Once a reporting entity concludes that it is appropriate to consolidate another legal entity, the reporting entity must evaluate the accounting for equity instruments that are not owned by the parent. Only equity-classified instruments that are not owned by the parent are noncontrolling interests.
The decision tree below illustrates how to determine whether a reporting entity has any noncontrolling interests.
For simple capital structures involving only equity-classified common stock, the noncontrolling interest is the portion of the subsidiary’s equity not owned by the parent. For more complex capital structures, a reporting entity will need to use considerable judgment when determining whether an ownership interest represents a noncontrolling interest. While a legal-form liability is never considered a noncontrolling interest, not all equity instruments may be considered noncontrolling interests. Interests that require judgment include, but are not limited to, the following: