8.8 Securities of Subsidiaries and Equity Method Investees
8.8.1 General
8.8.1.1 EPS Accounting
ASC 260-10
Income Available to Common Stockholders and Preferred Dividends
45-11A For purposes of
computing EPS in consolidated financial statements
(both basic and diluted), if one or more
less-than-wholly-owned subsidiaries are included in
the consolidated group, income from continuing
operations and net income shall exclude the income
attributable to the noncontrolling interest in
subsidiaries. Example 7 (see paragraph 260-10-55-64)
provides an example of calculating EPS when there is
a noncontrolling interest in a subsidiary in the
consolidated group.
Securities of Subsidiaries
55-20 The effect on consolidated EPS of options, warrants, and convertible securities issued by a subsidiary depends on whether the securities issued by the subsidiary enable their holders to obtain common stock of the subsidiary or common stock of the parent entity. The following general guidelines shall be used for computing consolidated diluted EPS by entities with subsidiaries that have issued common stock or potential common shares to parties other than the parent entity
- Securities issued by a subsidiary that enable their holders to obtain the subsidiary’s common stock shall be included in computing the subsidiary’s EPS data. Those per-share earnings of the subsidiary shall then be included in the consolidated EPS computations based on the consolidated group’s holding of the subsidiary’s securities. Example 7 (see paragraph 260-10-55-64) illustrates that provision.
- Securities of a subsidiary that are convertible into its parent entity’s common stock shall be considered among the potential common shares of the parent entity for the purpose of computing consolidated diluted EPS. Likewise, a subsidiary’s options or warrants to purchase common stock of the parent entity shall be considered among the potential common shares of the parent entity in computing consolidated diluted EPS. Example 7 (see paragraph 260-10-55-64) illustrates that provision.
55-21 The preceding provisions also apply to investments in common stock of corporate joint ventures and investee companies accounted for under the equity method.
55-22 The if-converted method shall be used in determining the EPS impact of securities issued by a parent entity that are convertible into common stock of a subsidiary or an investee entity accounted for under the equity method. That is, the securities shall be assumed to be converted and the numerator (income available to common stockholders) adjusted as necessary in accordance with the provisions in paragraph 260-10-45-40(a) through (b). In addition to those adjustments, the numerator shall be adjusted appropriately for any change in the income recorded by the parent (such as dividend income or equity method income) due to the increase in the number of common shares of the subsidiary or equity method investee outstanding as a result of the assumed conversion. The denominator of the diluted EPS computation would not be affected because the number of shares of parent entity common stock outstanding would not change upon assumed conversion.
When an entity has an NCI in a consolidated subsidiary, regardless of whether
the subsidiary reports EPS, the entity must calculate basic and diluted EPS
at the subsidiary level to determine income from continuing operations and
net income attributable to the parent in the calculation of basic and
diluted EPS of the consolidated group to be presented in the consolidated
financial statements. In other words, EPS amounts are calculated at the
subsidiary level and the parent’s portion of the subsidiary’s EPS is
included in EPS of the consolidated group. The parent’s portion is
determined by multiplying the number of shares of the subsidiary’s common
stock owned by the parent by the subsidiary’s amounts of basic and diluted
EPS. The product of these two amounts is included in the numerator in the
parent’s calculation of the consolidated group’s basic and diluted EPS.
When an entity has an equity method investment, in accordance with ASC
260-10-55-21, the “flow-through” approach applicable to entities with NCIs
is used to calculate basic and diluted EPS unless the entity has elected the
fair value option for the equity method investee. Thus, an entity with an
equity method investee must consider the dilutive effect of the investee’s
potential common shares in calculating its diluted EPS. As with the
accounting for diluted EPS that applies to NCIs, the dilutive effect of the
equity method investee’s potential common shares will affect the numerator
in the investor’s calculation of diluted EPS. That is, the numerator will
include the investee’s diluted EPS multiplied by the number of the
investee’s shares owned by the entity. As a result, a reduction of the
investee’s diluted EPS that is attributable to the investee’s potential
common shares will reduce the amount included in the numerator in the
investor’s calculation of diluted EPS.
If an entity accounts for an equity method investee at fair value through
earnings, the flow-through approach in ASC 260-10-55-21 may not be
appropriate since the investor does not use the equity method of accounting
to recognize the investee’s earnings and losses. In this circumstance, it is
acceptable for the investor not to apply ASC 260-10-55-21. That is, any
dilution arising from the equity method investee would be reflected in the
mark-to-market adjustment resulting from the periodic change in the
investment’s fair value recognized in net income (i.e., the entity does not
need to make any additional adjustments to calculate diluted EPS). This
approach is consistent with the accounting for contracts that are settled in
cash and recognized at fair value through earnings. If, however, the
investor applies ASC 260-10-55-21, the entity should also consider the need
for an additional numerator adjustment that reflects the difference between
the results of the equity method of accounting and those of fair value
accounting. See Section
4.7 for further discussion of the guidance applicable to
contracts that may be settled in stock or cash.
Connecting the Dots
Under ASC 810, an entity with an NCI in a consolidated subsidiary must report
net income on the face of the income statement before any
allocations to the NCI. However, the entity only reports EPS amounts
attributable to the parent. That is, income or loss of a subsidiary
that is attributable to the NCI is excluded from all EPS amounts
that are presented for the consolidated group. References herein to
“EPS of the consolidated group” mean EPS calculations presented in
the consolidated financial statements that include only the parent’s
portion of (1) income or loss attributable to NCIs and (2) earnings
or losses of an equity method investee.
ASC 260-10-55-20 through 55-22 contain guidance addressing how potential common
stock is treated in the parent’s calculation of diluted EPS of the
consolidated group when the parent has an investment in a
less-than-wholly-owned consolidated subsidiary. In accordance with this
guidance, the impact on the calculation of the consolidated group’s EPS will
depend on whether the potential common stock represents potential shares of
the parent or the subsidiary. The table below summarizes the impact of
potential common stock on the diluted EPS of the consolidated group when the
potential common stock was not issued in a share-based payment arrangement.
See Section
7.1.8 for more information about the accounting for
share-based payment awards.
Connecting the Dots
The calculation of the diluted EPS of a consolidated group that
includes an NCI must conform to the antidilution and sequencing
requirements of ASC 260 (see Section
4.1.2). In accordance with that guidance, the control
number is based on the subsidiary’s income or loss. Therefore, if
the subsidiary’s control number is a loss, the inclusion of
potential common shares in diluted EPS would be antidilutive.
In addition, antidilution of the parent’s diluted EPS would occur if
(1) the only potential common shares of the subsidiary are options
held by the parent that allow it to increase its ownership or (2)
the parent holds more options to purchase the subsidiary’s common
stock than third-party investors do. Because only potential common
shares that are dilutive may be included in the calculation of
diluted EPS, the parent entity should ensure that its diluted EPS
complies with the antidilution guidance in ASC 260.
Table 8-6
Potential Common Stock | |||
|---|---|---|---|
Type | Issued by | Settled in Shares of | Impact on Diluted EPS of Consolidated Group14 |
Option on common stock15 | Subsidiary | Subsidiary | Numerator — The potential common stock reduces the numerator in the parent’s calculation of diluted EPS for the consolidated group. The impact on the numerator is determined on the basis of the subsidiary’s calculation of diluted EPS by using the treasury stock method. The parent uses the subsidiary’s diluted EPS to calculate its share of the subsidiary’s income for purposes of diluted EPS of the consolidated group.
Denominator — The denominator in the parent’s calculation of diluted EPS of the consolidated group is not affected because the assumed exercise has no impact on the number of shares of the parent’s common stock outstanding. |
Parent | Numerator — The numerator in the parent’s calculation of diluted EPS of
the consolidated group is not affected because the
number of shares of the subsidiary’s common stock
outstanding would not change upon assumed exercise.
The only exception would be a situation in which the
subsidiary accounts for the option as a liability
instrument in its stand-alone financial statements.
In that circumstance, the numerator in the parent’s
calculation of diluted EPS of the consolidated group
must be adjusted to reverse the impact that the
mark-to-market adjustment in the subsidiary’s
stand-alone financial statements has on the income
of the subsidiary allocated to the parent in
accordance with the guidance in ASC 260 on contracts
that may be settled in cash or stock. Denominator — The potential common stock is included with other potential
common stock of the parent in the parent’s
calculation of diluted EPS of the consolidated
group. While the proceeds upon assumed exercise will
be retained by the subsidiary, it is generally
acceptable to assume that the subsidiary would use
all of the proceeds to repurchase the parent’s
common stock under the treasury stock method. This
assumption is acceptable since consolidation is
consistent with the concept of a single economic
entity and the subsidiary will reflect the receipt
of proceeds in its equity. | ||
Parent | Subsidiary | Numerator — The potential common stock reduces the numerator in the
parent’s calculation of diluted EPS of the
consolidated group. Under ASC 810-10-45-17A, the
initial fair value of the option is recognized in
the parent’s consolidated financial statements as an
NCI. However, since the option was issued by the
parent, it will generally not be recognized in the
subsidiary’s separate financial statements. As a
result, the subsidiary’s potential common stock may
not be reflected in its calculation of diluted EPS.
Therefore, the parent would need to apply the
treasury stock method to determine the reduction in
the numerator in the parent’s calculation of diluted
EPS of the consolidated group. That is, the
potential common stock affects the calculation of
diluted EPS of the consolidated group because the
subsidiary’s income would have been allocated to the
parent and NCI differently if the option was
exercised. While the proceeds upon assumed exercise
will be retained by the parent and will result in an
entry to reclassify amounts from NCI to parent
equity in accordance with ASC 810-10-45-23, it is
acceptable to assume that the parent would use all
of the proceeds to repurchase the subsidiary’s
common stock under the treasury stock method. This
assumption is acceptable since consolidation is
consistent with the concept of a single economic
entity and the parent will reflect the receipt of
proceeds in its equity. Denominator — The denominator in the parent’s calculation of diluted EPS of the consolidated group is not affected because the assumed exercise has no impact on the number of shares of the parent’s common stock outstanding. | |
Convertible debt16 |
Subsidiary
| Subsidiary | Numerator — The potential common stock reduces the numerator in the parent’s calculation of diluted EPS of the consolidated group. The impact on the numerator is determined on the basis of the subsidiary’s calculation of diluted EPS by using the if-converted method. The parent uses the subsidiary’s diluted EPS to calculate its share of the subsidiary’s income for purposes of diluted EPS of the consolidated group.
Denominator — The denominator in the parent’s calculation of diluted EPS of the consolidated group is not affected because the assumed conversion has no impact on the number of shares of the parent’s common stock outstanding. |
|
Subsidiary
| Parent | Numerator — The parent should apply the if-converted method to calculate
diluted EPS of the consolidated group. In the
parent’s application of the if-converted method, the
numerator must be adjusted to reverse interest
expense and the related income tax effect in
accordance with ASC 260-10-45-40(b). The impact of
that adjustment must be allocated between the parent
and the NCI. The numerator in the parent’s calculation of diluted EPS of the consolidated group is otherwise not affected because the number of shares of the subsidiary’s common stock outstanding would not change upon assumed conversion. The only exception is if the subsidiary accounted for the embedded conversion option as a derivative liability instrument in its stand-alone financial statements. In that circumstance, the numerator in the parent’s calculation of diluted EPS of the consolidated group must be adjusted to reverse the impact that the mark-to-market adjustment in the subsidiary’s stand-alone financial statements had on the subsidiary’s income allocated to the parent in accordance with the guidance in ASC 260 on contracts that may be settled in cash or stock.
Denominator — The potential common stock is included with other potential common stock of the parent in the parent’s calculation of diluted EPS of the consolidated group by using the if-converted method. | |
Parent | Subsidiary | Numerator — The potential common stock reduces the numerator in the parent’s calculation of diluted EPS of the consolidated group. The impact on the numerator is determined on the basis of the calculation of diluted EPS of the consolidated group by using the if-converted method. The parent should apply the if-converted method as follows:
Denominator — The denominator in the parent’s calculation of diluted EPS of the consolidated group is not affected because the assumed conversion has no impact on the number of shares of the parent’s common stock outstanding. | |
ASC 260-10-55-20 through 55-22 are also relevant for equity
method investees. For equity method investments, the investor must consider
the potential common stock of the equity method investee when computing
diluted EPS.
8.8.1.2 Examples
ASC 260-10
Example 7: Securities of a Subsidiary — Computation of Basic and Diluted EPS
55-64 This Example illustrates the EPS computations for a subsidiary’s securities that enable their holders to obtain the subsidiary’s common stock based on the provisions in paragraph 260-10-55-20. The facts assumed are as follows:
55-65 Parent Entity:
- Net income was $10,000 (excluding any earnings of or dividends paid by the subsidiary).
- 10,000 shares of common stock were outstanding; the parent entity had not issued any other securities.
- The parent entity owned 900 common shares of a domestic subsidiary entity.
- The parent entity owned 40 warrants issued by the subsidiary.
- The parent entity owned 100 shares of convertible preferred stock issued by the subsidiary.
55-66 Subsidiary Entity:
- Net income was $3,600.
- 1,000 shares of common stock were outstanding.
- Warrants exercisable to purchase 200 shares of its common stock at $10 per share (assume $20 average market price for common stock) were outstanding.
- 200 shares of convertible preferred stock were outstanding. Each share is convertible into two shares of common stock.
- The convertible preferred stock paid a dividend of $1.50 per share.
- No interentity eliminations or adjustments were necessary except for dividends.
- Income taxes have been ignored for simplicity.
55-67 The following table illustrates subsidiary’s EPS.
In the above example, the subsidiary’s basic and diluted EPS must be calculated because the parent’s portion of the subsidiary’s income on a diluted basis is less than the parent’s portion before the consideration of the subsidiary’s potential common stock.
The example below illustrates the calculation of basic and diluted EPS for an
UP-C structure.
Example 8-20
Diluted EPS of UP-C Structure
Company P is a publicly traded holding company that was established only to own
an equity interest in Company O, an LLC that owns
and operates a portfolio of investment properties.
In practice, this type of ownership structure is
often called an “UP-C” structure. In such a
structure, the parent (P in this example) is
typically referred to as “PubCo” while the operating
subsidiary (O in this example) is also known as
“OpCo.”
Company O’s equity capital consists of Class A units and Class B units. These
units have the same rights to distributions of cash
flows, regardless of whether they are periodic or
occur upon liquidation. Company P owns all of the
Class A units and therefore has control of and
consolidates O. The Class B units are owned by
third-party investors and represent an NCI in P’s
consolidated financial statements. The holders of
the Class B units may exchange their units on a 1:1
basis for publicly traded common shares of P. At all
times, P must own one Class A unit for each publicly
traded common share outstanding.
Assume the following as of and for the year ended December 31, 20X1:
- Company P has 1 million outstanding common shares.
- Company O has 1 million outstanding Class A units (all owned by P) and 1 million Class B units (all owned by third parties).
- Company O’s net income is $100 million.
- No dividends are paid (note that this assumption is made for simplicity since, in these types of structures, dividends are generally declared and paid).
For P’s consolidated financial statements, basic EPS should be calculated in accordance with the guidance in Section 8.8.1.1. That calculation is as follows:
Basic EPS of O
Basic EPS of P
Diluted EPS should be calculated on the basis of the more dilutive of the following two calculations:
- Company P’s portion of O’s diluted EPS in accordance with Section 8.8.1.1.
- The if-converted method, for which conversion of the Class B units into P’s common shares is assumed. (Note that in applying the if-converted method, P must adjust the numerator to take into account the earnings of O that were allocated to the NCI and would have been allocated to P if all Class B units had been converted into P’s common shares. See Section 4.4 for further discussion of the if-converted method.)
Since there are no potential common shares of P or O (a simplistic assumption
that would not typically be true), the calculations
of basic and diluted EPS in accordance with
Section
8.8.1.1 are the same. Under the
if-converted method, it is assumed that (1) all
Class B units are converted into common shares of P
and (2) the earnings allocated to the Class B units
are attributable to P because, after the conversion
of Class B units into P’s common shares, P owns all
of the equity of O. The calculation under the
if-converted method is as follows:
As illustrated above, the amounts of diluted EPS under the two calculations are
the same. On the basis of the typical terms of UP-C
structures, which require the parent company (P in
this example) to own one unit of the subsidiary
operating company (O in this example) for each
common share outstanding and provides for a 1:1
conversion rate of operating company units into
parent shares, the two calculations will generally
yield the same reported diluted EPS of the parent.
However, the EPS accounting is more complex when
there are potential common shares of the parent
company or subsidiary operating company.
Further assume the following:
- On January 1, 20X1, P grants 100,000 nonvested common shares to employees. These shares cliff vest at the end of two years. The grant-date fair-value-based measure of these shares is $20 per share, which is also the average share price of P’s common stock for 20X1. These nonvested shares are not participating securities.
- The compensation cost recognized during 20X1 in connection with the nonvested common shares was $1,000,000 (i.e., 100,000 × $20 ÷ 2 = $1,000,000).
- Under the treasury stock method, the 100,000 nonvested common shares produce 25,000 incremental shares to be included in diluted EPS. (Note that the only proceeds under the treasury stock method are the average unrecognized compensation cost, which is $1,500,000. This amount purchases 75,000 shares at an average share price of $20 per share.)
In accordance with the governance documents that require P to always own one unit in O for each common share outstanding, when the nonvested common shares vest, an equivalent number of O’s Class A units will be issued to P. Thus, in applying the treasury stock method, in addition to the 25,000 incremental shares that are included in the denominator, P must take into account the additional Class A units in O that will be owned when those nonvested common shares have vested. Such additional Class A units would change the allocation of O’s net income to the Class A and Class B units. That allocation change is as follows:
Company P’s calculation of diluted EPS under the treasury stock method is as follows:
Note that when the if-converted method is applied, diluted EPS is $48.88, as calculated below.
*
Note that there is no adjustment made to add
back or reverse compensation cost. This amount is
merely showing the compensation cost that was not
included in the previous example.
Diluted EPS under the if-converted method is antidilutive compared with that under the treasury stock method; therefore, P would report diluted EPS of $48.41.
Note that the same concepts in this example apply when share-based payment awards are issued by a subsidiary and those shares are exchangeable into shares of the parent. In such circumstances, the diluted EPS of the consolidated group should be calculated on the basis of the more dilutive of the following two calculations:
- The treasury stock method, under the assumption that the incremental common shares of the subsidiary are not exchanged into the parent’s common shares. As a result, the amount of the subsidiary’s net income that is allocated to the parent entity is reduced (i.e., a reduction of the numerator in the calculation of diluted EPS for the consolidated group).
- The if-converted method, under the assumption that the incremental common shares of the subsidiary are exchanged into common shares of the parent entity. As a result, the number of shares of the parent entity increases (i.e., an increase of the denominator in the calculation of diluted EPS for the consolidated group).
8.8.2 Dividends on Preferred Stock
8.8.2.1 Preferred Stock Issued by Subsidiary to Third Parties
A subsidiary may have preferred stock that it issues to third-party investors.
If the preferred stock is classified as an equity instrument, it meets the
definition of an NCI. In accordance with ASC 260-10-45-11, dividends on
preferred stock reduce income available to common stockholders. Therefore,
dividends on preferred stock of a consolidated subsidiary will reduce income
available to the parent’s common stockholders. The impact that dividends on
the subsidiary’s preferred stock will have on the parent’s basic and diluted
EPS depends on whether the subsidiary’s common stock is also owned by
third-party investors:
-
Parent owns all common stock of subsidiary — If the parent owns all of the subsidiary’s common stock, the entire amount of dividends on the subsidiary’s preferred stock will reduce the parent’s income available to common stockholders. If the subsidiary does not have any potential common stock, the calculation of EPS at the subsidiary level will generally not be necessary in the calculation of the parent’s EPS.
-
Third-party investors own common stock of the subsidiary (parent guaranteed dividends on subsidiary’s preferred stock) — When the parent guarantees dividends on its subsidiary’s preferred stock, the entire amount of such dividends will reduce the parent’s income available to common stockholders. By analogy to the guidance in ASC 480-10-S99-3A(22), no portion of such dividends should be allocated to the third-party investors in the subsidiary. See Section 3.2.3.3.1 for further discussion.
-
Third-party investors own common stock of subsidiary (parent did not guarantee dividends on subsidiary’s preferred stock) — If third-party investors own common stock of the subsidiary and the parent did not guarantee the subsidiary’s payment of preferred dividends, the dividends on the subsidiary’s preferred stock must be deducted from net income of the subsidiary to arrive at income available to the subsidiary’s common stockholders, which will represent the numerator in the subsidiary’s calculation of basic and diluted EPS. The parent will include its attributable portion of the subsidiary’s basic and diluted EPS in the numerator in the calculation of basic and diluted EPS of the consolidated group, as illustrated in Section 8.8.1.2. Because the common stock of the consolidated subsidiary is owned, in part, by third-party investors, the dividends on the subsidiary’s preferred stock will be allocated between the parent and third-party investors.
If the preferred stock is redeemable, dividends will include adjustments to the redemption amount of the preferred stock. See further discussion in Section 8.8.4.2.
8.8.2.2 Preferred Stock Issued by Subsidiary to Parent
A subsidiary may issue preferred stock to its parent. Because the preferred
stock is eliminated in the consolidated financial statements, dividends on
the preferred stock do not affect basic or diluted EPS of the consolidated
group. The example below discusses preferred stock issued by a subsidiary to
the parent as a means of funding dividends on preferred stock issued by the
parent.
Example 8-21
Preferred Stock Issued by Subsidiary to Its Parent
Assume the following:
- Subsidiary S is a majority-owned subsidiary of Company P, a public holding company.
- Company P issues to the public $100 million of Series A preferred stock that pays dividends at a rate of 5 percent per annum.
- In connection with the public offering of the Series A preferred stock, S issues to P $100 million of preferred stock that has the same terms as the Series A preferred stock (the “subsidiary preferred stock”). This issuance occurred as a means of funding dividends on the Series A preferred stock issued by the parent, since P is a holding company with no independent operations or cash flows.
- The Series A preferred stock is not convertible or mandatorily redeemable and does not meet the definition of a participating security.
In P’s consolidated financial statements, the subsidiary preferred stock does
not represent an NCI because it is eliminated. In
P’s calculation of basic and diluted EPS of the
consolidated group, the subsidiary preferred stock
has no impact on the calculation of basic or diluted
EPS because the shares and related dividends are
eliminated in consolidation. However, in the
calculation of basic and diluted EPS of the
consolidated group, dividends on the Series A
preferred stock should be deducted from net income
in arriving at income available to common
stockholders in accordance with ASC 260-10-45-11.
Since the Series A preferred stock is not
convertible and does not represent a participating
security, it has no other impact on P’s calculation
of basic and diluted EPS of the consolidated group.
8.8.2.3 Preferred Stock Issued by Subsidiary That Represents a Discontinued Operation
ASC 260 does not contain explicit guidance on the EPS accounting related to
situations in which a subsidiary that is classified as a discontinued
operation has issued preferred stock. However, dividends on a subsidiary’s
preferred stock classified in discontinued operations should not affect the
parent entity’s determination of income from continuing operations of the
consolidated group. Rather, the numerator adjustment for dividends
(including deemed dividends when the preferred stock is redeemable or has
been redeemed) should be only attributable to EPS amounts calculated for
discontinued operations. If the subsidiary has NCIs other than the preferred
stock, the dividends must be allocated between the parent and the other NCI
holders. See Section
8.8.2.1 for further discussion.
8.8.3 Application of Two-Class Method by Subsidiary
A subsidiary with multiple classes of common stock or participating securities
must apply the two-class method to calculate basic and diluted EPS. Even if the
subsidiary does not separately present EPS amounts, the subsidiary must apply
the two-class method so that its parent can calculate basic and diluted EPS for
the consolidated group. See Chapter 5 for discussion of participating securities and the
two-class method. See Section
8.8.4 for discussion of the application of the two-class method
of EPS to redeemable NCIs.
A subsidiary may have outstanding securities that participate in the parent’s earnings. These types of participating securities may not have any impact on the subsidiary’s calculations of basic and diluted EPS. That is, provided that these securities do not represent potential common shares of the subsidiary, they generally would not affect the subsidiary’s calculations of basic and diluted EPS. However, an allocation of the parent’s distributed and undistributed earnings under the two-class method, in accordance with the contractual participation rights of the securities, is required in the parent’s calculation of EPS for the consolidated group.
8.8.4 Redeemable NCIs
8.8.4.1 Background
Common and preferred shares issued by a consolidated subsidiary that are
classified as equity instruments are reported as an NCI in the consolidated
balance sheet of the parent (i.e., the reporting entity). An NCI may be
subject to redemption features whose exercise is outside the control of the
reporting entity (e.g., a put option). If the reporting entity is an SEC
registrant, it is subject to the classification and measurement guidance in
ASC 480-10-S99-3A. In accordance with the classification guidance in ASC
480-10-S99-3A, an NCI that is subject to redemption may need to be
classified in temporary equity in the reporting entity’s consolidated
balance sheet.17 Furthermore, in accordance with the subsequent-measurement guidance in
ASC 480-10-S99-3A, the reporting entity may be required to remeasure the NCI
to its redemption amount.18 This section addresses the EPS considerations related to NCIs that are
(1) classified in temporary equity in the reporting entity’s balance sheet
in accordance with the classification requirements of ASC 480-10-S99-3A and
(2) are being remeasured to their redemption amount in accordance with the
subsequent-measurement requirements of ASC 480-10-S99-3. In this section,
such NCIs are referred to as “redeemable NCIs.”
The accounting for redeemable NCIs 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 NCI (common share vs. preferred share).
-
Whether the redemption price is at fair value or other than fair value.
-
The reporting entity’s policy for determining the amount of the adjustment to the redemption amount to be recorded in each period.
-
The reporting entity’s policy for classifying the offsetting entry to such adjustments.
-
When a common-share redeemable NCI is redeemable at other than fair value, the reporting entity’s policy for incorporating such adjustments into its EPS calculation.
Many of the financial reporting complexities pertain to the subsequent
measurement of redeemable NCIs. These measurement considerations are
discussed in this section to the extent that they affect the EPS accounting.
For more detailed discussion of the classification and measurement
considerations that apply to redeemable NCIs, see Chapter 9 of Deloitte’s Roadmap
Noncontrolling
Interests.
8.8.4.2 Types of Redemption Features and Prices
An NCI can be redeemed through mechanisms such as put option rights, a
combination of put and call option rights, or a forward purchase (sale)
agreement (collectively, “redemption features”). Examples of redemption
features embedded in NCIs include, but are not limited to:
-
Unilateral rights held by NCI holders to require the controlling interest holder to repurchase the subsidiary’s shares (e.g., put option) on some future date.
-
Redemption features that may be triggered by the occurrence (or, in some instances, nonoccurrence) of a contingent event (e.g., the occurrence of a debt downgrade or the nonoccurrence, by a specified date, of an IPO). Typically, the contingent event is outside the control of the NCI holder, issuer, and controlling interest holder, and its occurrence (or nonoccurrence) triggers either (1) exercisability of a put option held by the NCI holder or (2) settlement of a forward purchase agreement.
Generally, one of the following three methods (or some combination thereof) is
used to determine the redemption price of a redeemable NCI:
-
Redemption-date fair value — The redemption price is based on the fair value of the NCI at redemption and is determined through a third-party appraisal or another fair value measurement technique.Example 8-22NCI Redeemable at Fair ValueCompany A is the parent of Subsidiary B. Entity X holds a 20 percent NCI in B, and X’s NCI is puttable to A at fair value on the redemption date. On June 15, 20X7, X invokes its ability to put its 20 percent interest in B to A. As a condition of the redemption feature, A and X hire an appraiser to determine the current fair value of the 20 percent interest in B. Company A will then purchase the interest from X at the appraised fair value as of the redemption date.
-
Fixed price — The redemption price is fixed at a specified amount upon issuance of the redeemable NCI.Example 8-23NCI Redeemable at Fixed PriceCompany C is the parent of Subsidiary D, and Entity Y purchases a 15 percent NCI in D from C. Company C and Entity Y agree that Y can sell its 15 percent interest in D back to C for a fixed amount ($1 million) at any time during the next three years.
-
Specified formula — The redemption price is calculated on the basis of redemption-date inputs incorporated into a formula specified at the inception of the redeemable NCI. With limited exceptions, redemption features that are based on a prespecified formula do not ensure that the security will be redeemed at its fair value at the time of redemption. Footnote 18 of ASC 480-10-S99-3A states that “[c]ommon stock that is redeemable based on a specified formula is considered to be redeemable at fair value if the formula is designed to equal or reasonably approximate fair value. The SEC staff believes that a formula based solely on a fixed multiple of earnings (or other similar measure) is not considered to be designed to equal or reasonably approximate fair value.” Entities should use judgment when determining whether the formula is designed to equal or reasonably approximate fair value.Example 8-24NCI Redeemable at Formula-Driven PriceCompany E is the parent of Subsidiary F, and Entity Z holds a 25 percent NCI in F. Entity Z’s NCI is puttable to E at a price that Z calculates by using a prespecified formula on the redemption date. In this case, the prespecified formula redemption feature is 10 times trailing 12 months’ EBITDA as of the redemption date. On September 1, 20X7, Z invokes its ability to put its 25 percent interest in F to E. Company E must purchase the 25 percent interest in F from Z at an amount computed on the basis of the prespecified formula on the redemption date. The prespecified formula in this example does not ensure that the NCI will be redeemed at its fair value because the EBITDA multiple was set at inception and will not necessarily be the market multiple at the time the put is exercised. Therefore, this NCI should be accounted for as an NCI redeemable at other than fair value.
This section only discusses NCIs that are being remeasured to their redemption
amount. As a result, it does not address contingently redeemable NCIs for
which it is not probable that the instrument will become redeemable. As
further discussed in Section 8.8.4.3.2, the EPS implications differ for
common-share redeemable NCIs depending on whether such instruments are
redeemable at fair value or at an amount other than fair value (i.e., both
NCIs that are redeemable at a fixed price and NCIs that are redeemable at a
specified formula value). The reporting considerations related to NCIs that
are redeemable at other than fair value are significantly different from,
and more complex than, those related to NCIs that are redeemable at fair
value.
8.8.4.3 Impact of ASC 480-10-S99-3A Adjustments on EPS
8.8.4.3.1 General
In addition to affecting classification and subsequent measurement, the
redemption feature in a redeemable NCI could also have an impact on the
ASC 810 attribution19 of the subsidiary’s net income between the (1) controlling
interests and NCIs and (2) parent’s EPS calculations. Specifically:
-
Subsequent measurement of a redeemable NCI is governed by the policy elected for measuring NCIs that are not currently redeemable but whose redemption is probable.
-
The amount of a subsidiary’s net income that is attributed to NCIs on the face of the consolidated reporting entity’s income statement is affected by classification of the offsetting entry that accompanies any ASC 480-10-S99-3A measurement adjustment20 arising from ASC 480-10-S99-3A adjustments to the redeemable NCI’s carrying amount.21 Classification of this offsetting entry is affected, in turn, by a sequence of variables. The first variable is related to the form of the redeemable NCI (common shares vs. preferred shares). For a common-share redeemable NCI, the next variable is related to the nature of the redemption price (fair value vs. other than fair value). For a common-share redeemable NCI that is redeemable at other than fair value, the final variable is related to classification of this offsetting entry, which is governed by the reporting entity’s policy election for recording such adjustments (income attributable to NCI vs. retained earnings). This sequence of variables makes the accounting for redeemable NCIs one of the more complex aspects of U.S. GAAP to apply. An entity needs to properly consider these complexities to determine the appropriate EPS accounting.
-
The impact of a redeemable NCI on the parent’s EPS calculation depends on:
-
The parent’s policy for classifying the offsetting entry that accompanies any ASC 480-10-S99-3A measurement adjustment as either a component of equity or a component of net income attributable to NCIs.
-
The form of the redeemable NCI (common share vs. preferred share).
-
The nature of the redemption price (fair value vs. other than fair value) for a common-share redeemable NCI.
-
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 8.8.4.3.2 through 8.8.4.3.3.
The table below summarizes the effects of the various forms of redeemable NCIs
on the parent’s financial statements.
Table 8-7
Form of NCI/Redemption Price | Classification/Initial Measurement | Subsequent Measurement | Impact on Attribution of Earnings | Impact on EPS Calculation |
|---|---|---|---|---|
Common share/fair value | Temporary equity/typically fair value(a) | Measure at higher of:
| None(d) | None(d) |
Common share/other than fair value | Temporary equity/typically fair value(a) | Measure at higher of:
| Depends on ASC 480-10-S99-3A offsetting entry policy election(e)
| Direct or indirect(e) |
Preferred share/any price | Temporary equity/typically fair value(a) | Measure in accordance with ASC 480-10-S99-3A(c) | Depends on ASC 480-10-S99-3A offsetting entry policy election(f) | Direct or indirect(f) |
|
Notes to Table: (a) See Sections
9.4.1 and 9.4.2 of
Deloitte’s Roadmap Noncontrolling
Interests for further discussion of
the classification and initial measurement of
redeemable NCIs. (b) The attribution of a subsidiary’s earnings to NCIs under ASC 810 occurs
before the application of ASC 480-10-S99-3A. As
discussed in detail in Chapter 6 of
Deloitte’s Roadmap Noncontrolling
Interests, a portion of a partially
owned subsidiary’s earnings is typically
attributed to NCIs in accordance with ASC 810. The
amount of a subsidiary’s earnings (loss)
attributed to an NCI generates a corresponding
increase (decrease) in the NCI’s carrying amount.
This ASC 810 attribution adjustment must be
recorded before the reporting entity records an
ASC 480-10-S99-3A measurement adjustment. (c) For NCIs that are not currently redeemable but whose redeemability is
probable in the future, 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 measurement
adjustment after applying the measurement guidance
in ASC 810:
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 NCIs that
are redeemable at a fixed price while applying the
immediate method to all redeemable NCIs that are
redeemable at fair value or by using a formula.
The immediate method always applies to NCIs that
are currently redeemable. 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 NCI (in accordance with ASC
810-10-45-19 through 45-21) from reducing the
carrying amount of the redeemable NCI below the
instrument’s initial carrying amount. That is,
while ASC 480-10-S99-3A(16)(e) does not allow for
the application of cumulative “negative”
measurement adjustments to the carrying amount of
a redeemable NCI, it also does not preclude the
recording of cumulative negative ASC 810
attribution adjustments. Note that if the carrying
amount of a redeemable NCI after the ASC 810
attribution adjustment is less than the redeemable
NCI’s redemption price, a subsequent measurement
adjustment under ASC 480-10-S99-3A should be
recorded to adjust the redeemable NCI’s carrying
amount to its redemption price. See Section 9.4.3
of Deloitte’s Roadmap Noncontrolling
Interests for further discussion of
the subsequent measurement of redeemable NCIs. (d) See Section
8.8.4.3.2.1. (e) See Section
8.8.4.3.2.2. (f) See Section
8.8.4.3.3. | ||||
8.8.4.3.2 Common-Share Redeemable NCIs
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 valueFN18, 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. [Footnote reference 19
omitted]
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.
____________________
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.
FN18 Common stock
that is redeemable based on a specified formula is
considered to be redeemable at fair value if the
formula is designed to equal or reasonably
approximate fair value. The SEC staff believes
that a formula based solely on a fixed multiple of
earnings (or other similar measure) is not
considered to be designed to equal or reasonably
approximate fair value.
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).
A reporting entity with a common-share redeemable NCI within the scope of ASC
480-10-S99-3A should first apply the subsequent-measurement guidance in
ASC 810 and then apply the subsequent-measurement guidance in ASC
480-10-S99-3A. As a result, the NCI will be recorded at the higher of (1) the cumulative amount that would
result from applying the measurement guidance in ASC 810 (i.e., the
initial carrying amount, increased or decreased for the NCI’s share of
net income or loss, other comprehensive income or 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
480-10-S99-3A measurement adjustment (e.g., recording the ASC 810
attribution adjustment in the current period may increase the carrying
amount of the redeemable NCI above both (1) and (2), making it necessary
to reverse all or part of a prior-period ASC 480-10-S99-3A measurement
adjustment).
As explained below, classification of the ASC 480-10-S99-3A offsetting entry
that accompanies any ASC 480-10-S99-3A measurement adjustment is
governed by the nature of the redemption price (fair value vs. other
than fair value) and, for common-share redeemable NCIs that are
redeemable at other than fair value, the entity’s policy for recording
the ASC 480-10-S99-3A measurement adjustments and for incorporating them
into the parent’s EPS calculation.
8.8.4.3.2.1 Common-Share NCIs Redeemable at Fair Value
When the redemption price of a common-share redeemable NCI exceeds the NCI’s ASC
810 carrying amount after the attribution of income or loss to the
NCI, a reporting entity that is within the scope of ASC
480-10-S99-3A should record a measurement adjustment in accordance
with that guidance. Regardless of the classification of the
offsetting entry to the measurement adjustment under ASC
480-10-S99-3A (i.e., APIC or retained earnings), for a common-share
redeemable NCI that is redeemable at fair value, the ASC
480-10-S99-3A measurement adjustment 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. Therefore,
the ASC 480-10-S99-3A measurement adjustment will have no impact on
EPS calculations.
8.8.4.3.2.2 Common-Share NCIs Redeemable at Other Than Fair Value
The ASC 480-10-S99-3A measurement adjustment for a common-share NCI redeemable
at other than fair value is intended, in part, to reflect the
liquidity being provided to the redeemable NCI holder for the entire
redemption price as well as to identify the NCI’s potential to
convey value to its holder that is incremental to the value that the
holder of a nonredeemable common-share NCI could receive in a
transaction conducted at fair value with an unrelated marketplace
participant. The multiple financial reporting objectives of this
measurement adjustment, coupled with the accepted diversity in
practice related to achieving these objectives, makes classification
of the offsetting entry to this ASC 480-10-S99-3A measurement
adjustment one of the more complex aspects of U.S. GAAP to apply to
redeemable NCIs.
To set the stage for the ensuing discussion and illustration of the various
approaches that are acceptable for achieving these financial
reporting objectives, a reporting entity must answer the following
threshold questions before it can determine the impact of the ASC
480-10-S99-3A measurement adjustment on its consolidated financial
statements:
-
To what extent does the reporting entity wish the ASC 480-10-S99-3A 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 480-10-S99-3A 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 480-10-S99-3A measurement adjustment to the portion of this 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, by which the redeemable NCI’s redemption price exceeds both (1) the redeemable NCI’s fair value and (2) the redeemable NCI’s ASC 810 carrying amount. This portion is hereafter referred to as the “excess portion of the ASC 480-10-S99-3A measurement adjustment”22 or the excess portion of the ASC 480-10-S99-3A offsetting entry.The remaining portion of the ASC 480-10-S99-3A measurement adjustment necessary to ensure that the redeemable NCI’s period-end carrying amount equals the greater of its ASC 810 carrying amount or its redemption price is hereafter referred to as the “base portion of the ASC 480-10-S99-3A measurement adjustment”23 or the base portion of the ASC 480-10-S99-3A offsetting entry. On a cumulative basis, this will be the amount, if any, by which the redeemable NCI’s current redemption price is equal to or less than fair value but greater than the redeemable NCI’s ASC 810 carrying amount. This portion of the ASC 480-10-S99-3A measurement adjustment does not affect net income attributable to the parent or the parent’s reported EPS.
Note that while the latter approach may reduce the impact of the ASC 480-10-S99-3A measurement adjustment on net income attributable to the parent, the parent’s reported EPS, or both, it is also significantly more complex to apply since it focuses on ensuring that the cumulative impact of the redemption feature is isolated to the amount by which the redemption price exceeds both the redeemable NCI’s fair value and its ASC 810 carrying amount. Consequently, classification of each period’s ASC 480-10-S99-3A measurement adjustment is affected by both (1) the NCI’s redemption price, its ASC 810 carrying amount, and its fair value in the current period and (2) the amount and treatment of the ASC 480-10-S99-3A measurement adjustment recognized in prior periods. As a result of this approach’s focus on the cumulative impact of redeemable NCIs on net income attributable to the parent, the parent’s reported EPS, or both, the ASC 480-10-S99-3A 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 480-10-S99-3A 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 offsetting entry that accompanies the ASC 480-10-S99-3A measurement adjustment?
-
If the reporting entity elects to limit the impact of the ASC 480-10-S99-3A measurement adjustment to the excess portion of the ASC 480-10-S99-3A measurement adjustment, how does the reporting entity wish to classify:
-
The base portion of the ASC 480-10-S99-3A measurement adjustment?
-
The excess portion of the ASC 480-10-S99-3A measurement adjustment?
-
The following approaches are acceptable for reflecting in consolidated financial
reporting the ASC 480-10-S99-3A measurement adjustment for
common-share redeemable NCIs redeemable at other than fair value and
represent possible responses to the questions above:
-
Income classification — entire adjustment method — Use net income (loss) attributable to NCIs to classify the entire ASC 480-10-S99-3A offsetting entry. Because net income (loss) attributable to NCIs directly affects income available to common stockholders of the parent, a reporting entity using this method is not required to make additional adjustments in calculating the parent’s EPS to accurately reflect the impact of the redemption feature (see Example 8-25).
-
Equity classification — entire adjustment method — Use retained earnings to classify the entire ASC 480-10-S99-3A 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 at the subsidiary level, treating the entire amount of the ASC 480-10-S99-3A offsetting entry as an adjustment in the subsidiary’s EPS calculation. The resulting EPS amount determined at the subsidiary level for the class of subsidiary shares owned by the parent should then be used to determine the amount of subsidiary income that must be incorporated into the numerator of the parent’s EPS calculation (see Example 8-25).
-
Income classification — excess adjustment method — Use net income (loss) attributable to NCIs to classify only the excess portion of the ASC 480-10-S99-3A offsetting entry. The base portion of the ASC 480-10-S99-3A 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 offsetting entries for redeemable parent common shares in retained earnings (or APIC in the absence of retained earnings) justifies the acceptability of this approach for classifying in retained earnings the base portion of the ASC 480-10-S99-3A offsetting entry (see Example 8-26).
-
APIC — Upon considering the guidance in ASC 810-10-45-23 requiring that changes in a parent’s ownership interest be accounted for as equity transactions, one can conclude that it is acceptable to use this approach to classify in APIC the base portion of the ASC 480-10-S99-3A offsetting entry (see Example 8-26).
-
-
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 480-10-S99-3A offsetting entry. The base portion of the ASC 480-10-S99-3A 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,” the acceptability of this approach for classifying in retained earnings the base portion of the ASC 480-10-S99-3A offsetting entry can be justified on the basis of the guidance in ASC 480-10-S99-3A(21) (see Example 8-27).
-
APIC — As noted above in the description of the “income classification — excess adjustment method,” the acceptability of this approach for classifying in APIC the base portion of the ASC 480-10-S99-3A offsetting entry can be justified on the basis of the guidance in ASC 810-10-45-23 (see Example 8-27).
-
The first two approaches are governed by the parent’s election (in accordance
with footnote 17 of ASC 480-10-S99-3A) to reflect the entire amount
of the ASC 480-10-S99-3A 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 calculation. The second two
approaches are governed 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 480-10-S99-3A 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 calculation. Each of the excess
adjustment methods has acceptable subpolicies that must be elected
to clarify what component of shareholders’ equity (retained earnings
or APIC) is used to classify the base portion of the ASC
480-10-S99-3A measurement adjustment).
While the approaches above are acceptable alternatives, a reporting entity
should generally consistently apply (and appropriately disclose) the
same method for 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 NCI 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 income available to common
stockholders of the parent (the numerator of the parent’s EPS
calculation), 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.
The acceptability of the income classification and equity classification methods
(provided that the method selected is consistently applied to 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, under all of the adjustment methods, as
well as in Examples 8-25 through 8-27, it is presumed that the
common-share NCI is redeemable by the subsidiary itself (as opposed
to being redeemable or guaranteed by the parent). Although the
mechanics may be different, the accounting outcomes would be
expected to be the same on a consolidated basis when the adjustment
methods illustrated in Examples 8-25 through 8-27 are
applied, regardless of whether the common-share NCI is redeemable by
the subsidiary itself or by the parent when the nonredeemable common
shares of the subsidiary are held entirely by the parent. The
outcomes may differ if the nonredeemable common shares of the
subsidiary are also held by other third parties.
In accordance with SAB Topic 6.B, an SEC registrant that elects to use an equity classification method must present income or loss applicable 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.” (See Section 9.1.6 for further discussion of this reporting requirement.) Otherwise, an SEC registrant that elects to use an equity classification method can present such amounts in the footnotes to the consolidated financial statements.
8.8.4.3.2.3 Examples of Common-Share NCIs Redeemable at Other Than Fair Value
Example 8-25
Application of Entire Adjustment Methods Related to Income Classification and Equity Classification, Respectively
Assume the following:
- Company G is the parent of Subsidiary H.
- Entity I holds a 20 percent NCI 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 NCI).
- The NCI 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 480-10-S99-3A measurement adjustments.
- Company G determines the fair value of I’s NCI at the end of each reporting period.
- Neither G nor H has any outstanding securities other than those described above.
- Company G has sufficient retained earnings to cover any portion of ASC 480-10-S99-3A offsetting entries that are classified in retained earnings.
- To classify its ASC 480-10-S99-3A 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 period ended 20X6 (all numbers in thousands):
20X6
ASC 810 Attribution Adjustment/ASC 480-10-S99-3A Measurement Adjustment/Offsetting Entry
For the period ended December 31, 20X6, G uses the journal entries below to
subsequently measure I’s NCI in H.
EPS Impact
Income Classification — Entire Adjustment Method
For the period ended December 31, 20X6, because income attributable to the NCI
directly affects net income attributable to G’s
common stockholders, use of the income
classification — entire adjustment method does not
necessitate additional adjustments to arrive at
the control number of G’s EPS calculation. Company
G will report net income attributable to its
common stockholders and income available to common
stockholders (the control number of EPS) of
$1,797,000, as shown in the table below.
Equity Classification — Entire Adjustment Method
Under the equity classification — entire adjustment method, the ASC
480-10-S99-3A measurement adjustment to the
redeemable NCI does not affect G’s reported
amounts of consolidated net income and net income
attributable to common stockholders of G. However,
G must apply the two-class method at the
subsidiary level, recognizing the entire amount of
the ASC 480-10-S99-3A offsetting entry as income
distributed to the NCI holders of H, to arrive at
income available to common stockholders (the
control number of EPS). After applying the
two-class method, G will report income available
to common stockholders (the control number of EPS)
of $1,797,000, which is the same amount as that
resulting from application of the income
classification — entire adjustment method.
Therefore, under both methods, G will report the
same EPS amounts in this example. The calculations
under the equity classification — entire
adjustment method are shown below.
Application of the two-class method at the subsidiary level has been simplified by the lack of (1) declared dividends of H and (2) any other participating securities or potential common shares at the subsidiary or parent level.
For an illustration of the accounting under the two applicable methods for
additional years by using the same assumptions as
in this example, see Example 9-6 in
Deloitte’s Roadmap Noncontrolling
Interests.
Example 8-26
Application of Income Classification — Excess Adjustment Method (APIC or Retained Earnings)
Assume the same facts as in the example above, 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 period
ended 20X6 and have added facts for the periods
ended 20X7, 20X8, and 20X9 to illustrate this
approach in various scenarios.
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.
- Company G has 1 million common shares outstanding for all periods.
- Company G has no potential common shares.
Key figures associated with G, H, and the NCI that I holds in H are as follows
(all numbers in thousands):
20X6
ASC 810 Attribution Adjustment/ASC 480-10-S99-3A Measurement Adjustment/Offsetting Entry
For the period ended December 31, 20X6, G uses the journal entries below to
subsequently measure I’s NCI 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 stockholders will be directly affected by
the portion of the ASC 480-10-S99-3A offsetting
entry that reflects the cumulative excess (if any)
of the NCI’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 480-10-S99-3A offsetting
entry arising from redemption prices below fair
value, no additional adjustment to net income
attributable to G’s common stockholders is
necessary to arrive at income available to common
stockholders (the control number for G’s EPS
calculation). With respect to this period, because
100 percent of the ASC 480-10-S99-3A measurement
adjustment is related to a redemption price that
is less than fair value, none of the ASC
480-10-S99-3A offsetting entry is classified in
net income attributable to NCIs. Accordingly, G
reports net income attributable to G and income
available to common stockholders of $1,820,000 for
20X6, as shown in the table below.
20X7
ASC 810 Attribution Adjustment/ASC 480-10-S99-3A
Measurement Adjustment/Offsetting
Entry
For the period ended December 31, 20X7, G uses the journal entries below to
subsequently measure I’s NCI in H.
EPS Impact
The 20X7 period-end carrying amount of the NCI is solely related to the NCI’s
initial measurement ($1,100,000) plus cumulative
attribution of earnings to the NCI ($345,000)
since this amount ($1,445,000) exceeds the NCI’s
redemption price ($1,414,000). Consequently, 100
percent of the ASC 480-10-S99-3A measurement
adjustment for 20X7 reflects a reversal of the
20X6 ASC 480-10-S99-3A measurement adjustment.
Because the 20X6 ASC 480-10-S99-3A measurement
adjustment arose from a 20X6 redemption price
($1,278,000) that was less than the NCI’s 20X6
fair value ($1,350,000), the 20X6 ASC
480-10-S99-3A measurement adjustment was
classified in equity under the income
classification — excess adjustment method and did
not affect net income attributable to NCIs or
income available to common stockholders. As a
result, the entire amount of the 20X7 ASC
480-10-S99-3A measurement adjustment is also
classified in equity and does not affect net
income attributable to G or income available to
common stockholders. 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 and income available to common
stockholders of $2,110,000, as shown in the table
below.
20X8
ASC 810 Attribution Adjustment/ASC 480-10-S99-3A Measurement Adjustment/Offsetting Entry
For the period ended December 31, 20X8, G uses the journal entries below to
subsequently measure I’s NCI in H.
EPS Impact
Because 100 percent of the ASC 480-10-S99-3A measurement adjustment for 20X8
arises from a redemption price that exceeds the
redeemable NCI’s fair value, all of the ASC
480-10-S99-3A offsetting entry is classified in
net income attributable to NCIs. Accordingly, G
reports net income attributable to G and income
available to common stockholders of $2,585,000, as
shown in the table below.
20X9
ASC 810 Attribution Adjustment/ASC 480-10-S99-3A Measurement Adjustment/Offsetting Entry
For the period ended December 31, 20X9, G uses the journal entries below to
subsequently measure I’s NCI in H.
EPS Impact
Of the ASC 480-10-S99-3A measurement adjustment for 20X9, $23,000 is related to
the amount necessary to recognize (on a cumulative
basis) in net income attributable to NCIs the
excess of the redemption price over the redeemable
NCI’s fair value. The remaining $17,000 of the ASC
480-10-S99-3A 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 and income
available to common stockholders of $2,077,000, as
shown in the table below.
Company G would report the following EPS amounts for 20X6, 20X7, 20X8, and 20X9:
Example 8-27
Application of Equity Classification — Excess Adjustment Method (APIC or Retained Earnings)
Assume the same facts as in Example 8-25, 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 period ended 20X6 and have added the same
facts as those added in Example 8-26 for
the periods ended 20X7, 20X8, and 20X9 to
illustrate this approach in various scenarios.
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.
- Company G has 1 million common shares outstanding for all periods.
- Company G has no potential common shares.
Key figures associated with G, H, and the NCI that I holds in H are as follows
(all numbers in thousands):
20X6
ASC 810 Attribution Adjustment/ASC 480-10-S99-3A Measurement Adjustment/Offsetting Entry
For the period ended December 31, 20X6, G uses the journal entries below to
subsequently measure I’s NCI in H under the equity
classification — excess adjustment method
(APIC/retained earnings).
20X7
ASC 810 Attribution Adjustment/ASC 480-10-S99-3A Measurement Adjustment/Offsetting Entry
For the period ended December 31, 20X7, G uses the journal entries below to
subsequently measure I’s NCI in H.
20X8
ASC 810 Attribution Adjustment/ASC 480-10-S99-3A Measurement Adjustment/Offsetting Entry
For the period ended December 31, 20X8, G uses the journal entries below to
subsequently measure I’s NCI in H.
For 20X8, all of the 20X8 ASC 480-10-S99-3A 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 480-10-S99-3A offsetting entry and for 20X8, there is no base portion of the ASC 480-10-S99-3A offsetting entry. Further, as stated in the facts, G has sufficient retained earnings to absorb the $15,000 debit arising from the ASC 480-10-S99-3A measurement adjustment.
20X9
ASC 810 Attribution Adjustment/ASC 480-10-S99-3A Measurement Adjustment/Offsetting Entry
For the period ended December 31, 20X9, G uses the journal entries below to
subsequently measure I’s NCI in H.
Of the ASC 480-10-S99-3A measurement adjustment for 20X9, $23,000 is related to
the amount necessary to recognize (on a cumulative
basis) the amount by which the redemption price
exceeds the redeemable NCI’s fair value. Under the
equity classification — excess adjustment method,
this amount (i.e., the excess portion of the ASC
480-10-S99-3A measurement adjustment) must be
classified in retained earnings. The remaining
$17,000 of the ASC 480-10-S99-3A offsetting entry
(i.e., the base portion of the ASC 480-10-S99-3A
measurement adjustment) is classified in APIC or
retained earnings (depending on G’s policy
election).
EPS Impact for All Years
Under the equity classification — excess adjustment method, the ASC
480-10-S99-3A measurement adjustments to the
redeemable NCI do not affect G’s reported amounts
of consolidated net income and net income
attributable to common stockholders of G. However,
G must apply the two-class method at the
subsidiary level to reflect the impact of
redemption price adjustments that exceed fair
value in its calculations of EPS. Under the
two-class method, the portion of the ASC
480-10-S99-3A offsetting entry that reflects the
excess (if any) of the NCI’s redemption price over
the instrument’s fair value is not treated as a
distribution to the NCI holders (i.e., it has no
impact on EPS). The portion of the ASC
480-10-S99-3A offsetting entry that reflects the
excess (if any) of the redemption price of the NCI
over the instrument’s fair value is treated as a
distribution on the NCI (i.e., it affects EPS).
The two-class method is applied at the subsidiary
level under this method to determine the portion
of the subsidiary’s income that is included in
income available to common stockholders of the
parent (the control number of EPS).
The following table illustrates the calculations of income available to common stockholders for each period:
As can be seen from the table
above, the reported amounts of income available to
common stockholders and basic and diluted EPS are
the same as in Example 8-26.
However, this may not always be the case,
especially for entities with complex capital
structures.
8.8.4.3.3 Preferred-Share Redeemable NCIs
ASC 480-10 — SEC Materials — SEC Staff Guidance
SEC Staff Announcement: Classification and Measurement of Redeemable Securities
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.
Like the ASC 480-10-S99-3A measurement adjustment used for common-share
redeemable NCIs, the ASC 480-10-S99-3A measurement adjustment for
preferred-share redeemable NCIs 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 480-10-S99-3A offsetting entries for preferred-share
redeemable NCIs by applying the same classification policy it elected
for recording preferred dividends of a subsidiary in the parent’s
financial statements (see Example 3-10 and Section 6.8 of
Deloitte’s Roadmap Noncontrolling Interests). However, unlike
common-share redeemable NCIs for which an offsetting entry is made under
ASC 480-10-S99-3A, the periodic measurement adjustment for
preferred-share redeemable NCIs should not be bifurcated 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 480-10-S99-3A
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 NCIs 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 NCIs to classify the entire ASC 480-10-S99-3A offsetting entry.
-
Preferred-share equity classification method — Classify the ASC 480-10-S99-3A 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 NCIs. 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 480-10-S99-3A 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 NCIs that are redeemable by the parent.
Example 8-28
Preferred-Share Redeemable NCI
Assume the following:
- Company A owns all of the outstanding common shares of Subsidiary B.
- On January 1, 20X7, Subsidiary B issued a preferred-share NCI 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 NCI to the interest’s redemption price.
Company A has determined that an effective interest rate of 11.803 percent
results in the full accretion of the NCI to its
redemption price by December 31, 20X8. Company A
subsequently measures the NCI at the following
amounts:
Assume also that:
- Company A and Subsidiary B report the following net income for 20X7 and 20X8:For A, the amounts reported do not include A’s investment in B.
- Company A and its subsidiary have no intercompany transactions that must be eliminated.
- Company A has sufficient retained earnings to cover ASC 480-10-S99-3A offsetting entries that are classified in retained earnings.
ASC 480-10-S99-3A Measurement Adjustment/Offsetting Entry
Company A uses the journal entries below to subsequently measure C’s NCI 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. As shown in the tables below, A will report net income attributable to A and income available to common stockholders 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. Consequently, even in
the absence of a common-share NCI, A will be
required to record an adjustment to net income
attributable to A to arrive at income available to
common stockholders. 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 income available to common
stockholders of $14,318,966 and $16,455,034 for
the same periods.
Under both methods, income available to common stockholders (the control number of EPS) is the same; therefore, regardless of which method is applied, EPS would be the same.
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 NCI’s ASC 480-10-S99-3A offsetting entry and
determine the EPS impact of such an interest’s ASC 480-10-S99-3A
measurement adjustment. However, for preferred-share redeemable
NCIs, it is not acceptable to bifurcate the ASC 480-10-S99-3A
offsetting entry into an excess portion and a base portion.
Rather, the entire amount of the preferred-share redeemable
NCI’s ASC 480-10-S99-3A 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 arrive at income available to the parent’s common
stockholders).
In the example above, it is assumed that the preferred-share NCI 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 480-10-S99-3A measurement adjustment, which affects EPS, has
been attributed to A as the counterparty to the redemption
feature. If the preferred-share NCI held by C were redeemable by
B itself, the resulting impact of the ASC 480-10-S99-3A
measurement adjustment, which affects EPS, would be attributed
to B’s common shareholder(s). Although the mechanics may differ,
because A is the sole common shareholder of B, the accounting
outcome would be expected to be the same on a consolidated
basis regardless of whether the preferred-share NCI is
redeemable by the subsidiary itself or by the parent. If, on the
other hand, B’s common shares are held by multiple investors
(rather than by A alone) and (1) the parent does not guarantee
the redemption of the subsidiary preferred stock and (2) there
are no other contractual arrangements that could shift the
allocation of income or loss between the common shareholders,
the impact of the ASC 480-10-S99-3A measurement adjustment would
be attributed to the parent and the common-share NCI holders on
the basis of their common-share ownership percentages. This
allocation would affect calculations of EPS.
In accordance with SAB Topic 6.B, an SEC registrant that elects to use an equity classification method must present income or loss applicable 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. See Section 9.1.6 for further discussion of this reporting requirement.
8.8.4.4 Impact of Redemption Accounting on EPS
An entity should apply the guidance in ASC 810-10-45-23 to account for the
acquisition of an NCI. 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.” See Section
7.1 of Deloitte’s Roadmap Noncontrolling Interests for
additional details on accounting for changes in a parent’s ownership
interest. In addition to the discussion below, see Section 3.2.3.3 for
more information about the redemption of redeemable NCIs.
8.8.4.4.1 Redemptions of Common-Share NCIs
With respect to redemptions of NCIs in the form of common shares, 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 480-10-S99-3A
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 480-10-S99-3A 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, see the discussion of common-share NCIs redeemable at fair
value (Section
8.8.4.3.2.1) and the discussion of common-share NCIs
redeemable at other than fair value (Section 8.8.4.3.2.2).
8.8.4.4.2 Redemptions of Preferred-Share NCIs
With respect to redemptions of NCIs 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 their carrying amount, the reporting entity should 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.
Note also that if the consideration transferred to
redeem NCIs in the form of preferred shares does not reflect the fair
value of the redeemed shares, the transaction involves other elements
that should be accounted for in accordance with other GAAP.
8.8.4.5 Expiration of a Redemption Feature
If the redemption feature embedded in the NCI expires without being exercised,
the carrying amount of the NCI should be reclassified into permanent equity
of the parent. The previously recorded excess amounts should not be
reversed; therefore, previous amounts that affected EPS should also not be
reversed or otherwise cause an adjustment to EPS in the period of the
reclassification. 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.
8.8.5 Reciprocal Interests
When an investor holds an equity investment in an investee (i.e., a consolidated subsidiary or an equity method investee) and the investee concurrently holds an investment in the investor, such investments are known as reciprocal interests. ASC 260 does not specifically address the impact of reciprocal interests on the calculation of EPS. The accounting for reciprocal interests in consolidated subsidiaries and equity method investees on the basis of the approaches commonly applied in practice is further discussed below.
8.8.5.1 Consolidated Subsidiaries
In a manner consistent with the concept of a single economic entity and the
guidance in ASC 810-10-45-5, reciprocal interests should generally be
presented as treasury shares on the parent’s consolidated balance sheet
regardless of the extent of the parent’s ownership interest in its
subsidiary. That is, 100 percent of a subsidiary’s interests in its parent
should generally be reported as treasury shares in the parent’s consolidated
financial statements even if the subsidiary is not wholly owned by the
parent. See Example
4-2 of Deloitte’s Roadmap Noncontrolling Interests for an
illustration of this concept.
In the parent’s consolidated income statement, the existence of reciprocal
interests affects the allocation of the consolidated entity’s earnings
between the parent’s third-party shareholders and the subsidiary’s NCI
holders, since the subsidiary’s NCI holders indirectly own a portion of the
parent’s common stock. In practice, there are two methods of attributing
earnings of the consolidated entity: the treasury stock method and the
simultaneous equations method:24
-
Treasury stock method — EPS of the consolidated group is calculated by reducing the weighted-average number of the parent’s common shares outstanding by the number of common shares owned by the subsidiary that may be deemed to be owned by the parent through its ownership interest in the subsidiary. The theory underlying this method is that a portion of the parent’s common shares owned by the subsidiary are treasury shares and that those shares therefore should not be considered outstanding in the calculation of EPS.
-
Simultaneous equations method — EPS of the consolidated group is calculated by (1) excluding all the parent’s common shares owned by the subsidiary from the weighted-average number of the parent’s common shares outstanding and (2) adjusting the parent’s income available to common stockholders to exclude an amount of the subsidiary’s earnings or losses that results from owning the parent’s common stock; this amount would be calculated by using complex algebraic formulas.
Use of the treasury stock method is more common because entities that use the simultaneous equations method must apply complex algebraic concepts. Although the parent’s income available to common stockholders under the treasury stock method may differ from that under the simultaneous equations method, consolidated net income will be the same under both methods. Further, because of accompanying differences in the number of parent shares that will be included in the calculation of the parent’s EPS, each method will also produce the same reported EPS amounts. Thus, either method is acceptable as long as it is applied consistently to all reciprocal interests.
See Example 6-10 in
Deloitte’s Roadmap Noncontrolling Interests for an illustration of
each method.
8.8.5.2 Equity Method Investees
The investor should present reciprocal interests as a reduction of both its
investment in the equity method investee and its equity in the investee’s
earnings. In practice, there are two methods of calculating the investee’s
earnings: the treasury stock method and the simultaneous equations method.
Application of the treasury stock method tends to be more common since, as
illustrated in Section
6.6 of Deloitte’s Roadmap Noncontrolling Interests, the
simultaneous equations method can be very complex. However, either method is
acceptable as long as an investor applies it consistently to all reciprocal
interests. Under the treasury stock method, the equity method investor
considers its shares held by the equity method investee to be treasury
stock. Therefore, the investor records its share of the investee’s net
income, excluding the equity method earnings from the investee’s equity
method investment in the investor. Example 5-19 in Deloitte’s Roadmap
Equity Method
Investments and Joint Ventures illustrates the
application of the treasury stock method to reciprocal interests of an
equity method investee.
Footnotes
14
It is assumed that the
potential common stock is dilutive.
15
In this table, unless
otherwise noted, it is assumed that the options on
common stock (1) must be share-settled upon
exercise, (2) are classified within stockholders’
equity in the parent’s consolidated financial
statements, and (3) do not meet the definition of
a participating security. See Section
4.7 for a discussion of the EPS
accounting related to situations in which a stock
option may be settled in cash or stock or is
classified as a liability. See Section
8.8.3 for a discussion of the EPS
accounting for participating securities of a
less-than-wholly-owned consolidated
subsidiary.
16
In this table, unless
otherwise noted, it is assumed that the
convertible debt (1) must be share-settled upon
exercise (i.e., no portion of the instrument may
be settled in cash), (2) does not contain an
embedded conversion option that must be separately
accounted for as a derivative instrument, and (3)
does not meet the definition of a participating
security. See Section 8.8.3
for a discussion of the EPS accounting for
participating securities of a
less-than-wholly-owned consolidated
subsidiary.
17
NCIs may need to be classified in temporary equity
if they are puttable to the issuing entity, the parent entity, or a
consolidated subsidiary of the parent entity. See Section 9.3
of Deloitte’s Roadmap Noncontrolling
Interests for further discussion of the
requirements in ASC 480-10-S99-3A related to temporary equity
classification.
18
When an NCI is subject to the measurement guidance
in ASC 480-10-S99-3A, the parent entity should first apply the
recognition and measurement guidance in ASC 810 to the NCI. The
measurement guidance in ASC 480-10-S99-3A is applied after the
application of ASC 810. A reporting entity’s application of ASC
480-10-S99-3A does not exonerate the entity from the requirements of
the accounting and disclosure guidance in ASC 810. See Section 9.4.3
of Deloitte’s Roadmap Noncontrolling
Interests for further discussion of the
measurement requirements of ASC 480-10-S99-3A.
19
See Chapter 6 of Deloitte’s
Roadmap Noncontrolling Interests for further
discussion of attribution.
20
This entry has no impact on the
parent’s consolidated net income. However, it may
affect the amount of net income attributable to NCIs
on the face of the reporting entity’s consolidated
income statement as well as (directly or indirectly)
the amount of income available to the parent’s
common stockholders, which is the starting point for
the parent’s EPS calculation. The extent to which
this entry affects net income attributable to NCIs
and therefore net income attributable to the
parent’s common stockholders will depend on various
policies the reporting entity has elected for
classifying this entry, as described in Section
8.8.4.3.2.2.
21
These adjustments are recorded when
an NCI’s redemption price exceeds its ASC 810
carrying amount (i.e., its carrying amount after the
attribution of income or loss to the NCI). There are
two acceptable methods under ASC 480-10-S99-3A(15)
that may be applied to record a measurement
adjustment related to an NCI that is not currently
redeemable: the “accretion method” and the
“immediate method.” The immediate method is required
if the NCI is currently redeemable. See Table
8-7 for discussion of each method.
22
This amount reflects the
portion of an NCI’s redemption price that exceeds
the interest’s fair value.
23
This amount reflects the
portion of the ASC 480-10-S99-3A offsetting entry
arising from the portion of an NCI’s redemption
price that is equal to or less than fair value but
greater than the redeemable NCI’s ASC 810 carrying
amount.
24
The descriptions below assume that the subsidiary
only owns common stock of the parent. To the extent that the
subsidiary also has potential common shares in the parent, the
calculations of diluted EPS must take into account such ownership
interests, further complicating the EPS calculations.