend has been declared by the parent’s subsidiary. While the financial results reported in the consolidated financial statements will be the same under either approach, the consolidation process will vary depending on the approach selected for preparing the parent-only financial statements. The example below illustrates the impact of a downstream transaction in the consolidated financial statements of a parent that has elected to apply the equity method to its investment in its subsidiary when preparing its parent-only financial statements.

Example 6-7

Company A has a 75 percent controlling interest in Subsidiary B. The remaining 25 percent of B’s common stock is owned by an unrelated third party, Entity C. Company A and Entity C split all earnings of B in a manner proportionate to their ownership interests. There are no contractual or other provisions that would make it necessary to allocate B’s earnings between A and C on other than a proportionate basis.

During 20X2, in addition to third-party transactions conducted by A and B, A has $125,000 of sales to B. As illustrated in the diagram below, the inventory sold to B has a cost basis of $60,000.

As of December 31, 20X2, the inventory that B has purchased from A is not yet resold to third parties.

In 20X3, B sells to third parties all inventory purchased from A in 20X2. There are no changes to B’s ownership structure, and no additional intercompany transactions are executed between A and B in 20X3.

Illustrated below are the following:

The financial statements of A and B, respectively, for the year ended December 31, 20X2, together with the consolidating entries that would be recorded as of December 31, 20X2.
The financial statements of A and B, respectively, for the year ended December 31, 20X3, together with the consolidating entries that would be recorded as of December 31, 20X3.
The eliminating entries related to the downstream sale of inventory for the years ended December 31 of 20X2 and 20X3, respectively.

Note that in A’s stand-alone financial statements, A accounts for its investment in B under the equity method.

For simplicity:

Tax implications have been ignored.
Each of the transactions (including intercompany sales) is presumed to have been cash settled in the year it occurred.
Intercompany sales have been presented separately from third-party sales to highlight the consolidation and elimination impact of intercompany transactions.
Investments in B and noncontrolling interest accounts have been broken down by their contributed capital and retained earnings components.

Note that in the year ended December 31, 20X3, the consolidating entry of $222,000 represents the consolidating entry from the prior year.

6.4.2 Eliminating Profit (Loss) on Upstream Transactions

In an upstream transaction, a subsidiary sells goods (or services) to its parent. To the extent that the intercompany sales price is greater (less) than the subsidiary’s cost basis in such goods, a profit (loss) will be recorded in the subsidiary’s financial statements. Thus, unlike a downstream transaction, in which there is no gain or loss on the subsidiary’s books to ultimately attribute, an upstream transaction typically gives rise to a gain or loss on the subsidiary’s books that needs to be deferred, with the effect of such deferral being allocated to the controlling and (depending on the parent’s policy election) noncontrolling interests. The eliminating entry itself highlights the competing requirements of ASC 810-10.

As previously noted, the ASC master glossary defines a noncontrolling interest as the “portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent.” The single economic entity concept articulated in ASC 810-10-45-1 and ASC 810-10-45-18 requires a reporting entity to eliminate intercompany transactions (including any associated gain or loss) in the consolidated financial statements. While ASC 810-10 also requires the reporting entity to allocate a subsidiary’s income and comprehensive income between the controlling and noncontrolling interests, it stops short of prescribing a specific means for doing so. Further clouding the picture, the last sentence of ASC 810-10-45-18 states that the “elimination of the intra-entity income or loss may be allocated between the parent and noncontrolling interests” (emphasis added), leaving open the possibility of attributing the effect of the eliminating entry to noncontrolling interests while stopping short of requiring such attribution outright.

In light of the competing requirements summarized above, we believe that there are two acceptable methods for attributing to controlling and noncontrolling interests the effect of the eliminating entry on an upstream transaction:

Parent-only attribution method — Under the parent-only attribution method, 100 percent of the deferred income (loss) reduces (increases) net income attributable to the controlling interests on the basis that from the perspective of a single economic entity, until the parent resells the inventory to third parties (as addressed below), no transaction has occurred with an external party, and therefore no profit should flow through to the consolidated entity’s bottom line (i.e., net income attributable to the parent). While this method results in reported net income attributable to controlling interests that is lower (higher) than that under the parent/noncontrolling interest attribution method in the period of profit (loss) deferral, amounts reported as noncontrolling interests in the consolidated balance sheet in the same period will equal the noncontrolling interest holders’ portion of the subsidiary’s net assets after the upstream sale. That is, under the parent-only attribution method, the carrying amount of the noncontrolling interests in the consolidated balance sheet reflects the noncontrolling interest holders’ increased (decreased) claim on the subsidiary’s net assets in recognition that the subsidiary’s net assets increase (decrease) as a result of the upstream transaction even though 100 percent of the income (loss) on the upstream sale is deferred in consolidation.
Parent/noncontrolling interest attribution method — Under the parent/noncontrolling interest attribution method, a reporting entity attributes the eliminating entry necessary to defer income (loss) on the upstream transaction to the parent and noncontrolling interest holders in proportion to their ownership interests (in the absence of any identified contractual arrangements in step 1 of the three-step process described in Section 6.2). Thus, although reported net income (loss) will be the same under this method as under the parent-only attribution method, reported net income (loss) attributable to the parent’s controlling interest will be higher (lower) in the period of profit (loss) deferral. Essentially, this method immediately affects the consolidated reporting entity’s bottom line (through the attribution of income as opposed to net income) for the portion of income (loss) on the upstream transaction that is related to noncontrolling interests in the subsidiary. Consequently, under the parent/noncontrolling interest attribution method, until the parent resells the inventory to third parties, the consolidated financial statements reflect higher net income (loss) attributable to the controlling interests but a lower (higher) overall balance sheet amount associated with the noncontrolling interest holders’ claim on the subsidiary’s net assets.

Connecting the Dots

The existence of two attribution methods allows for reporting entities with similar transactions to temporarily report different amounts for net income attributable to the controlling and noncontrolling interest holders, as well as different carrying amounts for noncontrolling interests, on their individual consolidated balance sheets. However, as illustrated in the example below, these differences reverse themselves upon the parent’s ultimate sale of the inventory to third parties. Notwithstanding the temporary nature of the differences that result from a reporting entity’s decision to choose one attribution method over the other, we believe that the selection of an attribution method is an accounting policy election that a reporting entity should apply consistently when consolidating all of its partially owned subsidiaries.

The example below illustrates the impact of applying both attribution methods to an upstream transaction in the consolidated financial statements of a parent that has elected to apply the equity method to its investment in its subsidiary when preparing its parent-only financial statements.

Example 6-8

During 20X2, in addition to third-party transactions conducted by A and B, B has $125,000 of sales to A. As illustrated in the diagram below, the inventory sold to A has a cost basis of $60,000.

As of December 31, 20X2, the inventory that A has purchased from B is not yet resold to third parties.

In 20X3, A sells to third parties all inventory purchased from B in 20X2. There are no changes to B’s ownership structure, and no additional intercompany transactions are executed between A and B in 20X3.

Illustrated below are the following:

The financial statements of A and B, respectively, for the years ended December 31, 20X2, and December 31, 20X3, together with the consolidating entries that would be recorded as of the end of each of those years under the parent-only attribution method.
The eliminating entries related to the upstream sale of inventory for the years ended December 31 of 20X2 and 20X3, respectively, under each alternative attribution method.
The financial statements of A and B, respectively, for the years ended December 31, 20X2, and December 31, 20X3, together with the consolidating entries that would be recorded as of the end of each of those years under the parent/noncontrolling interest attribution method.

Note that in A’s stand-alone financial statements, A accounts for its investment in B under the equity method.

For simplicity:

Tax implications have been ignored.
Each of the transactions (including intercompany sales) is presumed to have been cash settled in the year it occurred.
Intercompany sales have been presented separately from third-party sales to highlight the consolidation and elimination impact of intercompany transactions.
Investments in B (A) and noncontrolling interest (consolidated) accounts have been broken down by their contributed capital and retained earnings components.

Footnotes

ASC 980-810-45-1 provides an exception under which profit on sales to regulated affiliates would not be eliminated when specific criteria are met.

6.9 Noncontrolling Interests in Pass-Through Entities — Income Tax Financial Reporting Considerations

ASC 810-10

ASC 810-10-45-19 requires reporting entities to report earnings attributed to noncontrolling interests as part of consolidated earnings and not as a separate component of income or expense. Thus, the income tax expense recognized by the consolidating entity will include the total income tax expense of the consolidated entity. When there is a noncontrolling interest in a subsidiary, the amount of income tax expense that is consolidated by the parent will depend on whether the subsidiary is a pass-through (e.g., a U.S. partnership) or taxable entity (e.g., a U.S. C corporation).

ASC 810-10 does not affect how entities determine income tax expense under ASC 740. Typically, no income tax expense is attributable to a pass-through entity; rather, such expense is attributable to its owners. Therefore, a parent with an interest in a subsidiary that is a pass-through entity should recognize income taxes on only its controlling interest in the pass-through entity’s pretax income. In the consolidated income tax expense, the parent should not include the income taxes on the pass-through entity’s pretax income attributed to the noncontrolling interest holders.

Example 6-15

Company X has a 90 percent controlling interest in Subsidiary Y (a limited liability corporation). Subsidiary Y is a pass-through entity and is not subject to income taxes in any jurisdiction in which it operates. Company X’s pretax income for 20X9 is $100,000. Subsidiary Y has pretax income of $50,000 for the same period. Company X has a tax rate of 25 percent. For simplicity, this example assumes that there are no temporary differences.

Given the facts above, X would report the following in its consolidated income statement for 20X9:

In this example, ASC 810-10 does not affect how X determines income tax expense under ASC 740 since X recognizes income tax expense for only its controlling interest in the income of Y. However, ASC 810-10 does affect the effective tax rate (ETR) of X. Given the impact of ASC 810-10, X’s ETR is 24.2 percent ($36,250 ÷ 150,000). If X is a public entity and the reconciling item is significant, X should disclose the tax effect of the amount of income from Y attributed to the noncontrolling interest in its numerical reconciliation from expected to actual income tax expense.

Chapter 7 — Changes in a Parent’s Ownership Interest

7.1 Changes in a Parent’s Ownership Interest Without an Accompanying Change in Control

ASC 810-10

45-22 A parent’s ownership interest in a subsidiary might change while the parent retains its controlling financial interest in the subsidiary. For example, a parent’s ownership interest in a subsidiary might change if any of the following occur:

The parent purchases additional ownership interests in its subsidiary.
The parent sells some of its ownership interests in its subsidiary.
The subsidiary reacquires some of its ownership interests.
The subsidiary issues additional ownership interests.

45-23 Changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary shall be accounted for as equity transactions (investments by owners and distributions to owners acting in their capacity as owners). Therefore, no gain or loss shall be recognized in consolidated net income or comprehensive income. The carrying amount of the noncontrolling interest shall be adjusted to reflect the change in its ownership interest in the subsidiary. Any difference between the fair value of the consideration received or paid and the amount by which the noncontrolling interest is adjusted shall be recognized in equity attributable to the parent. Example 1 (paragraph 810-10-55-4B) illustrates the application of this guidance.

45-24 A change in a parent’s ownership interest might occur in a subsidiary that has accumulated other comprehensive income. If that is the case, the carrying amount of accumulated other comprehensive income shall be adjusted to reflect the change in the ownership interest in the subsidiary through a corresponding charge or credit to equity attributable to the parent. Example 1, Case C (paragraph 810-10-55-4F) illustrates the application of this guidance.

An entity’s ownership structure is often fluid. A parent may directly purchase additional ownership interests in its subsidiary from a third party, or it may sell some or all of its current ownership interests in the subsidiary to a third party. Alternatively, a subsidiary may issue (purchase) additional ownership interests to (from) third parties, thereby diluting (concentrating) the parent’s ownership interest. Irrespective of the events that lead to changes in ownership interests in the subsidiary, if control has not changed, a parent accounts for such changes in ownership as equity transactions. Generally, the parent should neither recognize a gain or loss on sales or issuances of subsidiary shares nor step up to fair value the portion of the subsidiary’s net assets that corresponds to the additional interests acquired. Rather, any difference between consideration paid or received and the change in noncontrolling interest is typically recorded in equity. As part of equity transaction accounting, the reporting entity must also reallocate the subsidiary’s AOCI between the parent and the noncontrolling interest.

As explained in the next section, there is an exception to this overall “equity transaction” principle for certain decreases in ownership specified in ASC 810-10-45-21A(b).

7.1.1 Scope Limitations for Certain Decreases in Ownership Without an Accompanying Change in Control

ASC 810-10

45-21A The guidance in paragraphs 810-10-45-22 through 45-24 applies to the following:

Transactions that result in an increase in ownership of a subsidiary
Transactions that result in a decrease in ownership of either of the following while the parent retains a controlling financial interest in the subsidiary:
1. A subsidiary that is a business or a nonprofit activity, except for either of the following:
  1. Subparagraph superseded by Accounting Standards Update No. 2017-05.
  2. A conveyance of oil and gas mineral rights (for guidance on conveyances of oil and gas mineral rights and related transactions, see Subtopic 932-360).
  3. A transfer of a good or service in a contract with a customer within the scope of Topic 606.
2. A subsidiary that is not a business or a nonprofit activity if the substance of the transaction is not addressed directly by guidance in other Topics that include, but are not limited to, all of the following:
  1. Topic 606 on revenue from contracts with customers
  2. Topic 845 on exchanges of nonmonetary assets
  3. Topic 860 on transferring and servicing financial assets
  4. Topic 932 on conveyances of mineral rights and related transactions
  5. Subtopic 610-20 on gains and losses from the derecognition of nonfinancial assets.

ASC 810-10-45-21A provides separate scope guidance on the applicability of ASC 810-10-45-22 through 45-24 to decreases in ownership (without an accompanying change in control) of (1) certain subsidiaries that are businesses or nonprofit activities and (2) certain other subsidiaries that are not businesses or nonprofit activities.

The guidance in ASC 810-10 on decreases in ownership without an accompanying change in control applies to all decreases in ownership (without an accompanying change in control) of subsidiaries that are businesses or nonprofit activities except for decreases that result from the types of transactions listed below, for which the guidance cited in the right column of the table would generally be considered.

Types of Transactions	Guidance to Be Considered
Conveyances of oil and gas mineral rights	ASC 932-360
Transfers of goods or services in contracts with customers	ASC 606

The guidance in ASC 810-10 on decreases in ownership without an accompanying change in control also applies to all decreases in ownership (without an accompanying change in control) in subsidiaries that are not businesses or nonprofit activities except for decreases that result from transactions whose substance is addressed by other U.S. GAAP, including, but not limited to, the types of transactions listed below, for which the guidance cited in the right column of the table would generally be considered.

Types of Transactions	Guidance to Be Considered
Revenue transactions	ASC 606
Exchanges of nonmonetary assets	ASC 845
Transfers and servicing of financial assets1	ASC 860
Conveyances of mineral rights and related transactions	ASC 932
Gains and losses from derecognition of nonfinancial assets	ASC 610-20

Essentially, ASC 810-10-45-21A(b) precludes a reporting entity from ignoring other U.S. GAAP simply because, for example, it transfers an equity interest in a subsidiary to effect the transaction.

The scope guidance in ASC 810-10-45-21A is symmetrical with that in ASC 810-10-40-3A, which addresses the scope of the deconsolidation and derecognition guidance in ASC 810-10. Note that because the scope limitations in ASC 810-10-45-21A(b) focus on avoiding premature derecognition of assets that could not otherwise be derecognized under U.S. GAAP, transactions that increase a parent’s ownership while retaining control are not subject to these limitations.

The decision tree below depicts the determination of scope for decreases in ownership interests without an accompanying change in control.

Since ASC 810-10’s scope guidance on transactions that lead to decreases in ownership (without an accompanying change in control) is symmetrical to its guidance on transactions that lead to deconsolidation and derecognition of a subsidiary, it may be helpful to refer to Appendix F of Deloitte’s Roadmap Consolidation — Identifying a Controlling Financial Interest, which discusses considerations related to transactions in the latter category.

7.1.1.1 Transfer of Equity Interests in a Subsidiary Holding Financial Assets

A reporting entity should apply ASC 860 in lieu of ASC 810 when it issues an equity interest in a subsidiary whose only assets are financial assets.2 Paragraph BC9 of ASU 2010-02 explains, in part, as follows:

[T]he Board reasoned that limiting the decrease in ownership provisions of Subtopic 810-10 to businesses or nonprofit activities would remove the potential conflict in asset derecognition or gain or loss guidance that may exist in other U.S. GAAP and should limit the ability to use a legal entity to avoid the accounting consequences of other U.S. GAAP. For example, some Board members were concerned that an entity may place financial assets into a subsidiary and apply Subtopic 810-10 to sales of equity interests in that subsidiary in an effort to circumvent the guidance in Topic 860 on transfers of interests in financial assets (including the guidance on whether such transfers represent sales or secured borrowings).

Although the FASB was concerned with circumvention of ASC 860 through structuring, it is important to note that this scope limitation is not isolated to attempted circumvention of ASC 860. Rather, we believe that the scope guidance establishes a principle that transfers of equity interests in a subsidiary holding financial assets while the parent retains control should be accounted for under ASC 860. Since the entire financial asset is not transferred outside the consolidated group in this scenario, the proceeds from issuing the equity interest should be classified as a liability unless the issuance meets the definition of a participating interest and the derecognition criteria in ASC 860 are met.

In a speech at the 2009 AICPA Conference on Current SEC and PCAOB Developments, an SEC staff member, Professional Accounting Fellow Brian Fields, illustrated this concept by presenting an example in which a reporting entity transfers financial assets to a newly created subsidiary (e.g., a special-purpose entity) in exchange for all senior and subordinated interests in the subsidiary. All interests are in legal-form equity and do not contain a maturity date. The reporting entity then sells the senior interests to outside investors. The activities of the subsidiary are significantly limited and do not have the breadth and scope of activities of a business.

After presenting the example, Mr. Fields described how the SEC has previously evaluated transactions of this nature:

While these [newly created subsidiaries] contain only financial assets and do not have the breadth and scope of activities of a business, some believe that by describing the beneficial interests sold as legal form equity and not including an explicit maturity date they can classify securitization proceeds received as noncontrolling equity interests in the consolidated financial statements of the parent sponsor. We have reached a different view in these circumstances. Beneficial interests in such entities are essentially transfers of interests in financial asset cash flows dressed up in legal entity form, and we believe the proceeds received on such transfers should be presented as collateralized borrowings pursuant to transfer accounting requirements to the extent the underlying financial assets themselves do not qualify for derecognition.

To say it again in another way, when a subsidiary is created simply to issue beneficial interests backed by financial assets rather than to engage in substantive business activities, we’ve concluded that sales of interests in the subsidiary should be viewed as transfers of interests in the financial assets themselves. The objective of an asset-backed financing is to provide the beneficial interest holders with rights to a portion of financial asset cash flows and the guiding literature is contained in Codification Topic 860 on transfers of financial assets. That literature requires a transfer to be reflected either as a sale or collateralized borrowing, depending on its specific characteristics — presentation as an equity interest in the reporting entity is not a possible outcome. [Emphasis added and footnote omitted]

7.1.2 Model of Accounting for Changes in a Parent’s Ownership Interest in a Subsidiary While the Parent Maintains Control

ASC 810-10

ASC 220-10

45-14 The total of other comprehensive income for a period shall be transferred to a component of equity that is presented separately from retained earnings and additional paid-in capital in a statement of financial position at the end of an accounting period. A descriptive title such as accumulated other comprehensive income shall be used for that component of equity.

As previously stated, there are several transactions that may result in a change in a parent’s ownership interest in a subsidiary (e.g., the parent purchases [sells] outstanding shares of the subsidiary from [to] a noncontrolling interest holder, or the subsidiary purchases [issues] its own shares from [to] holders of noncontrolling interests). A transaction that gives rise to a change in a parent’s ownership interest in a subsidiary while the parent maintains control of the subsidiary is within the scope of ASC 810-10 and thus represents an equity transaction.

To determine the adjustment(s) to equity and noncontrolling interest accounts that must be recorded in the consolidated financial statements, a reporting entity must compare the consideration paid (received) in the transaction with the noncontrolling interest’s claim on net assets after the transaction. Although seemingly straightforward, this analysis requires the entity to consider two nuances in practice:

The structure of the transaction (the parent’s acquiring [selling] subsidiary shares directly from [to] a noncontrolling interest holder vs. the subsidiary’s reacquiring [issuing] its own shares from [to] holders of noncontrolling interests) may directly affect the absolute amount of the subsidiary’s net assets and thus indirectly affect each party’s claim on the subsidiary’s net assets.
Whereas ASC 220-10-45-14 requires a parent to separately present its portion of a subsidiary’s AOCI as a separate component of equity, ASC 220 and ASC 810 do not require separate presentation of the noncontrolling interest holder’s portion of the subsidiary’s AOCI. Consequently, ASC 810-10-45-24 requires that when a parent’s ownership interest in a consolidated subsidiary changes and the subsidiary has AOCI reported in its stand-alone balance sheet, the parent must adjust the consolidated AOCI balance to reflect the parent’s new interest in the subsidiary’s AOCI balance. The offset to this journal entry is to the parent’s equity balance (typically, additional paid-in capital [APIC]).

The table below summarizes how various forms of transactions involving changes in ownership of common shares in a subsidiary affect (1) the subsidiary’s net assets, (2) the controlling and noncontrolling interest holders’ respective ownership percentages, and (3) the consolidated reporting entity’s AOCI balance. (Refer to Section 7.1.2.8 for special considerations related to transactions involving changes in ownership of preferred shares in a subsidiary.)

Effect of Transactions Involving Changes in Ownership of Common Shares in a Subsidiary
Transaction	Effect on Subsidiary’s Net Assets	Effect on Controlling Interest Holder’s Ownership Percentage	Effect on Noncontrolling Interest Holders’ Ownership Percentage	Effect on Consolidated Reporting Entity’s AOCI Balance Related to Subsidiary3
Parent purchases equity interests in its subsidiary from a noncontrolling interest holder (see Section 7.1.2.1)	None	Increased	Decreased	Increased
Subsidiary purchases equity interests in itself from third parties (see Section 7.1.2.2)	Decreased	Increased	Decreased	Increased
Parent sells to a third party a portion of its investment in its subsidiary (see Section 7.1.2.6)	None	Decreased	Increased	Decreased
Subsidiary issues equity interests to third parties (see Section 7.1.2.7)	Increased	Decreased	Increased	Decreased

7.1.2.1 Parent’s Acquisition of Interests in Subsidiary Directly From Third Party

A parent may acquire interests in its subsidiary directly from a noncontrolling interest holder. By acquiring those interests, the parent increases its relative ownership interest in the subsidiary. The example below illustrates the accounting for such an acquisition.

Example 7-1

Subsidiary XYZ is capitalized as follows:

Company A (the parent) purchases 100 shares of XYZ common stock from B (the noncontrolling interest holder) for $10,000. As a result, A should perform the following steps to reflect in A’s consolidated financial statements the increase in A’s ownership:

Step 1: Adjust the subsidiary’s net assets — This step is not applicable to transactions performed directly between shareholders. Net assets remain at $80,000.
Step 2: Determine the new ownership percentages — The new ownership percentages held by A and B, respectively, are calculated as follows:
- Company A’s new ownership percentage = (750 shares + 100 shares) ÷ 1,000 shares = 85%.
- Entity B’s new ownership percentage = (250 shares – 100 shares) ÷ 1,000 shares = 15%.
Step 3: Determine the new carrying amount of the noncontrolling interest — Entity B’s new carrying amount is$80,000 × 15% = $12,000.
Step 4: Recognize the consideration paid, the change in the noncontrolling interest, and the adjustment to APIC — The following entry should be recorded:
Step 5: Adjust the consolidated reporting entity’s AOCI balance — The following entry should be recorded:

7.1.2.1.1 Parent’s Acquisition of Interests in Subsidiary Directly From Third Party That Includes Contingent Consideration Payable

ASC 810-10-45-23 (reproduced in Section 7.1.2) provides guidance on changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary. That guidance requires entities to account for such changes as equity transactions with no gain or loss recognized in consolidated net income or comprehensive income (see Example 7-1). However, ASC 810 does not provide specific guidance on contingent consideration payable in connection with a parent’s acquisition of noncontrolling interests that does not result in a change in control. For example, a parent may acquire noncontrolling interests and agree to transfer additional consideration to the seller in the future, subject to the occurrence or nonoccurrence of a future uncertain event.

Given that ASC 810 does not address contingent consideration, entities should evaluate the applicability of other U.S. GAAP. For example, certain contingent consideration arrangements may be within the scope of ASC 480, ASC 710, ASC 718, or ASC 815.

We are aware of diversity in practice when entities determine that the guidance in other U.S. GAAP is not directly applicable to their contingent consideration arrangements. One accounting policy applied in practice is to analogize to the contingent consideration guidance for an acquirer of a business in ASC 805 and initially recognize the contingent consideration at fair value upon acquisition of the noncontrolling interest, with subsequent changes in fair value of the contingent consideration recognized in earnings each reporting period. Other accounting policies may also be acceptable (e.g., applying ASC 450 for initial recognition and measurement). A reporting entity should consistently apply its adopted accounting policy.

Example 7-2

Subsidiary XYZ is capitalized as follows:

Company A (the parent) purchases 100 shares of XYZ common stock from B (the noncontrolling interest holder) for contingent consideration that is not within the scope of other U.S. GAAP (e.g., ASC 710, ASC 718, or ASC 815). Company A’s accounting policy is to recognize contingent consideration associated with acquisitions of noncontrolling interests in a manner consistent with the accounting for contingent consideration payable in business combinations under ASC 805-30. The fair value of the contingent consideration payable on the acquisition date is $10,000. At the end of A’s next reporting period, the fair value of the contingent consideration payable is $12,000.

As a result, A should perform the following steps to reflect the increased ownership of XYZ in A’s consolidated financial statements:

Step 1: Adjust the subsidiary’s net assets — This step is not applicable to transactions performed directly between XYZ shareholders. Subsidiary XYZ’s net assets remain at $80,000.
Step 2: Determine the new ownership percentages — The new ownership percentages held by A and B, respectively, are calculated as follows:
- Company A’s new ownership percentage = (750 shares + 100 shares) ÷ 1,000 shares = 85%.
- Entity B’s new ownership percentage = (250 shares – 100 shares) ÷ 1,000 shares = 15%.
Step 3: Determine the new carrying amount of the noncontrolling interest — Entity B’s new carrying amount is $80,000 × 15% = $12,000.
Step 4: Recognize the consideration paid, the change in the noncontrolling interest, and the adjustment to APIC — The following entry should be recorded:
Step 5: Adjust the consolidated reporting entity’s AOCI balance — The following entry should be recorded:
Step 6: Subsequent accounting for contingent consideration — The fair value of the contingent consideration on the next reporting date is $12,000. Accordingly, the following entry should be recorded:

Connecting the Dots

It is common for a parent’s acquisition of a noncontrolling interest to occur in accordance with a contract executed before the closing of the acquisition (e.g., in accordance with a share purchase agreement, a purchased call option, or a written put option). Depending on the facts and circumstances, such a contract may be accounted for at fair value on a recurring basis under ASC 480, ASC 815-10, or ASC 815-40. The fair value measurement of the contract would incorporate the value of any contingent consideration payable in connection with the noncontrolling interest acquisition.

7.1.2.2 Subsidiary’s Direct Acquisition of Its Equity Interests

Although the parent may not be a direct party to the transaction, a subsidiary’s acquisition of its own shares from third parties also serves to increase the parent’s controlling interest in the subsidiary. As illustrated below, a reporting entity would recognize such a transaction by performing the same five steps described in Section 7.1.2.

Example 7-3

Subsidiary XYZ is capitalized as follows:

Subsidiary XYZ purchases 100 shares of its common stock (par value equals $1 per share) from B (the noncontrolling interest holder) for $10,000. As a result, A should perform the following steps to reflect in A’s consolidated financial statements the increase in A’s ownership:

Step 1: Adjust the subsidiary’s net assets — Subsidiary XYZ’s net assets after the transaction are as follows:
Step 2: Determine the new ownership percentages — The new ownership percentages held by A and B, respectively, are calculated as follows:
- Company A’s new ownership percentage = 750 shares ÷ (1,000 shares –100 shares) = 83.33%.
- Entity B’s new ownership percentage = (250 shares – 100 shares) ÷ (1,000 shares – 100 shares) = 16.67%.
Step 3: Determine the new carrying amount of the noncontrolling interest — Entity B’s new carrying amount is $70,000 × 16.67% = $11,669.
Step 4: Recognize the consideration paid, the change in the noncontrolling interest, and the adjustment to APIC — The following entry should be recorded:
Step 5: Adjust the consolidated reporting entity’s AOCI balance — The following entry should be recorded:

Connecting the Dots

When an entity repurchases its common shares, it should consider the guidance in ASC 505-30. In some circumstances, the price paid to repurchase common shares includes other elements (stated or unstated) for which separate accounting is required. ASC 505-30 provides guidance on allocating the repurchase price to these other elements. The accounting for the other elements is subject to the requirements of other U.S. GAAP. However, in some circumstances, an entity may conclude that the requirements of other U.S. GAAP do not address the accounting for the excess of the repurchase price over fair value and that this excess therefore represents an expense. In reaching such a conclusion, an entity must use judgment and evaluate the specific facts and circumstances associated with the repurchase transaction. Refer to Deloitte’s Roadmap Earnings per Share for more information. While ASC 505-30 is written in the context of a reporting entity’s acquisition of its common stock, we generally believe that the concepts of ASC 505-30 should be applied to a reporting entity’s acquisition of a common-share noncontrolling interest.

7.1.2.3 Downstream Transactions

A partially owned subsidiary may obtain control of its parent (e.g., by exchanging its common shares for the outstanding voting common shares of its parent) in a type of transaction known as a downstream merger. As a result of the transaction, the consolidated net assets are owned by both the former shareholders of the parent and the former shareholders of the noncontrolling interest in the subsidiary. Regardless of its legal form, a downstream merger is accounted for as if the parent acquired the noncontrolling interest in its subsidiary. Therefore, the reporting for a downstream merger is similar to that for a reverse acquisition without a change in basis for the assets and liabilities. The parent is treated as the ongoing reporting entity from an accounting perspective. The consolidated financial statements of the surviving entity are those of the parent even though the subsidiary is the surviving legal entity. The surviving entity’s stockholders’ equity is adjusted to reflect the former parent’s stockholders’ equity after effect is given to the acquisition of the noncontrolling interest, which is accounted for as an equity transaction in accordance with ASC 810-10-45-23. See Deloitte’s Roadmap Business Combinations for more information about downstream mergers.

7.1.2.4 Additional Ownership Interest Obtained Through a Business Combination

In a business combination, an acquirer (parent) may obtain an additional ownership interest in an existing consolidated subsidiary if the target has a noncontrolling interest in that acquirer’s (parent’s) subsidiary before the business combination.

Under the acquisition accounting model in ASC 805, total consideration transferred to the seller by the acquirer must be attributed to all assets acquired and liabilities assumed in the business combination. Such attribution is based on the fair value of the individual assets acquired and liabilities assumed. When the target entity holds a noncontrolling interest in a subsidiary of the acquirer, one of the “assets” acquired by the acquirer is an increased ownership interest in the acquirer’s previously consolidated subsidiary. Consequently, and in a manner consistent with the guidance in ASC 810-10, an equity transaction has also taken place. To record this equity transaction, the acquirer should treat the amount attributed to the acquired noncontrolling interest under the acquisition accounting model in ASC 805 as the consideration “paid” to acquire the noncontrolling interest. Once the consideration “paid” has been determined, the acquirer should perform the five steps outlined in Section 7.1.2 to recognize its increased ownership interest in its subsidiary.

7.1.2.5 Acquisition of Additional Ownership Interests in a Subsidiary When the Parent Obtained Control Before Adopting FASB Statement 160

As discussed in Section 7.1.2, a parent’s acquisition of additional ownership interests in a partially owned subsidiary is generally accounted for as an equity transaction. Before the adoption of FASB Statement 160, a parent would apply the guidance in paragraph 14 of FASB Statement 141 to account for increases in its ownership interest in a consolidated subsidiary. Paragraph 14 required the parent to apply purchase accounting and step up a portion of the target’s net assets related to the additional ownership percentage acquired. Often, the parent recorded additional goodwill associated with the purchase of this additional ownership interest.

When a parent has a controlling financial interest in a partially owned subsidiary that was acquired before the adoption of FASB Statement 160, a question often arises about whether the parent can step up the subsidiary’s net assets to fair value when the parent subsequently acquires additional ownership interests in the subsidiary.

Because FASB Statement 160 required prospective application of its amendments to the accounting requirements later codified in ASC 810-10, the parent can neither further step up the subsidiary’s net assets to fair value for the additional interest acquired nor record additional goodwill (as it previously did under FASB Statement 141). As a result, the parent will never fully step up to fair value a partial controlling interest in its subsidiary if that subsidiary was acquired before the adoption of FASB Statement 160.

Example 7-4

Before adopting FASB Statement 160, Company X purchased an 80 percent controlling interest in Subsidiary Y. In accordance with FASB Statement 141, X recorded Y’s net assets acquired at 80 percent fair value and 20 percent carrying value. Company X adopted FASB Statement 160 on January 1, 2009. In March 2016, X purchased an additional 20 percent interest in Y. Accordingly, in the manner described in Section 7.1.2, X accounts for its increase in ownership interest as an equity transaction between the parent and the noncontrolling interest. That is, X neither applies additional acquisition accounting nor steps up Y’s net assets to fair value for the additional 20 percent interest it acquired. Instead, X records the difference between the cash consideration paid and the carrying amount of the noncontrolling interest as an adjustment to X’s APIC.

7.1.2.6 Parent’s Selling of Interests in a Subsidiary Directly to a Noncontrolling Interest Holder

A parent should use the same five-step approach described in Section 7.1.2 to recognize decreases in its ownership interest in its subsidiary while control is maintained.

Example 7-5

Subsidiary XYZ is capitalized as follows:

Company A (the parent) sells 100 shares of XYZ common stock to Entity B (the newly established noncontrolling interest holder) for $10,000. As a result, A should perform the following steps to reflect in A’s consolidated financial statements the decrease in A’s ownership:

Step 1: Adjust the net assets of the subsidiary — This step is not applicable to transactions performed directly between shareholders. Net assets remain at $80,000.
Step 2: Determine the new ownership percentages — The new ownership percentages held by A and B, respectively, are calculated as follows:
- Company A’s new ownership percentage = (1,000 shares – 100 shares) ÷ 1,000 shares = 90%.
- Entity B’s new ownership percentage = (0 shares + 100 shares) ÷ 1,000 shares = 10%.
Step 3: Determine the new carrying amount of the noncontrolling interest — Entity B’s new carrying amount is $80,000 × 10% = $8,000.
Step 4: Recognize the consideration received, the change in the noncontrolling interest, and the adjustment to APIC — The following entry should be recorded:
Step 5: Adjust the consolidated reporting entity’s AOCI balance — The following entry should be recorded:

7.1.2.7 Subsidiary’s Direct Issuance of Its Equity Interests to Third Parties

Although the parent may not be a direct party to the transaction, a subsidiary’s issuance of its own shares to third parties also serves to dilute the parent’s controlling interest in the subsidiary. As illustrated below, a parent would recognize such a transaction by performing the same five steps described in Section 7.1.2.

Example 7-6

Subsidiary XYZ is capitalized as follows:

Subsidiary XYZ issues 100 shares of its common stock (par value equals $1 per share) to Entity B (the newly established noncontrolling interest holder) for $10,000. As a result, A should perform the following steps to reflect in A’s consolidated financial statements the decrease in A’s ownership:

Step 1: Adjust the net assets of the subsidiary — Subsidiary XYZ’s net assets after the transaction are as follows:
Step 2: Determine the new ownership percentages — The new ownership percentages held by A and B, respectively, are calculated as follows:
- Company A’s new ownership percentage = 1,000 shares ÷ (1,000 shares + 100 shares) = 90.91%.
- Entity B’s new ownership percentage = (0 shares + 100 shares) ÷ (1,000 shares + 100 shares) = 9.09%.
Step 3: Determine the new carrying amount of the noncontrolling interest — Entity B’s new carrying amount is $90,000 × 9.09% = $8,181.
Step 4: Recognize the consideration received, the change in the noncontrolling interest, and the adjustment to APIC — The following entry should be recorded:
Step 5: Adjust the consolidated reporting entity’s AOCI balance — The following entry should be recorded:

7.1.2.7.1 Parent’s Accounting for Subsidiary’s Issuance of Share-Based Payment Awards

A subsidiary may issue share-based payment awards of its own stock to its employees. ASC 718-10-35-2 states, in part:

The compensation cost for an award of share-based employee compensation classified as equity shall be recognized over the requisite service period, with a corresponding credit to equity (generally, paid-in capital). [Emphasis added]

The guidance in ASC 718 indicates that when an entity issues share-based payment awards, a corresponding increase in equity or a liability should be recorded to offset the share-based payment expense. However, a subsidiary’s issuance of equity-classified share-based payment awards to its employees may decrease the parent’s ownership interest in the subsidiary. We believe that in such cases, it would be appropriate for the parent to (1) recognize a share-based payment expense as the awards vest over time at the subsidiary and (2) record a corresponding credit to the noncontrolling interests. Other alternatives may also be acceptable.

The example below illustrates an entity’s accounting for the issuance of share-based payment awards in the form of stock options that, once fully vested, are either exercised or forfeited. If the options are forfeited, the amount previously credited to noncontrolling interests for the vested portion would be reclassified into equity (i.e., the parent’s APIC). This example can be applied to other forms of share-based payment award arrangements, including restricted stock units.

Example 7-7

Parent Company A has an 80 percent ownership interest in Subsidiary B. The remaining 20 percent is owned by a third-party noncontrolling interest holder.

On January 1, 20X6, B grants to its employee, Employee C, 100 at-the-money stock options that are exchangeable into common shares of B once they are exercised. The options vest annually over the next three years. Each option has a grant date fair-value-based measure of $6 and an exercise price of $10. The options have a term of three years. Assume that A recognizes forfeitures when they occur.

The entries below outline the vesting of the options in the following scenarios:

Scenario 1 — Fully vested options are exercised on January 1, 20X9, when C’s 100 shares in B have a proportionate ownership interest in B of $800.
Scenario 2 — Employee C forfeits its vested options on January 1, 20X9.

7.1.2.7.2 Reorganization Through an UP-C Structure

The use of umbrella partnership C corporation (“UP-C”) structures by private equity investors and other owners of private operating entities that seek liquidity through public equity offerings is common. To facilitate an UP-C reorganization, the owners of a private operating entity first convert the entity to a partnership or limited liability company (LLC) if it is not one already. They then form a new holding company — a C corporation — and transfer to the holding company their controlling interest in the operating entity (thereby becoming the operating entity’s “legacy owners”). The legacy owners retain a direct noncontrolling interest in the operating entity, and shares of the holding company’s stock are sold in an initial public offering (IPO).

The UP-C structure enables private owners to access the public markets while retaining partnership or LLC interests as well as the pass-through and other tax benefits that come from those interests. The structure and transactions may generate additional tax attributes for the holding company (e.g., goodwill and other intangible asset basis adjustments), the benefits of which are often shared with the operating entity’s legacy owners (e.g., through tax receivable agreements).

Example 7-8

Company J, a private operating company, is an LLC that is 100 percent owned by two members who each own 5,000 units of the LLC. As of 20X1, J has accumulated a deficit of $100 million in equity.

Company J’s ownership structure is illustrated below.

In 20X2, J’s owners create an UP-C structure as follows:

First, J’s owners form Company K, a holding company organized as a C corporation. They plan for K to publicly sell shares of its stock in an IPO.
In contemplation of K’s IPO, J’s owners amend J’s operating agreement. Specifically, they modify J’s capital structure by reclassifying the interests in J as voting (“Class A”) and nonvoting (“Class B”) LLC units.
Before or contemporaneously with the launch of K’s IPO, J issues 7,000 Class B units to the two LLC members who originally owned 100 percent of J (the “pre-IPO LLC members,” who are now J’s legacy owners) and 3,000 Class A units to K. That is, all of the previous 10,000 units of J were converted to 7,000 Class B units and 3,000 Class A units.
In K’s IPO, K issues 3,000 Class A common shares of its stock to the public.
Company K is the managing member of J.

The 20X2 UP-C reorganization is illustrated below.

Each Class B LLC unit can be exchanged on a one-for-one basis for a Class A share of K’s common stock. The UP-C reorganization represents a transaction between entities under common control followed by an IPO and does not result in a change in accounting basis of K’s net assets, which include J’s net assets.

After the UP-C reorganization, K owns 30 percent of J’s LLC member interests, and the pre-IPO LLC members own 70 percent. Company K’s sole assets are its member interests in J, and those interests represent a controlling interest in J (because the pre-IPO LLC members’ interests in J are nonvoting). The pre-IPO LLC members’ interests in J represent noncontrolling interests in K’s consolidated financial statements.

We believe that it is appropriate for K to view the initial recognition of the noncontrolling interests related to the outstanding LLC units of J as being akin to a change in a parent’s ownership interest without a change in control. This transaction, therefore, is accounted for as an equity transaction in accordance with ASC 810-10-45-23.

Company K should account for the UP-C reorganization as a transaction with a less than wholly owned subsidiary that results in a change in ownership percentage. Company K should ratably allocate the accumulated deficit of $100 million that existed immediately before the reorganization between K and the noncontrolling interests.

Company K should reflect 30 percent (3,000 Class A units owned out of 10,000 LLC units outstanding) or $30 million of the total pre-IPO accumulated deficit (30% ownership × $100 million accumulated deficit) in its consolidated financial statements. The remaining portion (a $70 million deficit) should be allocated in K’s financial statements to the noncontrolling interest holders.

Note that any subsequent change in K’s ownership of J, such as the issuance of additional LLC units, would require a rebalancing between the noncontrolling interests and the parent in accordance with the five-step process described in Section 7.1.2.

Further note that in this example, the noncontrolling interests are not redeemable. Facts and circumstances may vary in an UP-C transaction, and the noncontrolling interests may be redeemable depending on the transaction’s terms. The classification of equity instruments in the asset, liability, or equity section of a reporting entity’s balance sheet is outside the scope of this publication. See Deloitte’s Roadmap Distinguishing Liabilities From Equity, which provides extensive interpretive guidance on the appropriate classification of equity instruments within or outside of the equity section of a reporting entity’s balance sheet. In addition, see Chapter 9 of this Roadmap, which provides interpretive guidance on how an entity should account for a redeemable noncontrolling interest, including initial measurement guidance, once it has been determined that equity classification of the redeemable noncontrolling interest is appropriate.

7.1.2.8 Special Considerations Related to Transactions Involving Changes in Ownership of Preferred Shares in a Subsidiary

Preferred shares typically convey to their holder rights that differ significantly from those conveyed by common shares. For example, whereas common shares typically provide their holder with the upside and downside potential associated with residual interests in an entity, preferred shares typically limit the holder’s upside to a stated dividend amount and provide their holder with downside protection through the combination of a substantive stated liquidation preference and seniority to common shareholders. While preferred shares also typically lack creditor rights, the combination of rights conveyed by preferred shares typically provide their holder with certain risks and rewards that are more akin to those of a debt instrument than to those of an equity instrument.

Recognizing that the objective of noncontrolling interest presentation and measurement is to provide investors in a reporting entity with a depiction of claims held by others on the net assets of a subsidiary, we believe that preferred shares in a subsidiary that are held by third parties should be classified as noncontrolling interests in the reporting entity’s consolidated balance sheet. However, to the extent that the preferred shares provide their holder with a substantive preference to common shareholders in liquidation while limiting the holder’s participation in profits (beyond a stated dividend), we believe that just as an issuance of debt does not cause a rebalancing of equity accounts, the amounts received from the fair value issuance of subsidiary preferred shares can be excluded from the five-step process outlined in Section 7.1.2. That is, we expect that the issuance of such preferred shares would not make it necessary to reallocate existing equity balances (including AOCI) between the controlling and noncontrolling interest holders.

Subsidiary preferred shares with more complex features may have a risk return profile that differs from that of the preferred shares described in this section. Preparers facing such scenarios should consider consulting with professional accounting advisers.

The interpretive guidance above is provided in the context of a subsidiary’s issuances, as opposed to repurchases, of preferred shares. The reporting entity’s accounting for a subsidiary’s repurchase of preferred shares depends on whether the preferred shares are within the scope of ASC 480-10-S99-3A and whether the shares are redeemable or nonredeemable:

Redeemable preferred shares — As discussed in Section 9.4.1, preferred-share redeemable noncontrolling interests in a subsidiary are classified in the temporary equity section of the reporting entity’s consolidated balance sheet. After issuance of a subsidiary’s redeemable preferred shares, the carrying amount of a preferred-share redeemable noncontrolling interest is adjusted in accordance with one of the two methods described in Section 9.4.3.2. The objective of this measurement adjustment is to ultimately recognize the preferred-share redeemable noncontrolling interest at its redemption price on its redemption date. Therefore, if the redeemable preferred shares in the subsidiary are redeemed at their carrying amount, no rebalancing should be required since there will be no difference between the shares’ book value and their redemption value at the time of redemption. However, if the preferred-share redeemable noncontrolling interest is redeemed at a price other than its carrying amount (e.g., a reporting entity that applies the accretion method has a subsidiary that voluntarily acquires the preferred-share redeemable noncontrolling interest before the shares’ stated redemption date), a rebalancing will be necessary to account for the difference between the consideration paid to acquire the preferred-share redeemable noncontrolling interest and the interest’s carrying amount. See Section 9.4.5.2 for additional considerations related to the EPS implications of redemptions of preferred-share noncontrolling interests.
Nonredeemable preferred shares — Unlike the carrying amount of preferred-share redeemable noncontrolling interests, the carrying amount of preferred-share noncontrolling interests that are not redeemable is not adjusted after issuance of the shares. As a result, the repurchase of preferred-share noncontrolling interests that are not redeemable will generally result in a rebalancing of the equity accounts since the book value of the nonredeemable preferred shares will most likely not equal the redemption price. In rebalancing the equity accounts, an entity should perform the five-step process outlined in Section 7.1.2. Further, the difference between the net carrying amount of the preferred shares and the redemption price will increase or reduce net income attributable to the parent in the parent’s calculation of income available to common stockholders. See Deloitte’s Roadmap Earnings per Share for further discussion.

7.1.2.9 Accounting for Costs Related to Equity Transactions With Noncontrolling Interest Holders

ASC 810-10-45-23 indicates 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 (investments by owners and distributions to owners acting in their capacity as owners).”

SAB Topic 5.A provides guidance on accounting for costs related to the issuance of equity securities, stating that “[s]pecific incremental costs directly attributable to a proposed or actual offering of securities may properly be deferred and charged against the gross proceeds of the offering.” Therefore, direct costs of issuing equity securities are generally reflected as a reduction of the amount that would have otherwise been recorded in APIC. SAB Topic 5.A further states that “management salaries or other general and administrative expenses may not be allocated as costs of the offering and deferred costs of an aborted offering may not be deferred and charged against proceeds of a subsequent offering.” These indirect costs are generally reflected as an expense in the income statement.

In addition, AICPA Technical Q&As Section 4110.09 states that although there is no authoritative literature on costs entities incur to acquire their own stock, some “believe that costs associated with the acquisition of treasury stock should be treated in a manner similar to stock issue costs.” Under SAB Topic 5.A, direct costs associated with the acquisition of treasury stock may be added to the cost of the treasury stock.

On the basis of the above, direct costs of purchasing or selling noncontrolling interests in a subsidiary when control is maintained may be recorded as an adjustment to APIC. However, indirect costs of purchasing or selling noncontrolling interests in a subsidiary when control is maintained are generally reflected as an expense in the income statement. These conclusions are supported by analogies to ASC 810, SAB Topic 5.A, and AICPA Technical Q&As Section 4110.09.

While these conclusions are supported by analogies to the aforementioned guidance, we are also aware of others analogizing to the treatment of transaction costs in a business combination. Companies using this approach may elect an accounting policy to record all transaction costs as an expense in the income statement.

Although both approaches above are acceptable, a reporting entity should elect and consistently apply an accounting policy for such transaction costs.

7.1.2.10 Establishment of Noncontrolling Interests in Conjunction With an Asset Acquisition or Business Combination

As stated in ASC 810-10-45-23, changes in a parent’s ownership interest while the parent retains control in a partially owned subsidiary are accounted for as equity transactions, with no gain or loss recognized in consolidated net income or comprehensive income. If a difference exists at initial acquisition between noncontrolling interests’ claims on net assets based on terms and conditions from contractual arrangements and either their fair value (for noncontrolling interests recognized in a business combination or in an asset acquisition that results from the consolidation of a VIE) or their proportionate share of relative fair value (for noncontrolling interests recognized in an asset acquisition that results from the consolidation of a subsidiary that is not a VIE), a subsequent equity transaction that changes a parent’s ownership interest in a subsidiary while the parent maintains control of the subsidiary should not trigger recognition of a gain or loss resulting from this difference. We believe that it is not appropriate to recognize this difference subsequently as a gain or loss until the noncontrolling interests are derecognized upon the occurrence of one of the following events:

Liquidation of the legal entity — The partially owned subsidiary is legally dissolved (i.e., it no longer exists as a legal entity).
Parent’s loss of control — The reporting entity loses control of the partially owned subsidiary under ASC 810 (see Section 7.2).
Acquisition of the noncontrolling interests in existence on the acquisition date — The equity interests present as of the acquisition date as noncontrolling interests in the partially owned subsidiary are acquired by the reporting entity.

See Sections 5.2.4 and 6.12 for additional considerations.

7.1.3 Accounting for the Tax Effects of Transactions With Noncontrolling Shareholders

ASC 740-20

45-11 The tax effects of the following items occurring during the year shall be charged or credited directly to other comprehensive income or to related components of shareholders’ equity: . . .

c. An increase or decrease in contributed capital (for example, deductible expenditures reported as a reduction of the proceeds from issuing capital stock). . . .

g. All changes in the tax bases of assets and liabilities caused by transactions among or with shareholders shall be included in equity including the effect of valuation allowances initially required upon recognition of any related deferred tax assets. Changes in valuation allowances occurring in subsequent periods shall be included in the income statement.

As discussed in Section 7.1.2, a parent accounts for changes in its ownership interest in a subsidiary over which it maintains control as equity transactions. The parent cannot recognize a gain or loss in consolidated net income or comprehensive income for such transactions and is not permitted to step up a portion of the subsidiary’s net assets to fair value to the extent of any additional interests acquired (i.e., no additional acquisition method accounting). As part of the equity transaction accounting, the parent must also generally reallocate the subsidiary’s AOCI between the parent and the noncontrolling interest.

The direct tax effect of a change in ownership interest in a subsidiary when the parent maintains control is generally recorded in stockholders’ equity. Some transactions with noncontrolling shareholders may create both a direct and an indirect tax effect. It is important to properly distinguish between the direct and indirect tax effects of a transaction since their accounting may differ. For example, the indirect tax effect of a parent’s change in its assumptions associated with undistributed earnings of a foreign subsidiary resulting from a sale of its ownership interest in that subsidiary is recorded as income tax expense rather than as an adjustment to stockholders’ equity.

Example 7-9

Parent Entity A owns 80 percent of its foreign subsidiary, which operates in a zero-rate tax jurisdiction. The foreign subsidiary has a net book value of $100 million as of December 31, 20X9. Entity A’s tax basis of its 80 percent investment is $70 million. Assume that the carrying amounts of the interest of the parent (A) and noncontrolling interest holder (Entity B) in the foreign subsidiary are $80 million and $20 million, respectively. The $10 million difference between A’s book basis and tax basis in the foreign subsidiary is attributable to undistributed earnings of the foreign subsidiary. In accordance with ASC 740-30-25-17, A has not historically recorded a deferred tax liability (DTL) for the taxable temporary difference associated with undistributed earnings of the foreign subsidiary because A has specific plans to reinvest such earnings in the foreign subsidiary indefinitely and the reversal of the temporary difference is therefore indefinite.

On January 1, 20Y0, A sells 12.5 percent of its interest in the foreign subsidiary to a nonaffiliated entity, Entity C, for total proceeds of $20 million. As summarized in the table below, this transaction (1) decreases A's carrying amount in the foreign subsidiary by $10 million (12.5% × $80 million) to $70 million and reduces A's interest in the foreign subsidiary to 70 percent ($70 million of $100 million total net book value), and (2) increases the total carrying amount of the noncontrolling interest holders (B and C) by $10 million to $30 million.

Assume that A is subject to a 25 percent tax rate.

Below is A’s journal entry on January 1, 20Y0, before consideration of income tax accounting:

Entity A’s tax consequence from the tax gain on the sale of its investment in the foreign subsidiary is approximately $2.8 million, or [$20 million selling price – ($70 million tax basis × 12.5% portion sold)] × 25% tax rate. The amount comprises the following direct and indirect tax effects:

The direct tax effect of the sale is $2.5 million. This amount, which is associated with the difference between the selling price and book basis of the interest sold by A (i.e., the gain on the sale), is calculated as [$20 million selling price – ($80 million book basis × 12.5% portion sold)] × 25% tax rate. The gain on the sale of A’s interest is recorded in shareholders’ equity; therefore, the direct tax effect is also recorded in shareholders’ equity.
The indirect tax effect of the sale is $312,500. This amount, which is associated with the preexisting taxable temporary difference (i.e., the undistributed earnings of the subsidiary) of the interest sold, is calculated as [($80 million book basis – $70 million tax basis) × 12.5% portion sold] × 25% tax rate. The partial sale of the foreign subsidiary results in a change in A’s assertion regarding the indefinite reinvestment of the subsidiary’s earnings associated with the interest sold by A. This is considered an indirect tax effect and recognized as income tax expense.

Below is A’s journal entry on January 1, 20Y0, to account for the income tax effects of the sale of its interest in the foreign subsidiary:

As a result of the sale, A should reassess its intent and ability to indefinitely reinvest the earnings of the foreign subsidiary associated with its remaining 70 percent ownership interest. A DTL should be recognized if circumstances have changed and A concludes that the temporary difference is now expected to reverse in the foreseeable future. This reassessment and the recording of any DTL may occur in a period preceding the actual sale of its ownership interest, since a liability should be recorded when A’s assertion regarding indefinite reinvestment changes.

For a discussion of the tax effects of contributions to pass-through entities in control-to-control transactions, see Section 3.4.16 of Deloitte’s Roadmap Income Taxes.

Footnotes

Refer to Section 7.1.1.1 for further discussion.

We do not believe that the accounting model should change by virtue of a clearly inconsequential amount of nonfinancial assets in the subsidiary.

All increases and decreases reflected in this column are in absolute terms.

7.2 Changes in a Parent’s Ownership Interest With an Accompanying Change in Control

ASC 810-10

40-4 A parent shall deconsolidate a subsidiary or derecognize a group of assets specified in paragraph 810-10-40-3A as of the date the parent ceases to have a controlling financial interest in that subsidiary or group of assets. See paragraph 810-10-55-4A for related implementation guidance.

40-4A When a parent deconsolidates a subsidiary or derecognizes a group of assets within the scope of paragraph 810-10-40-3A, the parent relationship ceases to exist. The parent no longer controls the subsidiary’s assets and liabilities or the group of assets. The parent therefore shall derecognize the assets, liabilities, and equity components related to that subsidiary or group of assets. The equity components will include any noncontrolling interest as well as amounts previously recognized in accumulated other comprehensive income. If the subsidiary or group of assets being deconsolidated or derecognized is a foreign entity (or represents the complete or substantially complete liquidation of the foreign entity in which it resides), then the amount of accumulated other comprehensive income that is reclassified and included in the calculation of gain or loss shall include any foreign currency translation adjustment related to that foreign entity. For guidance on derecognizing foreign currency translation adjustments recorded in accumulated other comprehensive income, see Section 830-30-40.

A change in ownership interest in a subsidiary is one of many ways a parent may cede control of that subsidiary. Upon a loss of control, the parent must derecognize in its consolidated financial statements the subsidiary’s assets, liabilities, and components of equity (including noncontrolling interests). Appendix F of Deloitte’s Roadmap Consolidation — Identifying a Controlling Financial Interest provides in-depth guidance on considerations for reporting entities upon the deconsolidation of a subsidiary, including SEC disclosure requirements that are applicable in such circumstances.

Chapter 8 — Presentation and Disclosure

Chapter 9 — Redeemable Noncontrolling Interests

9.1 Introduction

Common and preferred shares of a consolidated subsidiary are sometimes subject to redemption rights held by the noncontrolling shareholder. The combination of a noncontrolling interest and a redemption feature (e.g., a put option) may result in what is referred to as a redeemable noncontrolling interest. Redemption features can be important to the noncontrolling interest holder because they enable the holder to liquidate its investment when there is no readily accessible market. As described in Section 3.3, noncontrolling interest classification is limited to instruments that are appropriately classified in the equity section of the reporting entity’s balance sheet. Because classification of equity instruments in the asset, liability, or equity section of a reporting entity’s balance sheet is outside the scope of this publication, we have presumed in this chapter that equity classification of a redeemable noncontrolling interest has already been determined to be appropriate.1

Accounting for redeemable noncontrolling interests is one of the more complex topics in U.S. GAAP, in part because the reporting entity’s accounting depends on the unique combination of the following:

The form of the redeemable noncontrolling interest (common-share vs. preferred-share).
Whether the redemption price is at fair value or other than fair value (see Sections 9.4.4.1 through 9.4.4.2.1.3).
The reporting entity’s policy for determining the amount of the adjustment to be recorded each period (see Sections 9.4.3 through 9.4.3.4).
The reporting entity’s policy for classifying the offsetting entry to such adjustments (see Sections 9.4.4 through 9.4.4.2.1.3).
When a common-share redeemable noncontrolling interest is redeemable at other than fair value, the reporting entity’s policy for incorporating such adjustments into its EPS computation (see Sections 9.4.4.2 through 9.4.4.2.1.3).

The remainder of this chapter summarizes the key financial reporting and EPS considerations related to redeemable noncontrolling interests.

Footnotes

See Deloitte’s Roadmap Distinguishing Liabilities From Equity, which provides extensive interpretive guidance on the appropriate classification of instruments within or outside of the equity section of a reporting entity’s balance sheet.

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:

Also assume 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.

Appendix A — Differences Between U.S. GAAP and IFRS Standards

Appendix A — Differences Between U.S. GAAP and IFRS Accounting Standards

Although the accounting for noncontrolling interests under U.S. GAAP is generally consistent with their treatment under IFRS® Accounting Standards, there are some differences, such as those summarized in the table below.1 The differences outlined are based on a comparison of authoritative literature under U.S. GAAP and IFRS Accounting Standards and do not necessarily include interpretations of such literature.

Subject	U.S. GAAP	IFRS Accounting Standards
Initial measurement of noncontrolling interests when a reporting entity first consolidates a partially owned subsidiary	If a reporting entity acquires a controlling financial interest in a legal entity that meets the definition of a business, it should account for the transaction as a business combination under ASC 805. That guidance generally requires an acquiring entity to initially recognize the assets and liabilities of, and noncontrolling interests in, the acquired business at fair value. Regardless of whether all assets or liabilities are recognized at fair value, noncontrolling interests recognized as the result of a business combination are always measured initially at fair value. For additional information, see Section 5.2.	Under IFRS 3, an entity may choose, on an acquisition-by-acquisition basis, to measure noncontrolling interest components that “are present ownership interests and entitle their holders to a proportionate share of the [acquiree’s] net assets in the event of liquidation” as of the acquisition date at either (1) the present ownership instruments’ proportionate share in the recognized amounts of the acquiree’s identifiable net assets (often referred to as the “proportionate share method”) or (2) fair value. All other noncontrolling interest components are measured at fair value. For additional information, see A25.7.3.1 of Deloitte’s iGAAP publication.
Scope — decreases in ownership without an accompanying change in control	ASC 810-10-45-21A provides separate scope guidance on the applicability of ASC 810-10-45-22 through 45-24 to a reporting entity parent’s decreases in ownership (without an accompanying change in control) of (1) certain subsidiaries that are businesses or nonprofit activities and (2) certain other subsidiaries that are not businesses or nonprofit activities. Essentially, ASC 810-10-45-21A(b) precludes a reporting entity from ignoring other applicable U.S. GAAP (e.g., guidance on conveyances of oil and gas mineral rights) simply because the parent has transferred an equity interest in a subsidiary to effect the transaction. For additional information, see Section 7.1.1.	IFRS 10 does not contain similar scope guidance. For additional information, see A24.11.4.1 of Deloitte’s iGAAP publication.
Attribution of eliminated income or loss (VIEs)	ASC 810-10-35-3 specifies that the effect of the eliminating entry for intercompany transactions between a primary beneficiary and its VIE subsidiary should not be attributed to the noncontrolling interests. For additional information, see Section 6.5.	IFRS 10 requires that intragroup transactions and the resulting unrealized profits and losses be eliminated in full. This requirement applies equally to all subsidiaries that are consolidated. For additional information, see A24.10.1.3.1 of Deloitte’s iGAAP publication.

Footnotes

In addition to the differences in the table, a reporting entity should consider any potential differences that could arise as a result of respective regulatory requirements. For example, the SEC staff announcement codified in ASC 480-10-S99-3A indicates that when an equity instrument (e.g., a common-share or preferred-share redeemable noncontrolling interest) has a redemption feature not solely within the control of the issuer, an SEC registrant is required to present the instrument on the balance sheet between permanent equity and liabilities in a section labeled “temporary equity” or “mezzanine equity.” Under IFRS Accounting Standards, however, there is no concept of temporary equity (noncontrolling interests that qualify for temporary equity presentation under ASC 480-10-S99-3A would typically need to be classified as liabilities under IFRS Accounting Standards). For additional information related to that difference specifically, see Section 9.4.1 of this publication and Section 10.2 of Deloitte’s Roadmap Distinguishing Liabilities From Equity.

Appendix B — Titles of Standards and Other Literature

Appendix C — Abbreviations

Abbreviation	Description
AICPA	American Institute of Certified Public Accountants
AOCI	accumulated other comprehensive income
APIC	additional paid-in capital
ARB	AICPA Accounting Research Bulletin
ASC	FASB Accounting Standards Codification
ASR	SEC Accounting Series Release
ASU	FASB Accounting Standards Update
CTA	cumulative translation adjustment
DTA	deferred tax asset
DTL	deferred tax liability
EBITDA	earnings before interest, taxes, depreciation, and amortization
EITF	FASB Emerging Issues Task Force
EPS	earnings per share
ETR	effective tax rate
FASB	Financial Accounting Standards Board
FRR	SEC Financial Reporting Release
GAAP	generally accepted accounting principles
HLBV	hypothetical liquidation at book value
IFRS	International Financial Reporting Standard
IPO	initial public offering
IRC	Internal Revenue Code
IRR	internal rate of return
LIHTC	low-income housing tax credit
LLC	limited liability company
NCI	noncontrolling interest
OCI	other comprehensive income
PCAOB	Public Company Accounting Oversight Board
SAB	SEC Staff Accounting Bulletin
SEC	U.S. Securities and Exchange Commission
SOP	AICPA Statement of Position
UP-C	umbrella partnership C corporation
VIE	variable interest entity

Appendix D — Roadmap Updates for 2024

The tables below summarize the substantive changes made in the 2024 edition of this Roadmap.

New Content

Section	Title	Description
7.1.2.1.1	Parent’s Acquisition of Interests in Subsidiary Directly From Third Party That Includes Contingent Consideration Payable	New section that discusses how a reporting entity could account for contingent consideration payable in connection with a parent’s acquisition of noncontrolling interests. The new section includes new Example 7-2; subsequent examples in Chapter 7 have been renumbered accordingly.

Amended Content

Section	Title	Description
4.2.1	Parent and Subsidiary With Different Fiscal-Year-End Dates	Deleted the discussion of the SEC’s August 17, 2018, final rule that amended some of the Commission’s disclosure requirements (e.g., by removing Rule 3A-02(b) from SEC Regulation S-X) as of November 5, 2018.
4.3.2.2	Subsidiary’s Ownership Interest in Parent (Reciprocal Interests) — Consolidated Reporting	Added a discussion about the application of ASC 505-30 in a parent’s consolidated financial statements when a subsidiary owns parent shares.
6.7.3	Impact of Changes to OCI or AOCI Resulting From Transition Adjustments or Changes in Accounting Principle	Deleted the discussion of ASU 2018-02 related to transition adjustments recognized directly in AOCI.

	Andrew Winters Audit & Assurance Partner Deloitte & Touche LLP +1 203 761 3355 anwinters@deloitte.com		Derek Bradfield Audit & Assurance Partner Deloitte & Touche LLP +1 303 305 3878 dbradfield@deloitte.com
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	James Webb Audit & Assurance Partner Deloitte & Touche LLP +1 415 783 4586 jwebb@deloitte.com		John Wilde Audit & Assurance Partner Deloitte & Touche LLP +1 415 783 6613 johnwilde@deloitte.com