On the Radar
Noncontrolling Interests
Once a reporting entity concludes that it is appropriate to consolidate another legal
entity, the reporting entity must evaluate the accounting for equity instruments
that are not owned by the parent. Only equity-classified instruments that are not
owned by the parent are noncontrolling interests.
The objective of accounting for noncontrolling interests is to
present users of the consolidated financial statements with a clear depiction of the
portion of a less than wholly owned subsidiary’s net assets, net income, and
comprehensive income that is attributable to holders of equity-classified ownership
interests other than the parent. In practice, the combination of complex capital
structures, multiple sources of authoritative guidance on accounting for
noncontrolling interests, and multiple policy elections available to reporting
entities can make this objective difficult to achieve.
ASC 810-10-20 defines a noncontrolling interest as the “portion of equity (net
assets) in a subsidiary not attributable, directly or indirectly, to a parent” and
further states that a “noncontrolling interest is sometimes called a minority
interest.” This definition applies to all entities that prepare consolidated
financial statements.
Although the accounting principles related to noncontrolling interests have been in
place for many years, they can be difficult to apply. The relatively brief guidance
on nonredeemable noncontrolling interests (ASC 810-10) has resulted in diversity in
practice, while the guidance on redeemable noncontrolling interests (ASC
480-10-S99-1 and ASC 480-10-S99-3A) is highly prescriptive and contains multiple
policy elections. For these reasons, accounting for noncontrolling interests is a
particularly challenging aspect of U.S. GAAP.
The decision tree below illustrates
how to determine whether a reporting entity has any noncontrolling interests.
Since a noncontrolling interest is defined as a specific “portion of
equity” (emphasis added), the first step in the
identification of a noncontrolling interest is to establish whether such ownership
interest in the subsidiary is appropriately classified in the equity section of the
subsidiary’s balance sheet and the parent’s consolidated balance sheet.
For simple capital structures
involving only equity-classified common stock, the noncontrolling interest is the
portion of the subsidiary’s equity not owned by the parent. For more complex capital
structures, a reporting entity will need to use considerable judgment when
determining whether an ownership interest represents a noncontrolling interest.
While a legal-form liability is never considered a noncontrolling interest, not all
equity instruments may be considered noncontrolling interests. Interests that
require judgment include, but are not limited to, the following:
It is important to note that the scope of the
noncontrolling interest literature begins with the
identification of an instrument as an equity interest
and the instrument’s classification as such on the
balance sheet.
Attribution of Income (Loss) and Other Comprehensive Income (Loss)
The measurement of noncontrolling interests on the reporting
entity’s balance sheet is affected, in part, by the manner in which elements of a
subsidiary’s income and other comprehensive income or loss are attributed to the
parent’s controlling interest and the noncontrolling interests held by parties other
than the parent.
While ASC 810-10 requires a reporting entity to allocate a subsidiary’s income or
loss and comprehensive income or loss between the controlling and noncontrolling
interests, it does not prescribe a specific means for doing so. Although attribution
of income or loss and comprehensive income or loss is commonly performed on the
basis of the relative ownership interests of the parent and noncontrolling
interests, there are many instances in which it would be inappropriate to attribute
income or loss solely on the basis of relative ownership percentages.
When assessing an appropriate attribution method, companies should consider (1) the
attribution when contracts specify allocations of profits and losses, costs and
expenses, or distributions that differ from investors’ relative ownership
percentages, (2) the attribution of losses in excess of the investee’s carrying
value, (3) the attribution of eliminated income or loss (both for entities
consolidated under the variable interest entity model and for those that are not),
(4) the attribution of income in the presence of reciprocal interests, and (5) the
attribution of other comprehensive income or loss.
Redeemable Noncontrolling Interests
Common and preferred shares of a
consolidated subsidiary are sometimes subject to redemption rights held by the
noncontrolling shareholder. Accounting for a redeemable noncontrolling interest is
one of the more complex aspects of U.S. GAAP to apply because the reporting entity’s
accounting may be affected by a multitude of factors that are specific to the
redeemable instrument itself and to policy elections made by the reporting entity.
Such factors include the following:
Nearly all of the guidance on accounting for redeemable noncontrolling interests is codified in ASC 480-10-S99-3A and originated with the SEC staff’s interpretations of ASR 268 in EITF Topic D-98. Accordingly, this
guidance must be applied by all SEC registrants. While reporting entities other than
SEC registrants are not subject to the guidance in ASC 480-10-S99-3A, they may elect
to apply it.
When applied, ASC 480-10-S99-3A is essentially an “overlay” that is
applied after the application of ASC 810-10. That is, a reporting entity must apply
the provisions of ASC 810-10, including the guidance on attributing subsidiary
income to controlling and noncontrolling interests, before applying the provisions
of ASC 480-10-S99-3A, which primarily focus on subsequent measurement and balance
sheet presentation issues that arise from the existence of a redemption feature. A
redeemable noncontrolling interest may also affect a reporting entity’s earnings per
share computation.
The decision tree below illustrates
how to evaluate the redemption features included in a contract with a noncontrolling
interest holder, or embedded in the noncontrolling interest, when the noncontrolling
interest itself has already been determined to be appropriately classified as
equity.
Changes in a Parent’s Ownership Interest
An entity’s ownership structure is often fluid. For instance:
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A parent may directly purchase additional ownership interests in its subsidiary from a third party, or it may sell some or all of its current ownership interests in the subsidiary to a third party.
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Alternatively, a subsidiary may issue (purchase) additional ownership interests to (from) third parties, thereby diluting (concentrating) the parent’s ownership interest.
Irrespective of the events that lead to changes in ownership interests in the
subsidiary, if control has not changed, a parent accounts for such changes in
ownership as equity transactions. Generally, the parent should neither recognize a
gain or loss on sales or issuances of subsidiary shares nor step up to fair value
the portion of the subsidiary’s net assets that corresponds to the additional
interests acquired. Rather, any difference between consideration paid or received
and the change in noncontrolling interest is typically recorded in equity. As part
of equity transaction accounting, the reporting entity must also reallocate the
subsidiary’s accumulated other comprehensive income (AOCI) between the parent and
the noncontrolling interest.
To properly reflect these principles
when accounting for changes in ownership interest (within the scope of ASC 810-10)
without an accompanying change in control, a reporting entity should perform the
following five steps:
Presentation and Disclosure
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ASC 810-10 Requires:
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Separate presentation of consolidated net income and
consolidated comprehensive income on the face of the
consolidated financial statements. Additional detail must
also be provided about the portions of each of these totals
that are attributable to the parent and the noncontrolling
interests, respectively.
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Reconciliations of changes in stockholders’ equity that
detail changes attributable to the parent and the
noncontrolling interests, respectively.
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Disclosure of reallocations of AOCI between the parent and
the noncontrolling interests.
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Each of the presentation and disclosure requirements summarized above ultimately
arises from the desire to clearly articulate for users of financial statements how
changes in a reporting entity’s net assets affect the parent and noncontrolling
interest holders.
While ASC 810-10 provides extensive presentation and disclosure
guidance aimed at clearly depicting a noncontrolling interest holder’s claim on the
net assets, net income, and comprehensive income of a consolidated subsidiary, no
such presentation and disclosure requirements exist for the consolidated statement
of cash flows. Redeemable noncontrolling interests remain subject to the disclosure
and reconciliation requirements of ASC 810-10-50-1A(c) and SEC Regulation S-X, Rule
3-04, even if such interests are classified in the temporary equity section of the
reporting entity’s balance sheet.
Deloitte’s Roadmap Noncontrolling Interests
comprehensively discusses the accounting guidance on
noncontrolling interests, primarily that in ASC 810-10 and
ASC 480-10-S99-3A. For extensive analysis of whether a
reporting entity should consolidate another legal entity,
see Deloitte’s Roadmap Consolidation — Identifying a
Controlling Financial Interest.
Entities should also consider Deloitte’s Roadmap Distinguishing Liabilities From
Equity, which provides extensive
interpretive guidance on the appropriate classification of
equity instruments, including noncontrolling interests,
within or outside of the equity section of a reporting
entity’s balance sheet.
Contacts
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Andrew Winters
Audit & Assurance
Partner
Deloitte & Touche
LLP
+1 203 761 3355
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Andrew Pidgeon
Audit & Assurance Partner
Deloitte & Touche LLP
+1 415 783 6426
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If you are interested in Deloitte’s
noncontrolling interest accounting service offerings, please contact:
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Jamie Davis
Audit & Assurance
Partner
Deloitte & Touche
LLP
+1 312 486 0303
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