Noncontrolling interests: measurement, presentation and changes in ownership

In this lesson you will

Measure noncontrolling interest at acquisition and roll it forward
Attribute net income, losses and dividends to the noncontrolling interest
Record a change in ownership that does not cause a loss of control as an equity transaction
Compute the gain or loss on deconsolidation when control is lost

What a noncontrolling interest is

A noncontrolling interest is the portion of equity in a subsidiary not attributable, directly or indirectly, to the parent. Statement 160, codified in Topic 810, ended the practice of presenting it as a liability or in the mezzanine and moved it into equity.

Initial measurement

In a business combination, the noncontrolling interest is measured at acquisition-date fair value (805-20-30-1). Fair value per share of the noncontrolling interest can differ from the acquirer's price per share, because the acquirer usually pays a control premium and the minority holders do not have control. The valuation often starts with the acquirer's price, removes the control premium, and checks the result against any trading in the shares.

Presentation

810-10-45-16 requires the noncontrolling interest to be presented in the consolidated balance sheet within equity, separately from the parent's equity. 810-10-50-1A requires:

consolidated net income and comprehensive income, with the amounts attributable to the parent and to the noncontrolling interest shown on the face of the statements
a reconciliation of the carrying amount of total equity, parent equity and noncontrolling interest at the beginning and end of the period

Earnings per share is computed on income attributable to the parent.

Redeemable noncontrolling interests are different for SEC registrants. If the holder can require the company to buy the shares for cash, or redemption is outside the company's control, SEC guidance in 480-10-S99-3A classifies the interest outside permanent equity.

Attributing income and losses

Net income and each component of other comprehensive income are attributed to the parent and the noncontrolling interest. 810-10-45-21 says losses are attributed to the noncontrolling interest even if that results in a deficit balance. A contractual arrangement that specifies a different allocation, such as a preferred return, is followed.

Attribute subsidiary income after consolidation adjustments that belong to the subsidiary, such as depreciation on the fair value step-ups and the elimination of upstream unrealized profit.

Changes in ownership without loss of control

810-10-45-23 treats changes in a parent's ownership interest that do not result in a loss of control as equity transactions. No gain or loss is recognized, and goodwill is not remeasured. The carrying amount of the noncontrolling interest is adjusted to reflect the change in ownership, and the difference between that adjustment and the cash paid or received is recognized in equity attributable to the parent, usually additional paid-in capital. Accumulated other comprehensive income is reallocated in proportion.

Loss of control

When a parent ceases to have a controlling financial interest, it deconsolidates the subsidiary and recognizes a gain or loss in net income under 810-10-40-5. The gain or loss is the difference between:

the aggregate of the fair value of consideration received, the fair value of any retained noncontrolling investment, and the carrying amount of any noncontrolling interest in the former subsidiary, including its share of accumulated other comprehensive income
the carrying amount of the former subsidiary's assets and liabilities

The retained investment is remeasured to fair value, and that fair value becomes its new basis, often under the equity method.

Tools

The NCI rollforward workbook tracks the balance by component, and the noncontrolling interest share calculator splits income and dividends.

Worked example

An 80 percent acquisition, one year of results and a step-up to 90 percent

Fernwood Group buys 80 percent of Larkspur Inc. for $8,000,000. The fair value of the 20 percent noncontrolling interest is $1,900,000, lower per share than Fernwood's price because it carries no control premium. Larkspur's identifiable net assets have a fair value of $7,500,000.

Goodwill: 8,000,000 + 1,900,000 - 7,500,000 = $2,400,000.

Year 1: Larkspur's net income after depreciation of the fair value step-ups is $1,000,000, and it pays dividends of $300,000.

NCI share of income: 1,000,000 x 20% = $200,000. NCI share of dividends: 300,000 x 20% = $60,000. NCI at year end: 1,900,000 + 200,000 - 60,000 = $2,040,000.

Start of Year 2: Fernwood buys another 10 percent of Larkspur from the minority holders for $1,250,000, moving to 90 percent. Control does not change.

Carrying amount of the NCI transferred: 2,040,000 x 10/20 = $1,020,000. Entry: debit noncontrolling interest $1,020,000, debit additional paid-in capital $230,000, credit cash $1,250,000.

Conclusion: no gain or loss and no change to the $2,400,000 of goodwill. The remaining NCI is $1,020,000.

Self-check

Answer each question before you open the answer.

Where is a noncontrolling interest presented in the consolidated balance sheet?
Show answer
Within equity, separately from the parent’s equity, under 810-10-45-16. Redeemable interests of SEC registrants are presented outside permanent equity under SEC guidance.
A subsidiary’s losses would push the noncontrolling interest below zero. Are the losses still attributed to it?
Show answer
Yes. 810-10-45-21 requires losses to be attributed to the noncontrolling interest even if that creates a deficit balance.
A parent sells 15 percent of a wholly owned subsidiary and keeps control. Is a gain recognized?
Show answer
No. Under 810-10-45-23 the sale is an equity transaction. The difference between the proceeds and the carrying amount of the interest sold goes to the parent’s additional paid-in capital.
On loss of control, how is a retained 30 percent interest measured?
Show answer
At fair value on the date control is lost, and that amount is included in the gain or loss computation under 810-10-40-5.

Sources

Back to the syllabus

Standards are paraphrased from the primary sources listed above; read the source before relying on a requirement. This lesson is training material, not professional advice. Report an error