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ii 

Publications in Deloitte’s Roadmap Series

Business Combinations Business Combinations — SEC Reporting Considerations Carve-Out Transactions Comparing IFRS Standards and U.S. GAAP Consolidation — Identifying a Controlling Financial Interest Contingencies and Loss Recoveries Contracts on an Entity’s Own Equity Convertible Debt Current Expected Credit Losses Disposals of Long-Lived Assets and Discontinued Operations Distinguishing Liabilities From Equity Earnings per Share Environmental Obligations and Asset Retirement Obligations Equity Method Investments and Joint Ventures Equity Method Investees — SEC Reporting Considerations Fair Value Measurements and Disclosures Foreign Currency Transactions and Translations Income Taxes Initial Public Offerings Leases Noncontrolling Interests Non-GAAP Financial Measures Revenue Recognition SEC Comment Letter Considerations, Including Industry Insights Segment Reporting Share-Based Payment Awards Statement of Cash Flows

iii Acknowledgments

Rob Comerford and Andrew Winters oversaw the development of the inaugural (2017) edition of this publication under the leadership of Brandon Coleman. Andrew Pidgeon led the preparation of this 2020 edition under the guidance of Andrew Winters.

Andrew P. and Andrew W. are grateful for the meaningful contributions of Alison Hefele and Jack Widmann to this edition. They also wish to extend their appreciation to Teri Asarito, Sandy Cluzet, Geri Driscoll, David Eisenberg, and David Frangione for delivering the first-class editorial and production effort that we have come to rely on.

iv Contents

Preface x

Contacts xi

Chapter 1 — Overview 1 1.1 Scope 1 1.2 Intercompany Matters With Noncontrolling Interest Implications 1 1.3 Initial Recognition and Measurement of Noncontrolling Interests 2 1.4 Attribution of Income, Other Comprehensive Income, and Cumulative Translation Adjustment Balances 2 1.5 Changes in a Parent’s Ownership Interest 3 1.6 Presentation and Disclosure 4 1.7 Redeemable Noncontrolling Interests 4

Chapter 2 — Glossary of Selected Terms 6 2.1 Accretion Method 6 2.2 ASC 480 Measurement Adjustment 6 2.3 ASC 480 Offsetting Entry 6 2.4 ASC 810-10 Attribution Adjustment 6 2.4A ASC 810-10 Carrying Amount 7 2.5 Attribution 7 2.6 Base Portion of the ASC 480 Measurement Adjustment 7 2.7 Business Combination 7 2.8 Controlling Financial Interest 7 2.9 Downstream Transaction 8 2.10 Equity Interests 8 2.11 Excess Portion of the ASC 480 Measurement Adjustment 8 2.12 Fair Value 8 2.13 Foreign Entity 9 2.14 Goodwill 9 2.15 Hypothetical Liquidation at Book Value 9 2.16 Immediate Method 9 2.17 Noncontrolling Interest 9 2.18 Parent/Noncontrolling Interest Attribution Method 9 2.19 Parent-Only Attribution Method 10

v 2.20 Primary Beneficiary 10 2.21 Reciprocal Interests 10 2.22 Redeemable Noncontrolling Interest 10 2.23 Reporting Entity 10 2.24 SEC Registrant 11 2.25 Simultaneous Equations Method 11 2.26 Subsidiary 11 2.27 Treasury Stock Method 11 2.28 Upstream Transaction 11 2.29 Variable Interest Entity 12 2.30 Variable Interests 12

Chapter 3 — Scope 13 3.1 Portion of a Subsidiary Not Attributable to the Parent 14 3.1.1 Noncontrolling Interest in a Subsidiary Owned by the Parent or Affiliate of a Reporting Entity 15 3.2 Only Equity Interests Can Be Noncontrolling Interests 18 3.2.1 Other Equity Interests — Carried Interests or Profits Interests 20

Chapter 4 — Intercompany Matters With Noncontrolling Interest Implications 21 4.1 Multiple Legal Entities Representing a Single Reporting Entity 21 4.1.1 Parent and Subsidiary With Different Fiscal-Year-End Dates 21 4.1.2 Parent and Subsidiary Accounting Policies 22 4.2 Transactions Between Parent and Subsidiary 22 4.2.1 Intercompany Transactions 22 4.2.2 Intercompany Ownership Interests 23 4.2.2.1 Subsidiary’s Ownership Interest in Parent (Reciprocal Interests) — Subsidiary Reporting 23 4.2.2.2 Subsidiary’s Ownership Interest in Parent (Reciprocal Interests) — Consolidated Reporting 24 4.3 Capitalization of Retained Earnings by a Subsidiary 25

Chapter 5 — Initial Recognition and Measurement 26 5.1 Initial Measurement of Noncontrolling Interests When a Reporting Entity First Consolidates a Partially Owned Subsidiary 27 5.1.1 Noncontrolling Interests Recognized Concurrently With a Business Combination 27 5.1.2 Noncontrolling Interests Recognized Concurrently With an Asset Acquisition 27 5.1.3 Initial Measurement of Noncontrolling Interests When an Acquired Subsidiary Has Retained Earnings or a Deficit 27 5.2 Noncontrolling Interests Recognized When the Reporting Entity Sells Shares in a Wholly Owned Subsidiary and Retains Control 28 5.3 Other Considerations Related to the Initial Recognition of a Noncontrolling Interest 29 5.3.1 Accounting for the Issuance of a Noncontrolling Interest With Ownership Tax Benefits 29 5.3.1.1 Separating the Benefits of Tax Credits From the Substantive Noncontrolling Interest 29

vi Contents

Chapter 6 — Attribution of Income, Other Comprehensive Income, and Cumulative Translation Adjustment Balances 31 6.1 Attributions Disproportionate to Ownership Interests 32 6.1.1 Application of the HLBV Method as a Means to Attribute (Comprehensive) Income and Loss 33 6.1.2 Financial Reporting Requirements of Other Codification Topics That Affect Attributions 41 6.1.2.1 Business Combinations Consummated Before the Effective Date of FASB Statement 141(R) (Codified in ASC 805-10) 41 6.1.2.2 Business Combinations Consummated After the Effective Date of ASC 805-10 42 6.1.3 Attribution of Income in Carried Interest Arrangements 43 6.2 Attribution of Losses in Excess of Carrying Amount 45 6.3 Attribution of Eliminated Income or Loss (Other Than VIEs) 49 6.3.1 Eliminating Profit (Loss) on Downstream Transactions 51 6.3.2 Eliminating Profit (Loss) on Upstream Transactions 56 6.4 Attribution of Eliminated Income or Loss (VIEs) 65 6.5 Attribution of Income in the Presence of Reciprocal Interests 68 6.6 Attribution of Other Comprehensive Income or Loss 70 6.6.1 Impact of FASB Statement 160 Transition Method on Attribution of OCI in Subsequent Periods 70 6.6.2 Foreign Currency Translation Adjustments 73 6.6.3 Impact of Changes to OCI or AOCI Resulting From Transition Adjustments or Changes in Accounting Principle 74 6.7 Presentation of Preferred Dividends of a Subsidiary 77 6.7.1 Noncontrolling Interests Held by Preferred Shareholders 78 6.8 Noncontrolling Interests in Pass-Through Entities — Income Tax Financial Reporting Considerations 80 6.9 Calculation of Earnings per Share When There Is a Noncontrolling Interest 81 6.10 Adoption of a New Accounting Standard  81

Chapter 7 — Changes in a Parent’s Ownership Interest 82 7.1 Changes in a Parent’s Ownership Interest Without an Accompanying Change in Control 82 7.1.1 Scope Limitations for Certain Decreases in Ownership Without an Accompanying Change in Control 83 7.1.1.1 Noncontrolling Interests Arising From Transfers of Real Estate Accounted for as a Profit-Sharing Arrangement 86 7.1.1.2 Transfer of Equity Interests in a Subsidiary Holding Financial Assets 88 7.1.2 Model of Accounting for Changes in a Parent’s Ownership Interest in a Subsidiary While the Parent Maintains Control 89 7.1.2.1 Parent’s Acquisition of Interests in Subsidiary Directly From Third Party 91 7.1.2.2 Subsidiary’s Direct Acquisition of Its Equity Interests 92 7.1.2.3 Additional Ownership Interest Obtained Through a Business Combination 93 7.1.2.4 Acquisition of Additional Ownership Interests in a Subsidiary When the Parent Obtained Control Before Adopting FASB Statement 160 94 7.1.2.5 Parent’s Selling of Interests in a Subsidiary Directly to a Noncontrolling Interest Holder 95

vii Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

7.1.2.6 Subsidiary’s Direct Issuance of Its Equity Interests to Third Parties 96 7.1.2.7 Special Considerations Related to Transactions Involving Changes in Ownership of Preferred Shares in a Subsidiary 99 7.1.2.8 Accounting for Costs Related to Equity Transactions With Noncontrolling Interest Holders 100 7.1.3 Accounting for the Tax Effects of Transactions With Noncontrolling Shareholders 101 7.2 Changes in a Parent’s Ownership Interest With an Accompanying Change in Control 103

Chapter 8 — Presentation and Disclosure 104 8.1 Overview 104 8.2 Balance Sheet Presentation 105 8.3 Presentation of Income and Comprehensive Income 106 8.4 Statement of Cash Flows Presentation 107 8.5 Statement of Stockholders’ Equity Presentation 108 8.5.1 Interim Equity Reconciliations for SEC Registrants 110 8.5.1A Redeemable Noncontrolling Interests’ Impact on Disclosures and Reconciliations of Stockholders’ Equity 113 8.5.2 Comprehensive Income Requirement — Disclosure of Reallocations of AOCI Between the Parent and the Noncontrolling Interest 114 8.5.3 Presenting Effects of the Noncontrolling Interest in the AOCI Reclassification Adjustments Disclosure 115

Chapter 9 — Redeemable Noncontrolling Interests 117 9.1 Examples of Redeemable Noncontrolling Interests 118 9.2 Scope of ASC 480-10-S99-3A and Interaction With ASC 810-10 120 9.3 Accounting for Redeemable Noncontrolling Interests 123 9.3.1 Classification of Redeemable Noncontrolling Interests 124 9.3.2 Initial Measurement of Redeemable Noncontrolling Interests 125 9.3.3 Subsequent Measurement of Redeemable Noncontrolling Interests 126 9.3.3.1 Sequencing of ASC 810-10 Attribution and ASC 480 Measurement Adjustments 127 9.3.3.2 Methods of Determining ASC 480 Measurement Adjustment Amount 128 9.3.3.3 Impact of an IPO-Triggered Mandatory Conversion Feature 129 9.3.3.4 Illustrative Examples of Subsequent Measurement of Redeemable Noncontrolling Interests 129 9.3.4 Determining the Offsetting Entry and the EPS Impact of ASC 480 Measurement Adjustments 133 9.3.4.1 Common-Share Noncontrolling Interests Redeemable at Fair Value 134 9.3.4.2 Common-Share Noncontrolling Interests Redeemable at Other Than Fair Value 135 9.3.4.3 Preferred-Share Redeemable Noncontrolling Interests 163 9.3.4.4 Additional SEC Reporting Considerations 167 9.3.5 Redemption Accounting 167 9.3.5.1 Redemptions of Common-Share Noncontrolling Interests 168 9.3.5.2 Redemptions of Preferred-Share Noncontrolling Interests 168 9.3.6 Accounting for the Expiration of a Redemption Feature 168

viii Contents

9.4 Disclosures Related to Redeemable Noncontrolling Interests 169 9.4.1 Equity Reconciliation Disclosures Related to Redeemable Noncontrolling Interests 169 9.4.2 Effect of Changes in Parent’s Ownership Interest in Subsidiaries (Without an Accompanying Change in Control) on Redeemable Noncontrolling Interests 176

Appendix A — Differences Between U.S. GAAP and IFRS Standards 181

Appendix B — Titles of Standards and Other Literature 183

Appendix C — Abbreviations 186

Appendix D — Changes Made in the 2020 Edition of This Publication 187

ix Preface

July 2020

To the clients, friends, and people of Deloitte:

We are pleased to present the 2020 edition of A Roadmap to Accounting for Noncontrolling Interests. This Roadmap provides Deloitte’s insights into and interpretations of the accounting guidance on noncontrolling interests. Appendix D highlights substantive changes made to the Roadmap since issuance of the 2019 edition.

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 810-101) has resulted in diversity in practice, while the guidance on redeemable noncontrolling interests (ASC 480-10-S99) 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 guidance in this Roadmap presumes that (1) a parent has already established that consolidation of its subsidiary is appropriate under ASC 810-10 and (2) the equity interests of a subsidiary qualify for equity classification under ASC 480. Consequently, this Roadmap should be viewed as a companion publication to Deloitte’s A Roadmap to Consolidation — Identifying a Controlling Financial Interest. While classification of equity interests is outside the scope of this publication, readers may refer to Deloitte’s A Roadmap to Distinguishing Liabilities From Equity for extensive guidance on such matters.

Subscribers to the Deloitte Accounting Research Tool (DART) may access any interim updates to this publication by selecting the Roadmap from the Roadmap Series page on DART. If a “Summary of Changes Since Issuance” displays, subscribers can view those changes by clicking the related links or by opening the “active” version of the Roadmap.

We hope that you find this publication to be a valuable resource when considering the accounting guidance on noncontrolling interests. However, it is not a substitute for consulting with Deloitte professionals on complex accounting questions and transactions.

Sincerely,

Deloitte & Touche LLP

1 For the full titles of standards, topics, and regulations, see Appendix B. For the full forms of abbreviations, see Appendix C.

x Contacts

If you have questions about the information in this publication, please contact any of the following Deloitte professionals:

Andrew Winters Partner Deloitte & Touche LLP +1 203 761 3355 [email protected]

Ashley Carpenter Rob Comerford Partner Partner Deloitte & Touche LLP Deloitte & Touche LLP +1 203 761 3197 +1 203 761 3732 [email protected] [email protected]

Sean May Andrew Pidgeon Partner Partner Deloitte & Touche LLP Deloitte & Touche LLP +1 415 783 6930 +1 415 783 6426 [email protected] [email protected]

xi Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

If you are interested in Deloitte’s noncontrolling interest accounting service offerings, please contact these Deloitte professionals:

Derek Gillespie Chris Rogers Partner Partner Deloitte & Touche LLP Deloitte & Touche LLP +1 212 492 4356 +1 202 220 2695 [email protected] [email protected]

xii Chapter 1 — Overview

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 subsidiary’s net assets, net income, and net comprehensive income that is attributable to equity holders 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.

The sections below give an overview of the framework for classifying, measuring, and presenting noncontrolling interests. The topics summarized in those sections are further discussed and illustrated in Chapters 3 through 9 of this Roadmap.

1.1 Scope 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.” Consequently, noncontrolling interests are presented only in the consolidated financial statements of a parent whose holdings include a controlling interest in one or more subsidiaries it partially owns. Noncontrolling interests in a partially owned subsidiary are not recognized in the subsidiary’s own financial statements (seeSection 3.1).

Since a noncontrolling interest is defined as a specific “portion ofequity ” (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 either the subsidiary’s balance sheet or the parent’s consolidated balance sheet (see Section 3.2).

1.2 Intercompany Matters With Noncontrolling Interest Implications Noncontrolling interests arise because a parent and its subsidiaries represent separate and distinct legal entities. Accordingly, each legal entity may separately prepare its own set of financial statements. Through the consolidation process, the financial statements are combined to present the parent and its subsidiaries as if they were a single economic entity. In recognition of their separate identities, it is possible for a parent and its subsidiaries to have different fiscal-year-end dates, the presence of which must be considered in the preparation of consolidated financial statements (seeSections 4.1 and 4.1.1).

While the separate financial statements of a parent and its subsidiaries must reflect the changes in each entity’s financial position as a result of intercompany transactions (seeSection 4.2.1) and intercompany ownership interests (see Section 4.2.2), such transactions and ownership interests must be eliminated in consolidation so that the consolidated financial statements are presented as if the parent and its subsidiaries were a single economic entity. The process of eliminating such transactions and ownership interests can be more complex in circumstances involving noncontrolling interests.

1 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

1.3 Initial Recognition and Measurement of Noncontrolling Interests Since a noncontrolling interest represents the portion of a subsidiary that is not attributable to its parent, it is typical for noncontrolling interests to be recognized for the first time upon the occurrence of either of the following: • The initial consolidation of a subsidiary not wholly owned by the parent. • The parent’s sale of shares in a wholly owned subsidiary over which the parent retains control after the sale.

Chapter 5 of this Roadmap provides interpretive guidance on the initial recognition and measurement of noncontrolling interests arising when a parent first consolidates a partially owned subsidiary (see Sections 5.1 through 5.1.3) or the parent sells shares in a wholly owned subsidiary over which the parent retains control after the sale (see Section 5.2).

1.4 Attribution of Income, Other Comprehensive Income, and Cumulative Translation Adjustment Balances Attributing income of a partially owned subsidiary to a parent and the subsidiary’s noncontrolling interest holders is easy in theory but can prove difficult in practice. A simple starting point would be to allocate the subsidiary’s net income (loss) between the parent and the noncontrolling interest holders in proportion to their ownership interests. However, the presence of different classes of equity interests, the existence of contractual arrangements that serve to shift rights to receive benefits or obligations to absorb losses between different equity holders, or financial reporting requirements of other Codification topics can result in the need to attribute a subsidiary’s net income (loss) in a manner that is disproportionate to each party’s ownership interest (see Sections 6.1 through 6.2).

The presence of intercompany transactions and the accompanying need to eliminate (for purposes of preparing consolidated financial statements) the profit or loss arising from such transactions also affects the allocation of a subsidiary’s net income between a parent and noncontrolling interest holders. In addition, the attribution of eliminating entries arising from intercompany transactions is affected by (1) the subsidiary’s status as a variable interest entity (VIE) or voting interest entity, (2) the nature of the transaction (i.e., upstream vs. downstream sales), and, in the case of an upstream transaction, (3) the policy elected by the parent for attributing the eliminating entry to the parent and the noncontrolling interests (see Sections 6.3 through 6.4).

The presence of reciprocal interests (subsidiary ownership of parent shares) is another factor that affects the attribution of net income to a parent and noncontrolling interests. While there are two acceptable approaches for determining the impact of reciprocal interests on the attribution of earnings, each approach will generate the same end result. The approach selected as the entity’s accounting policy can simplify (or significantly complicate) the actual process of attributing the subsidiary’s earnings (and may also make it necessary to dust off the algebra textbook that has been sitting on your bookshelf for a decade or two). For further discussion, see Section 6.5.

Other matters that entities must consider when attributing income to a parent and noncontrolling interests include: • Attribution of (1) other comprehensive income (OCI) or other comprehensive loss and (2) foreign currency translation adjustments (see Sections 6.6 through 6.6.3). • The presentation of preferred dividends of a subsidiary (see Section 6.7).

2 Chapter 1 — Overview

• Income tax financial reporting considerations related to noncontrolling interests in pass-through entities (see Section 6.8). • The impact of income attribution on the parent’s consolidated earnings per share (EPS) computation (see Section 6.9).

1.5 Changes in a Parent’s Ownership Interest Changes in a parent’s ownership interest in a subsidiary after the initial recognition of noncontrolling interests trigger the need to “rebalance” the equity accounts reported on the parent’s consolidated balance sheet between controlling and noncontrolling interests. Decreases in ownership of subsidiaries may arise from transactions outside the scope of ASC 810-10 whose substance is addressed by other U.S. GAAP (see Section 7.1.1). Such transactions include, but are not limited to: • Revenue transactions (ASC 605 or ASC 606). • Exchanges of nonmonetary assets (ASC 845). • Transfers of financial assets (ASC 860). • Conveyances of mineral rights and related transactions (ASC 932). • Sales of in-substance real estate (ASC 360 or ASC 976). • Gains and losses from derecognition of nonfinancial assets (ASC 610-20).

Note that ASC 360-20, which provides guidance on real estate sale transactions, is partially superseded by ASC 606 and ASC 610-20 upon the adoption of the new revenue standard. However, ASC 360-20 continues to apply to sale-and-leaseback transactions involving real estate assets until the amendments in ASU 2016-02 on leases take effect. SeeChapter 17 of Deloitte’s A Roadmap to Applying the New Revenue Recognition Standard for further discussion of nonfinancial assets.

The rebalancing of equity accounts between controlling and noncontrolling interests that results from changes in a parent’s ownership interest in a subsidiary while the parent maintains control is generally achieved through a five-step process (seeSection 7.1.2). However, the extent to which each step is applicable will depend on whether the change in ownership arises as a result of (1) the parent’s purchase or sale of subsidiary shares (see Sections 7.1.2.1 and 7.1.2.5) or (2) the direct acquisition or issuance of shares by the subsidiary (see Sections 7.1.2.2 and 7.1.2.6).

Other changes in ownership that warrant special consideration include: • Increases in ownership of a partially owned subsidiary that result from a business combination with a noncontrolling interest holder. See Section 7.1.2.3. • Acquisition of additional ownership interests in a subsidiary when the parent obtained control before adopting FASB Statement 160 (codified in ASC 810). SeeSection 7.1.2.4. • Changes in preferred-share ownership. See Section 7.1.2.7. • Accounting for the tax effects of transactions with noncontrolling shareholders. SeeSection 7.1.3. • Changes in ownership with an accompanying change in control. See Section 7.2.

3 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

1.6 Presentation and Disclosure The issuance of FASB Statement 160 (codified in ASC 810) clarified that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Before Statement 160 was issued, there was only limited guidance on how noncontrolling interests should be reported. Statement 160 clarified that noncontrolling interests should “be reported in the consolidated statement of financial position within equity (net assets), separately from the parent’s equity (or net assets)” 1 (see Section 8.1). To provide additional clarity to common shareholders of the consolidated entity regarding their claim on the net assets of the consolidated entity, ASC 810-10 requires: • Separate presentation of consolidated net income and consolidated comprehensive income on the face of the consolidated financial statements. Additional detail must also be provided about the portions of each of these totals that are attributable to the parent and the noncontrolling interests, respectively (see Section 8.3). • Reconciliations of changes in stockholders’ equity that detail changes attributable to the parent and the noncontrolling interests, respectively (see Sections 8.5 and 8.5.1). • Disclosure of reallocations of accumulated other comprehensive income (AOCI) between the parent and the noncontrolling interests (see Section 8.5.2).

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 and net income of a consolidated subsidiary, no such presentation and disclosure requirements exist for the consolidated statement of cash flows (see Section 8.4).

1.7 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.

The guidance on accounting for redeemable noncontrolling interests resides in ASC 480-10-S99-3A and originated with the SEC staff’s views 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 (see Sections 9.2 and 9.3.3.1).

1 Quoted from ASC 810-10-45-16.

4 Chapter 1 — Overview

A redeemable noncontrolling interest within the scope of ASC 480-10-S99-3A is classified outside of permanent equity, in a section of the balance sheet typically referred to as “temporary” equity (see Section 9.3.1). A redeemable noncontrolling interest’s initial measurement is typically equal to its fair value (see Section 9.3.2). Subsequent measurement depends on multiple factors, including whether: • The redeemable noncontrolling interest is redeemable at fair value or at other than fair value (see Sections 9.3.4.1 through 9.3.4.2.1.3). • The instrument is currently, or is probable of becoming, redeemable (see Sections 9.3.3.2 and 9.3.3.3).

The impact of subsequent measurement adjustments on the parent’s consolidated income statement and EPS computation will be driven by the unique combination of all of the following: • The redeemable noncontrolling interest’s form — specifically, common-share versus preferred- share (see Sections 9.3.4 through 9.3.4.4). • The instrument’s redemption price (see Sections 9.1 and 9.3.4 through 9.3.4.4). • The reporting entity’s policy election for classifying the offsetting entry for measurement adjustments required under ASC 480-10-S99-3A (see Sections 9.3.4 through 9.3.4.4).

While much of ASC 480-10-S99-3A focuses on the accounting for a redeemable noncontrolling interest from the time of issuance, the actual redemption of a common-share or preferred-share redeemable noncontrolling interest is accounted for as an equity transaction. In cases involving the redemption of a preferred-share redeemable noncontrolling interest, if the price at which the redeemable noncontrolling interest is ultimately redeemed differs from the price stated in the redemption feature, an additional EPS impact may result (see Section 9.3.5).

If a redemption feature expires unexercised, the carrying amount of the noncontrolling interest is reclassified into permanent equity of the parent, and reversal of prior measurement adjustments is not permitted (see Section 9.3.6).

As discussed in Sections 8.5 and 8.5.1, ASC 810-10 requires certain entities to present reconciliations of changes in stockholders’ equity that detail changes attributable to the parent and noncontrolling interest holders. 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 (seeSection 9.4.1).

Sections 9.4 through 9.4.2 discuss additional considerations related to the presentation of temporary equity in the reconciliation of changes in stockholders’ equity, as well as the effect of changes in a parent’s ownership interest in subsidiaries (without an accompanying change in control) on redeemable noncontrolling interests.

5 Chapter 2 — Glossary of Selected Terms

The purpose of the glossary below is to briefly explain key terms that are further discussed in subsequent chapters of this Roadmap. The definition of any term defined in the Codification is reproduced from the appropriate ASC subtopic (typically ASC 810-10) or the ASC master glossary.

2.1 Accretion Method As discussed in Section 9.3.3.2 of this Roadmap, the accretion method represents one of the two acceptable methods under ASC 480-10-S99-3A(15) for subsequently measuring noncontrolling interests that are not currently redeemable but whose redemption is probable. Under this method, companies “[a]ccrete changes in the redemption [price of the instrument] over the period from the date of issuance (or from the date that it becomes probable that the instrument will become redeemable, if later) to the earliest redemption date of the instrument using an appropriate methodology.” For information about the other alternative, refer to the definition of the immediate method below.

2.2 ASC 480 Measurement Adjustment As described in Sections 9.3.3 through 9.3.3.2, an adjustment is recorded in accordance with ASC 480-10-S99-3A when a noncontrolling interest’s redemption price exceeds its ASC 810-10 carrying amount (i.e., its carrying amount after the attribution of income or loss to the noncontrolling interest). There are two methods of recording an ASC 480 measurement adjustment: the accretion method and the immediate method.

2.3 ASC 480 Offsetting Entry As described in Section 9.3, an ASC 480 offsetting entry accompanies any ASC 480 measurement adjustment recorded by a reporting entity. This entry has no impact on consolidated net income of the parent. However, it may affect the amount of net income attributable to noncontrolling interests on the face of the reporting entity’s consolidated income statement and may also affect (directly or indirectly) the amount of net income attributable to the parent’s common shareholders, which is the starting point for the parent’s EPS computation. The extent to which the ASC 480 offsetting entry affects net income attributable to noncontrolling interests or net income attributable to the parent’s common shareholders will depend on various policy elections made by the reporting entity for classifying this entry, as described in Sections 9.3.4 and 9.3.4.2.

2.4 ASC 810-10 Attribution Adjustment As discussed in Section 2.5 and Chapter 6, a portion of a partially owned subsidiary’s earnings is typically attributed to noncontrolling interests in accordance with ASC 810-10. The amount of the subsidiary’s earnings (loss) attributed to noncontrolling interests generates a corresponding increase (decrease) in the noncontrolling interests’ carrying amount. As described in Section 9.3.2, the ASC 810-10 attribution adjustment must be recorded before the reporting entity records an ASC 480 measurement adjustment.

6 Chapter 2 — Glossary of Selected Terms

2.4A ASC 810-10 Carrying Amount The ASC 810-10 carrying amount is the amount at which redeemable noncontrolling interests are carried on the reporting entity’s consolidated balance sheet after attribution of the subsidiary’s earnings under ASC 810-10 but exclusive of any ASC 480 measurement adjustments.

2.5 Attribution Although not specifically defined in ASC 810-10-20, “attribution” as used in ASC 810-10 (and therefore as used in this Roadmap) is the process of allocating (comprehensive) net income or loss between the parent and the noncontrolling interest holders on the basis of relevant terms, including ownership percentages and contractual provisions. Refer to Chapter 6 for further discussion of attribution.

2.6 Base Portion of the ASC 480 Measurement Adjustment As discussed in Section 9.3.4.2, the cumulative base portion of the ASC 480 measurement adjustment, which does not affect net income attributable to the parent, the parent’s reported EPS, or both on a cumulative basis, equals the portion, if any, of the redeemable noncontrolling interest’s current redemption price that is equal to or less than fair value but greater than the redeemable noncontrolling interest’s ASC 810-10 carrying amount. The current period’s base portion of the ASC 480 measurement adjustment, if any, represents the cumulative base portion of the ASC 480 measurement adjustment on the reporting date less the cumulative base portion of the ASC 480 measurement adjustment at the beginning of the reporting period.

2.7 Business Combination

ASC 810-10 — Glossary

Business Combination A transaction or other event in which an acquirer obtains control of one or more businesses. Transactions sometimes referred to as true mergers or mergers of equals also are business combinations. . . .

2.8 Controlling Financial Interest

ASC 810-10

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

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

7 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

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

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

2.9 Downstream Transaction A downstream transaction is a parent company’s sale of goods or services to one of its subsidiaries. To the extent that the transaction involves goods that are sold for more (less) than the parent’s cost basis in such goods, a profit (loss) will be recorded in the parent-only financial statements. Any profit (loss) is deferred until the goods are ultimately sold to a third party. The elimination of 100 percent of all profit (loss) is attributed to the parent. Refer toExample 6-5 for an illustration of the accounting for downstream transactions in circumstances involving noncontrolling interests.

2.10 Equity Interests

ASC 810-10 — Glossary

Equity Interests Used broadly to mean ownership interests of investor-owned entities; owner, member, or participant interests of mutual entities; and owner or member interests in the net assets of not-for-profit entities.

2.11 Excess Portion of the ASC 480 Measurement Adjustment As discussed in Section 9.3.4.2, the cumulative excess portion of the ASC 480 measurement adjustment equals the portion, if any, of the redeemable noncontrolling interest’s current redemption price that is greater than both (1) the redeemable noncontrolling interest’s fair value and (2) the redeemable noncontrolling interest’s ASC 810-10 carrying amount. The current period’s excess portion of the ASC 480 measurement adjustment, if any, represents the cumulative excess portion of the ASC 480 measurement adjustment on the reporting date less the cumulative excess portion of the ASC 480 measurement adjustment at the beginning of the reporting period.

2.12 Fair Value

ASC 810-10 — Glossary

Fair Value The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

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

8 Chapter 2 — Glossary of Selected Terms

2.13 Foreign Entity

ASC 810-10 — Glossary

Foreign Entity An operation (for example, subsidiary, division, branch, joint venture, and so forth) whose financial statements are both: a. Prepared in a currency other than the reporting currency of the reporting entity b. Combined or consolidated with or accounted for on the equity basis in the financial statements of the reporting entity.

2.14 Goodwill

ASC 350-20 — Glossary

Goodwill An asset representing the future economic benefits arising from other assets acquired in a business combination or an acquisition by a not-for-profit entity that are not individually identified and separately recognized. . . .

2.15 Hypothetical Liquidation at Book Value Hypothetical liquidation at book value (HLBV) represents a method for allocating the period’s (comprehensive) income or loss between controlling and noncontrolling interest at the end of each reporting period. Under the HLBV method, changes in an owner’s claim on the net assets of a reporting entity’s subsidiary that would result from the period-end hypothetical liquidation of the subsidiary at book value form the basis for allocating the subsidiary’s (comprehensive) income or loss between its controlling and noncontrolling interest holders. Refer to Section 6.1.1 for further discussion of the HLBV method.

2.16 Immediate Method As discussed in Section 9.3.3.2 of this Roadmap, the immediate method represents one of the two acceptable methods under ASC 480-10-S99-3A(15) for subsequently measuring noncontrolling interests that are not currently redeemable but whose redemption is probable. Under this method, companies “[r]ecognize changes in the redemption [price] immediately as they occur.” For information about the other alternative, refer to the definition of the accretion method above.

2.17 Noncontrolling Interest

ASC 810-10 — Glossary

Noncontrolling Interest The portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. A noncontrolling interest is sometimes called a minority interest.

2.18 Parent/Noncontrolling Interest Attribution Method The parent/noncontrolling interest attribution method is an attribution model specific to upstream transactions under which the income deferral arising from the eliminating entry (pending the ultimate sale of the goods to third parties) is attributed to the parent and noncontrolling interests. When applying

9 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020) this method, the reporting entity attributes the income deferral to the parent and noncontrolling interest holders in proportion to their ownership interests (in the absence of any identified contractual arrangements that specify otherwise). Refer to Example 6-6 for an illustration of accounting for upstream transactions in circumstances involving noncontrolling interests.

2.19 Parent-Only Attribution Method The parent-only attribution method is an attribution model specific to upstream transactions under which the income deferral arising from the eliminating entry (pending the ultimate sale of the goods to third parties) is attributed to the parent. When this method is used, 100 percent of the deferred income (loss) reduces (increases) net income attributable to the parent. Refer to Example 6-6 for an illustration of accounting for upstream transactions in circumstances involving noncontrolling interests.

2.20 Primary Beneficiary

ASC 810-10 — Glossary

Primary Beneficiary An entity that consolidates a variable interest entity (VIE). See paragraphs 810-10-25-38 through 25-38J for guidance on determining the primary beneficiary.

A reporting entity that consolidates (i.e., has a controlling financial interest in) a VIE is the “primary beneficiary” of the VIE. SeeChapter 7 of Deloitte’s A Roadmap to Consolidation — Identifying a Controlling Financial Interest for a detailed discussion of how a reporting entity should assess whether it has a controlling financial interest and is therefore the primary beneficiary of the VIE.

2.21 Reciprocal Interests In practice, the term “reciprocal interests” is used to refer to cross holdings between a parent and one of its subsidiaries when the parent holds equity interests in the subsidiary and the subsidiary holds equity interests in the parent.

2.22 Redeemable Noncontrolling Interest A redeemable noncontrolling interest comprises common or preferred shares held by a noncontrolling shareholder in a consolidated subsidiary that are subject to redemption rights (e.g., a put option). Refer to Section 9.2 for a discussion of the conditions that must be met for redeemable noncontrolling interests to be within the scope of ASC 480-10-S99-3A, which contains special presentation and measurement requirements related to such interests.

2.23 Reporting Entity Although not specifically defined in ASC 810-10-20, the term “reporting entity” as used in ASC 810-10 refers to the entity that performs the consolidation analysis (i.e., the party potentially consolidating a legal entity).

The focus of this Roadmap is on accounting for a noncontrolling interest resulting from the consolidation of a legal entity that is not wholly owned by a single party. Therefore, as used in this Roadmap, “reporting entity” refers to an entity that consolidates a subsidiary in which one or more noncontrolling interests are held. The reporting entity may also be referred to as the parent.

10 Chapter 2 — Glossary of Selected Terms

2.24 SEC Registrant

ASC Master Glossary

Securities and Exchange Commission Registrant An entity (or an entity that is controlled by an entity) that meets any of the following criteria: a. It has issued or will issue debt or equity securities that are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local or regional markets). b. It is required to file financial statements with the Securities and Exchange Commission (SEC). c. It provides financial statements for the purpose of issuing any class of securities in a public market.

2.25 Simultaneous Equations Method The simultaneous equations method (as the term is used in this Roadmap) is relevant in the context of reciprocal interests when a subsidiary owns equity of its parent. It is one of the two methods of allocating earnings of a consolidated subsidiary between third-party shareholders of the subsidiary’s parent and the subsidiary’s noncontrolling interest holders. This method is complex and is not as commonly applied as the treasury stock method (defined below). Refer toExample 6-8 for an illustration of this method’s application.

2.26 Subsidiary

ASC 810-10 — Glossary

Subsidiary An entity, including an unincorporated entity such as a partnership or trust, in which another entity, known as its parent, holds a controlling financial interest. (Also, a variable interest entity that is consolidated by a primary beneficiary.)

2.27 Treasury Stock Method The treasury stock method (as the term is used in this Roadmap) is relevant in the context of reciprocal interests when a subsidiary owns equity of its parent. It is one of the two methods of allocating earnings of a consolidated subsidiary between third-party shareholders of the subsidiary’s parent and the subsidiary’s noncontrolling interest holders. This method is commonly applied because of the complexity of the alternative approach, which is the simultaneous equations method (defined above). Refer to Example 6-8 for an illustration of this method’s application.

2.28 Upstream Transaction An upstream transaction is a subsidiary’s sale of goods or services to its parent. To the extent that the transaction involves goods that are sold for more (less) than the subsidiary’s cost basis in such goods, a profit (loss) will be recorded in the subsidiary’s financial statements. There are two acceptable methods for eliminating profit (loss) on such sales until the parent sells the goods to a third party: the parent-only attribution method and the parent/noncontrolling interest attribution method. Refer to Example 6-6 for an illustration of the accounting for upstream transactions in circumstances involving noncontrolling interests.

11 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

2.29 Variable Interest Entity

ASC 810-10 — Glossary

Variable Interest Entity A legal entity subject to consolidation according to the provisions of the Variable Interest Entities Subsections of Subtopic 810-10.

A VIE is a legal entity that is outside the scope of the traditional voting interest entity model. Specifically, a VIE does not qualify for any of the scope exceptions under ASC 810-10-15-12 or ASC 810-10-15-17 and meets one of the following three conditions: 1. The equity investment at risk is not sufficient for the legal entity to finance its activities without additional subordinated financial support. Said differently, the equity investors do not have sufficient “skin in the game.” 2. The holders of the equity investment at risk, as a group, lack the characteristics of a controlling financial interest. Equity investors do not have the attributes typically expected of an equity holder. 3. The voting rights of some holders of the equity investment at risk are disproportionate to their obligation to absorb losses or their right to receive returns, and substantially all of the activities are conducted on behalf of the holder of equity investment at risk with disproportionately few voting rights. This is an anti-abuse provision designed to prevent structuring opportunities to circumvent consolidation under the voting interest entity model.

For guidance on scope exceptions and guidance on determining whether a legal entity meets the above three conditions, see Chapters 3 and 5, respectively, of Deloitte’s A Roadmap to Consolidation — Identifying a Controlling Financial Interest.

2.30 Variable Interests

ASC 810-10 — Glossary

Variable Interests The investments or other interests that will absorb portions of a variable interest entity’s (VIE’s) expected losses or receive portions of the entity’s expected residual returns are called variable interests. Variable interests in a VIE are contractual, ownership, or other pecuniary interests in a VIE that change with changes in the fair value of the VIE’s net assets exclusive of variable interests. Equity interests with or without voting rights are considered variable interests if the legal entity is a VIE and to the extent that the investment is at risk as described in paragraph 810-10-15-14. Paragraph 810-10-25-55 explains how to determine whether a variable interest in specified assets of a legal entity is a variable interest in the entity. Paragraphs 810-10-55-16 through 55-41 describe various types of variable interests and explain in general how they may affect the determination of the primary beneficiary of a VIE.

A reporting entity cannot consolidate a legal entity if it does not hold a variable interest in that legal entity. Variable interests exist in many different forms and willabsorb portions of the variability that the VIE was designed to create. An interest that creates an entity’s variability is not a variable interest.

As a rule of thumb, most arrangements on the credit side of the balance sheet (e.g., equity and debt) are variable interests because they absorb variability as a result of the performance of the entity. However, identifying whether other arrangements, such as those involving derivatives, leases, or decision-maker and other service-provider contracts, are variable interests that can be more complex. See Chapter 4 of Deloitte’s A Roadmap to Consolidation — Identifying a Controlling Financial Interest for additional details.

12 Chapter 3 — Scope

For a reporting entity to determine whether it should apply the guidance on the measurement and recognition of noncontrolling interests, the entity must first evaluate the scope of that guidance. Aside from providing explicit scope limitations for certain transactions that lead to decreases in ownership without an accompanying change in control (see Section 7.1.1), ASC 810-10 does not explicitly address the scope of its guidance on noncontrolling interests. Rather, 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 definition is brief, it contains multiple components, analyzed below, that are imperative for assessing whether the guidance on noncontrolling interests is applicable. The decision tree below illustrates how to determine whether there are any noncontrolling interests.

Does the reporting No There are no noncontrolling entity have any interests. consolidated subsidiaries?

Yes

Do other parties hold any ownership No There are no noncontrolling interests in any of the interests. subsidiaries?

Yes

Are these ownership interests No There are no noncontrolling classified as equity? interests. (Section 3.2)

Yes

Recognize and measure the ownership interests as noncontrolling interests. (Chapters 5 through 9)

13 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

Note that a noncontrolling interest exists only from the perspective of the parent that prepares consolidated financial statements. Specifically, the reporting entity’s perspective will determine what noncontrolling interests exist. See Section 3.1.1 for more information.

3.1 Portion of a Subsidiary Not Attributable to the Parent

ASC 810-10

45-15 The ownership interests in the subsidiary that are held by owners other than the parent is a noncontrolling interest. The noncontrolling interest in a subsidiary is part of the equity of the consolidated group.

45-16 The noncontrolling interest shall be reported in the consolidated statement of financial position within equity (net assets), separately from the parent’s equity (or net assets). That amount shall be clearly identified and labeled, for example, as noncontrolling interest in subsidiaries (see paragraph 810-10-55-4I). An entity with noncontrolling interests in more than one subsidiary may present those interests in aggregate in the consolidated financial statements. A not-for-profit entity shall report the effects of any donor-imposed restrictions, if any, in accordance with paragraph 958-810-45-1.

A noncontrolling interest arises in the consolidated financial statements of a reporting entity (a parent) that consolidates a legal entity (a subsidiary) it does not wholly own. For the user(s) of the parent’s consolidated financial statements, this differentiates the portion of the net assets in such statements that ultimately accrues to the parent (and the parent’s shareholders) from the portion that accrues to third-party investors in the subsidiary.

The example below illustrates how a reporting entity would identify noncontrolling interests.

Example 3-1

Company B is a public reporting entity that manufactures corn chips and matches. Equity ownership of B is widely distributed since B’s common stock is traded on a public exchange. Company B has expanded as a result of the organic growth of Subsidiary J, a corn chip manufacturer that B wholly owns. In addition, B has acquired an 80 percent equity interest in Subsidiary X, a match manufacturer, and a 50 percent equity interest in Joint Venture Z, another match manufacturer.

Company B has a controlling financial interest in J and X and, in accordance with ASC 810-10, consolidates these subsidiaries. The equity interests issued by J and X are appropriately classified in the equity section of B’s consolidated financial statements. While B holds a 50 percent interest in Z, it does not have a controlling financial interest in Z and therefore does not consolidate Z. A summary of B’s equity interests is presented below.

Company B

100% 80% 50%

Subsidiary J Subsidiary X Joint Venture Z

To identify the noncontrolling interest when preparing its consolidated financial statements, B should first identify its consolidated subsidiaries. As stated above, J and X are consolidated by B.

14 Chapter 3 — Scope

Example 3-1 (continued)

Company B should then determine whether other parties hold ownership interests in its consolidated subsidiaries and, if so, whether such interests are classified as equity in the subsidiaries’ financial statements. While J is a wholly owned subsidiary, 20 percent of the equity interest in X is held by an unrelated third party and is classified as equity in X’s financial statements. As a result, B must present the 20 percent interest in X that is held by the third party as a noncontrolling interest in B’s consolidated financial statements since this presentation differentiates B’s 80 percent equity interest in X from the 20 percent equity interest in X that is held by the third party.

Note that even though an unrelated third party owns 50 percent of Z, because B does not consolidate Z, it will not present the interests of the third party as a noncontrolling interest.

3.1.1 Noncontrolling Interest in a Subsidiary Owned by the Parent or Affiliate of a Reporting Entity In a consolidated group that includes multiple levels of reporting entities (e.g., a consolidated group that comprises a parent,1 a first-tier subsidiary2 wholly or partially owned by the parent, and a second-tier subsidiary wholly or partially owned by the first-tier subsidiary), additional complexities may arise with regard to the recognition and measurement of the noncontrolling interests in the financial statements of each individual reporting entity (i.e., the parent and first-tier subsidiary in this instance).

Specifically, when preparing its consolidated financial statements, a reporting entity must first identify its controlling interests in all of its subsidiaries, recognizing that its controlling interests might be held directly or indirectly by one or more entities in the same consolidated group. All interests classified in equity that are not directly or indirectly considered part of the controlling interest will be separately recognized and measured as noncontrolling interests. The examples below illustrate the complexities that can arise in the identification of controlling and noncontrolling interests in multitiered legal entity structures.

Example 3-2

Assume the same facts as in Example 3-1, except that Subsidiary J holds a 60 percent controlling equity interest in Subsidiary N and consolidates N. A summary of B’s equity interests in J, X, Z, and N is presented below.

Company B

100% 80% 50%

Subsidiary J Subsidiary X Joint Venture Z

60%

Subsidiary N

If J is the reporting entity, it must present noncontrolling interests in its consolidated financial statements to differentiate between its 60 percent controlling equity interest in N and the 40 percent equity interest held by third parties.

If B is the reporting entity, there are no noncontrolling interests in J since B wholly owns the equity of that specific legal entity. However, B must classify the 40 percent equity interest in N held by third parties as a noncontrolling interest when preparing B’s consolidated financial statements because B’s wholly owned subsidiary J does not itself wholly own N.

1 May also be referred to as the ultimate parent. 2 May also be referred to as the immediate parent of the second-tier subsidiary.

15 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

Example 3-3

Assume the same facts as in Example 3-2, except that the remaining 40 percent equity interest in N that is not owned by J is directly owned by B. The diagram below illustrates the equity interests of B and J.

Company B3

100% 80% 50%

40% Subsidiary J4 Subsidiary X Joint Venture Z

60%

Subsidiary N5

As indicated in Section 3.1, ASC 810-10-45-15 defines noncontrolling interests as the “ownership interests in the subsidiary that are held by owners other than the parent.” We believe that since J is the first-tier parent of N, it is appropriate for J to present B’s 40 percent equity interest in N as a noncontrolling interest in J’s consolidated financial statements. For users of J’s consolidated financial statements, such presentation differentiates J’s direct 60 percent equity interest in N from the 40 percent equity interest in N that is held by B. That is, the presentation of B’s direct 40 percent equity interest in N as a noncontrolling interest in J’s consolidated financial statements signals to users of J’s financial statements (which could include stakeholders other than equity investors) that J’s claim on the net assets of N is limited to J’s 60 percent equity interest.6

In contrast, when preparing its own consolidated financial statements, B would not identify any noncontrolling interest in N since B holds 100 percent of the equity interests in N as a result of (1) B’s 40 percent direct equity interest in N and (2) B’s 60 percent indirect equity interest in N through B’s ownership of J. Such presentation signals to users of B’s consolidated financial statements that B is entitled to 100 percent of N’s net assets as a result of the aggregation of B’s direct and indirect equity interests in N.

Example 3-3A

Assume the same facts as in Example 3-2, except for the following: • Company B owns 90 percent of J, and the remaining 10 percent ownership interest in J is held by Unrelated Third-Party Investor 1. • Company B, J, and Unrelated Third-Party Investor 2 hold direct ownership interests in N of 60 percent, 25 percent, and 15 percent, respectively.

3 Second-tier subsidiary’s ultimate parent. 4 Second-tier subsidiary’s immediate parent. 5 Second-tier subsidiary. 6 Although an alternative presentation of a parent’s or affiliate’s noncontrolling interest may be used under specific facts and circumstances, the SEC staff may question that presentation. SEC registrants that are considering the use of an alternative presentation are encouraged to preclear it with the SEC staff before issuing their financial statements.

16 Chapter 3 — Scope

Example 3-3A (continued)

The diagram below illustrates the ownership interests of the various entities.

Unrelated Third- 50% Company B Party Investor 1

10% 90% 80%

Unrelated Third- Subsidiary J Subsidiary X Joint Venture Z Party Investor 2 25% 60% 15% Subsidiary N

As indicated in Section 3.1, ASC 810-10-45-15 defines noncontrolling interests as the “ownership interests in the subsidiary that are held by owners other than the parent.” When preparing its consolidated financial statements, B may identify a noncontrolling interest of 17.5 percent in N (10 percent noncontrolling interest in J multiplied by J’s 25 percent equity interest in N, plus the 15 percent noncontrolling interest held by Unrelated Third-Party Investor 2). Such presentation would signal to users of B’s consolidated financial statements that B is entitled to 82.5 percent of N’s net assets as a result of the aggregation of B’s direct and indirect equity interests in N.

Connecting the Dots

An ultimate parent may hold equity interests in a second-tier subsidiary (1) directly, (2) indirectly through a first-tier subsidiary that is the immediate parent of the second-tier subsidiary, or (3) indirectly through another first-tier subsidiary that is an affiliate (e.g., a sister company) of the immediate parent. We believe that in a manner consistent with Example 3-3, the equity owned by the ultimate parent or the affiliate of the immediate parent should be presented in the immediate parent’s consolidated financial statements as a separate component of the immediate parent’s stockholders’ equity that is classified and measured as a noncontrolling interest. The ultimate parent’s or affiliate’s share of the immediate parent’s consolidated net income (arising from the ultimate parent’s or affiliate’s direct interest in the second-tier subsidiary) is shown in net income attributable to the noncontrolling interest, which is a single line item presented below the immediate parent’s net income.

For instance, assume the same facts as in Example 3-3, except that the remaining 40 percent equity interest in N that is not owned by J is directly owned by X. In J’s consolidated financial statements, the 40 percent interest held by X would be presented in J’s stockholders’ equity as a noncontrolling interest, and X’s share of N’s net income would be shown in net income attributable to noncontrolling interests.

17 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

3.2 Only Equity Interests Can Be Noncontrolling Interests

ASC 810-10

45-16A Only either of the following can be a noncontrolling interest in the consolidated financial statements: a. A financial instrument (or an embedded feature) issued by a subsidiary that is classified as equity in the subsidiary’s financial statements b. A financial instrument (or an embedded feature) issued by a parent or a subsidiary for which the payoff to the counterparty is based, in whole or in part, on the stock of a consolidated subsidiary, that is considered indexed to the entity’s own stock in the consolidated financial statements of the parent and that is classified as equity.

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

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

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

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: • Freestanding put and call options on a subsidiary’s common stock. • Embedded put and call options on a subsidiary’s common stock. • Shares of preferred stock issued by a subsidiary. • Freestanding put and call options on a subsidiary’s preferred stock. • Embedded put and call options on a subsidiary’s preferred stock. • Financial instruments indexed to a subsidiary’s own equity. • Share-based payment awards. • Units issued by a subsidiary that is an LLC or LP.

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

18 Chapter 3 — Scope

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

Example 3-4

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

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

Unrelated Company A Entity B Entity G Third Parties

90% 10% Mandatorily Outstanding redeemable debt preferred stock obligations

Subsidiary Z

Classification in Z’s Stand-Alone Financial Classification in A’s Consolidated Interest Statements Financial Statements

90% common shares held by A Equity Equity — controlling interest

10% common shares held by Equity Equity — noncontrolling interest unrelated third parties

Mandatorily redeemable Liability under ASC 480 Liability7 preferred stock held by B

Debt obligations held by G Liability under ASC 470 Liability8

7 The mandatorily redeemable preferred stock held by B does not qualify for classification as a noncontrolling interest because it is classified as a liability under ASC 480 in Z’s stand-alone financial statements. 8 The debt obligations do not qualify for classification as a noncontrolling interest because they are classified as a liability under ASC 470 in Z’s stand-alone financial statements.

19 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

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

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

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

9 See Section 6.1.3 for a discussion about the attribution of carried interests. 10 At the December 2006 AICPA Conference on Current SEC and PCAOB Developments, Joseph Ucuzoglu, then a professional accounting fellow in the SEC’s Office of the Chief Accountant, delivered speecha that we believe would be appropriate for an entity to consider when determining whether other equity interests have the characteristics of a substantive class of equity. For a relevant excerpt of this speech, see Section 2.6 of Deloitte’s A Roadmap to Accounting for Share-Based Payment Awards.

20 Chapter 4 — Intercompany Matters With Noncontrolling Interest Implications

A parent-subsidiary relationship may give rise to complexities, particularly when a subsidiary is not wholly owned by its parent. This is because the purpose of consolidated financial statements is to present a parent and its subsidiaries as if they were a single economic entity, which is appropriate since the parent-subsidiary relationship itself arises out of the parent’s presumed ability to control the activities and transactions of its subsidiaries. However, when a subsidiary is not wholly owned by its parent, certain situations may challenge the parent’s ability to easily present its financial statements as if the parent and its subsidiary were a single entity.

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

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

ASC 810-10

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

Under ASC 810-10-45-12, a parent and its subsidiary are not required to share a fiscal-year-end date. However, the difference in fiscal-year-end dates should not be more than approximately three months. See Sections 11.1.3 through 11.1.3.2 of Deloitte’s A Roadmap to Consolidation — Identifying a Controlling Financial Interest for a comprehensive discussion of reporting and disclosure considerations that arise when a parent and its subsidiary have different fiscal-year-end dates, including (1) the effect of material intervening events, (2) reporting in the initial quarter after the parent’s acquisition of the subsidiary, and (3) classification of the subsidiary’s loan payable.

21 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

SEC Considerations On August 17, 2018, the SEC issued a final rule that amends some of the Commission’s disclosure requirements, including certain disclosure requirements in SEC Regulation S-X (see Section 8.5.1 for additional discussion). Among the amendments in the final rule is the removal of Rule 3A-02(b) from Regulation S-X. Before the final rule became effective on November 5, 2018, Rule 3A-02(b) used the phrase “93 days,” as opposed to the phrase “about three months” in ASC 810-10-45-12, and required disclosure of (1) the closing date for the subsidiary and (2) the factors supporting the parent’s use of different fiscal-year-end dates.

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

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

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

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

4.2 Transactions Between Parent and Subsidiary

ASC 810-10

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

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

4.2.1 Intercompany Transactions ASC 810-10-45-1 and ASC 810-10-45-18 require intercompany transactions to be eliminated in their entirety. In recognition that transactions between a parent and its subsidiaries are those of a single economic entity from a consolidation perspective, only transactions with parties outside the consolidated group are presented in consolidated financial statements. This is because transactions between entities within a consolidated group do not result in the culmination of the earnings process.

22 Chapter 4 — Intercompany Matters With Noncontrolling Interest Implications

The full elimination of intercompany transactions is not affected by the existence of noncontrolling interests. However, the manner in which the elimination of intercompany transactions is attributed to controlling and noncontrolling interests may be affected by: • The subsidiary’s status as a VIE (see Section 6.4 for more information). • The nature of transactions involving sales of goods between the parent and a subsidiary that has been consolidated under the voting interest entity model (refer to Sections 6.3 through 6.3.2 for a discussion of considerations related to downstream and upstream sales).

4.2.2 Intercompany Ownership Interests As noted in Section 4.2.1, intercompany transactions and balances must be eliminated in consolidated financial statements. The requirement to eliminate intercompany balances may be easy to apply in circumstances involving simple transactions (e.g., a direct loan between a parent and its subsidiary) but may become more difficult to apply in other situations. For example, a parent’s consolidation of a subsidiary is often based, in part, on its ownership of common stock of that subsidiary. Sometimes, the subsidiary may also hold equity interests in its parent (e.g., as part of an investment strategy that predates consolidation). On a consolidated basis, such cross holdings represent reciprocal interests.

4.2.2.1 Subsidiary’s Ownership Interest in Parent (Reciprocal Interests) — Subsidiary Reporting A subsidiary may hold an investment in its parent’s common stock. The Codification does not address the reporting by a subsidiary in its separate financial statements of an investment in its parent’s common stock.

The EITF addressed this issue at its May 21, 1998, meeting on EITF Issue 98-2. The Task Force tentatively concluded that a subsidiary should account for an investment in the common stock of its parent in a manner similar to how it accounts for treasury stock and should present that investment as a contra- equity account in its separate financial statements. However, at the July 23, 1998, EITF meeting on the same issue, the Task Force withdrew that tentative conclusion and noted that (1) an entity’s policy with respect to the accounting for investments in the stock of its parent should be disclosed and (2) an entity that changes an existing policy must demonstrate that the change in accounting is preferable in the circumstances.

Certain characteristics of transactions involving the parent’s common stock may make it difficult to separate the parent from the subsidiary. Specifically, because a parent’s consolidation of its subsidiary is predicated on control, there is a presumption that a parent directs its subsidiary’s transactions. This presumption, which implies that a parent that is seeking to acquire its own shares may be indifferent to doing so directly or through a subsidiary whose actions it controls, would typically lead to the conclusion that an investment in the parent’s stock should be presented in the equity section of a wholly owned subsidiary’s separate financial statements and should be accounted for in the same manner as treasury stock (i.e., initially measured at cost, with no change in basis for changes in fair value, regardless of whether the shares are publicly traded).

However, we believe that there are certain circumstances in which a subsidiary might have acquired shares of its parent’s stock separately and apart from any direction of the parent, thus overcoming the aforementioned presumption. In such circumstances, and under the assumption that the parent is substantive (e.g., the parent has substance beyond its ownership of the subsidiary), it may be appropriate for the subsidiary to present those acquired shares as investment securities in the subsidiary’s stand-alone financial statements.

23 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

Indicators that a subsidiary’s acquisition of shares of its parent’s stock was not a treasury stock transaction directed by the parent include the following: • The acquired shares will be used in the near future (less than one year) to settle an independent third-party obligation of the subsidiary incurred as a result of its own operations. • The acquisition of the shares was in the ordinary course of business and was funded by the subsidiary from its own operations. • The acquired shares do not constitute a significant percentage of the parent’s total shares outstanding. • The investment in the parent’s stock is immaterial to the total assets of the subsidiary. • The shares of the parent’s stock (1) are held by a newly acquired subsidiary and (2) were held by the acquiree before the business combination occurred.

These indicators are not intended to be all-inclusive, and no single indicator is determinative.

The determination of whether a subsidiary has overcome the presumption that its acquisition of shares of its parent’s stock is a parent-directed treasury transaction is a matter of judgment and should be based on an evaluation of the specific facts and circumstances.

Example 4-1

Company A, a public reporting entity, has a controlling interest in Subsidiary B, an insurance company that offers policies that allow policyholders to cause B to invest in equity securities on their behalf. While making these purchases on behalf of policyholders, B will retain legal title to these securities. Company A’s stock, which is widely held and actively traded, is a security that the policyholders may select. In these circumstances, the manner in which B acquired shares in A (i.e., in response to policyholder investment selections) would overcome the presumption of control of such acquisition by the parent company, and B would record the shares as investment securities in its stand-alone financial statements.

4.2.2.2 Subsidiary’s Ownership Interest in Parent (Reciprocal Interests) — Consolidated Reporting

ASC 810-10

45-5 Shares of the parent held by a subsidiary shall not be treated as outstanding shares in the consolidated statement of financial position and, therefore, shall be eliminated in the consolidated financial statements and reflected as treasury shares.

As noted in Section 4.2.2.1, a subsidiary in certain instances may account for holdings of its parent’s shares as an investment (as opposed to a treasury stock transaction). However, in a manner consistent with the single economic entity concept 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.

24 Chapter 4 — Intercompany Matters With Noncontrolling Interest Implications

Example 4-2

Company A is a public entity whose common shares are actively traded on the New York Stock Exchange. Company A has 10,000 shares of its common stock issued and outstanding. Company A has an 85 percent controlling interest in Subsidiary B.

Subsidiary B is a privately held company that has 5,000 shares of its common stock issued and outstanding. Unrelated third parties own the remaining 15 percent (750 shares) of B’s common shares.

Subsidiary B purchases 1,000 shares (10 percent) of A’s stock in an open-market transaction at $35 per share.

The diagram below illustrates the ownership interests of A and B after B’s purchase of A’s common shares. 85% 90% 15% 4,250 shares Unrelated 9,000 shares 750 shares Unrelated Company A Subsidiary B Third Parties Third Parties 10% 1,000 shares

To record B’s acquisition of A’s shares on A’s consolidated balance sheet, A records the following journal entry:

Treasury stock 35,000 Cash 35,000

Note that B’s shares of A’s stock indirectly entitle B’s shareholders (and, therefore, holders of the noncontrolling interest in B) to a portion of A’s earnings. Two methods of attributing the consolidated earnings of A to A’s shareholders and holders of the noncontrolling interest in B are described in Section 6.5.

4.3 Capitalization of Retained Earnings by a Subsidiary

ASC 810-10

45-9 Occasionally, subsidiaries capitalize retained earnings arising since acquisition, by means of a stock dividend or otherwise. This does not require a transfer to retained earnings on consolidation because the retained earnings in the consolidated financial statements shall reflect the accumulated earnings of the consolidated group not distributed to the owners of, or capitalized by, the parent.

A parent that consolidates a legal entity, regardless of whether the parent wholly owns the legal entity, will generally be able to move assets and liabilities between the parent and the subsidiary at its discretion. When a parent causes a subsidiary to declare and issue a stock dividend (or perform a similar transaction), the transaction does not affect equity attributable to the parent or noncontrolling interest unless the stock dividend is not distributed pro rata to each owner. Pro rata distributions have no effect on equity attributable to the parent or noncontrolling interest because consolidated financial statements already present the retained earnings of the subsidiary and parent together. If the stock dividend is not distributed pro rata to each owner (i.e., the controlling interest and noncontrolling interest), a change in ownership interest without a change in control results, and the guidance discussed in Sections 7.1 through 7.1.3 will apply.

25 Chapter 5 — Initial Recognition and Measurement

Is the reporting entity consolidating for the Yes See Sections 5.1 through 5.1.3. first time a subsidiary that it does not wholly own?

No

Has the reporting entity sold shares in a wholly owned Yes See Section 5.2. subsidiary over which it retained control after the sale?

Noncontrolling interests represent the portion of a less than wholly owned subsidiary’s equity that is attributable to an owner other than the parent. Consequently, the requirement to initially measure noncontrolling interests arises the first time that a third party acquires ownership of a portion of the equity in a subsidiary of the reporting entity. Noncontrolling interests are typically recognized for the first time upon the occurrence of either of the following: • The initial consolidation of a subsidiary not wholly owned by the parent (see Sections 5.1 through 5.1.3). • The parent’s sale of shares in a wholly owned subsidiary over which the parent retains control after the sale (see Section 5.2).

In each case, the requirement to initially recognize noncontrolling interests is linked to a preceding conclusion that the subsidiary is appropriately consolidated under ASC 810-10. Interests held in nonconsolidated legal entities do not represent noncontrolling interests and are instead governed by other U.S. GAAP. The path to reaching a consolidation conclusion is discussed in Deloitte’s A Roadmap to Consolidation — Identifying a Controlling Financial Interest.

The initial measurement of noncontrolling interests is principally a balance sheet matter. Subsequent changes in the percentage of a subsidiary’s equity interests held by noncontrolling interest holders typically result from transactions between owners (e.g., the sale of an ownership interest to [by] a noncontrolling interest holder by [to] the reporting entity).

26 Chapter 5 — Initial Recognition and Measurement

The remainder of this chapter is limited to addressing the amount at which noncontrolling interests are measured upon initial recognition. The accounting for subsequent changes in the percentage of a subsidiary’s equity interests held by noncontrolling interest holders (typically arising from incremental sales, acquisitions, issuances, or redemptions of subsidiary shares) is addressed in Chapter 7.

5.1 Initial Measurement of Noncontrolling Interests When a Reporting Entity First Consolidates a Partially Owned Subsidiary The conclusion that a reporting entity should consolidate a partially owned legal entity and simultaneously recognize and measure a noncontrolling interest for the first time can result from a business combination (see Section 5.1.1) or an asset acquisition (see Section 5.1.2).

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

A business combination can arise in any of the following ways: • Through a single transaction. • In stages. • When a reporting entity becomes the primary beneficiary of a VIE.

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

5.1.2 Noncontrolling Interests Recognized Concurrently With an Asset Acquisition If a reporting entity acquires a controlling financial interest in a legal entity that does not meet the definition of a business, it should account for the transaction as an asset acquisition. Asset acquisitions are accounted for under a cost accumulation model in which the cost of the acquisition, including certain transaction costs, is allocated to the assets acquired on the basis of relative fair values, with some exceptions. In an asset acquisition in which a reporting entity acquires less than 100 percent of a legal entity’s net assets, the reporting entity should recognize a noncontrolling interest at an amount equal to the noncontrolling interest’s proportionate share of the relative fair value of any assets and liabilities acquired.

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

ASC 810-10

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

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

27 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

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

5.2 Noncontrolling Interests Recognized When the Reporting Entity Sells Shares in a Wholly Owned Subsidiary and Retains Control While a noncontrolling interest may initially result from a business combination (see Section 5.1.1) or asset acquisition (see Section 5.1.2), it may also result from the dilution of a reporting entity’s equity interest in a wholly owned subsidiary over which the reporting entity retains control.

Example 5-1

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

As of June 30, 20X7:

Company A

100%

Subsidiary B

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

As of July 15, 20X9:

Company A Entity G

90% 10%

Subsidiary B

Upon the sale of the equity to G, A should initially recognize the noncontrolling interest (i.e., the 10 percent ownership interest that A no longer holds in B) in an amount equal to G’s new ownership interest of 10 percent multiplied by the net assets of B. See Section 7.1.2.5 for discussion of how to account for a parent’s selling of interests in a subsidiary directly to a noncontrolling interest holder.

28 Chapter 5 — Initial Recognition and Measurement

In addition, the size of a noncontrolling interest can increase as a result of a parent’s sale of equity in its subsidiary. Such a sale remains an equity transaction, with no gain or loss recognized in the financial statements of the parent or subsidiary, as long as the parent retains control over the subsidiary both before and after the transaction. See Sections 7.1 through 7.1.2.7 for a discussion of changes in a parent’s ownership interest without an accompanying change in control.

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

5.3 Other Considerations Related to the Initial Recognition of a Noncontrolling Interest 5.3.1 Accounting for the Issuance of a Noncontrolling Interest With Ownership Tax Benefits Some consolidated entities are pass-through entities (e.g., partnerships). Often, the equity interests issued by pass-through entities entitle their holder to receive tax credits and other tax benefits (e.g., accelerated pass-through tax losses) that arise from the pass-through entities’ activities. Since only ownership interests that are “classified as equity” should be classified as noncontrolling interests, the first step is to consider whether the instrument should be classified as a liability in accordance with ASC 480, which may be the case if the instrument is mandatorily redeemable.

In most instances, this form of equity interest will be appropriately classified in equity as a noncontrolling interest. Because of the complexity of attributing earnings to the noncontrolling interest, the parent will generally apply the HLBV method to subsequently attribute (comprehensive) income and loss to the noncontrolling interest (see Section 6.1.1).

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

5.3.1.1 Separating the Benefits of Tax Credits From the Substantive Noncontrolling Interest The low-income housing tax credit (LIHTC) is the federal government’s primary program for encouraging private capital investment in the development of affordable rental housing for low-income households by allowing investors in a qualifying affordable housing project to claim tax credits on their federal income tax returns. Affordable housing projects that qualify for the LIHTC are often established in pass- through limited liability entities (typically either limited partnerships or limited liability companies) to limit an investor’s financial risk exposure while still allowing the tax credits arising from the project to pass through to the investor.

In a LIHTC partnership structure, the general partner typically has an insignificant equity interest in the partnership but receives a fee for its decision-making responsibilities, including building or renovating the housing project, issuing partnership interests, and maintaining and operating the housing project. The limited partners typically hold essentially all of the equity interests, and the price paid by the limited partners to acquire their equity interests is primarily a function of the estimated tax benefits to be earned.

29 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

Often, a LIHTC partnership is considered a VIE, and despite not having made a significant equity investment in the partnership, the general partner will meet both of the characteristics of a controlling financial interest and thus will consolidate the LIHTC partnership.2

Upon consolidation of a legal entity that generates LIHTCs, the parent (i.e., the general partner) recognizes the limited partner’s capital contributions on its balance sheet in accordance with the noncontrolling interest guidance. In general, such amounts are not mandatorily redeemable, in which case the general partner would not classify the noncontrolling interest entirely as a liability in its financial statements. However, questions have arisen about whether it would be appropriate for the parent to bifurcate the limited partner’s capital contribution (i.e., the noncontrolling interest) into separate liability (e.g., deferred revenue) and equity components. Some have asserted that as general partner of the LIHTC partnership, the reporting entity has effectively “sold” the LIHTCs to the limited partner(s) in a manner akin to the transfer of goods or services in a revenue transaction. However, in at least one instance, the SEC staff has indicated that ownership interests in a LIHTC partnership that provide limited partners with substantive and contractually specified rights to receive allocations of the partnership’s economic benefits should be classified as noncontrolling interests in the parent’s consolidated financial statements. In conjunction with this observation, the SEC staff has objected to the bifurcation of limited partners’ noncontrolling interests into separate liability and equity components in the general partner’s consolidated balance sheet.

2 For additional information about the analysis of a LIHTC structure as a VIE and the subsequent determination of its primary beneficiary, see Section E.4 of Deloitte’s A Roadmap to Consolidation — Identifying a Controlling Financial Interest.

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

ASC 810-10

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

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

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

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

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

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

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

Although items of income or loss and comprehensive income or loss are commonly attributed on the basis of the relative ownership interests of the parent and noncontrolling interests, there are many instances, as explained in Sections 6.1.1 through 6.2, in which it would be inappropriate to attribute income or loss solely on the basis of relative ownership percentages.

31 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

6.1 Attributions Disproportionate to Ownership Interests

ASC 970-323

35-16 Venture agreements may designate different allocations among the investors for any of the following: a. Profits and losses b. Specified costs and expenses c. Distributions of cash from operations d. Distributions of cash proceeds from liquidation.

35-17 Such agreements may also provide for changes in the allocations at specified times or on the occurrence of specified events. Accounting by the investors for their equity in the venture’s earnings under such agreements requires careful consideration of substance over form and consideration of underlying values as discussed in paragraph 970-323-35-10. To determine the investor’s share of venture net income or loss, such agreements or arrangements shall be analyzed to determine how an increase or decrease in net assets of the venture (determined in conformity with GAAP) will affect cash payments to the investor over the life of the venture and on its liquidation. Specified profit and loss allocation ratios shall not be used to determine an investor’s equity in venture earnings if the allocation of cash distributions and liquidating distributions [is] determined on some other basis. For example, if a venture agreement between two investors purports to allocate all depreciation expense to one investor and to allocate all other revenues and expenses equally, but further provides that irrespective of such allocations, distributions to the investors will be made simultaneously and divided equally between them, there is no substance to the purported allocation of depreciation expense.

Contractual agreements often specify attributions of a subsidiary’s profits and losses, costs and expenses, distributions from operations, or distributions upon liquidation that are different from investors’ relative ownership percentages.

Although ASC 970-323 was written for equity method investments in the real estate industry, we believe that it is appropriate to refer to this literature for guidance on developing an appropriate method of allocating a subsidiary’s economic results between controlling and noncontrolling interests when a contractual agreement, rather than relative ownership percentages, governs the economic attribution of items of income or loss. ASC 970-323 implies that for the attribution of (comprehensive) income or loss to be substantive from a financial reporting perspective, it must hold true and best represent cash distributions over the life of the subsidiary. Reporting entities should focus on substance over form. Further, the reference to the allocation of depreciation expense in the last sentence of ASC 970-323- 35-17 is also instructive when guidance in other Codification topics (e.g., the guidance on reporting current-period items of profit or loss related to “partial goodwill” arising from business combinations that occurred before the effective date of ASC 805-10) may result in attribution of specific items of (comprehensive) income or loss on a basis other than the relative ownership percentages of the controlling and noncontrolling interests. For more information, see Sections 6.1.2 through 6.1.2.2.1.

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

Given the potential impact of contractual arrangements (or financial reporting requirements of other Codification topics) on each party’s absorption of items of income or loss, we believe that reporting entities should generally perform the following three steps to allocate a subsidiary’s income or loss between the parent and noncontrolling interest holders in a manner that reflects the substance of the arrangements:

Identify all contractual arrangements between the parent, noncontrolling interest holders, subsidiary, and third parties (or financial reporting requirements of other Codification topics) that have the potential to shift the allocation of income or loss between the parties on a basis STEP 1 other than their relative equity ownership percentages.

Allocate the economic results of the subsidiary between the controlling and noncontrolling interests to reflect the contractual arrangements (or financial reporting requirements of STEP 2 other Codification topics) identified in step 1.

Allocate residual items of income and loss (which may differ from net income because of the adjustments made in step 2) between the controlling and noncontrolling interest holders in STEP 3 accordance with each party’s pro rata equity ownership interest in the subsidiary.

Note that the sum of the allocations in steps 2 and 3 should equal the reported income or loss of the subsidiary.

In some instances, reporting entities may use the HLBV method to achieve the result intended by steps 1, 2, and 3. For further discussion of the HLBV method, see Section 6.1.1.

Connecting the Dots We believe that the guiding principle for attributing (comprehensive) income or loss to controlling and noncontrolling interests is to ascertain whether attributions that would otherwise be made in the current year are at significant risk of being unwound in subsequent periods on the basis of a different attribution method being used for subsequent cash distributions. In such instances, professional judgment must be used, and consideration should be given to the facts and circumstances at hand. Preparers should consider consulting with professional accounting advisers.

6.1.1 Application of the HLBV Method as a Means to Attribute (Comprehensive) Income and Loss Although the Codification does not prescribe a specific method for attributing (comprehensive) income or loss to controlling and noncontrolling interests, reporting entities will often use the HLBV method, which is a balance sheet approach to encapsulating the change in an owner’s claim on a subsidiary’s net assets as reported under U.S. GAAP. Under the HLBV method, changes in an owner’s claim on the net assets of a reporting entity’s subsidiary that would result from the period-end hypothetical liquidation of the subsidiary at book value form the basis for allocating the subsidiary’s (comprehensive) income or loss between its controlling and noncontrolling interest holders.

The HLBV method was developed with equity method investments in mind and arose in response to increasingly complex capital structures, the lack of prescribed implementation guidance on how an equity method investor should determine its share of earnings or losses generated by the equity method investee, and the ensuing diversity in practice. In an attempt to establish in the authoritative

33 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020) literature the appropriate accounting for equity method investments in entities with complex structures, the AICPA issued a proposed SOP, Accounting for Investors’ Interests in Unconsolidated Real Estate Investments, in November 2000. The proposed SOP, which was not ultimately finalized, was intended for investments of unconsolidated real estate. However, the proposal led to increased use of the HLBV method as an acceptable means to allocate (comprehensive) income between a subsidiary’s controlling and noncontrolling interests when each investor’s right to participate in the (comprehensive) income of the subsidiary is disproportionate to its ownership interest.

Notwithstanding the HLBV method’s origins (or its ultimate absence from the Codification), we believe that given the FASB’s focus on substance over form, the HLBV method will often be an acceptable method for allocating (comprehensive) income or loss between the controlling and noncontrolling interest holders. Other methods may also be acceptable depending on the facts and circumstances.

Under the HLBV method, a reporting entity attributes (comprehensive) income to each investor by using the following formula:

Period-end claim on Distributions Contributions Prior-period claim on net assets as reported received during made during net assets as reported under U.S. GAAP the period the period under U.S. GAAP

The examples below illustrate the determination of (comprehensive) income or loss attribution under the HLBV method.

Example 6-1

Subsidiary XYZ, a subsidiary of ParentCo, is capitalized as follows:

Noncontrolling ParentCo Interest Total Preferred stock $ — $ 100 $ 100 Common stock $ 240 $ 60 $ 300

Presented below is XYZ’s condensed balance sheet for the periods ending December 31 of 20X4, 20X5, and 20X6, respectively.

December 31, December 31, December 31, 20X4 20X5 20X6 Assets $ 900 $ 1,050 $ 1,850

Liabilities 500 500 500

Stockholders’ equity Preferred stock 100 100 100 Common stock 300 300 300 Retained earnings — 150 950

Total stockholders’ equity 400 550 1,350

Total liabilities and stockholders’ equity $ 900 $ 1,050 $ 1,850

In 20X5, XYZ had net income of $150. In 20X6, it had net income of $800.

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

Example 6-1 (continued)

Subsidiary XYZ is a limited-life entity that does not make regular distributions to its stockholders. The preferred stockholders do not participate in distributions or have any voting rights. In each of the years presented XYZ has not received any additional capital contributions from its investors. Subsidiary XYZ’s articles of incorporation indicate that upon XYZ’s liquidation, its net assets are distributed with the following priority: • Return of the preferred stockholder’s capital contribution. • Return of the common stockholders’ capital contributions. • 100 percent to preferred stockholders until they receive a cumulative $200 return. • Remainder to common stockholders on pro rata basis. Given XYZ’s complex capital structure, ParentCo has elected a policy of attributing XYZ’s net income to ParentCo and the noncontrolling interest holders in the consolidated financial statements by using the HLBV method. Thus, net income for 20X5 and 20X6 is attributed to the noncontrolling interest holders on the basis of the hypothetical liquidation of XYZ’s net assets as of December 31 of 20X4, 20X5, and 20X6, respectively, as shown in the tables below. Note that intercompany transactions and tax impacts have been ignored for simplicity. Period-End Claim on Net Assets as Reported Under U.S. GAAP

December 31, 20X4 December 31, 20X5 December 31, 20X6 Parent NCI Total Parent NCI Total Parent NCI Total Preferred stock capital contribution —$ 100 $ 100 —$ 100 $ 100 —$ 100 $ 100 Common stock capital contribution $ 240 60 300 $ 240 60 300 $ 240 60 300 Preferred stock preferred return — — — — 150 150 — 200 200 Common stock returns — — — — — — 600 150 750

Net assets $ 240 $ 160 $ 400 $ 240 $ 310 $ 550 $ 840 $ 510 $ 1,350

Net income attributable to noncontrolling interests is calculated as follows:

20X5 20X6 Noncontrolling interests’ period-end claim on net assets $ 310 $ 510 Plus: distributions received by noncontrolling interests — — Less: contributions made by noncontrolling interests — — Less: noncontrolling interests’ prior-period claim on net assets 160 310

Net income attributable to noncontrolling interests $ 150 $ 200

35 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

Example 6-1A

Subsidiary X, a partnership, was formed to develop and construct a renewable solar energy facility. Subsidiary X will own the facility and sell electricity at a fixed rate to a local utility under a long-term power purchase agreement. Subsidiary X is a flow-through entity for tax purposes; therefore, the tax attributes (such as investment tax credits and accelerated tax depreciation) related to the solar energy facility are allocated to X’s partners in accordance with X’s operating agreement between the partners.

The fair market value of the solar energy facility is $35 million. The tax equity investor and sponsor (collectively, the “investors”) will contribute $15.5 million and $19.5 million, respectively, to X. Assume that (1) X is a consolidated subsidiary of the sponsor and (2) the tax equity investor’s interest in X is classified as a noncontrolling interest in the sponsor’s consolidated financial statements.1

Subsidiary X has a complex capital structure that requires an allocation of income, gain, loss, tax deductions, and tax credits before and after a “flip date” to the investors that is not consistent with the investors’ relative ownership percentages. The flip date is defined as the point in time when the tax equity investor receives a target after-tax internal rate of return (IRR) on its investment (in this example, tax equity’s target after-tax IRR is 8 percent). The tax equity investor achieves its IRR through cash distributions as well as the allocation of investment tax credits and other tax benefits.

Under the partnership agreement, income, gain, loss, tax deductions, and tax credits for each tax year will be allocated between the tax equity investor and the sponsor as follows:2

Pre-Flip Post-Flip Tax equity investor 99 percent 5 percent Sponsor 1 percent 95 percent

Cash distributions for each tax year, which are not designed to approximate GAAP earnings in each period, will be allocated between the tax equity investor and the sponsor as follows:

Pre-Flip Post-Flip Tax equity investor 25 percent 5 percent Sponsor 75 percent 95 percent

Finally, tax gain (or loss) recognized upon the partnership’s liquidation will be distributed according to the following waterfall: • First, to partners with negative IRC Section 704(b)3 capital accounts, the amount needed to bring their capital accounts to zero. • Second, to the tax equity investor, an amount necessary to achieve its target IRR. • Finally, to the partners in accordance with their post-flip tax sharing ratios (95 percent to the sponsor and 5 percent to the tax equity investor), any remaining gain (or loss).

1 Note, however, that in some arrangements, the sponsor may account for its interest in a partnership as an equity method investment rather than as a consolidated subsidiary depending on the facts and circumstances and the outcome of applying the guidance in ASC 810 and ASC 323. Nonetheless, the sponsor may calculate and record its equity method income and loss in a manner consistent with the HLBV method by using the mechanics described herein. See Example 5-3 in Section 5.1.2.1 of Deloitte’s A Roadmap to Accounting for Equity Method Investments and Joint Ventures. 2 The partnership operating agreement may call for certain allocations, such as 99:1, in the per-flip period. However, the tax equity investor and the sponsor must still perform a detailed analysis of the partners’ Internal Revenue Code (IRC) Section 704(b) capital accounts and tax basis since the operation of the partnership tax rules/limitations can often result in allocations that do not necessarily match the stated allocation percentages in the operating agreement. 3 IRC Section 704(b) discusses special allocations of partnership items.

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

Example 6-1A (continued)

Note that in this example, we assumed a generic set of liquidation provisions in using the HLBV method to attribute X’s income or loss to the controlling and noncontrolling interests in the sponsor’s consolidated financial statements. In practice, there is tremendous diversity in liquidation provisions from deal to deal. Given X’s complex capital structure, the sponsor has elected a policy of attributing X’s earnings or losses to the controlling and noncontrolling interests by using the HLBV method. For the sponsor to apply the HLBV method in accordance with this policy, an analysis of the investors’ IRC Section 704(b) capital accounts (as adjusted per the liquidation provisions of the partnership agreement) must be performed. The mechanics of the HLBV method in this type of flip structure involve a complex combination of U.S. GAAP and tax concepts, typically consisting of the following steps (as of each reporting period end):4 1. Determine the subsidiary’s period-end U.S. GAAP capital account balance. 2. Determine the subsidiary’s and each investor’s starting IRC Section 704(b) capital account balance. 3. Calculate the subsidiary’s IRC Section 704(b) book gain (loss) on hypothetical liquidation (U.S. GAAP capital account from step 1 less starting IRC Section 704(b) capital account balance from step 2). 4. Allocate the subsidiary’s IRC Section 704(b) book gain (loss) from step 3 in the following order (specifics as determined by the liquidation provisions in the relevant agreement): a. Allocate the gain to restore negative IRC Section 704(b) capital account balances to zero. b. Allocate the gain to the tax equity investor until the target IRR is achieved. c. Allocate the remaining gain (loss) in accordance with the appropriate residual sharing percentages. 5. Add/subtract the gain (loss) allocated in step 4 to each investor’s IRC Section 704(b) capital account balance determined in step 2. 6. Determine the change in each investor’s claim on the subsidiary’s book value during the period (adjusted for contributions and distributions). The attribution of X’s earnings or losses to the controlling and noncontrolling interests under the HLBV method is calculated for the sponsor (the controlling interest holder) and the tax equity investor (the noncontrolling interest holder) in years 1 through 3, as shown below. Note that intra-entity profit and loss eliminations and tax impacts have been ignored for simplicity.

Step 1: Determine X’s period-end U.S. GAAP capital account balance:

Year 1 Year 2 Year 3 Subsidiary X’s pretax U.S. GAAP net income $ 1,000,000 $ 1,250,000 $ 1,500,000

U.S. GAAP equity rollforward: Beginning balance $ — $ 34,000,000 $ 33,000,000 (+) Net income (loss) 1,000,000 1,250,000 1,500,000 (–) Cash distributions (2,000,000) (2,250,000) (2,500,000) (+) Capital contributions 35,000,000 — —

Ending balance $ 34,000,000 $ 33,000,000 $ 32,000,000

4 This example represents a simple HLBV waterfall calculation. Depending on the complexity of the liquidation waterfall in the operating agreement, as well as the discrete items in the entity’s financial statements, additional steps may be necessary.

37 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

Example 6-1A (continued)

Step 2: Determine X’s and each investor’s starting IRC Section 704(b) capital account balance:

Year 1 Year 2 Year 3 Taxable income (loss)* $ (4,500,000) $ (8,000,000) $ (2,500,000)

Subsidiary X: Beginning balance $ — $ 28,500,000 $ 18,250,000 (+) Taxable income (loss) (4,500,000) (8,000,000) (2,500,000) (–) Cash distributions (2,000,000) (2,250,000) (2,500,000) (+) Capital contributions 35,000,000 — —

Ending balance $ 28,500,000 $ 18,250,000 $ 13,250,000

Tax equity investor (noncontrolling interest holder):

Beginning balance $ — $ 10,545,000 $ 2,062,500

(+) Taxable income (loss) × 99% (4,455,000) (7,920,000) (2,475,000)

(–) Cash distributions (500,000) (562,500) (625,000)

(+) Capital contributions 15,500,000 0 0

Ending balance $ 10,545,000 $ 2,062,500 $ (1,037,500)

Sponsor (controlling interest holder):

Beginning balance $ — $17,955,000 $16,187,500

(+) Taxable income (loss) × 1% (45,000) (80,000) (25,000)

(–) Cash distributions (1,500,000) (1,687,500) (1,875,000)

(+) Capital contributions 19,500,000 — —

Ending balance $ 17,955,000 $ 16,187,500 $ 14,287,500

* Although X realized U.S. GAAP income in all years shown, a subsidiary in this type of arrangement typically will pass significant tax losses through to its investors because of accelerated depreciation on the renewable solar energy assets.

Step 3: Calculate X’s IRC Section 704(b) book gain (loss) on hypothetical liquidation (U.S. GAAP capital account from step 1 less starting IRC Section 704(b) capital account balance from step 2):

Year 1 Year 2 Year 3 U.S. GAAP capital account $ 34,000,000 $ 33,000,000 $ 32,000,000 IRC Section 704(b) capital account 28,500,000 18,250,000 13,250,000

IRC Section 704(b) book gain (loss) on liquidation $ 5,500,000 $ 14,750,000 $ 18,750,000

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

Example 6-1A (continued)

Step 4: Allocate X’s IRC Section 704(b) book gain (loss) on liquidation:

Year 1 Year 2 Year 3 Subsidiary X: Gain (loss) available to allocate $ 5,500,000 $ 14,750,000 $ 18,750,000 Unadjusted IRC Section 704(b) capital accounts: Tax equity investor 10,545,000 2,062,500 (1,037,500) Sponsor 17,955,000 16,187,500 14,287,500

Step 4(a): Allocate gain to restore negative capital accounts:

Year 1 Year 2 Year 3 Restore negative capital accounts $ — $ — $ 1,037,500 Remaining gain (loss) to allocate after step 4(a) 5,500,000 14,750,000 17,712,500

Step 4(b): Allocate gain to tax equity investor until target after-tax return (IRR) is achieved:**

Year 1 Year 2 Year 3 Amount necessary to achieve target IRR $ 3,500,000 $ 2,000,000 $ 1,500,000 Remaining gain to allocate after step 4(b) 2,000,000 12,750,000 16,212,500

** For simplicity, we have included a fixed amount for the amount necessary to achieve the target IRR in the calculation above; however, in practice, determining this amount can be complex.

Step 4(c): Allocate remaining gain (loss) in accordance with appropriate residual sharing percentages:

Year 1 Year 2 Year 3 Tax equity investor (5 percent) $ 100,000 $ 637,500 $ 810,625 Sponsor (95 percent) 1,900,000 12,112,500 15,401,875 Remaining gain to allocate after step 4(c) — — —

Step 5: Add/subtract the gain (loss) allocated in step 4 to each investor’s starting IRC Section 704(b) capital account balance determined in step 2:

Year 1 Year 2 Year 3 Tax equity investor: Unadjusted IRC Section 704(b) capital account $ 10,545,000 $ 2,062,500 $ (1,037,500) Step 4(a) adjustment — — 1,037,500 Step 4(b) adjustment 3,500,000 2,000,000 1,500,000 Step 4(c) adjustment 100,000 637,500 810,625

Adjusted IRC Section 704(b) capital account $ 14,145,000 $ 4,700,000 $ 2,310,625

39 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

Example 6-1A (continued)

Year 1 Year 2 Year 3 Sponsor:

Unadjusted IRC Section 704(b) capital account $ 17,955,000 $ 16,187,500 $ 14,287,500 Step 4(a) adjustment — — — Step 4(b) adjustment — — — Step 4(c) adjustment 1,900,000 12,112,500 15,401,875

Adjusted IRC Section 704(b) capital account $ 19,855,000 $ 28,300,000 $ 29,689,375

Step 6: Determine the change in each investor’s claim on X’s book value during the period (adjusted for contributions and distributions):

Year 1 Year 2 Year 3 Tax equity investor: Claim on X’s book value (beginning) $ — $ 14,145,000 $ 4,700,000 Claim on X’s book value (ending) 14,145,000 4,700,000 2,310,625 Change in claim on book value 14,145,000 (9,445,000) (2,389,375) (+) Cash distributions 500,000 562,500 625,000 (–) Capital contributions (15,500,000) — —

HLBV income (loss) attributable to noncontrolling interest $ (855,000) $ (8,882,500) $ (1,764,375)

Sponsor:

Claim on X’s book value (beginning) $ — $ 19,855,000 $ 28,300,000 Claim on X’s book value (ending) 19,855,000 28,300,000 29,689,375 Change in claim on book value 19,855,000 8,445,000 1,389,375 (+) Cash distributions 1,500,000 1,687,500 1,875,000 (–) Capital contributions (19,500,000) — —

HLBV income (loss) attributable to controlling interest $ 1,855,000 $ 10,132,500 $ 3,264,375

In consolidation, the sponsor would have recognized in full X’s pretax income of $1,000,000, $1,250,000, and $1,500,000 in years 1, 2, and 3, respectively, as part of the sponsor’s consolidated net income before attributions to the noncontrolling interest. However, although X has net income in each of the three periods, because of the application of the HLBV method as shown above, the net income will be attributed on the basis of the change in each party’s claim on book value, which results in a net loss attributed to the noncontrolling interest. For example, in year 1, X had pretax net income of $1,000,000, which would be reflected in the sponsor’s pretax income upon consolidation. Application of the HLBV method results in the attribution of a net loss of $855,000 to the noncontrolling interest. To properly reflect the income attributable to the sponsor, the sponsor would record a credit entry to attribute earnings of $855,000 along with a debit to noncontrolling interest to reduce the noncontrolling interest balance. A similar process should be performed for years 2 and 3.

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

Example 6-1A (continued)

Below are the journal entries the sponsor would use to attribute X’s earnings or losses to the noncontrolling interest account in the sponsor’s consolidated financial statements.

Year 1 Noncontrolling interest 855,000 Net loss attributable to controlling interest 855,000 Year 2 Noncontrolling interest 8,882,500 Net loss attributable to controlling interest 8,882,500 Year 3 Noncontrolling interest 1,764,375 Net loss attributable to controlling interest 1,764,375

Connecting the Dots

We believe that while it will often be acceptable for an entity to use the HLBV method to allocate (comprehensive) income between controlling and noncontrolling interests, there may be instances in which it would be inappropriate for an entity to use the HLBV method. Because the HLBV method inherently focuses on how the net assets of an entity will be distributed in liquidation, a detailed understanding of the entity’s intention with respect to cash distributions is important. We believe that when provisions governing the attribution of liquidating distributions differ significantly from those governing the attribution of ordinary distributions, it would be inappropriate to rely on the HLBV method to allocate the earnings of a going-concern entity between the controlling and noncontrolling interests if the subsidiary is expected to make significant ordinary distributions throughout its life. In such instances, stricter adherence to the three-step process described in Section 6.1 would be appropriate.

[Example 6-2 has been deleted.]

6.1.2 Financial Reporting Requirements of Other Codification Topics That Affect Attributions As noted in Section 6.1, the financial reporting requirements of other Codification topics may make it necessary to attribute items of (comprehensive) income or loss (e.g., depreciation expense) on a basis other than the relative ownership percentages of the controlling and noncontrolling interests.

6.1.2.1 Business Combinations Consummated Before the Effective Date of FASB Statement 141(R) (Codified in ASC 805-10) If an acquirer obtained less than a 100 percent ownership interest in an entity it acquired in a business combination consummated before the effective date of FASB Statement 141(R) (codified in ASC 805-10), the acquirer would have measured only a proportionate amount of the acquired entity’s identifiable net assets at fair value. For example, if the acquirer obtained a 75 percent interest, it would have measured the acquired entity’s identifiable net assets as of the date of the business combination at 75 percent fair value and 25 percent carryover value. Because of this mixed measurement model, attributions of the acquired entity’s post-combination amortization expense, depreciation expense, and impairment charges to the parent and noncontrolling interest holders are typically not based on each party’s proportionate ownership interests. Rather, in the absence of any other contractual arrangements

41 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020) identified in step 1 of the three-step process described inSection 6.1, one rational method of allocating these items between the controlling and noncontrolling interests in step 2 is to attribute the profit (loss) impact arising from the 75 percent step-up in basis to the acquirer, and the profit (loss) impact of items arising from the 25 percent carryover basis to the noncontrolling interest. Although not codified, paragraph B38 of the Background Information and Basis for Conclusions of FASB Statement 160 provides the following example:

[I]f an entity acquired 80 percent of the ownership interests in a subsidiary in a single transaction before [FASB] Statement 141(R) [codified in ASC 805-10] was effective, it likely would have recorded the intangible assets recognized in the acquisition of that subsidiary at 80 percent of their fair value (80 percent fair value for the ownership interest acquired plus 20 percent carryover value for the interests not acquired in that transaction, which for unrecognized intangible assets would be $0). If the Board would have required net income to be attributed based on relative ownership interests in [FASB Statement 160 and ASC 810-10], the noncontrolling interest would have been attributed 20 percent of the amortization expense for those intangible assets even though no amount of the asset was recognized for the noncontrolling interest. Before [FASB Statement 160] was issued, the parent generally would have been attributed all of the amortization expense of those intangible assets.

Similarly, when a reporting unit contains only goodwill or recognized intangible assets associated with a business combination consummated before the effective date of the guidance codified in ASC 805-10, a reporting entity’s attribution of 100 percent of all impairment losses on such items to the parent would generally be considered rational. This approach is consistent with ASC 350-20-35-57A, which states that “[a]ny impairment loss measured in the . . . goodwill impairment test shall be attributed to the parent and the noncontrolling interest on a rational basis.”

6.1.2.2 Business Combinations Consummated After the Effective Date of ASC 805-10 If an acquirer obtained less than a 100 percent ownership interest in an entity it acquired in a business combination consummated after the effective date of FASB Statement 141(R), the acquirer would measure the acquired entity’s identifiable net assets at their full fair value (i.e., net assets related to both the parent and the noncontrolling interest are governed by a single measurement principle). We believe that under the three-step process described in Section 6.1, the acquired entity’s post-combination amortization expense, as well as its depreciation expense and (non-goodwill-related) impairment charges, would typically be attributed to the parent and noncontrolling interest in a manner similar to how all other items of profit or loss are treated and attributed. That is, in the absence of any other contractual arrangements identified in step 1, no special consideration would be given to attributing these items in steps 2 and 3.

6.1.2.2.1 Goodwill Impairment Losses With respect to goodwill impairment losses, we believe that rational methods for attributing such losses to the parent and noncontrolling interests may include the following approaches: • Attribute impairment losses on the basis of the relative fair values, as of the acquisition date, of the parent and noncontrolling interest. Because of a possible control premium, the amount of impairment loss attributed to the parent, as a percentage of its ownership interest, may be higher than the amount attributed to the noncontrolling interest. • Attribute impairment losses on the basis of the relative fair values, as of the impairment testing date, of the parent and noncontrolling interest. Because of a possible control premium, the amount of impairment loss attributed to the parent, as a percentage of its ownership interest, may be higher than the amount attributed to the noncontrolling interest. • Attribute impairment losses in a manner consistent with how net income and losses of the reporting unit (subsidiary) are attributed to the parent and noncontrolling interest (e.g., on the basis of the relative ownership interests of the parent and noncontrolling shareholders).

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

6.1.3 Attribution of Income in Carried Interest Arrangements Private equity, hedge, real estate, and similar fund managers (collectively, “asset managers”) usually receive a performance fee as compensation for managing the capital of one or more investors in a fund. A common arrangement is referred to as “2 and 20” (i.e., 2 percent and 20 percent). The 2 percent refers to an annual management fee computed on the basis of assets under management. The 20 percent refers to a term in a performance fee arrangement under which the asset manager participates in a specified percentage (e.g., 20 percent) of returns after other investors have achieved a specified return on their investments, which is referred to as a hurdle rate (e.g., 8 percent).

Under a prevalent form of such an arrangement, the performance fee (“carried interest”) is allocated to a capital account embedded in a legal-form equity interest (e.g., a general partner or managing member interest). As noted above, the asset manager’s capital account receives allocations of the returns of a fund when those returns exceed predetermined thresholds. In addition to the carried interest, the asset manager or affiliates often acquire a small ownership interest in the fund through general partner or limited partner interests on the same basis as other investors.

Asset managers that do not have a controlling financial interest in the legal entity that issues the carried interest (i.e., asset managers that do not consolidate the legal entity) may account for the carried interest as revenue. In those instances, depending on the asset manager’s revenue recognition policies, the carried interest recognized as revenue in each period may or may not conform to the contractual profit and loss provisions of the fund.5

Sometimes, an asset manager with the right to the carried interest consolidates the legal entity that issues the carried interest. In those instances, the asset manager should not recognize revenue from the legal entity related to the carried interest because such revenue is eliminated in consolidation. However, the carried interest will affect the attribution of profit and loss to the legal entity’s parent and noncontrolling interest holders because the allocation of carried interest is essentially a disproportionate allocation of profit to the asset manager. A question therefore arises about whether the impact of the carried interest on the attribution of the profits and losses should conform to (1) the contractual profit and loss provisions of the consolidated fund or (2) the asset manager’s revenue recognition approach6 related to carried interest earned from legal entities that the asset manager does not consolidate.

We believe that when an asset manager attributes income or loss related to carried interest arrangements to controlling and noncontrolling interests, it would be inappropriate for the asset manager to allocate carried interest from a consolidated legal entity in a manner consistent with the asset manager’s revenue recognition approach for recognizing carried interest from a nonconsolidated legal entity unless that approach is consistent with the contractual allocation of profits and losses stipulated in the agreement establishing the rights and obligations of the holders of controlling and noncontrolling interests in the legal entity that issues the carried interest (the “legal entity agreement”). Rather, an asset manager should apply ASC 810-10-45-20 when accounting for the allocation of carried interest arrangements of its consolidated subsidiaries.

5 Before adopting ASC 606, entities generally apply the guidance in EITF Topic D-96 (codified in ASC 605-20-S99-1) when recognizing revenue related to carried interest received from a nonconsolidated fund. That guidance provides for two alternative methods of recognizing revenue related to performance-based fee arrangements. ASC 605-20-S99-1 is superseded upon an entity’s adoption of ASC 606. Some asset managers may elect to apply the equity method of accounting to amounts earned under carried interest arrangements. For additional discussion of revenue recognition considerations related to carried interest arrangements upon an entity’s adoption of ASC 606, see Section 3.2.6 of Deloitte’s A Roadmap to Applying the New Revenue Recognition Standard. 6 As used in this section, the term “revenue recognition approach” also contemplates situations in which an asset manager applies the equity method of accounting to record carried interest and records an equity method pickup each reporting period.

43 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

Since ASC 810-10-45-20 requires a reporting entity to attribute net income or loss to the parent and the noncontrolling interest holders, a parent entity (asset manager) should not, for example, defer allocation of the carried interest associated with a consolidated subsidiary until the end of the contractual measurement period specified in the arrangement even though doing so may be (or may have been) the asset manager’s method of recognizing revenue for carried interest arrangements with nonconsolidated legal entities under ASC 605-20-S99-1. Similarly, an asset manager should not defer allocation of a carried interest until the uncertainty associated with the ultimate outcome of the carried interest is resolved even though doing so may be the asset manager’s outcome of recognizing revenue for carried interest arrangements with nonconsolidated legal entities under ASC 606.

Instead, an asset manager should allocate carried interest between the controlling and noncontrolling interests (i.e., reflect the allocation of carried interest from the noncontrolling interest holders to the asset manager parent) in a manner consistent with the contractual profit and loss allocation (1) stipulated in the legal entity agreement and (2) reflected in the capital accounts of the consolidated legal entity. Applying this approach could lead to reflecting the carried interest in the period in which the income is earned and recorded by the consolidated investment fund rather than waiting to perform such allocation until a later reporting period. This approach is consistent with the three-step approach described in Section 6.1 for attributing a subsidiary’s income or loss in a manner disproportionate to ownership interests in the subsidiary.

Example 6-2A

Company X is the general partner of Fund Y, which is a closed-end three-year limited partnership that is designed to invest in equity and debt securities issued by emerging growth companies. Company X owns a 0.1 percent general partner interest in Y and a 25 percent limited partner interest in Y. Company Y’s remaining limited partner interests are owned by unrelated parties LP 1, LP 2, and LP 3. Fund Y is a VIE consolidated by X, and the remaining limited partner interests are classified as noncontrolling interests in X’s consolidated financial statements.

In exchange for performing its services, X is entitled to receive a base management fee equal to 2 percent of the net assets under management and an incentive-based capital allocation fee (i.e., carried interest) equal to 20 percent of the net income of Y in excess of $5 million per year, evaluated on a cumulative basis over the three-year life of Y. The incentive-based capital allocation fee is to be distributed to X at the end of the three- year life of Y on the basis of Y’s cumulative performance as compared with the cumulative three-year threshold of $15 million (i.e., $5 million per year over three years).

The parties’ respective interests are illustrated in the diagram below.

Company X

25% limited partner Base management fee equal to 2% of net assets under interest management 0.1% general partner Incentive fee (i.e., carried interest) equal to 20% interest of Y’s net income in excess of $5 million per year

Fund Y 25% limited partner interest LP 1

25% limited partner interest LP 2

25% limited partner interest LP 3

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

Example 6-2A (continued)

Fund Y’s annual and cumulative net income (loss), inclusive of the 2 percent base management fee owed to X, is as follows:

Year 1 Year 2 Year 3

Fund Y’s annual net income (loss) $ 15 million $ (5 million) $ 10 million

Fund Y’s cumulative net income (loss) $ 15 million $ 10 million $ 20 million

The allocation of Y’s annual net income to X and the noncontrolling interest holders for each year is as follows (for simplicity, the amounts below do not reflect X’s 0.1 percent general partner interest):

Year 1 Year 2 Year 3

Carried interest owed to X $ 2 million* $ (2 million)** $ 1 million***

Fund Y’s remaining net income (loss) after allocation of carried interest owed to X $ 13 million $ (3 million) $ 9 million

Fund Y’s remaining net income (loss) attributable to X (25%) $ 3.25 million $ (0.75 million) $ 2.25 million

Fund Y’s remaining net income (loss) attributable to noncontrolling interest holders (75%) $ 9.75 million $ (2.25 million) $ 6.75 million

* $2 million = ($15 million cumulative net income – $5 million cumulative threshold) × 20% carried interest. ** $(2 million) = [($10 million cumulative net income – $10 million cumulative threshold) × 20% carried interest] – $2 million carried forward carried interest balance of X. *** $1 million = [($20 million cumulative net income – $15 million cumulative threshold) × 20% carried interest] – $0 carried forward carried interest balance of X.

6.2 Attribution of Losses in Excess of Carrying Amount

ASC 810-10

45-21 Losses attributable to the parent and the noncontrolling interest in a subsidiary may exceed their interests in the subsidiary’s equity. The excess, and any further losses attributable to the parent and the noncontrolling interest, shall be attributed to those interests. That is, the noncontrolling interest shall continue to be attributed its share of losses even if that attribution results in a deficit noncontrolling interest balance.

Before FASB Statement 160 was issued, reporting entities were required under ARB 51 to attribute losses solely to the parent once losses allocated to the noncontrolling interest equaled the noncontrolling interest’s equity. The reasoning behind this requirement was that the noncontrolling interest could not be compelled to provide additional capital to the subsidiary, whereas the parent would most likely have an implicit obligation to keep the subsidiary a going concern. After adoption of FASB Statement 160, noncontrolling interests are considered equity of the consolidated group that participate fully in the risks and rewards of the subsidiary. Accordingly, with limited exception (described after Example 6-3), losses generally continue to be attributed to noncontrolling interests regardless of whether a deficit would be recorded. As explained in paragraphs B41 through B43 of the Background Information and Basis for Conclusions of FASB Statement 160, the FASB based its decision to change historical practice on the observation that although a controlling interest holder may be more likely to

45 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020) provide additional support to a subsidiary than a noncontrolling interest holder, it cannot be forced to do so. Given that observation, the Board was uncomfortable with requiring the allocation of losses between the controlling and noncontrolling interest holders to be predicated on probability.

Example 6-3

On January 1, 20X9, Company A acquired 80 percent of Subsidiary C in a transaction accounted for as a business combination under ASC 805-10. As of the acquisition date, the equity attributable to A (the parent) is $80 million, and the equity attributable to Entity B (the noncontrolling interest holder) is $20 million. Subsidiary C has only one class of common stock outstanding, and no shareholders have an explicit obligation to support the ongoing operations of C. During 20X9, C incurred net losses of $150 million.

The net earnings (losses) of C are attributed to A and B on the basis of their relative ownership interests (i.e., 80 percent/20 percent).

Of C’s 20X9 net losses, $30 million (20 percent of $150 million) would be attributed to the noncontrolling interest. As a result, the carrying amount of the noncontrolling interest will reflect a deficit balance of $10 million at the end of 20X9 ($20 million beginning balance reduced by $30 million of current-period losses). The remaining $120 million (80 percent of $150 million) of C’s 20X9 net losses would be attributed to A’s controlling interest, resulting in a 20X9 ending deficit balance for A’s controlling interest of $40 million.

The equity interests at acquisition and after the attribution of 20X9 losses are illustrated below.

Equity interests as of January 1, 20X9:

Company A Entity B

$80 million $20 million

Subsidiary C

Equity interests as of December 31, 20X9 (after the attribution of losses):

Company A Entity B

$(40 million) $(10 million)

Subsidiary C

Note that ASC 810-10-45-21 states that losses allocated to noncontrolling interests may exceed their interest in subsidiary equity. Thus, while ASC 810-10 acknowledges that a reporting entity may report noncontrolling interest balances as a negative amount in some situations, there are also circumstances in which it may not be appropriate to do so. Given that the FASB’s decision to permit the attribution of losses in excess of the noncontrolling interests’ equity balance was based on the Board’s belief that holders of controlling and noncontrolling interests in a typical entity could not be compelled to provide additional support to the entity, it remains appropriate to attribute losses in a manner disproportionate to ownership interests when a contractual arrangement does compel one investor to absorb more losses than another.

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

For example, contractual arrangements outside of the shareholder agreement itself (e.g., debt guarantees), coupled with the perennial need to consider substance over form, may require attribution of losses on a basis different from proportionate ownership interests or loss-sharing percentages specified in the shareholder agreement. Similarly, in subsequent periods of net income, disproportionate attribution of income may be required until losses that have been disproportionately attributed are fully recovered.

We believe that a subsidiary’s losses in excess of each party’s investment in the subsidiary’s equity should be allocated between the parent and noncontrolling interest holders in accordance with the three-step allocation process described in Section 6.1. That is, as illustrated in the example below, a reporting entity with a controlling financial interest in a legal entity should consider the impact of its other interests in the legal entity (e.g., debt and other forms of financial support) when determining the attribution of current- period losses, especially when the amount of losses attributed in prior periods exceeds the ownership interests of the parent and noncontrolling interest holders. A reporting entity should also use this three- step process when attributing income generated in subsequent reporting periods.

Example 6-4

In 20X1, Company A and Entity B enter into a partnership agreement under which Subsidiary C is formed. Company A has invested $75 million for a 75 percent equity controlling interest in C, and B has invested $25 million for the remaining 25 percent noncontrolling interest in C. Company A consolidates C accordingly.

In addition to the equity interests that C has issued, C has obtained the following forms of financing: • $110 million of senior bank financing, fully guaranteed for repayment by A. • $50 million of unsecured debt financing provided by third parties. This debt is not guaranteed by A or B. The equity interests and financing at formation are illustrated in the diagram below.

Senior Bank Unsecured Debt — Company A Entity B Financing — Not Guaranteed Guaranteed by A

$75 million $25 million $110 million $50 million

Subsidiary C

In its first five years of operations, C had no intercompany transactions with A or B. During this time, C generated annual net income (loss) as follows: • Year 1 — $(90 million). • Year 2 — $(100 million). • Year 3 — $(40 million). • Year 4 — $50 million. • Year 5 — $200 million. Subsidiary C’s partnership agreement requires income to be distributed on a pro rata basis in accordance with the respective ownership percentages of A and B, but it is silent on attribution of losses and does not impose on A or B any explicit obligation to support the continued operations of C. Although the partnership agreement does not explicitly specify a formula for attributing losses, A would apply the three-step process described in Section 6.1 as follows: • Step 1 — Identify all contractual arrangements between the parent, noncontrolling interest holders, subsidiary, and third parties (or financial reporting requirements of other Codification topics) that have the potential to shift income or loss between the parties on a basis other than their relative equity ownership percentages.

47 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2019)

Example 6-4 (continued)

Company A’s full (and sole) guarantee of C’s $110 million of senior bank financing serves to shift to A the responsibility for absorbing C’s cumulative losses that are in excess of $100 million (C’s initial equity balance) but less than or equal to $210 million. • Step 2 — Allocate the economic results of the subsidiary between the controlling and noncontrolling interests to reflect the contractual arrangements (or financial reporting requirements of other Codification topics) identified in step 1. In consolidating C’s financial results, A would (1) allocate the first $100 million of C’s cumulative losses (years 1 and 2) proportionately between its controlling interest and B’s noncontrolling interest and (2) attribute the next $110 million of C’s cumulative losses (years 2 and 3) solely to A’s controlling financial interest. • Step 3 — Allocate residual items of income and loss (which may differ from net income because of the adjustments made in step 2) between the controlling and noncontrolling interest holders in accordance with each party’s pro rata equity ownership interest in the subsidiary. In consolidating C’s financial results, A would allocate the remaining $20 million of C’s cumulative losses (year 3) proportionately between A’s controlling interest and B’s noncontrolling interest. Attributions of the first $130 million of net income in years 4 and 5 would essentially unwind (in reverse chronological order) the attributions made in steps 3 and 2 above, with the remaining $120 million of net income occurring in year 5 being allocated proportionately between A’s equity interests in C and those of B.

The following table details the attribution of C’s income (loss) and its associated impact on A’s equity interests in C and those of B for each reporting period (dollar amounts in millions):7

A Allocation B Allocation Total

Opening equity balance $ 75.0 $ 25.0 $ 100.0

Year 1 income/(loss) attribution $ (67.5) 75.0% $ (22.5) 25.0% $ (90.0)*

Year 2 opening equity balance $ 7.5 $ 2.5 $ 10.0

Year 2 income/(loss) attribution $ (97.5) 97.5% $ (2.5) 2.5% $ (100.0)**

Year 3 opening equity balance $ (90.0) — $ (90.0)

Year 3 income/(loss) attribution $ (35.0) 87.5% $ (5.0) 12.5% $ (40.0)***

Year 4 opening equity balance $ (125.0) $ (5.0) $ (130.0)

Year 4 income/(loss) attribution $ 45.0 90.0% $ 5.0 10.0% $ 50.0†

Year 5 opening equity balance $ (80.0) — $ (80.0)

Year 5 income/(loss) attribution $ 170.0 85.0% $ 30.0 15.0% $ 200.0‡

Year 5 closing equity balance $ 90.0 $ 30.0 $ 120.0

* In accordance with step 2, the $90 million loss in year 1 is allocated proportionately between equity holders. ** In accordance with step 2, the first $10 million of the loss in year 2 is allocated proportionately between the equity holders until their equity balance is zero. The next $90 million of the loss in year 2 is allocated to A because of the guarantee. *** In accordance with step 2, the first $20 million of the loss in year 3 is allocated to A because of the guarantee. In accordance with step 3, the remaining $20 million of the loss in year 3 is allocated proportionately between the equity holders. † To unwind the previous years’ allocation of cumulative net losses, the first $20 million of income in year 4 is allocated proportionately between the equity holders and the remaining $30 million of income in year 4 is allocated to A. ‡ To unwind the previous years’ allocation of cumulative net losses, the first $80 million of income in year 5 is allocated to A and the remaining profit is allocated proportionately.

7 For purposes of this example, tax implications have been ignored.

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

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

ASC 810-10

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

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

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

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

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

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

8 ASC 980-810-45-1 provides an exception under which profit would not be eliminated when specific requirements are met for certain types of intercompany sales.

49 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

Acceptable Eliminating Entry Attribution Methods for Intercompany Transactions With Partially Owned Subsidiaries

Intercompany Profit (Loss) Attribution of Transaction Elimination Eliminating Entry Notes

Downstream Fully eliminate Eliminating entry is Transaction all intercompany attributed to parent; 100 Sale from parent profit (loss) percent of eliminated to partially owned income (loss) reduces subsidiary (increases) net income attributed to controlling interests.

Upstream Fully eliminate Policy Election Transaction all intercompany Must be consistently Sale from partially profit (loss) applied to all owned subsidiary to consolidated, partially parent owned subsidiaries.

Parent-Only Attribution Consolidated net income will be Method the same as that under the parent/ Eliminating entry is noncontrolling interest attribution attributed to parent; 100 method. percent of eliminated In periods in which net income on income (loss) reduces an upstream transaction is being (increases) net income deferred (eliminated), net income attributable to controlling attributable to controlling interests interests. will be lower than that under the parent/noncontrolling interest attribution method.

In the same period, the noncontrolling interest holder’s ownership interest in net assets of subsidiary will be higher than that under the parent/noncontrolling interest attribution method.

Parent/Noncontrolling Consolidated net income will be the Interest Attribution same as that under the parent-only Method attribution method. Eliminating entry is In periods in which net income on attributed to parent an upstream transaction is being and noncontrolling deferred (eliminated), net income interests; eliminated attributable to controlling interest will income (loss) attributed to be higher than that under the parent- noncontrolling interests only attribution method. increases (decreases) net income attributable to In the same period, the controlling interests. noncontrolling interest holder’s ownership interest in net assets of the subsidiary will be lower than that under the parent-only attribution method.

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

6.3.1 Eliminating Profit (Loss) on Downstream Transactions In a downstream transaction, a parent sells goods to a subsidiary. To the extent that the goods are sold for more (less) than the parent’s cost basis in such goods, a profit (loss) will be recorded in the parent- only financial statements. In a manner consistent with the single economic entity concept articulated in ASC 810-10-45-1 and ASC 810-10-45-18, this type of transaction must be eliminated in the consolidated financial statements. Any associated profit or loss is deferred until the goods are ultimately sold to a third party. We believe that 100 percent of the eliminating entry arising from downstream transactions should be attributed to the parent’s controlling interest regardless of the parent’s ultimate ownership interest in the subsidiary because in the absence of any contractual arrangements identified in step 1 of the three-step process described in Section 6.1, holders of noncontrolling interests in the subsidiary will never participate economically in the profit or loss associated with downstream intercompany transactions. Consequently, attributing any portion of the deferral (or recognition in subsequent periods) of such profit or loss to the noncontrolling interest holders would ignore the substance of the transactions. However, because all of the subsidiary’s shareholders (which include the parent) will participate in any subsequent profit (loss) arising from thesubsidiary’s ultimate sale of the goods for amounts greater (less) than the purchase price the subsidiary paid to the parent, incremental profits or losses arising from the subsidiary’s ultimate sale of the goods to third parties are attributed to controlling and noncontrolling interests in accordance with steps 2 and 3.

Some reporting entities apply the equity method of accounting in their parent-only financial statements when accounting for the parent’s investment in a subsidiary. Others use the cost method, under which the parent-only financial statements include subsidiary income only to the extent that a dividend has been declared by the parent’s subsidiary. While the financial results reported in the consolidated financial statements will be the same under either approach, the consolidation process will vary depending on the approach selected for preparing the parent-only financial statements. Example 6-5 below illustrates the impact of a downstream transaction in the consolidated financial statements of a parent that has elected to apply the equity method to its investment in its subsidiary when preparing its parent-only financial statements.

Example 6-5

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

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

Company A Entity C

Inventory with $125,000 25% $60,000 cost basis cash

75%

Subsidiary B

51 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

Example 6-5 (continued)

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

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

Illustrated below are the following: • The financial statements of A and B, respectively, for the year ended December 31, 20X2, together with the consolidating entries that would be recorded as of December 31, 20X2. • The financial statements of A and B, respectively, for the year ended December 31, 20X3, together with the consolidating entries that would be recorded as of December 31, 20X3. • The eliminating entries related to the downstream sale of inventory for the years ended December 31 of 20X2 and 20X3, respectively. Note that in A’s stand-alone financial statements, A accounts for its investment in B under the equity method.

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

52

— — — — — — 14,250 39,250 79,000 385,000 200,000 105,000 144,750 185,000 159,000 500,000 135,000 195,000 700,000 644,750 125,000 1,704,000 1,069,000 1,704,000 1,509,000 Consolidated $ $ — 65,000 39,250 Downstream Sale 375,000 117,750 125,000 Credit $ 60,000 . ) Consolidating Entries 42,750 14,250 500,000 222,000 Debit $ 125,000

— — — — For details about consolidating entries 60,000 65,000 79,000 42,750 385,000 185,000 125,000 266,750 565,000 135,000 375,000 195,000 866,750 200,000 105,000 117,750 2,261,750 1,069,000 1,200,000 2,261,750 2,066,750 Note: through in this table, see of Inventory — Eliminating Entries (Year Ended December 31, 20X2 Combined $ $

— — — — — — — — 60,000 27,000 60,000 95,000 30,000 57,000 160,000 752,000 392,000 300,000 500,000 157,000 100,000 752,000 657,000 12/31/X2 $ $ 7 8 9,10 7 11 27,000 57,000 Credit 155,000 100,000 $ 160,000 7 9 7,8 10 Subsidiary B 30,000 187,000 125,000 Debit $ 100,000

— — — — — — — — — — — — — — 60,000 95,000 1/1/X2 360,000 695,000 275,000 500,000 100,000 695,000 600,000 Subsidiary B’s downstream purchase of inventory. Items of profit or loss closed out to retained earnings. Subsidiary B’s sale of inventory to third parties. Miscellaneous income items cash settled in current period. Miscellaneous expense items cash settled in current period. 7 8 9 10 11 $ $

— — 65,000 52,000 42,750 75,000 60,000 75,000 225,000 125,000 125,000 677,000 265,000 375,000 100,000 100,000 209,750 117,750 700,000 709,750 1,509,750 12/31/X2 1,509,750 1,409,750 $ $ 1 2 3 5 4 1,2 6 52,000 42,750 75,000 Credit 125,000 160,000 209,750 $ 225,000 1 2 4 1,2,3 5 Company A 60,000 75,000 42,750 402,000 Debit $ 100,000

— — — — — — — — — — — — 1/1/X2 75,000 75,000 350,000 425,000 375,000 100,000 700,000 500,000 period. period. 1,300,000 1,300,000 Company A’s sale of inventory to third parties. Company A’s downstream sale of inventory to B. Miscellaneous income items cash settled in current Miscellaneous expense items cash settled in current Company A’s portion of B’s earnings. Items of profit or loss closed out to retained earnings. 1 2 3 4 5 6 $ 1,200,000 $

Example 6-5 (continued) Sales — third party Less: cost of goods sold — third party Gross margin — third party Sales — intercompany Less: cost of goods sold — intercompany Gross margin — intercompany Other operating income Equity earnings of B Less: operating expenses Net income Less: net income attributable to noncontrolling interest Net income attributable to A Cash Inventory Other assets Investment in B — capital Investment in B — earnings of Total assets Liabilities Common stock Retained earnings Noncontrolling interests — capital Noncontrolling interests — retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

53 — — — — — — . 7,000 ) 45,000 46,250 89,000 412,000 250,000 199,000 162,000 206,000 250,000 363,000 167,000 700,000 843,750 125,000 1,882,000 1,269,000 1,882,000 1,715,000 Consolidated $ $ 37,000 46,250 Credit $ 65,000 375,000 138,750 125,000 Downstream Sale of Inventory — 7,000 Consolidating Entries Debit $ 21,000 500,000 222,000

— — — — — — — For details about consolidating entries through 45,000 97,000 89,000 21,000 412,000 315,000 162,000 138,750 162,000 250,000 363,000 375,000 167,000 2,395,750 1,269,000 1,200,000 1,028,750 2,395,750 2,228,750 Combined $ $ Note: in this table, see Eliminating Entries (Year Ended December 31, 20X3

— — — — — — — — — — 7,000 22,000 13,000 28,000 38,000 90,000 28,000 162,000 775,000 577,000 160,000 500,000 185,000 140,000 775,000 685,000

12/31/X3 $ $ 7 8 9,10 7 10 11 13,000 12,000 22,000 28,000 Credit 140,000 $ 162,000 7 9 7.8.10 10 Subsidiary B 7,000 5,000 Debit 197,000 $ 140,000

— — — — — — — — — — — — — — — — — 60,000 95,000 392,000 752,000 300,000 500,000 157,000 752,000 657,000 1/1/X3 period. period. earnings. Sale of assets or settlement liabilities for cash. Items of profit or loss items closed out to retained Subsidiary B’s sale of inventory to third parties. Miscellaneous income items cash settled in current Miscellaneous expense items cash settled in current 7 8 9 10 11 $ $

— — — — — — — 38,000 75,000 76,000 21,000 90,000 77,000 250,000 134,000 692,000 325,000 375,000 700,000 843,750 175,000 134,000 138,750 1,620,750 12/31/X3 1,620,750 1,543,750 $ $ 1 2 5 3,4 1 6 76,000 21,000 Credit 311,000 175,000 134,000 $ 250,000

1 3 1,2 4 5 4 Company A — — 38,000 21,000 23,000 Debit 326,000 250,000 $ 175,000

— — — — — — — — — — — — — — — 75,000 265,000 375,000 100,000 700,000 709,750 period. period. 1/1/X3 1,509,750 $ 677,000 Company A’s sale of inventory to third parties. Miscellaneous income items cash settled in current Miscellaneous expense items cash settled in current Acquisition of assets or settlement liabilities for cash. Company A’s portion of B’s earnings. Items of profit or loss closed out to retained earnings. 1,509,750 1,409,750 1 2 3 4 5 6 117,750 $

— third party cost of goods sold Example 6-5 (continued) Sales — third party Less: Gross margin — third party Sales — intercompany Less: cost of goods sold — intercompany Gross margin — intercompany Other operating income Equity earnings of B Less: operating expenses Net income Less: net income attributable to noncontrolling interest Net income attributable to A Cash Inventory Other assets Investment in B — capital Investment in B — earnings of Total assets Liabilities Common stock Retained earnings Noncontrolling interests — capital Noncontrolling interests — retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

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

Example 6-5 (continued)

Downstream Sale of Inventory — Eliminating Entries (Year Ended December 31, 20X2)

Consolidating Entry — eliminate downstream inventory sale: Sales — intercompany 125,000* Cost of goods sold — intercompany 60,000* Inventory 65,000

Consolidating Entry — eliminate beginning balance of B’s capital accounts/establish noncontrolling interests: Common stock (B) 500,000 Investment in B — capital 375,000 Noncontrolling interests — capital 125,000 Retained earnings (B) 100,000** Investment in B — earnings of B 75,000*** Noncontrolling interests — retained earnings 25,000†

Consolidating Entry — eliminate A’s equity method accrual of B’s current-year income ($57,000 × 75%): Equity earnings of B 42,750* Investment in B — earnings of B 42,750***

Consolidating Entry — attribute B’s current-year (third-party) earnings to noncontrolling interests ($57,000 × 25%): Net income attributable to noncontrolling interests 14,250* Noncontrolling interests — retained earnings 14,250†

Consolidating Entry — profit or loss effect of consolidating entries closed out to retained earnings: Elimination of sales — intercompany (Entry ) 125,000 Elimination of cost of goods sold — intercompany 60,000 (Entry ) Elimination of A’s equity method accrual of B’s 42,750 current-year income (Entry ) Attribution of B’s current-year earnings to 14,250 noncontrolling interests (Entry ) Net debit closed out to retained earnings 122,000** * One of the amounts repeated in the final eliminating entry to form the basis for $122,000, the net debit closed out to retained earnings. ** The sum of the two consolidating credits to retained earnings is $222,000. *** The sum of the two consolidating credits to investment in B — earnings of B is $117,750. † The sum of the two consolidating credits to noncontrolling interests — retained earnings is $39,250.

55 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

Example 6-5 (continued)

Downstream Sale of Inventory — Eliminating Entries (Year Ended December 31, 20X3)

Consolidating Entry — eliminate 20X2 profit on downstream sale from opening(combined) retained earnings/recognize previously deferred profit on prior-year downstream inventory sale: Retained earnings* 65,000** Cost of goods sold — third party 65,000***

Consolidating Entry — eliminate beginning balance of B’s capital accounts/establish noncontrolling interests: Common stock (B) 500,000 Investment in B — capital 375,000 Noncontrolling interests — capital 125,000 Retained earnings (B) 157,000** Investment in B — earnings of B 117,750† Noncontrolling interests — retained earnings 39,250‡

Consolidating Entry — eliminate A’s equity method accrual of B’s current-year income ($28,000 × 75%): Equity earnings of B 21,000*** Investment in B — earnings of B 21,000†

Consolidating Entry — attribute B’s current-year (third-party) earnings to noncontrolling interests ($28,000 × 25%): Net income attributable to noncontrolling interests 7,000*** Noncontrolling interests — retained earnings 7,000‡

Consolidating Entry — profit or loss effect of consolidating entries closed out to retained earnings: Recognition of previously deferred profit (Entry ) 65,000 Elimination of A’s equity method accrual of B’s current-year 21,000 income (Entry ) Attribution of B’s current-year earnings to 7,000 noncontrolling interests (Entry ) Net credit closed out to retained earnings 37,000 * The opening (combined) retained earnings balance includes profit recorded by A on the downstream sale in 20X2. The debit to retained earnings is required to eliminate 20X2 profit on the downstream sale from the opening (consolidated) retained earnings before eliminating entries arising from 20X3 activity are posted. ** The sum of the two consolidating debits to retained earnings is $222,000. *** One of the amounts repeated in the final eliminating entry to form the basis for $37,000, the net credit closed out to retained earnings. † The sum of the two consolidating credits to investments in B is $138,750. ‡ The sum of the two consolidating credits to noncontrolling interests — retained earnings is $46,250.

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

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

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

In light of the competing requirements summarized above, we believe that there are two acceptable methods for attributing to controlling and noncontrolling interests the effect of the eliminating entry on an upstream transaction: • Parent-only attribution method — Under the parent-only attribution method, 100 percent of the deferred income (loss) reduces (increases) net income attributable to the controlling interests on the basis that from the perspective of a single economic entity, until the parent resells the inventory to third parties (as addressed below), no transaction has occurred with an external party, and therefore no profit should flow through to the consolidated entity’s bottom line (i.e., net income attributable to the parent). While this method results in reported net income attributable to controlling interests that is lower (higher) than that under the parent/ noncontrolling interest attribution method in the period of profit (loss) deferral, amounts reported as noncontrolling interests in the consolidated balance sheet in the same period will equal the noncontrolling interest holders’ portion of the subsidiary’s net assets after the upstream sale. That is, under the parent-only attribution method, the carrying amount of the noncontrolling interests in the consolidated balance sheet reflects the noncontrolling interest holders’ increased (decreased) claim on the subsidiary’s net assets in recognition that the subsidiary’s net assets increase as a result of the upstream transaction even though 100 percent of the income (loss) on the upstream sale is deferred in consolidation. • Parent/noncontrolling interest attribution method — Under the parent/noncontrolling interest attribution method, a reporting entity attributes the eliminating entry necessary to defer income (loss) on the upstream transaction to the parent and noncontrolling interest holders in proportion to their ownership interests (in the absence of any identified contractual arrangements in step 1 of the three-step process described in Section 6.1). Thus, although reported net income (loss) will be the same under this method as under the parent-only attribution method, reported net income (loss) attributable to the parent’s controlling interest will be higher (lower) in the period of profit (loss) deferral. Essentially, this method immediately affects the consolidated reporting entity’s bottom line (through the attribution of income as opposed to net income) for the portion of income (loss) on the upstream transaction that is related to noncontrolling interests in the subsidiary. Consequently, under the parent/ noncontrolling interest attribution method, until the parent resells the inventory to third parties, the consolidated financial statements reflect higher net income (loss) attributable to the controlling interests but a lower (higher) overall balance sheet amount associated with the noncontrolling interest holders’ claim on the subsidiary’s net assets.

Connecting the Dots The existence of two attribution methods allows for reporting entities with similar transactions to temporarily report different amounts for net income attributable to the controlling and noncontrolling interest holders, as well as different carrying amounts for noncontrolling

57 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2019)

interests, on their individual consolidated balance sheets. However, as illustrated in the example below, these differences reverse themselves upon the parent’s ultimate sale of the inventory to third parties. Notwithstanding the temporary nature of the differences that result from a reporting entity’s decision to choose one attribution method over the other, we believe that the selection of an attribution method is an accounting policy election that a reporting entity should apply consistently when consolidating all of its partially owned subsidiaries.

Example 6-6 below illustrates the impact of applying both attribution methods to an upstream transaction in the consolidated financial statements of a parent that has elected to apply the equity method to its investment in its subsidiary when preparing its parent-only financial statements.

Example 6-6

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

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

Company A Entity C

$125,000 cash Subsidiary B inventory with 25% $60,000 cost 75% basis

Subsidiary B

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

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

Illustrated below are the following: • The financial statements of A and B, respectively, for the years ended December 31, 20X2, and December 31, 20X3, together with the consolidating entries that would be recorded as of the end of each of those years under the parent-only attribution method. • The eliminating entries related to the upstream sale of inventory for the years ended December 31 of 20X2 and 20X3, respectively, under each alternative attribution method. • The financial statements of A and B, respectively, for the years ended December 31, 20X2, and December 31, 20X3, together with the consolidating entries that would be recorded as of the end of each of those years under the parent/noncontrolling interest attribution method. Note that in A’s stand-alone financial statements, A accounts for its investment in B under the equity method.

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

58

— — — — — — 30,500 55,500 79,000 385,000 385,000 628,500 125,000 185,000 200,000 159,000 105,000 500,000 135,000 195,000 700,000

1,509,000 1,704,000 1,069,000 1,704,000 Consolidated $

$

128,500

— 55,500 65,000 Upstream Sale of Inventory 125,000 Credit $ 60,000 375,000 166,500 . )

—

Consolidating Entries — 30,500 91,500

500,000 287,000 Debit $ 125,000

Parent-Only Attribution Method — — — For details about consolidating entries 60,000 65,000 79,000 91,500 315,500 385,000 385,000 915,500 185,000 125,000 200,000 315,500 105,000 565,000 135,000 375,000 195,000 166,500 2,310,500 1,200,000 1,069,000 2,310,500 2,115,500 Combined $

$ Note: through in this table, see Eliminating Entries — Year Ended December 31, 20X2 (Both Attribution Methods Accounts affected by the attribution method selected are highlighted in red.

— — — — — — 60,000 60,000 30,000 65,000 27,000 60,000 95,000 160,000 817,000 125,000 100,000 122,000 642,000 115,000 122,000 500,000 222,000 817,000 722,000 12/31/X2 $

$ 7 8 9 10 7,8 11 27,000 30,000 125,000 160,000 122,000 Credit $ 160,000 7 8 10 7,8,9 Subsidiary B 60,000 30,000 Debit 312,000 $ 100,000

— — — — — — — — — — — — — — — — 1/1/X2 60,000 95,000 360,000 360,000 695,000 275,000 695,000 500,000 100,000 600,000 period. period. Miscellaneous expense items cash settled in current Items of profit or loss closed out to retained earnings. Subsidiary B’s sale of inventory to third parties. Subsidiary B’s upstream sale of inventory to Parent. Miscellaneous income items cash settled in current

$

$ 7 8 9 10 11

— — — — — — 75,000 52,000 91,500 75,000 225,000 225,000 100,000 125,000 193,500 193,500 427,000 450,000 166,500 375,000 100,000 700,000 693,500 12/31/X2 1,493,500 1,493,500 1,393,500

$

$

1 2 5 3,4 1 6 52,000 91,500 200,000 100,000 193,500 Credit $ 225,000 1 3 1,2 4 5 Company A 75,000 91,500 Debit 277,000 125,000 $ 100,000

— — — — — — — — — — — — — — 1/1/X2 75,000 75,000 350,000 350,000 425,000 375,000 100,000 700,000 500,000 1,300,000 1,300,000 1,200,000 current period. current period. Company A’s sale of inventory to third parties. Miscellaneous income items cash settled in Miscellaneous expense items cash settled in Purchase of inventory from B. Company A’s portion of B’s earnings. Items of profit or loss closed out to retained earnings.

$

$ 1 2 3 4 5 6

Example 6-6 (continued) Sales — third party Less: cost of goods sold — third party Gross margin — third party Sales — intercompany Less: cost of goods sold — intercompany Gross margin — intercompany Other operating income Equity earnings of B Less: operating expenses Net income Less: net income attributable to noncontrolling interest Net income attributable to A Cash Inventory Other assets Investment in B — capital Investment in B — earnings of Total assets Liabilities Common stock Retained earnings Noncontrolling interests — capital Noncontrolling interests — retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

59

— — — — — — 7,000 45,000 89,000 412,000 199,000 350,000 363,000 700,000 827,500 125,000 162,000 206,000 167,000 250,000

1,169,000 1,882,000 1,882,000

Consolidated $ 62,500 1,715,000 $

Upstream Sale of Inventory 62,500 37,000 . Credit 375,000 187,500 125,000 ) $ 65,000

— 7,000 Consolidating Entries — Debit 500,000 287,000 $ 21,000

Parent-Only Attribution Method — — — — — — For details about consolidating entries 45,000 97,000 89,000 21,000 350,000 363,000 412,000 375,000 167,000 162,000 162,000 315,000 1,169,000 1,200,000 1,077,500 2,444,500 Note: through in this table, see Eliminating Entries — Year Ended December 31, 20X3 (Both Attribution Methods Accounts affected by the attribution method selected are highlighted in red. While net income attributable to noncontrolling interests and net income attributable to Parent differ for the period, as illustrated by retained earnings accounts, the cumulative amount reported in income is the same under both attribution methods. Combined $ 187,500 2,444,500 2,277,500 $

— — — — — — — — — 7,000 75,000 38,000 90,000 28,000 22,000 13,000 28,000 727,000 500,000 250,000 162,000 840,000 750,000 840,000 140,000

12/31/X3 $ $

7 8 9,10 7 10 11 13,000 22,000 28,000 Credit 112,000 140,000 $ 162,000 7,8,10 10 7 9 10 Subsidiary B 7,000 5,000 100,000 Debit 197,000 $ 140,000

— — — — — — — — — — — — — — — — 60,000 95,000 1/1/X3 period. period. liabilities for cash. earnings. 115,000 500,000 222,000 817,000 722,000 817,000 Acquisition and sale of assets or settlement Items of profit or loss closed out to retained Subsidiary B’s sale of inventory to third parties. Miscellaneous income items cash settled in current Miscellaneous expense items cash settled in current 7 8 9 10 11 $ 642,000 $

— — — — — — 77,000 38,000 75,000 76,000 21,000 250,000 250,000 442,000 275,000 325,000 375,000 700,000 827,500 134,000 134,000 175,000 1,604,500 12/31/X3 $ 187,500 1,604,500 1,527,500 $

1 2 5 3,4 1 6 76,000 21,000 Credit 311,000 175,000 134,000 $ 250,000 1,2 5 1 3 4 4

Company A 38,000 21,000 23,000 Debit 326,000 250,000 $ 175,000 $

— — — — — — — — — — — — — — 75,000 1/1/X3 427,000 450,000 375,000 100,000 700,000 693,500 1,493,500 1,393,500 1,493,500 period. period. Miscellaneous income items cash settled in current Miscellaneous expense items cash settled in current Acquisition of assets or settlement liabilities for cash. Company A’s portion of B’s earnings. Company A’s sale of inventory to third parties. Items of profit or loss closed out to retained earnings. $ 166,500 $ 1 2 3 4 5 6

Example 6-6 (continued) Sales — third party Less: cost of goods sold — third party Gross margin — third party Sales — intercompany Less: cost of goods sold — intercompany Gross margin — intercompany Other operating income Equity earnings of B Less: operating expenses Net income Less: net income attributable to noncontrolling interest Net income attributable to A Cash Inventory Other assets Investment in B — earnings of Total assets Liabilities Noncontrolling interests — retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity Investment in B — capital Common stock Retained earnings Noncontrolling interests — capital

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

Example 6-6 (continued)

Upstream Sale of Inventory Eliminating Entries — Year Ended December 31, 20X2 (Both Attribution Methods)

Parent/Noncontrolling Parent-Only Interest Attribution Attribution Method Method Consolidating Entry — eliminate upstream inventory sale: Sales — intercompany 125,000* 125,000* Cost of goods sold — intercompany 60,000* 60,000* Inventory 65,000 65,000

Consolidating Entry — eliminate beginning balance of B’s capital accounts/establish noncontrolling interests: Common stock (B) 500,000 500,000 Investment in B — capital 375,000 375,000 Noncontrolling interests — capital 125,000 125,000 Retained earnings (B) 100,000** 100,000** Investment in B — earnings of B 75,000*** 75,000*** Noncontrolling interests — retained earnings 25,000† 25,000†

Consolidating Entry — eliminate A’s equity method accrual of B’s current-year income ($122,000 × 75%): Equity earnings of B 91,500* 91,500* Investment in B — earnings of B 91,500*** 91,500***

Consolidating Entry — attribute B’s current-year (third-party) earnings to noncontrolling interests ($122,000 × 25%): Net income attributable to noncontrolling interests 30,500* 30,500* Noncontrolling interests — retained earnings 30,500† 30,500†

Consolidating Entry — attribute eliminated profit on upstream sale to noncontrolling interests ($65,000 × 25%): Noncontrolling interests — retained earnings — 16,250‡ Net income attributable to noncontrolling interests — 16,250*

Consolidating Entry — profit or loss effect of consolidating entries closed out to retained earnings: Elimination of sales — intercompany (Entry ) 125,000 125,000 Elimination of cost of goods sold — intercompany (Entry ) 60,000 60,000 Elimination of A’s equity method accrual of B’s current-year income (Entry ) 91,500 91,500 Attribution of B’s current-year earnings to noncontrolling interests (Entry ) 30,500 30,500 Attribution of eliminated profit on upstream sale to noncontrolling interests (Entry ) — — 16,250 Net debit closed out to retained earnings 187,000** 170,750**

* One of the amounts repeated in the final eliminating entry to form the basis for the net debit closed out to retained earnings ($187,000 under the parent-only attribution method, or $170,750 under the parent/noncontrolling interest attribution method). ** The sum of the two consolidating debits to retained earnings is $287,000 (under the parent-only attribution method) or $270,750 (under the parent/noncontrolling interest attribution method). *** The sum of the two consolidating credits to investment in B — earnings of B is $166,500. † The sum of the two consolidating credits to noncontrolling interests — retained earnings is $55,500. ‡ Consolidating Entry (recorded under only the parent/noncontrolling interest attribution method) generates a lower noncontrolling interests — retained earnings balance in the year ended December 31, 20X2, than that generated under the parent-only attribution method. However, because this entry will reverse upon the sale of inventory to third parties, the noncontrolling interests — retained earnings balance is the same under both methods for the period ended December 31, 20X3.

61 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

Example 6-6 (continued)

Upstream Sale of Inventory Eliminating Entries — Year Ended December 31, 20X3 (Both Attribution Methods)

Parent/Noncontrolling Parent-Only Interest Attribution Attribution Method Method Consolidating Entry — eliminate 20X2 profit on the upstream sale from the opening (combined) retained earnings/recognize the impact of the 20X2 deferral attribution on opening noncontrolling interests — retained earnings/ recognize previously deferred profit on prior-year upstream inventory sale: Retained earnings* 65,000** 48,750** Noncontrolling interests — retained earnings* — 16,250 Cost of goods sold — third party 65,000*** 65,000***

Consolidating Entry — eliminate beginning balance of B’s capital accounts/establish noncontrolling interests: Common stock (B) 500,000 500,000 Investment in B — capital 375,000 375,000 Noncontrolling interests — capital 125,000 125,000 Retained earnings (B) 222,000** 222,000** Investment in B — earnings of B 166,500† 166,500† Noncontrolling interests — retained earnings 55,500‡ 55,500‡

Consolidating Entry — eliminate A’s equity method accrual of B’s current-year income ($28,000 × 75%): Equity earnings of B 21,000*** 21,000*** Investment in B — earnings of B 21,000† 21,000†

Consolidating Entry — attribute B’s current-year (third-party) earnings to noncontrolling interests ($28,000 × 25%): Net income attributable to noncontrolling interests 7,000*** 7,000*** Noncontrolling interests — retained earnings 7,000‡ 7,000‡

Consolidating Entry — attribute profit on prior-year upstream sale recognized in the current year to noncontrolling interests ($65,000 × 25%): Net income attributable to noncontrolling interests — 16,250*** Noncontrolling interests — retained earnings — 16,250‡,§

Consolidating Entry — profit or loss effect of consolidating entries closed out to retained earnings: Recognition of previously deferred profit on upstream sale (Entry ) 65,000 65,000 Elimination of A’s equity method accrual of B’s current-year income (Entry ) 21,000 21,000 Attribution of B’s current-year earnings to noncontrolling interests (Entry ) 7,000 7,000 Attribution of eliminated profit on upstream sale to noncontrolling interests (Entry ) — — 16,250 Net credit closed out to retained earnings 37,000 20,750 * The opening (combined) retained earnings balance includes the controlling interest’s portion of profit recorded by B on the upstream sale in 20X2. The debit to retained earnings is required to eliminate 20X2 profit on the upstream sale from the opening (consolidated) retained earnings before eliminating entries arising from 20X3 activity are posted. Selection of the parent/ noncontrolling interest attribution method also requires a debit to the opening noncontrolling interests — retained earnings to recognize the impact of the 20X2 deferral in the opening balance sheet. ** The sum of the two consolidating debits to retained earnings is $287,000 (under the parent-only attribution method) or $270,750 (under the parent/noncontrolling interest attribution method). *** One of the amounts repeated in the final eliminating entry to form the basis for the net credit closed out to retained earnings ($37,000 under the parent-only attribution method, or $20,750 under the parent/noncontrolling interest attribution method). † The sum of the two consolidating credits to investment in B — earnings of B is $187,500. ‡ The sum of the two (three) consolidating credits to noncontrolling interest — retained earnings is $62,500 under the parent-only attribution method ($78,750 under the parent/noncontrolling interest attribution method). § Consolidating Entry (recorded under only the parent/noncontrolling interest attribution method) generated a lower noncontrolling interest — retained earnings balance in the year ended December 31, 20X2, than that generated under the parent- only attribution method. However, because the 20X2 entry reverses upon the sale of inventory to third parties, the noncontrolling interests — retained earnings balance is the same under both methods for the period ended December 31, 20X3. Note that in the year ended December 31, 20X3, the consolidating entry of $287,000 under the parent-only attribution method and the consolidating entry of $270,750 under the parent/noncontrolling interest attribution method each represent the consolidating entry from the prior year.

62

— — — — — — 39,250 79,000 385,000 385,000 644,750 125,000 185,000 159,000 500,000 135,000 195,000 700,000 200,000 105,000 1,704,000 1,704,000 1,069,000 1,704,000 1,509,000 Consolidated $ 14,250 $

144,750

55,500 16,250 65,000 Upstream Sale of Inventory 125,000 Credit 375,000 166,500 $ 60,000 . )

Consolidating Entries — 16,250 91,500 30,500 500,000 270,750 Debit $ 125,000

Parent/NCI Attribution Method

— — For details about consolidating entries 60,000 65,000 79,000 91,500 315,500 385,000 385,000 915,500 185,000 125,000 315,500 565,000 135,000 375,000 195,000 200,000 105,000 166,500 2,310,500 1,200,000 1,069,000 2,310,500 2,115,500 — Combined $ $ Note: through in this table, see Eliminating Entries — Year Ended December 31, 20X2 (Both Attribution Methods Accounts affected by the attribution method selected are highlighted in red.

— — — — — — 60,000 30,000 60,000 65,000 27,000 60,000 95,000 160,000 817,000 125,000 122,000 642,000 115,000 500,000 222,000 100,000 122,000 817,000 722,000 12/31/X2

$ $

7 8 9 10 7,8 11 27,000 30,000 125,000 160,000 122,000 Credit $ 160,000 7 8 10 7,8,9 Subsidiary B 60,000 30,000 Debit 312,000 $ 100,000

— — — — — — — — — — — — — — — — 1/1/X2 60,000 95,000 360,000 360,000 695,000 695,000 600,000 275,000 500,000 100,000 in current period. in current period. earnings. Miscellaneous expense items cash settled Items of profit or loss closed out to retained Subsidiary B’s sale of inventory to third parties. Subsidiary B’s upstream sale of inventory to Parent. Miscellaneous income items cash settled 8 9 10 11 $ $ 7

— — — — — — 75,000 52,000 91,500 75,000 225,000 225,000 100,000 193,500 166,500 125,000 193,500 427,000 450,000 375,000 100,000 700,000 693,500 12/31/X2 1,493,500 1,493,500 1,393,500

$ $

1 2 5 3,4 1 6 52,000 91,500 200,000 100,000 193,500 Credit $ 225,000 1 3 1,2 4 5 Company A

75,000 91,500 Debit 277,000 125,000 $ 100,000

— — — — — — — — — — — — — — 1/1/X2 75,000 75,000 350,000 350,000 425,000 375,000 100,000 700,000 500,000 1,300,000 1,300,000 1,200,000 current period. current period. Company A’s sale of inventory to third parties. Miscellaneous income items cash settled in Miscellaneous expense items cash settled in Purchase of inventory from B. Company A’s portion of B’s earnings. Items of profit or loss closed out to retained earnings. $ $ 1 2 3 4 5 6

Example 6-6 (continued) Sales — third party Less: cost of goods sold — third party Gross margin — third party Sales — intercompany Less: cost of goods sold — intercompany Gross margin — intercompany Other operating income Equity earnings of B Less: operating expenses Net income Less: net income attributable to noncontrolling interest Net income attributable to A Cash Inventory Other assets Investment in B — capital Investment in B — earnings of Total assets Liabilities Common stock Retained earnings Noncontrolling interests — capital Noncontrolling interests — retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

63

— — — — — — 23,250 45,000 89,000 412,000 350,000 363,000 167,000 700,000 827,500 125,000 162,000 206,000 250,000 182,750 1,169,000 1,882,000

Consolidated $ 1,882,000 62,500 1,715,000 $

20,750 78,750

Credit 375,000 187,500 $ 65,000 125,000

Upstream Sale of Inventory Eliminating Consolidating Entries — 23,250 16,250 500,000 270,750 $ 21,000 Debit Parent/NCI Attribution Method

. ) — — — — — — For details about consolidating entries through 45,000 97,000 89,000 21,000 412,000 350,000 363,000 375,000 167,000 162,000 315,000 162,000 1,169,000 1,200,000 1,077,500 2,444,500 2,444,500 Note: in this table, see Entries — Year Ended December 31, 20X3 (Both Attribution Methods Accounts affected by the attribution method selected are highlighted in red. While net income attributable to noncontrolling interests and net income attributable to Parent differ for the period, as illustrated by retained earnings accounts, the cumulative amount reported in income is the same under both attribution methods. Combined $ 187,500 2,277,500 $

— — — — — — — — — 7,000 75,000 38,000 90,000 28,000 22,000 13,000 28,000 727,000 500,000 250,000 162,000 840,000 750,000 840,000 140,000 12/31/X3 $ $

7 8 9,10 7 11 10 13,000 28,000 22,000 Credit 112,000 140,000 $ 162,000 7,8,10 10 7 9 10 Subsidiary B 7,000 5,000 Debit 100,000 197,000 $ 140,000

— — — — — — — — — — — — — — — — 60,000 95,000 1/1/X3 period. period. liabilities for cash. earnings. 115,000 500,000 222,000 817,000 722,000 817,000 Acquisition and sale of assets or settlement Items of profit or loss closed out to retained Subsidiary B’s sale of inventory to third parties. Miscellaneous income items cash settled in current Miscellaneous expense items cash settled in current 7 8 9 10 11 $ 642,000 $

— — — — — — 77,000 38,000 75,000 76,000 21,000 250,000 250,000 442,000 275,000 325,000 375,000 700,000 827,500 134,000 134,000 175,000 1,604,500 12/31/X3 $ 187,500 1,604,500 1,527,500 $

1 2 5 3,4 1 6 76,000 21,000 Credit 311,000 175,000 134,000 $ 250,000 1,2 5 1 3 4 4 Company A 38,000 21,000 23,000 Debit 326,000 250,000 $ 175,000 $

— — — — — — — — — — — — — — 75,000 1/1/X3 427,000 450,000 375,000 100,000 700,000 693,500 1,493,500 1,393,500 1,493,500 period. period. cash. Miscellaneous expense items cash settled in current Items of profit or loss closed out to retained earnings. Company A’s sale of inventory to third parties. Miscellaneous income items cash settled in current Acquisition of assets or settlement liabilities for Company A’s portion of B’s earnings. $ 166,500 $ 1 2 3 4 5 6

Sales — third party Less: cost of goods sold — third party Gross margin — third party Sales — intercompany Less: cost of goods sold — intercompany Gross margin — intercompany Other operating income Equity earnings of B Less: operating expenses Net income Less: net income attributable to noncontrolling interest Net income attributable to A Cash Inventory Other assets Investment in B — capital Investment in B — earnings of Total assets Liabilities Common stock Retained earnings Noncontrolling interests — capital Noncontrolling interests — retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity Example 6-6 (continued)

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

6.4 Attribution of Eliminated Income or Loss (VIEs)

ASC 810-10

35-3 The principles of consolidated financial statements in this Topic apply to primary beneficiaries’ accounting for consolidated variable interest entities (VIEs). After the initial measurement, the assets, liabilities, and noncontrolling interests of a consolidated VIE shall be accounted for in consolidated financial statements as if the VIE were consolidated based on voting interests. Any specialized accounting requirements applicable to the type of business in which the VIE operates shall be applied as they would be applied to a consolidated subsidiary. The consolidated entity shall follow the requirements for elimination of intra-entity balances and transactions and other matters described in Section 810-10-45 and paragraphs 810-10-50-1 through 50-1B and existing practices for consolidated subsidiaries. Fees or other sources of income or expense between a primary beneficiary and a consolidated VIE shall be eliminated against the related expense or income of the VIE. The resulting effect of that elimination on the net income or expense of the VIE shall be attributed to the primary beneficiary (and not to noncontrolling interests) in the consolidated financial statements.

As explained in Section 6.3, ASC 810-10-45-1 and ASC 810-10-45-18 require intercompany balances and transactions to be eliminated in their entirety. Further, for entities other than VIEs, the means of attributing the eliminating entry between the controlling and noncontrolling interests depends on (1) the nature of the intercompany transaction (downstream vs. upstream) and (2) the policy elected by the parent (for upstream transactions only).

Under the VIE model, it may be the existence of intercompany transactions (e.g., supply arrangements under which the primary beneficiary takes a majority of the VIE’s output under a cost-plus arrangement) between a parent and its VIE subsidiary that causes the parent to be the primary beneficiary of the VIE subsidiary. ASC 810-10-35-3 specifies that the effect of the eliminating entry for intercompany transactions between a primary beneficiary and its VIE subsidiary should not be attributed to the noncontrolling interest. Rather, as explained in paragraph D55 of the Background Information and Basis for Conclusions of Interpretation 46(R), the FASB believed that “any effects on income of eliminating intercompany fees or other sources of income or expense between the variable interest entity and its primary beneficiary should be attributed to the primary beneficiary in the consolidated financial statements. For example, if the primary beneficiary has no equity interest in the variable interest entity and receives a fee from the entity, the amount of the fee that is eliminated in consolidation would be attributed to the primary beneficiary even if the remainder of the entity’s net income is allocated to the entity’s noncontrolling interest, the equity holders.”

On a consolidated basis, the primary beneficiary will continue to eliminate intercompany amounts received from or paid to a consolidated VIE. After elimination, these amounts will not be included in revenue or other income. However, the effect (i.e., the benefit or obligation) of these amounts received from or paid to the VIE should still be recognized in net income attributable to the primary beneficiary. Such recognition reflects the primary beneficiary’s legal claim to profits and losses.

In practice, the guidance on eliminating intercompany profit or loss against the related expense or income of the VIE can prove difficult to apply. On the other hand, the elimination of intercompany transactions with respect to a voting interest entity is generally more straightforward because the elimination of intercompany profit or loss is allocated proportionately between the controlling and noncontrolling interests.

The example below compares the approach to intercompany eliminations under the VIE model (specifically, ASC 810-10-35-3) with that under the voting interest entity model.

65 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

Example 6-7

Company X is a VIE capitalized by an equity investment of $10 from Enterprise Y and a loan of $990 from Enterprise Z. Enterprise Z has determined that it is the primary beneficiary of X. Each year, Z recognizes $75 of interest income as a result of its 7.6 percent interest rate on the debt.

Because X is a VIE, the guidance in ASC 810-10-35-3 should be applied. The table below illustrates the impact on Z’s financial statements of accounting for intercompany eliminations under ASC 810-10-35-3.

Approach to Intercompany Eliminations Under the VIE Model in ASC 810-10 (Specifically, ASC 810-10-35-3)

Consolidating Consolidated Z X Entries Z Sales $ 15,000 $ 1,500 $ — $ 16,500 Cost of sales 13,000 1,300 — 14,300 Gross margin 2,000 200 — 2,200 Other income (expense) Interest income 75 — (75)* — Interest expense — (75) 75* — Net income 2,075*** 125 — 2,200 Net income attributable to Y (the noncontrolling interest holder) $ — $ — $ (125)** (125) Net income attributable to Z $ 2,075***

* Intercompany revenue and expense between X and Z are eliminated. ** Net income of X, including the effect of interest expense, is attributable to Y, the noncontrolling interest holder, as follows:

Gross margin of X $ 200

Interest expense (75)

Net income attributable to Y $ 125

Under the ASC 810-10-35-3 approach, the effect of eliminating intercompany interest income or expense has been attributed to Z (the primary beneficiary) rather than Y (the noncontrolling interest holder). Enterprise Z’s interest income has been eliminated, and net income attributable to the noncontrolling interest holder includes the effect of the $75 interest expense. *** Net income attributable to Z remains unchanged from the $2,075 net income reported in Z’s stand-alone financial statements. This result reflects that the legal right of Y (the noncontrolling interest holder) to net income is limited to $125.

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

Example 6-7 (continued)

To better understand the unique aspects of accounting for intercompany eliminations under the VIE model, consider the table below, which shows how such eliminations would be accounted for if X were a voting interest entity. If the voting interest entity model were used, the effect of eliminating intercompany interest income or expense would be allocated in proportion to equity ownership. Since Z does not have an equity interest in X, all income after eliminations would be allocated to the noncontrolling interest.

Approach to Intercompany Eliminations Under the Voting Interest Entity Model in ASC 810-10

Consolidating Consolidated Z X Entries Z

Sales $ 15,000 $ 1,500 $ — $ 16,500

Cost of sales 13,000 1,300 — 14,300

Gross margin 2,000 200 — 2,200

Other income (expense)

Interest income 75 — (75)* —

Interest expense — (75) 75* — Net income 2,075*** 125 — 2,200

Net income attributable to Y (the noncontrolling interest holder) $ — $ — $ (200)** $ (200)

Net income attributable to Z $ 2,000***

* Intercompany revenue and expense between X and Z are eliminated. ** Net income of X is attributable to Y, the noncontrolling interest holder, as follows:

Gross margin of X $ 200

Interest expense (75)

Elimination of interest expense 75

Net income attributable to Y $ 200

*** Under the voting interest entity model illustrated here, net income attributable to Z is $75 lower than what it is under the VIE model.

67 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

6.5 Attribution of Income in the Presence of Reciprocal Interests

ASC 810-10

45-5 Shares of the parent held by a subsidiary shall not be treated as outstanding shares in the consolidated statement of financial position and, therefore, shall be eliminated in the consolidated financial statements and reflected as treasury shares.

As discussed in Section 4.2.2.2, a subsidiary may hold shares of its parent. In such instances, in a manner consistent with the single economic entity concept in ASC 810-10-10-1 and the provisions of ASC 810-10-45-5, 100 percent of those reciprocal interests should generally be presented as treasury shares on the parent’s consolidated balance sheet regardless of whether the subsidiary is wholly owned by the parent.

In the parent’s consolidated income statement, the existence of reciprocal interests affects the allocation of the consolidated entity’s earnings between third-party shareholders of the parent and the subsidiary’s noncontrolling interest holders. This is because the subsidiary’s noncontrolling interest 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. Application of the treasury stock method tends to be more common since, as demonstrated below, most preparers would have to dust off their algebra textbook before applying the simultaneous equations method. Although income attributable to the parent’s shareholders may differ under the two methods, 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 computation of a public parent’s earnings per share (EPS), each method will also produce the same reported EPS figure. Thus, we believe that either method is acceptable as long as a reporting entity applies its selected method consistently to all reciprocal interests.

The example below illustrates the application of each method.

Example 6-8

Company A is a public entity whose common shares are actively traded on the New York Stock Exchange. The company has 10,000 shares of its common stock issued and outstanding. In addition, it has an 85 percent controlling interest in Subsidiary B.

Subsidiary B is a privately held company that has 5,000 shares of its common stock issued and outstanding. Third parties own the remaining 15 percent (750 shares) of B’s common shares.

Subsidiary B purchases 1,000 shares (10 percent) of A’s stock in an open-market transaction at $35 per share.

The diagram below illustrates the respective ownership interests of A, B, and third parties.

85% 90% 15% 4,250 shares 9,000 shares 750 shares Third Parties Company A Subsidiary B Third Parties 10% 1,000 shares

In 20X6: • Company A’s earnings (excluding those arising from its equity interest in B) equaled $100,000. • Subsidiary B’s earnings (excluding those arising from its equity interest in A) equaled $60,000.

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

Example 6-8 (continued)

Treasury Stock Method The table below shows direct income from third-party transactions (i.e., exclusive of A’s and B’s equity interests in each other), consolidated net income, income attributions, and A’s basic EPS under the treasury stock method. For simplicity, intercompany transactions and tax implications have been ignored.

Item Amount Calculation

Company A’s direct income from third-party transactions $ 100,000 — Subsidiary B’s direct income from third-party transactions 60,000 — Consolidated net income 160,000 — Subsidiary B’s direct income attributable to noncontrolling interests (9,000) ($60,000) × 15% = ($9,000) $160,000 – $9,000 = Net income attributable to A’s shareholders 151,000 $151,000 Company A’s basic EPS $ 16.50 $151,000 ÷ 9,150 shares * = $16.50 per share * Under the treasury stock method, the parent’s shares that are held indirectly by noncontrolling interests should be considered outstanding for purposes of computing the parent’s EPS. Thus, the EPS denominator = 10,000 A shares outstanding – [(1,000 A shares held in treasury by B) × (A’s 85% controlling interest in B)] = 9,150 A shares.

Simultaneous Equations Method Under the simultaneous equations method, the income of A and B should first be computed as follows:

Let A = income of Company A.

Let B = income of Subsidiary B.

Let 0.85B = Company A’s ownership interest in Subsidiary B.

Let 0.1A = Subsidiary B’s ownership interest in Company A’s common stock issued and outstanding.

A = $100,000 + 0.85B

B = $60,000 + 0.1A

A = $100,000 + [0.85 × ($60,000 + 0.1A)]

A = $100,000 + $51,000 + 0.085A

A – 0.085A = $100,000 + $51,000

0.915A = $151,000

A = $165,027

B = $60,000 + (0.1 × 165,027) B = $76,503

69 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

Example 6-8 (continued) The table below shows direct income, consolidated net income, income attributions, and A’s basic EPS under the simultaneous equations method.

Item Amount Calculation

Company A’s direct income from third-party transactions $ 100,000 — Subsidiary B’s direct income from third-party transactions 60,000 — Consolidated net income 160,000 — Subsidiary B’s direct income attributable to ($76,503) × 15% = noncontrolling interests (11,475) ($11,475) $160,000 – $11,475 = Net income attributable to A’s shareholders 148,525 $148,525 Company A’s basic EPS $ 16.50 $148,525 ÷ 9,000 shares * = $16.50 per share * Under the simultaneous equations method, none of the parent’s shares that are held indirectly through its subsidiary should be considered outstanding for purposes of computing the parent’s EPS. Thus, the EPS denominator = 10,000 A shares outstanding – 1,000 A shares held in treasury by B = 9,000 A shares.

6.6 Attribution of Other Comprehensive Income or Loss

ASC 810-10

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

As stated in ASC 810-10-45-20, OCI or other comprehensive loss must also be attributed to the parent and noncontrolling interest. This paragraph was added to ARB 51 by FASB Statement 160 to address ambiguities that existed in ARB 51 before the adoption of FASB Statement 160 and to eliminate the diversity in practice that arose when some reporting entities did not attribute OCI or other comprehensive loss to noncontrolling interests.

6.6.1 Impact of FASB Statement 160 Transition Method on Attribution of OCI in Subsequent Periods

ASC 220-10

45-5 Paragraph 810-10-50-1A(a) states that, if an entity has an outstanding noncontrolling interest, amounts for both net income and comprehensive income attributable to the parent and net income and comprehensive income attributable to the noncontrolling interest in a less-than-wholly-owned subsidiary shall be reported in the financial statement(s) in which net income and comprehensive income are presented in addition to presenting consolidated net income and comprehensive income. For more guidance, see paragraph 810-10-50-1A(c).

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

ASC 220-10 (continued)

45-15 Reclassification adjustments shall be made to avoid double counting of items in comprehensive income that are presented as part of net income for a period that also had been presented as part of other comprehensive income in that period or earlier periods. For example, gains on investment securities that were realized and included in net income of the current period that also had been included in other comprehensive income as unrealized holding gains in the period in which they arose must be deducted through other comprehensive income of the period in which they are included in net income to avoid including them in comprehensive income twice (see paragraph 320-10-40-2). Example 3 (see paragraphs 220-10-55-18 through 55-27) illustrates the presentation of reclassification adjustments in accordance with this paragraph.

Although adoption of FASB Statement 160 was required for fiscal years beginning on or after December 15, 2008, decisions made at the time that guidance was adopted may continue to affect attributions of items of comprehensive income that originated before adoption when such items are recognized in the income statement (i.e., reclassified from AOCI to income) in subsequent reporting periods. Specifically, before the adoption of FASB Statement 160, two methods of attributing OCI or other comprehensive loss were prevalent in practice: • Method 1 — Attribute items of comprehensive income or loss solely to the controlling interest. • Method 2 — Attribute items of comprehensive income or loss to the controlling and noncontrolling interests, but limit attribution if the carrying amount of the noncontrolling interest had been reduced to $0.

Although FASB Statement 160 did not provide transition guidance for reporting entities that had historically applied Method 1, we believe that there were two acceptable transition alternatives: • Transition Alternative 1 — Apply the provisions in ASC 810-10-45-20 and ASC 220-10-45-5, both added by FASB Statement 160, retrospectively as if OCI or other comprehensive loss had been attributed to the noncontrolling interests in all prior periods. • Transition Alternative 2 — Apply the provisions in ASC 810-10-45-20 and ASC 220-10-45-5, both added by FASB Statement 160, prospectively.

Entities that chose Transition Alternative 2 should have a policy in place for attributing future reclassification adjustments described in ASC 220-10-45-15 to the controlling and noncontrolling interests. For example, such a policy should address how previously unrealized holding gains from available-for-sale securities that were reported in OCI and were attributed solely to the parent (Method 1) should be reclassified into net income and attributed to the controlling and noncontrolling interests once the gain is realized.

71 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

The decision tree below illustrates the application of the guidance discussed in this section to the current-period reclassification (to net income) of items that had previously been recorded as OCI before adoption of FASB Statement 160.

Before adoption of FASB Statement 160

Attributed OCI to controlling interests and, upon adoption of Attributed OCI to controlling FASB Statement 160, elected and noncontrolling interests. to:

Apply ASC 810-10- Apply ASC 810-10- 45-20 and ASC 220-10-45-5 45-20 and ASC 220-10-45-5 retrospectively (Transition prospectively (Transition Alternative 1). Alternative 2). Attribute reclassification adjustments (after adoption of FASB Statement 160) to controlling and noncontrolling interests.

Apply reporting Attribute entity’s policy reclassification for attributing adjustments (after reclassification adjustments adoption of FASB Statement (after adoption of FASB 160) to controlling and Statement 160) to noncontrolling controlling and interests. noncontrolling interests.

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

6.6.2 Foreign Currency Translation Adjustments

ASC 220-10

45-10A Items of other comprehensive income include the following: a. Foreign currency translation adjustments (see paragraph 830-30-45-12) . . . .

ASC 810-10

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

ASC 830-30

45-17 Accumulated translation adjustments attributable to noncontrolling interests shall be allocated to and reported as part of the noncontrolling interest in the consolidated reporting entity.

In accordance with ASC 830-30, to allow for combination or consolidation of a subsidiary that is a foreign entity, all elements of the foreign currency financial statements must be translated to the reporting currency. The cumulative impact of such translation is recorded as a cumulative translation adjustment (CTA) in AOCI. The cumulative translation gains and losses are reclassified out of AOCI and into earnings upon the sale or substantially complete liquidation of the investment in the foreign entity. (For information on what constitutes a substantially complete liquidation of an investment in a foreign entity, see Section 5.4.1 of Deloitte’s A Roadmap to Foreign Currency Transactions and Translations.) To the extent that a CTA is attributable to a noncontrolling interest, ASC 830-30-45-17 requires the CTA to be attributed to and reported as part of the noncontrolling interest in the consolidated financial statements.

When determining whether a CTA can be attributed to noncontrolling interest holders, the reporting entity should note that the CTA exists at the consolidated level as a result of differences between the subsidiary’s functional currency and the reporting currency. Accordingly, the CTA is directly related to the parent entity’s reporting currency and may not reflect the reporting currency of the noncontrolling interest holders.

In light of these factors, we believe that in a manner consistent with the guidance in ASC 830-30- 45-17 and the attribution guidance in ASC 810-10, a CTA should be attributed to the partially owned subsidiary’s noncontrolling interest that gives rise to the adjustment. That is, the objective of a noncontrolling interest is to give investors of the consolidated entity visibility into how their claim on the net assets of a partially owned subsidiary changes from period to period.

Accordingly, we believe that it would be misleading to allocate to the controlling interest 100 percent of a CTA associated with a foreign, partially owned subsidiary that reflects the impact of changing currency rates on the subsidiary’s total net assets. Thus, it would be appropriate to allocate a proportionate amount of the CTA to the noncontrolling interest.

73 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

Example 6-9

Company M is a multinational financial services company with global operations whose functional currency is the U.S. dollar. Company M holds a controlling interest of 60 percent in Subsidiary ABC. The remaining 40 percent is held by an unrelated third party, Entity DEF, and represents a noncontrolling interest.

Subsidiary ABC, which is located in Germany and operates there, uses the euro as its functional currency. Company M has determined that ABC is a foreign entity. There are no agreements in place that would otherwise govern allocations of ABC’s income, loss, or OCI between M and DEF in a manner that differs from their proportionate ownership interests.

At the end of 20X1, the translation of ABC’s assets, liabilities, and operations from the euro to the U.S. dollar results in a CTA of $100 million. Of the $100 million, $40 million is allocated to the noncontrolling interest in M’s consolidated financial statements.

6.6.3 Impact of Changes to OCI or AOCI Resulting From Transition Adjustments or Changes in Accounting Principle

ASC 220-10

45-5 Paragraph 810-10-50-1A(a) states that, if an entity has an outstanding noncontrolling interest, amounts for both net income and comprehensive income attributable to the parent and net income and comprehensive income attributable to the noncontrolling interest in a less-than-wholly-owned subsidiary shall be reported in the financial statement(s) in which net income and comprehensive income are presented in addition to presenting consolidated net income and comprehensive income. . . .

ASC 250-10

45-5 An entity shall report a change in accounting principle through retrospective application of the new accounting principle to all prior periods, unless it is impracticable to do so. Retrospective application requires all of the following: a. The cumulative effect of the change to the new accounting principle on periods prior to those presented shall be reflected in the carrying amounts of assets and liabilities as of the beginning of the first period presented. b. An offsetting adjustment, if any, shall be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period. c. Financial statements for each individual prior period presented shall be adjusted to reflect the period- specific effects of applying the new accounting principle.

45-6 If the cumulative effect of applying a change in accounting principle to all prior periods can be determined, but it is impracticable to determine the period-specific effects of that change on all prior periods presented, the cumulative effect of the change to the new accounting principle shall be applied to the carrying amounts of assets and liabilities as of the beginning of the earliest period to which the new accounting principle can be applied. An offsetting adjustment, if any, shall be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period.

45-7 If it is impracticable to determine the cumulative effect of applying a change in accounting principle to any prior period, the new accounting principle shall be applied as if the change was made prospectively as of the earliest date practicable. See Example 1 (paragraphs 250-10-55-3 through 55-11) for an illustration of a change from the first-in, first-out (FIFO) method of inventory valuation to the last-in, first-out (LIFO) method. That Example does not imply that such a change would be considered preferable as required by paragraph 250-10-45-12.

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

ASC 250-10 (continued)

45-8 Retrospective application shall include only the direct effects of a change in accounting principle, including any related income tax effects. Indirect effects that would have been recognized if the newly adopted accounting principle had been followed in prior periods shall not be included in the retrospective application. If indirect effects are actually incurred and recognized, they shall be reported in the period in which the accounting change is made.

ASC 810-10

45-16 The noncontrolling interest shall be reported in the consolidated statement of financial position within equity (net assets), separately from the parent’s equity (or net assets). That amount shall be clearly identified and labeled, for example, as noncontrolling interest in subsidiaries (see paragraph 810-10-55-4I). An entity with noncontrolling interests in more than one subsidiary may present those interests in aggregate in the consolidated financial statements. A not-for-profit entity shall report the effects of any donor-imposed restrictions, if any, in accordance with paragraph 958-810-45-1.

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

The guidance in ASC 250-10-45-5 through 45-8 prescribes how changes in an accounting principle should be applied and often requires entities to record an offsetting adjustment to retained earnings (or other appropriate components of equity) in the period of adoption.

In certain instances, an ASU may specify that the offsetting transition adjustment should be recorded as a component of OCI. Similarly, an adjustment to OCI could arise from a reporting entity’s accounting for a change in accounting principle. When a parent initially records its consolidating entries, it should record 100 percent of the change to its subsidiary’s OCI within its own OCI in a manner consistent with the guidance in ASC 810-10-45-19. Recognizing that the parent’s OCI should ultimately reflect its activities as well as the timing and magnitude of its future cash flows, the parent should then record a second entry to reclassify the noncontrolling interest holder’s portion of the OCI transition adjustment to the noncontrolling interest account, which is presented as a separate component of stockholders’ equity in accordance with ASC 810-10-45-16.

We believe that a similar concept applies when a transition adjustment or change in accounting principle requires the reporting entity to record an adjusting entry directly to the balance of AOCI. For example, ASU 2018-02 allows a reclassification from AOCI to retained earnings of “stranded” tax effects that arise from the December 22, 2017, tax legislation commonly known as the Tax Cuts and Jobs Act (the “Act”). Stranded tax effects arise from the tax effects of transactions that were initially recognized directly in OCI at tax rates in existence before the Act. Before adoption of ASU 2018-02, when the underlying transaction is reclassified out of AOCI in periods after enactment of the Act, amounts in AOCI related to the income tax rate differential (i.e., the difference between tax rates in effect before and after enactment of the Act) would be stranded in AOCI. When a parent initially records its consolidating entries upon adoption of ASU 2018-02, it should record 100 percent of the change in its subsidiary’s AOCI balance within its own AOCI and then record a second entry to reclassify the noncontrolling interest holder’s portion of the AOCI adjustment to the noncontrolling interest account.

75 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

Example 6-9A

Subsidiary Y is a consolidated subsidiary of Company X because X’s 90 percent ownership of Y gives X a controlling financial interest in Y.

On December 22, 2017, the Act is enacted, generally reducing the U.S. federal corporate income tax rate from 35 percent to 21 percent.

Before the enactment date of the Act, Y recognizes a $1,000 loss in OCI in connection with a derivative used in cash flow hedging activities. Because there is no tax basis in the derivative, Y also recognizes a $350 deferred tax asset (DTA) and records a corresponding entry to OCI. No other changes in the fair value of the hedge occur after its initial recognition, and the forecasted transaction would not occur until 2018.

On the enactment date, Y reflects the effect of the change to the tax rate by reducing the DTA by $140 (equal to the temporary difference of $1,000 multiplied by the 14 percent rate reduction) and recognizing a corresponding increase in income tax expense.

Before the issuance of X’s 2017 consolidated financial statements, X and Y adopt ASU 2018-02 (which, as noted above, allows a reclassification from AOCI to retained earnings of stranded tax effects related to the Act) and apply it to their respective 2017 financial statements.

The entries related to the transactional activity described above, as reflected in Y’s separate financial statements, are summarized in the table below.

Derivative Net Retained Liability AOCI DTA Income Earnings

Derivative loss $ (1,000) $ 1,000

Related tax effect — original tax rate (350) $ 350

Reduction in statutory tax rate upon enactment of the Act (140) $ 140 $ 140

Reclassification of stranded tax effects under ASU 2018-02 140 (140)

Final balance $ (1,000) $ 790 $ 210 $ 0

Next, X evaluates what the impact will be on its consolidated financial statements. To reflect the change to Y’s AOCI balance upon adoption of ASU 2018-02 (highlighted in red in the table above), X performs the following steps: • Step 1 — Record 100 percent of the $140 change to Y’s AOCI balance as a result of the adoption of ASU 2018-02. • Step 2 — Reclassify the noncontrolling interest holder’s portion (i.e., 10 percent) of Y’s AOCI adjustment to the noncontrolling interest account. To perform these steps, X records the following consolidating journal entries to its consolidated financial statements:

Step 1:

AOCI 140 Retained earnings 140

Step 2:

Noncontrolling interest 14 AOCI 14

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

6.7 Presentation of Preferred Dividends of a Subsidiary

ASC 810-10

40-2 Section 480-10-25 does not require mandatorily redeemable preferred stock to be accounted for as a liability under certain conditions. If such conditions apply and the mandatorily redeemable preferred stock is not accounted for as a liability, then the entity’s acquisition of a subsidiary’s mandatorily redeemable preferred stock shall be accounted for as a capital stock transaction. Accordingly, the consolidated entity would not recognize in its income statement any gain or loss from the acquisition of the subsidiary’s preferred stock. In the consolidated financial statements, the dividends on a subsidiary’s preferred stock, whether mandatorily redeemable or not, would be included in noncontrolling interest as a charge against income.

While ASC 810-10-40-2 highlights that distributions to equity holders (including noncontrolling interest holders) acting in their capacity as owners should be excluded from the determination of the consolidated entity’s net income, ASC 810-10 does not specifically address whether dividends on a subsidiary’s preferred stock should be treated as an attribution of the subsidiary’s income to the noncontrolling interest or a direct adjustment to retained earnings. Further, the last sentence of ASC 810-10-40-2 has been subject to multiple interpretations because ASC 810-10 does not allow the parent to present noncontrolling interest expense as a deduction in arriving at consolidated net income.

On the basis of the ambiguities in ASC 810-10-40-2 and informal discussions with the FASB staff, we believe that the following two alternatives are acceptable for presenting preferred dividends of a subsidiary in a parent’s consolidated financial statements: • Alternative 1 — The parent presents the subsidiary’s preferred dividends as a component of the attribution of net income (loss) to the noncontrolling interest on the face of the consolidated statement of income. The preferred dividends result in a decrease (increase) in consolidated net income (loss) attributable to the parent. We believe that Alternative 1 is acceptable in all situations and is the preferable approach. • Alternative 2 — The preferred dividends do not affect the reported amount of consolidated net income (loss) attributable to the parent. However, the parent (if public) treats the subsidiary’s preferred dividends as a direct adjustment when calculating income available to common stockholders of the parent. This outcome is consistent with the accounting for dividends on preferred stock issued by the parent. It is also consistent with the discussion in ASC 480-10- S99-3A(22)(a) regarding the accounting in the consolidated financial statements of the parent for remeasurement adjustments arising from redeemable preferred stock issued by a consolidated subsidiary. Under certain facts and circumstances, Alternative 2 may yield a presentation that could be considered misleading. Preparers should consider consulting with professional accounting advisers if Alternative 2 is applied. We believe that when Alternative 2 is applied by an entity that does not report EPS, the entity should provide transparent disclosure of the preferred dividends’ impact on income available to common stockholders9 when that amount differs materially from net income attributable to the controlling interest because of dividends paid on the noncontrolling interest. Such supplemental disclosure may be made on the face of the income statement (e.g., by using the format in the “Alternative 2” column of the table in Example 6-10) or in the notes.

9 For entities that present EPS, the alternatives will not affect income available to common stockholders, which is the numerator in the calculation of EPS.

77 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

The parent should consistently apply either Alternative 1 or Alternative 2 and consider disclosing its accounting policy in accordance with ASC 235-10-50. Further, if the subsidiary’s preferred stock is a redeemable equity security subject to the accounting requirements of ASC 480-10-S99-3A, any remeasurement adjustments are considered akin to dividends and should be presented in the manner prescribed by either of those alternatives. See Chapter 9 for additional considerations related to redeemable securities of a subsidiary.

Example 6-10

Assume the following facts: • Company A owns 100 percent of the common equity securities of its subsidiary, B. • Subsidiary B has issued preferred equity securities that are held by an unrelated third party, Entity C (the noncontrolling interest). • The preferred equity securities are neither cumulative nor participating securities (i.e., they do not participate in undistributed earnings of B). • For the year ended December 31, 20X9, A’s consolidated net income was $700,000 (including B’s net income), and B declared and paid dividends totaling $200,000 on the preferred equity securities. Under each alternative, the dividends on the preferred stock of B would be included as follows in A’s consolidated statement of income for the year ended December 31, 20X9:

Alternative 1 Alternative 2

Net income $ 700,000 $ 700,000

Less: net income attributable to the noncontrolling interest (200,000) —

Net income attributable to the controlling interest 500,000 700,000

Dividends on preferred stock* — (200,000)

Income available to common stockholders of A** $ 500,000 $ 500,000

* Adjustment to arrive at EPS numerator for public companies only. Supplemental disclosure of these items is encouraged for private companies. ** Because the noncontrolling interest is in the form of preferred securities that do not share in the undistributed earnings of B, A should not attribute any undistributed earnings of B to the noncontrolling interest.

6.7.1 Noncontrolling Interests Held by Preferred Shareholders A reporting entity should consider how to attribute its subsidiary’s net income or loss to the controlling and noncontrolling interests held in the subsidiary when the subsidiary is funded with classes of equity that have different rights and preferences (e.g., common equity and various classes of equity- classified preferred shares). While the terms of preferred shares may vary significantly, preferred shares commonly have a combination of some, or all, of the following rights that the reporting entity may need to consider when attributing its subsidiary’s net income or loss to the noncontrolling interests: • Rights to the subsidiary’s assets and earnings that have priority over the rights of common shareholders. • Entitlement to a share of the subsidiary’s earnings up to a stated dividend. • Entitlement to a liquidation preference in the subsidiary. • Stated dividend rights that are not affected by losses incurred by the subsidiary (i.e., the preferred shares receive dividends even if the subsidiary experiences losses).

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

We believe that depending on the terms of the share and the specific facts and circumstances, when the net income or loss of a reporting entity’s subsidiary is allocated between the controlling and noncontrolling interests held in the subsidiary, the reporting entity should allocate earnings or losses in a manner consistent with the three-step model described in Section 6.1 that reflects the substance of the rights and preferences of the subsidiary’s share classes.

Example 6-10A

Assume the following facts: • Company C, Company H, and Company I form Entity CHI. The purpose and design of CHI is to buy and manage pizzerias. • Company C contributes $100 million in exchange for 25 percent of the common shares of CHI, and H contributes $300 million in exchange for 75 percent of the common shares of CHI. • Company H has a controlling financial interest in, and consolidates, CHI. • Company I contributes $200 million to CHI in exchange for preferred shares in CHI that receive a 2 percent cumulative stated dividend per year; unpaid dividends are added to I’s liquidation preference, which is initially equal to its investment. Further assume that H has no other activities other than its investment in CHI. The results of operations for CHI for two years are as follows (dollar amounts in millions):

Year 1 Year 2

Net income (loss) $ 100 $ (50)

Because I, the preferred shareholder, is entitled to a 2 percent stated dividend per year on its preferred shares, H would attribute the net income (loss) of CHI to the controlling and noncontrolling interest holders as follows (dollar amounts in millions):

Year 1 Year 2

Net income (loss) $ 100 $ (50)

Less: net income attributable to the preferred noncontrolling interest held by I 4* 4*

Net income (loss) attributable to the common shareholders 96 (54)

Net income (loss) attributable to the common noncontrolling interest held by C $ 24** $ (13.5)***

Net income (loss) attributable to the controlling financial $ 72 $ (40.5) interest held by H

* Calculated as $200 × 2% stated dividend; CHI’s net loss in year 2 does not reduce I’s stated dividend amount per year. ** Calculated as $96 × 25% noncontrolling interest held by C. *** Calculated as $(54) × 25% noncontrolling interest held by C.

79 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

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

ASC 810-10

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

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

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

Example 6-11

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

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

Income before income tax expense ($100,000 + $50,000) $ 150,000 Income tax expense ([$100,000 + ($50,000 × 90%)] × 25%) (36,250) Consolidated net income 113,750 Less: net income attributable to noncontrolling interests ($50,000 × 10%) (5,000) Net income attributable to X’s common shareholders $ 108,750

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

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

6.9 Calculation of Earnings per Share When There Is a Noncontrolling Interest

ASC 260-10

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. . . .

When calculating consolidated EPS, a reporting entity should exclude net income attributable to noncontrolling interests. That is, as a starting point, the numerator of the reporting entity’s EPS calculation should be based on net income attributable to the parent’s shareholders, as determined in accordance with the guidance discussed in Sections 6.1 through 6.8.

6.10 Adoption of a New Accounting Standard If the adoption of a new accounting standard includes a transition adjustment that affects the equity of a subsidiary that the reporting entity controls but does not wholly own, the reporting entity should consider how the transition adjustment would affect the noncontrolling interest in the subsidiary. ASC 810-10-45-19 indicates that revenues, expenses, gains, losses, net income or loss, and OCI of a subsidiary not wholly owned by the parent should be attributed to both the parent and the noncontrolling interest holders. Therefore, it would be appropriate to attribute the transition adjustment to both the parent and the noncontrolling interest holders since the transition adjustment may have affected net income in the prior periods.

The reporting entity should also consider whether and, if so, how the adoption of a new accounting standard affects OCI.

81 Chapter 7 — Changes in a Parent’s Ownership Interest

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

ASC 810-10

45-22 A parent’s ownership interest in a subsidiary might change while the parent retains its controlling financial interest in the subsidiary. For example, a parent’s ownership interest in a subsidiary might change if any of the following occur: a. The parent purchases additional ownership interests in its subsidiary. b. The parent sells some of its ownership interests in its subsidiary. c. The subsidiary reacquires some of its ownership interests. d. The subsidiary issues additional ownership interests.

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

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

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

As explained in Section 7.1.1 below, there is an exception to this overall “equity transaction” principle for certain decreases in ownership specified in ASC 810-10-45-21A(b).

82 Chapter 7 — Changes in a Parent’s Ownership Interest

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

ASC 810-10

45-21A[1] The guidance in paragraphs 810-10-45-22 through 45-24 applies to the following: a. Transactions that result in an increase in ownership of a subsidiary b. Transactions that result in a decrease in ownership of either of the following while the parent retains a controlling financial interest in the subsidiary: 1. A subsidiary that is a business or a nonprofit activity, except for either of the following: i. A sale of in substance real estate (for guidance on a sale of in substance real estate, see Subtopic 360-20 or 976-605) ii. A conveyance of oil and gas mineral rights (for guidance on conveyances of oil and gas mineral rights and related transactions, see Subtopic 932-360). 2. A subsidiary that is not a business or a nonprofit activity if the substance of the transaction is not addressed directly by guidance in other Topics that include, but are not limited to, all of the following: i. Topic 605 on revenue recognition ii. Topic 845 on exchanges of nonmonetary assets iii. Topic 860 on transferring and servicing financial assets iv. Topic 932 on conveyances of mineral rights and related transactions v. Topic 360 or 976 on sales of in substance real estate.

Pending Content (Transition Guidance: ASC 606-10-65-1)

45-21A The guidance in paragraphs 810-10-45-22 through 45-24 applies to the following: a. Transactions that result in an increase in ownership of a subsidiary b. Transactions that result in a decrease in ownership of either of the following while the parent retains a controlling financial interest in the subsidiary: 1. A subsidiary that is a business or a nonprofit activity, except for either of the following: i. Subparagraph superseded by Accounting Standards Update No. 2017-05 ii. A conveyance of oil and gas mineral rights (for guidance on conveyances of oil and gas mineral rights and related transactions, see Subtopic 932-360). iii. A transfer of a good or service in a contract with a customer within the scope of Topic 606. 2. A subsidiary that is not a business or a nonprofit activity if the substance of the transaction is not addressed directly by guidance in other Topics that include, but are not limited to, all of the following: i. Topic 606 on revenue from contracts with customers ii. Topic 845 on exchanges of nonmonetary assets iii. Topic 860 on transferring and servicing financial assets iv. Topic 932 on conveyances of mineral rights and related transactions v. Subtopic 610-20 on gains and losses from the derecognition of nonfinancial assets.

1 Certain Codification subtopics related to gains and losses from derecognition of nonfinancial assets and transfers of goods or services in a contract with a customer within the scope of the new revenue standard (ASU 2014-09) will supersede current guidance in this paragraph. In addition, ASU 2017-05 on gains and losses from the derecognition of nonfinancial assets will further amend this paragraph. Reporting entities should take such changes into account for applicable periods. For public entities, ASU 2014-09 and ASU 2017-05 are effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods therein. In accordance with the deferred effective dates provided by ASU 2020-05, nonpublic entities that have not yet issued their financial statements (or made their financial statements available for issuance) as of June 3, 2020, may adopt ASU 2014-09 and ASU 2017-05 for annual reporting periods beginning after December 15, 2019, and interim reporting periods within annual reporting periods beginning after December 15, 2020. However, since the deferral is not mandatory, nonpublic entities may still elect to adopt ASU 2014-09 and ASU 2017-05 in accordance with previous guidance (i.e., for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019).

83 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

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

The guidance in ASC 810-10 on decreases in ownership without an accompanying change in control applies to all decreases in ownership (without an accompanying change in control) of subsidiaries that are businesses or nonprofit activitiesexcept for decreases that result from the types of transactions marked with an “X” below. For the types of transactions marked with an “X,” the guidance cited in the left column of the table would generally be considered.2

Before Adoption of New After Adoption of New Revenue Standard Revenue Standard Sales of in-substance real estate (ASC 360 or ASC 976-605)3 X See Section 7.1.1.1.2 Conveyances of oil and gas mineral rights (ASC 932-360) X X Transfers of goods or services in contracts with customers (ASC 606)4 See footnote 4 X

The guidance in ASC 810-10 on decreases in ownership without an accompanying change in control also applies to all decreases in ownership (without an accompanying change in control) in subsidiaries that are not businesses or nonprofit activitiesexcept for decreases that result from transactions whose substance is addressed by other U.S. GAAP, including, but not limited to, the types of transactions marked with an “X” below. For the types of transactions marked with an “X,” the guidance cited in the left column of the table would generally be considered.5

Before Adoption of New After Adoption of New Revenue Standard Revenue Standard Revenue transactions (ASC 605 or 606) X X Exchanges of nonmonetary assets (ASC 845) X X Transfers and servicing of financial assets (ASC 860)6 X X Conveyances of mineral rights and related transactions (ASC 932) X X Sales of in-substance real estate (ASC 360 or ASC 976)7 X See Section 7.1.1.1.2 Gains and losses from derecognition of nonfinancial assets (ASC 610-20)8 See footnote 8 X

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

2 As used in the table below, the term “new revenue standard” refers to the guidance in ASU 2014-09 as amended by ASU 2017-05. 3 Refer to Section 7.1.1.1 for special considerations related to sales of in-substance real estate. 4 This represents a new scope exception added to ASC 810-10-45-21A(b)(1) by the new revenue standard. 5 See footnote 2. 6 Refer to Section 7.1.1.2 for further discussion. 7 See footnote 3. 8 This represents a new scope exception added to ASC 810-10-45-21A(b)(2) by the new revenue standard.

84 Chapter 7 — Changes in a Parent’s Ownership Interest

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

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

Is the Is the subsidiary a substance of the business (as defined in No transaction addressed No Accounted for under ASC 810-10. ASC 805) or a nonprofit directly by guidance in activity? another Codification topic?

Yes Yes

Accounted for under the other Codification topic.

Is the transaction a sale of in-substance real estate (ASC 360-20 or No Accounted for under ASC 810-10. 976-605) or a conveyance of oil and gas mineral rights (ASC 932-360)?

Yes

Accounted for under the applicable Codification subtopic.

85 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

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

Is the Is the subsidiary a substance of the business (as defined in No transaction addressed No Accounted for under ASC 810-10. ASC 805) or a nonprofit directly by guidance in activity? another Codification topic?

Yes Yes

Accounted for under the other Codification topic.

Is the transaction a conveyance of oil and gas mineral rights No (ASC 932-360) or a transfer Accounted for under ASC 810-10. of goods or services in a contract with a customer (ASC 606)?

Yes

Accounted for under the applicable Codification subtopic.

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

7.1.1.1 Noncontrolling Interests Arising From Transfers of Real Estate Accounted for as a Profit-Sharing Arrangement

ASC 360-20

40-47 If the buyer is not independent of the seller, for example, if the seller holds or acquires an equity interest in the buyer, the seller shall recognize the part of the profit proportionate to the outside interests in the buyer at the date of sale. If the seller controls the buyer, no profit on the sale shall be recognized until it is realized from transactions with outside parties through sale or operations of the property.

Pending Content (Transition Guidance: ASC 842-10-65-1)

40-47 Paragraph superseded by Accounting Standards Update No. 2016-02.

86 Chapter 7 — Changes in a Parent’s Ownership Interest

7.1.1.1.1 Before the Adoption of the New Revenue Standard It is not uncommon for a reporting entity to transfer real estate to a newly established subsidiary that issues a portion of its own equity interests to unrelated third parties concurrently with its receipt of the real estate. When a reporting entity sells real estate to a consolidated subsidiary, the consolidated subsidiary is generally viewed in practice as the “buyer” of the real estate, as that term is used in ASC 360-20-40-47,9 and recognition of profit on the transfer is consequently deferred.

While the deferral of profit recognition is a generally accepted requirement of ASC 360, questions have arisen about whether ASC 810-10-45-21A precludes the reporting entity from looking to ASC 810-10 for guidance on recognizing and measuring (as noncontrolling interests) the portion of the subsidiary’s (buyer’s) equity interests that is owned by parties unrelated to the reporting entity.

The ASC 810-10 scope exception for sales of in-substance real estate arose from the issuance of ASU 2010-02. Although not codified, paragraphs BC13 and BC14 of ASU 2010-02 provide insight into the FASB’s rationale for issuing the ASU, stating, in part:

BC13. In the Board’s view, the accounting for decreases in ownership of a business should not differ because of industry factors. However, existing U.S. GAAP on accounting for sales of in substance real estate (Subtopics 360-20 and 976-605) includes extensive guidance on how continuing involvement affects sale accounting and profit recognition even when the real estate is a business. In contrast, there is very little guidance on how continuing involvement affects whether an investor has lost control of a subsidiary; therefore, the outcome under different U.S. GAAP could lead to inconsistent results.

BC14. The Board resolved this conflict by requiring an entity to continue to apply the guidance in Subtopics 360-20 and 976-605 for transactions that are sales of in substance real estate.

When profit recognition is precluded by ASC 360-20-40-47, the transfer of real estate is accounted for by the transferor (i.e., the reporting entity) as a lease, financing, or profit-sharing arrangement depending on facts and circumstances. ASC 360-20 does not provide guidance on classifying or measuring subsidiary interests held by third parties when the transfer is accounted for under the profit-sharing method. We believe that paragraphs BC13 and BC14 of ASU 2010-02 demonstrate that the FASB’s intention in issuing the ASU was to require the guidance in ASC 360 to prevail in the event of a conflict between ASC 360 and ASC 810-10. Recognizing that the absence of classification and measurement guidance in ASC 360-20 precludes any conflict between ASC 360 and ASC 810-10, we believe that it is appropriate for an entity to look back to the guidance in ASC 810-10-45-22 through 45-24 to determine how to classify and measure subsidiary interests held by third parties after real estate transfers accounted for as profit- sharing arrangements. Assuming that there are no features in the third-party interests that preclude noncontrolling interest classification under ASC 810-10 (seeSection 3.2), we believe that ASC 810-10 and Sections 7.1 through 7.1.3 of this Roadmap may be looked to for guidance on classifying the interests and accounting for the difference between the amount of cash received from issuance of the third-party interests and the amount at which the noncontrolling interest is initially recorded.

7.1.1.1.2 After the Adoption of the New Revenue Standard The scope exception in ASC 810-10-45-21A related to the applicability of ASC 810-10-45-22 through 45-24 to decreases in ownership for sales of in-substance real estate when there is not an accompanying change in control is superseded upon adoption of the new revenue standard since ASC 606 and ASC 610-20 partially supersede ASC 360-20. ASC 610-20 applies to all nonfinancial assets, not only to those within the scope of ASC 350 and ASC 360, if there is no other applicable guidance. For

9 ASC 360-20, which provides guidance on real estate sale transactions, is partially superseded by ASC 606 and ASC 610-20 upon adoption of the new revenue standard. However, ASC 360-20 (including ASC 360-20-40-47) continues to apply to sale-and-leaseback transactions involving real estate assets until the amendments in ASU 2016-02 on leases become effective.

87 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020) each nonfinancial asset, an entity would first determine whether the transfer of the nonfinancial asset is within the scope of ASC 606, ASC 610-20, ASC 810, or any other U.S. GAAP.

A key consideration in an entity’s determination of whether a sale of a nonfinancial asset is within the scope of ASC 606 or other guidance is whether the nonfinancial asset is an output of the entity’s ordinary business activities. For instance, if the nonfinancial asset is an output of the entity’s ordinary business activities (e.g., a home builder’s sale of real estate), the arrangement would be accounted for under ASC 606. However, if the nonfinancial asset isnot an output of the entity’s ordinary business activities (e.g., a financial services company’s sale of its headquarters), ASC 610-20 would apply. An entity would continue to apply the derecognition guidance in ASC 810-10-40 when transfers or sales are not in-substance nonfinancial assets and the nonfinancial assets are held within a subsidiary or are a group of assets that meets the definition of a business.

Refer to Section 17.2 of Deloitte’s A Roadmap to Applying the New Revenue Recognition Standard for additional details.

7.1.1.2 Transfer of Equity Interests in a Subsidiary Holding Financial Assets A reporting entity should apply ASC 860 in lieu of ASC 810 when it issues an equity interest in a subsidiary whose only assets are financial assets.10 Paragraph BC9 of ASU 2010-02 explains, in part, as follows:

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

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

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

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

88 Chapter 7 — Changes in a Parent’s Ownership Interest

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

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

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

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

ASC 810-10

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

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

ASC 220-10

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

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

89 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

To determine the adjustment(s) to equity and noncontrolling interest accounts that must be recorded in the consolidated financial statements, a reporting entity must compare the consideration paid (received) in the transaction with the noncontrolling interest’s claim on net assets after the transaction. Although seemingly straightforward, this analysis requires the entity to consider two nuances in practice: • The structure of the transaction (the parent’s acquiring [selling] subsidiary shares directly from [to] a noncontrolling interest holder vs. the subsidiary’s reacquiring [issuing] its own shares from [to] holders of noncontrolling interests) may directly affect the absolute amount of the subsidiary’s net assets and thus indirectly affect each party’s claim on the subsidiary’s net assets. • Whereas ASC 220-10-45-14 requires a parent to separately present its portion of a subsidiary’s AOCI as a separate component of equity, ASC 220 and ASC 810 do not require separate presentation of the noncontrolling interest holder’s portion of the subsidiary’s AOCI. Consequently, ASC 810-10-45-24 requires that when a parent’s ownership interest in a consolidated subsidiary changes and the subsidiary has AOCI reported in its stand-alone balance sheet, the parent must adjust the consolidated AOCI balance to reflect the parent’s new interest in the subsidiary’s AOCI balance. The offset to this journal entry is to the parent’s equity balance (typically, additional paid-in capital (APIC)).

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:

Adjust the net assets of the subsidiary to reflect any consideration paid directly to or received directly from the subsidiary. STEP 1

Determine the new ownership percentages of the controlling and noncontrolling interests. STEP 2

Adjust the carrying amount of the noncontrolling interest by multiplying the adjusted net assets of the subsidiary (step 1) by the noncontrolling interest’s new ownership percentage after STEP 3 the transaction (step 2).

Recognize any difference between the consideration paid (received) by the consolidated reporting entity and the adjustment to the noncontrolling interest (step 3) STEP 4 as an adjustment to the consolidated reporting entity’s APIC.

To the extent necessary, adjust the consolidated reporting entity’s AOCI balance to reflect the parent’s adjusted interest in the subsidiary’s AOCI (by using the percentages determined in step 2), STEP 5 and record an offsetting adjustment to the consolidated reporting entity’s APIC.

90 Chapter 7 — Changes in a Parent’s Ownership Interest

The table below summarizes how various forms of transactions involving changes in ownership of common shares in a subsidiary affect (1) the subsidiary’s net assets, (2) the controlling and noncontrolling interest holders’ respective ownership percentages, and (3) the consolidated reporting entity’s AOCI balance. (Refer to Section 7.1.2.7 for special considerations related to transactions involving changes in ownership of preferred shares in a subsidiary.)

Effect of Transactions Involving Changes in Ownership of Common Shares in a Subsidiary

Effect on Effect on Effect on Controlling Noncontrolling Consolidated Interest Interest Reporting Effect on Holder’s Holders’ Entity’s AOCI Subsidiary’s Ownership Ownership Balance Related Transaction Net Assets Percentage Percentage to Subsidiary11

Parent purchases equity interests in None Increased Decreased Increased its subsidiary from a noncontrolling interest holder (see Section 7.1.2.1)

Subsidiary purchases equity interests Decreased Increased Decreased Increased in itself from third parties (see Section 7.1.2.2)

Parent sells to a third party a portion None Decreased Increased Decreased of its investment in its subsidiary (see Section 7.1.2.5)

Subsidiary issues equity interests to Increased Decreased Increased Decreased third parties (see Section 7.1.2.6)

7.1.2.1 Parent’s Acquisition of Interests in Subsidiary Directly From Third Party A parent may acquire interests in its subsidiary directly from a noncontrolling interest holder. By acquiring those interests, the parent increases its relative ownership interest in the subsidiary. The example below illustrates the accounting for such an acquisition.

Example 7-1

Subsidiary XYZ is capitalized as follows:

Shares held by Company A (parent) 750 Shares held by Entity B (noncontrolling interest holder) 250 Shares of common stock 1,000

Common stock $ 1,000 Paid-in capital 59,000 Retained earnings 12,000 AOCI 8,000 Subsidiary’s net assets $ 80,000

Investor’s claim on net assets Company A ($80,000 × 75%) $ 60,000 Entity B ($80,000 × 25%) $ 20,000

11 All increases and decreases reflected in this column are in absolute terms. 91 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

Example 7-1 (continued) Company A (the parent) purchases 100 shares of XYZ common stock from B (the noncontrolling interest holder) for $10,000. As a result, A should perform the following steps to reflect in A’s consolidated financial statements the increase in A’s ownership: • Step 1: Adjust the subsidiary’s net assets — This step is not applicable to transactions performed directly between shareholders. Net assets remain at $80,000. • Step 2: Determine the new ownership percentages — The new ownership percentages held by A and B, respectively, are calculated as follows: o Company A’s new ownership percentage = (750 shares + 100 shares) ÷ 1,000 shares = 85%. o Entity B’s new ownership percentage = (250 shares – 100 shares) ÷ 1,000 shares = 15%. • Step 3: Determine the new carrying amount of the noncontrolling interest — Entity B’s new carrying amount is $80,000 × 15% = $12,000. • Step 4: Recognize the consideration paid, the change in the noncontrolling interest, and the adjustment to APIC — The following entry should be recorded:

Stockholders’ equity — noncontrolling interest 8,000* APIC 2,000** Cash 10,000 • Step 5: Adjust the consolidated reporting entity’s AOCI balance — The following entry should be recorded: APIC 800 AOCI 800***

* $20,000 (noncontrolling interest before the transaction) – $12,000 (noncontrolling interest after the transaction) = $8,000 additional ownership interest obtained by A. ** The difference between the consideration paid ($10,000) and the ownership interest obtained ($8,000) is recorded in equity. No loss is recorded since this is an equity transaction under ASC 810-10-45-23. *** (85% new ownership interest – 75% prior ownership interest) × $8,000 AOCI = $800.

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

Example 7-2

Subsidiary XYZ is capitalized as follows:

Shares held by Company A (parent) 750 Shares held by Entity B (noncontrolling interest holder) 250 Shares of common stock 1,000

Common stock $ 1,000 Paid-in capital 59,000 Retained earnings 12,000 AOCI 8,000 Subsidiary’s net assets $ 80,000

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Example 7-2 (continued) Investor’s claim on net assets Company A ($80,000 × 75%) $ 60,000 Entity B ($80,000 × 25%) $ 20,000

Subsidiary XYZ purchases 100 shares of its common stock (par value equals $1 per share) from B (the noncontrolling interest holder) for $10,000. As a result, A should perform the following steps to reflect in A’s consolidated financial statements the increase in A’s ownership: • Step 1: Adjust the subsidiary’s net assets — Subsidiary XYZ’s net assets after the transaction are as follows: Common stock $ 900 Paid-in capital 49,100 Retained earnings 12,000 AOCI 8,000 Subsidiary’s net assets $ 70,000 • Step 2: Determine the new ownership percentages — The new ownership percentages held by A and B, respectively, are calculated as follows: o Company A’s new ownership percentage = 750 shares ÷ (1,000 shares –100 shares) = 83.33%. o Entity B’s new ownership percentage = (250 shares – 100 shares) ÷ (1,000 shares – 100 shares) = 16.67%. • Step 3: Determine the new carrying amount of the noncontrolling interest — Entity B’s new carrying amount is $70,000 × 16.67% = $11,669. • Step 4: Recognize the consideration paid, the change in the noncontrolling interest, and the adjustment to APIC — The following entry should be recorded:

Stockholders’ equity — noncontrolling interest 8,331* APIC 1,669** Cash 10,000 • Step 5: Adjust the consolidated reporting entity’s AOCI balance — The following entry should be recorded: APIC 666 AOCI 666***

* $20,000 (noncontrolling interest before the transaction) – $11,669 (noncontrolling interest after the transaction) = $8,331 additional ownership interest obtained by A. ** The difference between the consideration paid ($10,000) and the ownership interest obtained ($8,331) is recorded in equity. No loss is recorded since this is an equity transaction under ASC 810-10-45-23. *** (83.33% new ownership interest – 75% prior ownership interest) × $8,000 AOCI = $666.

7.1.2.3 Additional Ownership Interest Obtained Through a Business Combination In a business combination, an acquirer (parent) may obtain an additional ownership interest in an existing consolidated subsidiary if the target has a noncontrolling interest in that acquirer’s (parent’s) subsidiary before the business combination.

Under the acquisition accounting model in ASC 805, total consideration transferred to the seller by the acquirer must be attributed to all assets acquired and liabilities assumed in the business combination. Such attribution is based on the fair value of the individual assets acquired and liabilities assumed. When the target entity holds a noncontrolling interest in a subsidiary of the acquirer, one of the “assets” acquired by the acquirer is an increased ownership interest in the acquirer’s previously consolidated subsidiary. Consequently, and in a manner consistent with the guidance in ASC 810-10, an equity

93 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020) transaction has also taken place. To record this equity transaction, the acquirer should treat the amount attributed to the acquired noncontrolling interest under the acquisition accounting model in ASC 805 as the consideration “paid” to acquire the noncontrolling interest. Once the consideration “paid” has been determined, the acquirer should perform the five steps outlined inSection 7.1.2 to recognize its increased ownership interest in its subsidiary.

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

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

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

Example 7-3

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

94 Chapter 7 — Changes in a Parent’s Ownership Interest

7.1.2.5 Parent’s Selling of Interests in a Subsidiary Directly to a Noncontrolling Interest Holder A parent should use the same five-step approach described inSection 7.1.2 to recognize decreases in its ownership interest in its subsidiary while control is maintained.

Example 7-4

Subsidiary XYZ is capitalized as follows:

Shares of common stock (all held by Company A [parent]) 1,000

Common stock $ 1,000 Paid-in capital 59,000 Retained earnings 12,000 AOCI 8,000 Subsidiary’s net assets $ 80,000 Company A (the parent) sells 100 shares of XYZ common stock to Entity B (the newly established noncontrolling interest holder) for $10,000. As a result, A should perform the following steps to reflect in A’s consolidated financial statements the decrease in A’s ownership: • Step 1: Adjust the net assets of the subsidiary — This step is not applicable to transactions performed directly between shareholders. Net assets remain at $80,000. • Step 2: Determine the new ownership percentages — The new ownership percentages held by A and B, respectively, are calculated as follows: o Company A’s new ownership percentage = (1,000 shares – 100 shares) ÷ 1,000 shares = 90%. o Entity B’s new ownership percentage = (0 shares + 100 shares) ÷ 1,000 shares = 10%. • Step 3: Determine the new carrying amount of the noncontrolling interest — Entity B’s new carrying amount is $80,000 × 10% = $8,000. • Step 4: Recognize the consideration received, the change in the noncontrolling interest, and the adjustment to APIC — The following entry should be recorded: Cash 10,000 Noncontrolling interest 8,000 APIC 2,000* • Step 5: Adjust the consolidated reporting entity’s AOCI balance — The following entry should be recorded: AOCI 800 APIC 800**

* The difference between the consideration received ($10,000) and the ownership interest sold ($8,000 claim on the subsidiary’s net assets) is recorded in equity. No gain or loss is recorded since this is an equity transaction under ASC 810-10-45-23. ** (100% prior ownership interest – 90% new ownership interest) × $8,000 AOCI = $800.

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

Example 7-5

Subsidiary XYZ is capitalized as follows:

Shares of common stock (all held by Company A [parent]) 1,000

Common stock $ 1,000 Paid-in capital 59,000 Retained earnings 12,000 AOCI 8,000 Subsidiary’s net assets $ 80,000 Subsidiary XYZ issues 100 shares of its common stock (par value equals $1 per share) to Entity B (the newly established noncontrolling interest holder) for $10,000. As a result, A should perform the following steps to reflect in A’s consolidated financial statements the decrease in A’s ownership: • Step 1: Adjust the net assets of the subsidiary — Subsidiary XYZ’s net assets after the transaction are as follows: Common stock $ 1,100 Paid-in capital 68,900 Retained earnings 12,000 AOCI 8,000 Subsidiary’s net assets $ 90,000 • Step 2: Determine the new ownership percentages — The new ownership percentages held by A and B, respectively, are calculated as follows: o Company A’s new ownership percentage = 1,000 shares ÷ (1,000 shares + 100 shares) = 90.91%. o Entity B’s new ownership percentage = (0 shares + 100 shares) ÷ (1,000 shares + 100 shares) = 9.09%. • Step 3: Determine the new carrying amount of the noncontrolling interest — Entity B’s new carrying amount is $90,000 × 9.09% = $8,181. • Step 4: Recognize the consideration received, the change in the noncontrolling interest, and the adjustment to APIC — The following entry should be recorded:

Cash 10,000 Noncontrolling interest 8,181 APIC 1,819* • Step 5: Adjust the consolidated reporting entity’s AOCI balance — The following entry should be recorded: AOCI 727 APIC 727**

* The difference between the consideration received ($10,000) and the ownership interest sold ($8,181 claim on the subsidiary’s net assets) is recorded in equity. No gain or loss is recorded since this is an equity transaction under ASC 810-10-45-23. ** (100% prior ownership interest – 90.91% new ownership interest) × $8,000 AOCI = $727.

96 Chapter 7 — Changes in a Parent’s Ownership Interest

7.1.2.6.1 Parent’s Accounting for Subsidiary’s Issuance of Share-Based Payment Awards A subsidiary may issue share-based payment awards of its own stock to its employees. ASC 718-10-35-2 states, in part:

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

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

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

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

Example 7-5A

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

Company J’s ownership structure is illustrated below.

LLC Members

100% owned; 10,000 LLC units

Company J (LLC)

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Example 7-5A (continued)

In 20X2, J’s owners create an UP-C structure as follows: • First, J’s owners form Company K, a holding company organized as a C corporation. They plan for K to publicly sell shares of its stock in an IPO. • In contemplation of K’s IPO, J’s owners amend J’s operating agreement. Specifically, they modify J’s capital structure by reclassifying the interests in J as voting (“Class A”) and nonvoting (“Class B”) LLC units. • Before or contemporaneously with the launch of K’s IPO, J issues 7,000 Class B units to the two LLC members who originally owned 100 percent of J (the “pre-IPO LLC members,” who are now J’s legacy owners) and 3,000 Class A units to K. That is, all of the previous 10,000 units of J were converted to 7,000 Class B units and 3,000 Class A units. • In K’s IPO , K issues 3,000 Class A common shares of its stock to the public. • Company K is the managing member of J. The 20X2 UP-C reorganization is illustrated below.

3,000 Class A shares Company K (C Corporation)

Public 3,000 Pre-IPO LLC Class A Class A 7,000 Class B Members Shares units units

Company J (LLC)

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

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

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

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

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

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

98 Chapter 7 — Changes in a Parent’s Ownership Interest

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

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

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

The interpretive guidance above is provided in the context of a subsidiary’s issuances, as opposed to repurchases, of preferred shares. The reporting entity’s accounting for a subsidiary’s repurchase of preferred shares depends on whether the reporting entity is within the scope of ASC 480-10-S99-3A and whether the shares are redeemable or nonredeemable: • Redeemable preferred shares — As discussed in Section 9.3.1, preferred-share redeemable noncontrolling interests in a subsidiary are classified in the temporary equity section of the reporting entity’s consolidated balance sheet. After issuance of a subsidiary’s redeemable preferred shares, the carrying amount of a preferred-share redeemable noncontrolling interest is adjusted in accordance with one of the two methods described in Section 9.3.3.2. The objective of this measurement adjustment is to ultimately recognize the preferred-share redeemable noncontrolling interest at its redemption price on its redemption date. Therefore, if the redeemable preferred shares in the subsidiary are redeemed at their carrying amount, no rebalancing should be required since there will be no difference between the shares’ book value and their redemption value at the time of redemption. However, if the preferred-share redeemable noncontrolling interest is redeemed at a price other than its carrying amount (e.g., a reporting entity that applies the accretion method has a subsidiary that voluntarily acquires the preferred-share redeemable noncontrolling interest before the shares’ stated redemption date), a rebalancing will be necessary to account for the difference between the consideration paid to acquire the preferred-share redeemable noncontrolling interest and the interest’s carrying amount. See Section 9.3.5.2 for additional considerations related to the EPS implications of redemptions of preferred-share noncontrolling interests.

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• Nonredeemable preferred shares — Unlike the carrying amount of preferred-share redeemable noncontrolling interests, the carrying amount of preferred-share noncontrolling interests that are not redeemable is not adjusted after issuance of the shares. As a result, the repurchase of preferred-share noncontrolling interests that are not redeemable will generally result in a rebalancing of the equity accounts since the book value of the nonredeemable preferred shares will most likely not equal the redemption price. In rebalancing the equity accounts, an entity should perform the five-step process outlined inSection 7.1.2.

7.1.2.8 Accounting for Costs Related to Equity Transactions With Noncontrolling Interest Holders ASC 810-10-45-23 indicates that “[c]hanges in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary shall be accounted for as equity transactions (investments by owners and distributions to owners acting in their capacity as owners).”

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

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

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

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

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

100 Chapter 7 — Changes in a Parent’s Ownership Interest

7.1.3 Accounting for the Tax Effects of Transactions With Noncontrolling Shareholders

ASC 740-20

45-11 The tax effects of the following items occurring during the year shall be charged or credited directly to other comprehensive income or to related components of shareholders’ equity: . . . c. An increase or decrease in contributed capital (for example, deductible expenditures reported as a reduction of the proceeds from issuing capital stock). . . . g. All changes in the tax bases of assets and liabilities caused by transactions among or with shareholders shall be included in equity including the effect of valuation allowances initially required upon recognition of any related deferred tax assets. Changes in valuation allowances occurring in subsequent periods shall be included in the income statement.

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

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

Example 7-6

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

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

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Example 7-6 (continued)

Original Carrying Original Ownership Carrying Amount Ownership Interest Entity Amount Interest January 1, 20Y0 January 1, 20Y0 A $ 80,000,000 80% $ 70,000,000 70% B 20,000,000 20 20,000,000 20 C — — 10,000,000 10 Total $ 100,000,000 100% $ 100,000,000 100%

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

Cash 20,000,000 Noncontrolling interest 10,000,000 APIC 10,000,000

Entity A’s tax consequence from the tax gain on the sale of its investment in the foreign subsidiary is approximately $2.8 million [$20 million selling price – ($70 million tax basis × 12.5% portion sold)] × 25% tax rate. The amount comprises the following direct and indirect tax effects: 1. The direct tax effect of the sale is $2.5 million. This amount is associated with the difference between the selling price and book basis of the interest sold by A (i.e., the gain on the sale) [$20 million selling price – ($80 million book basis × 12.5% portion sold)] × 25% tax rate. The gain on the sale of A’s interest is recorded in shareholders’ equity; therefore, the direct tax effect is also recorded in shareholders’ equity. 2. The indirect tax effect of the sale is $312,500. This amount is associated with the preexisting taxable temporary difference (i.e., the undistributed earnings of the subsidiary) of the interest sold [($80 million book basis – $70 million tax basis) × 12.5% portion sold] × 25% tax rate. The partial sale of the foreign subsidiary results in a change in A’s assertion regarding the indefinite reinvestment of the subsidiary’s earnings associated with the interest sold by A. This is considered an indirect tax effect and recognized as income tax expense. Below is A’s journal entry on January 1, 20Y0, to account for the income tax effects of the sale of its interest in the foreign subsidiary:

Income tax expense 312,500 APIC 2,500,000 Current tax payable 2,812,500

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

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

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

ASC 810-10

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

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

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

103 Chapter 8 — Presentation and Disclosure

8.1 Overview ASC 810-10-45-15 states that the “ownership interests in the subsidiary that are held by owners other than the parent [are] a noncontrolling interest.” ASC 810-10 explains how to present and disclose those equity interests held by owners other than the parent.

ASC 810-10

45-15 The ownership interests in the subsidiary that are held by owners other than the parent is a noncontrolling interest. The noncontrolling interest in a subsidiary is part of the equity of the consolidated group.

45-16 The noncontrolling interest shall be reported in the consolidated statement of financial position within equity (net assets), separately from the parent’s equity (or net assets). That amount shall be clearly identified and labeled, for example, as noncontrolling interest in subsidiaries (see paragraph 810-10-55-4I). An entity with noncontrolling interests in more than one subsidiary may present those interests in aggregate in the consolidated financial statements. A not-for-profit entity shall report the effects of any donor-imposed restrictions, if any, in accordance with paragraph 958-810-45-1.

45-16A Only either of the following can be a noncontrolling interest in the consolidated financial statements: a. A financial instrument (or an embedded feature) issued by a subsidiary that is classified as equity in the subsidiary’s financial statements b. A financial instrument (or an embedded feature) issued by a parent or a subsidiary for which the payoff to the counterparty is based, in whole or in part, on the stock of a consolidated subsidiary, that is considered indexed to the entity’s own stock in the consolidated financial statements of the parent and that is classified as equity.

50-1 Consolidated financial statements shall disclose the consolidation policy that is being followed. In most cases this can be made apparent by the headings or other information in the financial statements, but in other cases a note to financial statements is required.

50-1A A parent with one or more less-than-wholly-owned subsidiaries shall disclose all of the following for each reporting period: a. Separately, on the face of the consolidated financial statements, both of the following: 1. The amounts of consolidated net income and consolidated comprehensive income 2. The related amounts of each attributable to the parent and the noncontrolling interest. b. Either in the notes or on the face of the consolidated income statement, amounts attributable to the parent for any of the following, if reported in the consolidated financial statements: 1. Income from continuing operations 2. Discontinued operations 3. Subparagraph superseded by Accounting Standards Update No. 2015-01.

104 Chapter 8 — Presentation and Disclosure

ASC 810-10 (continued)

c. Either in the consolidated statement of changes in equity, if presented, or in the notes to consolidated financial statements, a reconciliation at the beginning and the end of the period of the carrying amount of total equity (net assets), equity (net assets) attributable to the parent, and equity (net assets) attributable to the noncontrolling interest. That reconciliation shall separately disclose all of the following: 1. Net income 2. Transactions with owners acting in their capacity as owners, showing separately contributions from and distributions to owners 3. Each component of other comprehensive income. d. In notes to the consolidated financial statements, a separate schedule that shows the effects of any changes in a parent’s ownership interest in a subsidiary on the equity attributable to the parent. . . .

8.2 Balance Sheet Presentation The general premise of a noncontrolling interest is balance sheet focused. Noncontrolling interests have the following two characteristics: • They are equity interests (i.e., they must be classified in equity, although they may include equity interests classified in temporary equity). • They represent the portion of a subsidiary’s equity that is not attributable to its parent.

The first characteristic is addressed by the requirement in ASC 810-10-45-16A that noncontrolling interests be limited to instruments classified in equity. The second characteristic is reflected in the presentation requirements of ASC 810-10-45-16, which prescribe that a reporting entity should clearly label and present the noncontrolling interest in the equity section of its balance sheet but separately from the parent’s equity. See Chapter 9 for a discussion of considerations related to noncontrolling interests classified in temporary equity.

Example 8-1 Company D is the parent of Subsidiary E and Subsidiary F, both of which are capitalized with only common stock. Further assume the following: • At the beginning of 20X8, D owned 80 percent of E’s common shares and 65 percent of F’s common shares. • In 20X8, D sold 5 percent of E’s common shares to an unrelated third party for $5,000. The book value of E (on E’s books) was $92,000 at the time of the sale. • At the beginning of 20X9, D owned 75 percent of E’s common shares and 65 percent of F’s common shares. • In 20X9, D purchased an additional 5 percent of F’s common shares from an unrelated third party for $4,100. The book value of F (on F’s books) was $70,000 at the time of the purchase. • At the end of 20X9, D owned 75 percent of E’s common shares and 70 percent of F’s common shares.

105 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

Example 8-1 (continued) The statement of financial condition below illustrates the presentation of the noncontrolling interest on D’s condensed balance sheet for 20X8 and 20X9.

Company D — Condensed Balance Sheet

Statement of Financial Condition December 31, 20X9 December 31, 20X8

Total assets* $ 809,400 $ 766,000

Total liabilities* 258,500 256,000

Stockholders’ equity

Common stock** 155,000 155,000

APIC** 94,400 95,000

AOCI** 32,990 35,500

Retained earnings** 216,000 174,500

Parent’s stockholders’ equity in Company D 498,390 460,000

Noncontrolling interest** 52,510 50,000

Total equity 550,900 510,000

Total liabilities and stockholders’ equity $ 809,400 $ 766,000

* Total assets and liabilities are presented on a condensed basis for the purpose of this example. ** These balances represent the components of stockholders’ equity, which are consistent with the equity rollforward in Example 8-3.

8.3 Presentation of Income and Comprehensive Income ASC 810-10-50-1A(a) explicitly requires a reporting entity with one or more less than wholly owned subsidiaries to separately present both income and comprehensive income on the face of the consolidated financial statements in the following three ways: • Consolidated net income and consolidated comprehensive income. • Net income and comprehensive income attributable to the parent. • Net income and comprehensive income attributable to the noncontrolling interest.

These three requirements reflect the basis for presenting the noncontrolling interest in the first place: equity interests are similar, and in the absence of an explanation to the contrary, it is assumed that the equity interests in net income and comprehensive income are each determined in a similar manner. By separately presenting the total amount of net income and comprehensive income and the amounts of each that are allocable to the parent and noncontrolling interest, the reporting entity ensures that the nuances of each individual interest (e.g., liquidation preferences or preferred returns) are transparently presented to users of the financial statements.

In addition to complying with these presentation requirements, a reporting entity may elect to present on the face of its consolidated income statement amounts attributable to the parent for income from continuing operations and discontinued operations. If the reporting entity elects not to present these items on the face of the consolidated income statements, it must separately disclose this information.

106 Chapter 8 — Presentation and Disclosure

Example 8-2

Assume the same facts as in Example 8-1. Illustrated below is the presentation of the noncontrolling interest in D’s condensed statement of operations and statement of OCI.

Company D — Condensed Statement of Operations and Statement of OCI

Statement of Operations 20X9 20X8

Revenue* $ 84,600 $ 80,600

Expenses* 36,500 34,500

Net income 48,100 46,100

Less: net income attributable to noncontrolling interest 6,600 6,800

Net income attributable to Company D parent $ 41,500 $ 39,300

Statement of OCI 20X9 20X8

Net income $ 48,100 $ 46,100

OCI:

Unrealized (loss) gain on cash flow hedges** (3,360) 4,350

Foreign currency translation gain (loss)** 260 (400)

Comprehensive income 45,000 50,050

Comprehensive income attributable to noncontrolling interest*** 6,010 7,450

Comprehensive income attributable to Company D parent $ 38,990 $ 42,600

* Total revenue and expenses are presented on a condensed basis for the purpose of this example. ** This represents the unrealized (loss) gain on cash flow hedges and the foreign currency translation gain (loss). *** The comprehensive income attributable to the noncontrolling interest represents the sum of net income attributable to the noncontrolling interest and the gain/loss components of OCI attributable to noncontrolling interests.

8.4 Statement of Cash Flows Presentation ASC 810-10 is silent on the effect of a noncontrolling interest on the statement of cash flows. The requirement to present net income and comprehensive income in a consolidated format, with accompanying separate allocations to the parent and noncontrolling interest (Section 8.3), may give rise to questions about whether the statement of cash flows should start with consolidated net income or with net income attributable to the parent.

While noncontrolling interests are typically thought of as representing a third party’s claim on the net assets of a consolidated subsidiary, unless a transaction is specifically with a noncontrolling interest holder, it is not possible to identify the portion of an individual asset (e.g., cash) that is attributable to a noncontrolling interest. Accordingly, the statement of cash flows does not require differentiation, on its face, between cash flows attributable to controlling and noncontrolling interests. Instead, consolidated net income is the starting point for both (1) a reporting entity’s statement of cash flows prepared under

107 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020) the indirect method and (2) a reporting entity’s reconciliation to net income in a statement of cash flows prepared under the direct method.

Distributions to noncontrolling interest holders (in their capacity as equity holders) are considered equity transactions and should be reflected as cash outflows for financing activities in accordance with ASC 230-10-45-15. Entities that determine that it is appropriate to classify the cash outflows associated with these distributions outside of financing activities in the statement of cash flows are encouraged to consult with their professional accounting advisers.

See Section 7.1.2.8 of this Roadmap and Section 6.2.2 in Deloitte’s A Roadmap to the Preparation of the Statement of Cash Flows for additional discussion, including the classification of costs associated with the purchasing or selling noncontrolling interests in a subsidiary.

8.5 Statement of Stockholders’ Equity Presentation ASC 810-10’s financial reporting requirements for noncontrolling interests focus on highlighting (1) the similarity of subsidiary equity interests owned by both the parent and noncontrolling interest holders and (2) differences between the rights of holders of noncontrolling interests in a subsidiary and holders of the equity interests in the parent. ASC 810-10-50-1A(c) and (d) acknowledge that focus by requiring a reporting entity to include the following in the statement of stockholders’ equity:

c. Either in the consolidated statement of changes in equity, if presented, or in the notes to consolidated financial statements, a reconciliation at the beginning and the end of the period of the carrying amount of total equity (net assets), equity (net assets) attributable to the parent, and equity (net assets) attributable to the noncontrolling interest. That reconciliation shall separately disclose all of the following: 1. Net income 2. Transactions with owners acting in their capacity as owners, showing separately contributions from and distributions to owners 3. Each component of other comprehensive income. d. In notes to the consolidated financial statements, a separate schedule that shows the effects of any changes in a parent’s ownership interest in a subsidiary on the equity attributable to the parent.

The reconciliation referred to in ASC 810-10-50-1A(c) must be presented in the consolidated statement of changes in equity if such a statement is presented. If that statement is not presented, the reconciliation must be presented in the notes to the consolidated financial statements.

Under SEC Regulation S-X, Rule 3-04, a public company is required to present in either a footnote or a separate financial statement a rollforward of the changes in each caption of stockholders’ equity and noncontrolling interests presented in the balance sheets. Rule 3-04 further states that this analysis must be presented “for each period for which a statement of comprehensive income is required to be filed with all significant reconciling items described by appropriate captions with contributions from and distributions to owners shown separately.”

108 Chapter 8 — Presentation and Disclosure

Example 8-3

Assume the same facts as in Example 8-1. Illustrated below is D’s consolidated statement of changes in equity for 20X8 and 20X9.

Company D — Consolidated Statement of Changes in Equity

Company D Shareholders

Retained Common Earnings AOCI Stock APIC NCI Total

January 1, 20X8 $ 135,200 $ 32,200 $ 155,000 $ 94,600 $ 37,950 $ 454,950

Sale of Subsidiary E’s common stock* 400 4,600 5,000

Comprehensive income:

Net income** 39,300 6,800 46,100

OCI (other comprehensive loss):

Unrealized gain on cash flow hedges*** 3,650 700 4,350

Foreign currency translation loss† (350) (50) (400)

December 31, 20X8 $ 174,500 $ 35,500 $ 155,000 $ 95,000 $ 50,000 $ 510,000

January 1, 20X9 $ 174,500 $ 35,500 $ 155,000 $ 95,000 $ 50,000 $ 510,000

Purchase of Subsidiary F’s common stock‡ (600) (3,500) (4,100)

Comprehensive income:

Net income** 41,500 6,600 48,100

OCI (other comprehensive loss):

Unrealized loss on cash flow hedges*** (2,720) (640) (3,360)

Foreign currency translation gain† 210 50 260

December 31, 20X9 $ 216,000 $ 32,990 $ 155,000 $ 94,400 $ 52,510 $ 550,900

* In 20X8, D sold common shares of E to an unrelated party for $5,000, which exceeded the book value by $400. As a result of the five steps outlined inSection 7.1.2, both APIC and the value of the noncontrolling interest increased. ** Net income represents the earnings of D in the year indicated, which are attributable to both the parent and the noncontrolling interest holders. *** In 20X8, D recorded an unrealized gain on cash flow hedges of $4,350, of which $700 was attributable to the noncontrolling interest holders. In 20X9, D recorded an unrealized loss on cash flow hedges of $3,360, of which $640 was attributable to the noncontrolling interest holders. † In 20X8, D recorded a foreign currency translation loss of $400, of which $50 was attributable to the noncontrolling interest holders. In 20X9, D recorded a foreign currency translation gain of $260, of which $50 was attributable to the noncontrolling interest holders. ‡ In 20X9, D purchased common shares of F from an unrelated party for $4,100, which exceeded the book value by $600. As a result of the five steps outlined in Section 7.1.2, both APIC and the value of the noncontrolling interest decreased.

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Unlike the reconciliation referred to in ASC 810-10-50-1A(c), which is not presented in the notes to the consolidated financial statements except in the absence of a consolidated statement of changes in equity, the separate schedule referred to in ASC 810-10-50-1A(d) must be presented in the notes to the consolidated financial statements when there are changes in a parent’s ownership interest in a subsidiary (see Chapter 7 for a discussion of how to account for such changes). This separate schedule is required regardless of whether some of its contents overlap with information provided as a result of the equity rollforward disclosure requirement in ASC 810-10-50-1A(c) (e.g., net income attributable to the parent and the increase or decrease in the parent’s APIC as a result of transactions with the noncontrolling interest holder). See ASC 810-10-55-4M for an illustration of the separate schedule required under ASC 810-10-50-1A(d).

8.5.1 Interim Equity Reconciliations for SEC Registrants The requirement for an equity reconciliation described above refers specifically to the beginning and end of a period. SEC registrants are required to present unaudited quarterly financial information. SEC Regulation S-X, Rule 3-04, requires all SEC registrants to provide a reconciliation “in each caption of stockholders’ equity and noncontrolling interests presented in the balance sheets.” Generally, SEC registrants present this annual equity reconciliation in a separate consolidated statement of changes in equity, although Rule 3-04 also permits disclosure in the notes to the consolidated financial statements.

On August 17, 2018, the SEC issued a final rule that amends some of the Commission’s disclosure requirements, including certain disclosure requirements in SEC Regulation S-X. While the changes generally reduce or eliminate some of an SEC registrant’s required disclosures, the amendments expand the requirements related to interim disclosures about changes in stockholders’ equity and noncontrolling interests (hereinafter referred to as changes in stockholders’ equity).

For filings on Form 10-Q, the final rule extends to interim periods the annual requirement in SEC Regulation S-X, Rule 3-04, to disclose (1) changes in stockholders’ equity and (2) the amount of dividends per share for each class of shares (as opposed to common stock only, as previously required). Note that the requirement to disclose changes in stockholders’ equity if such changes are considered material applies regardless of whether a registrant presents any noncontrolling interests in accordance with ASC 810.

Under the interim requirements in SEC Regulation S-X, Rules 8-03(a)(5) and 10-01(a)(7), registrants must analyze changes in stockholders’ equity, in the form of a reconciliation, for “the current and comparative year-to-date [interim] periods, with subtotals for each interim period.” Therefore, a registrant should include a reconciliation for the current quarter and year-to-date interim periods as well as the comparative periods of the prior year (i.e., a reconciliation covering each period for which an income statement is presented). Both rules refer to Rule 3-04 for presentation requirements, which, among other items, include a reconciliation that describes all significant reconciling items in each caption of stockholders’ equity and noncontrolling interests (if applicable). Rule 3-04 permits the disclosure of changes in stockholders’ equity (including dividend-per-share amounts) to be made either in a separate financial statement or in the notes to the financial statements.

As indicated in Section 8.5, ASC 810-10-50-1A(c) requires parent entities with one or more less than wholly owned subsidiaries to provide an equity reconciliation for each reporting period (i.e., on both an interim and annual basis). Under U.S. GAAP, such a reconciliation is required for the period between the end of the preceding fiscal year and the most recent fiscal quarter as well as for the corresponding periods in the preceding fiscal year. However, as outlined above, the SEC final rule introduces additional requirements (e.g., presentation of quarter-to-date reconciliations for current and comparative periods) regardless of whether a registrant presents a noncontrolling interest.

110 Chapter 8 — Presentation and Disclosure

For additional information about the interim equity reconciliation requirement, see Deloitte’s September 11, 2018, Financial Reporting Alert (updated October 1, 2018).

See Example 8-4A below for an illustration of two financial statement presentation options for these interim disclosures.

[Example 8-4 has been deleted.]

Example 8-4A

Company A is a calendar-year-end registrant that is filing its Form 10-Q for the third quarter of 20Y0. Further assume the following: • Company A has only one form of common stock outstanding and has declared dividends in each quarter. • Company A has a less than wholly owned subsidiary that is capitalized only with common stock; therefore, A presents a column for the noncontrolling interest held by a third party in its subsidiary. For illustrative purposes, the reconciliations below are presented only for the applicable September 30, 20Y0, period(s); however, a similar presentation would be required for the comparative interim periods in 20X9 as well. We understand that a registrant may use either of the two presentation options below to satisfy this requirement for interim periods reported on Form 10-Q, although there may be other acceptable options.

Option 1 Company A may present two separate reconciliations: one showing the changes in stockholders’ equity for the year-to-date interim period ended September 30, 20Y0 (excluding quarterly subtotals); and a separate reconciliation showing the changes for the most recent quarter-to-date period ending September 30, 20Y0. The reconciliation could be shown in separate financial statements (as presented below), the notes to the financial statements, or a combination thereof.

Consolidated Statement of Changes in Equity

Nine-Month Period Ended September 30, 20Y0

Retained Common Earnings AOCI Stock APIC NCI Total

January 1, 20Y0 $ 105,000 $ 26,000 $ 100,000 $ 50,600 $ 25,000 $ 306,600

Issuance of company’s common stock 13,000 47,000 60,000

Dividends declared ($2.55 per share) (18,000) (18,000)

Comprehensive income:

Net income 106,250 7,250 113,500

OCI:

Unrealized gain on cash flow hedges 3,450 350 3,800

September 30, 20Y0 $ 193,250 $ 29,450 $ 113,000 $ 97,600 $ 32,600 $ 465,900

111 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

Example 8-4A (continued)

Consolidated Statement of Changes in Equity

Three-Month Period Ended September 30, 20Y0 Retained Common Earnings AOCI Stock APIC NCI Total June 30, 20Y0 $ 162,250 $ 34,450 $ 105,000 $ 70,600 $ 30,400 $ 402,700

Issuance of company’s common stock 8,000 27,000 35,000

Dividends declared ($0.95 per share) (7,000) (7,000)

Comprehensive income:

Net income 38,000 2,500 40,500

OCI (other comprehensive loss):

Unrealized (loss) on cash flow hedges (5,000) (300) (5,300)

September 30, 20Y0 $ 193,250 $ 29,450 $ 113,000 $ 97,600 $ 32,600 $ 465,900

Option 2 Company A may present a reconciliation in a single statement that shows the changes in stockholders’ equity for the year-to-date interim period ended September 30, 20Y0, which includes separate subtotals for each interim period. Alternatively, the single reconciliation could be shown in the notes to the financial statements.

Consolidated Statement of Changes in Equity

Nine-Month Period Ended September 30, 20Y0

Retained Common Earnings AOCI Stock APIC NCI Total

January 1, 20Y0 $ 105,000 $ 26,000 $ 100,000 $ 50,600 $ 25,000 $ 306,600

Issuance of company’s common stock 5,000 20,000 25,000

Dividends declared ($0.75 per share) (5,000) (5,000)

Comprehensive income:

Net income 23,250 1,750 25,000

OCI:

Unrealized gain on cash flow hedges 2,450 150 2,600

March 31, 20Y0 123,250 28,450 105,000 70,600 26,900 354,200

Dividends declared ($0.85 per share) (6,000) (6,000)

Comprehensive income:

Net income 45,000 3,000 48,000

OCI:

Unrealized gain on cash flow hedges 6,000 500 6,500

112 Chapter 8 — Presentation and Disclosure

Example 8-4A (continued)

Consolidated Statement of Changes in Equity (continued)

Nine-Month Period Ended September 30, 20Y0 Retained Common Earnings AOCI Stock APIC NCI Total June 30, 20Y0 $ 162,250 $ 34,450 $ 105,000 $ 70,600 $ 30,400 $ 402,700

Issuance of company’s 8,000 27,000 35,000 common stock

Dividends declared ($0.95 per share) (7,000) (7,000)

Comprehensive income:

Net income 38,000 2,500 40,500

OCI (other comprehensive loss):

Unrealized (loss) on cash flow hedges (5,000) (300) (5,300)

September 30, 20Y0 $ 193,250 $ 29,450 $ 113,000 $ 97,600 $ 32,600 $ 465,900

8.5.1A Redeemable Noncontrolling Interests’ Impact on Disclosures and Reconciliations of Stockholders’ Equity The SEC staff guidance on the classification and measurement of redeemable securities in ASC 480-10- S99-3A requires a reporting entity to classify certain redeemable noncontrolling interests in temporary equity. As explained in more detail in Section 9.2, a reporting entity must also apply the measurement guidance in both ASC 480-10-S99-3A and ASC 810-10 to such redeemable noncontrolling interests. ASC 480-10-S99-3A does not change the conclusion in ASC 810-10-45-15 and 45-16 that noncontrolling interests represent equity in the consolidated financial statements of the parent. Therefore, redeemable noncontrolling interests remain subject to the disclosure requirements of ASC 810-10-50-1A(c) and the following reconciliation requirements of SEC Regulation S-X: • Rule 3-04 for annual reporting purposes. • Rule 10-01(a)(7) for interim reporting purposes. • Rule 8-03(a)(5) for smaller reporting companies.

The disclosure requirements are applicable under U.S. GAAP even if such interests are classified in the temporary equity section of the reporting entity’s balance sheet.

The reconciliation of amounts pertaining to redeemable noncontrolling interests should include the impact of applying the initial and subsequent measurement guidance of ASC 480-10-S99-3A, which is discussed in more detail in Sections 9.3.2 and 9.3.3. Otherwise, the amounts required to be disclosed under ASC 810-10-50-1A(c) would not reconcile to the amounts recorded in the consolidated balance sheet. This conclusion is based on the guidance in SEC Regulations S-X, Rule 3-04, which states, in part:

An analysis of the changes in each caption of stockholders’ equity and noncontrolling interests presented in the balance sheets . . . shall be presented in the form of a reconciliation of the beginning balance to the ending balance for each period for which an income statement is required to be filed with all significant reconciling items described by appropriate captions with contributions from and distributions to owners shown separately. [Emphasis added]

See additional guidance and illustrations in Section 9.4.

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8.5.2 Comprehensive Income Requirement — Disclosure of Reallocations of AOCI Between the Parent and the Noncontrolling Interest As noted in Section 7.1, ASC 810-10-45-23 requires 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.” As part of that equity transaction accounting, the parent is also required to reallocate the subsidiary’s AOCI between the parent and the noncontrolling interest (a separate component of stockholders’ equity). This is based on the requirement in ASC 810-10-45-24, which states:

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

An entity should not include in the separate schedule required under ASC 810-10-50-1A(d) the effect of changes in the parent’s consolidated AOCI that result from a reallocation of the subsidiary’s AOCI between the parent and the noncontrolling interest. That is, because reallocations of AOCI between the parent and the noncontrolling interest do not affect the income statement, entities are not required to disclose such reallocations in the separate schedule required under ASC 810-10-50-1A(d).

Example 8-5

Assume the following facts, which are the same as those in Examples 8-1, 8-2, and 8-3: • Company D is the parent of Subsidiary E and Subsidiary F, both of which are capitalized with only common stock. • At the beginning of 20X8, D owned 80 percent of E’s common shares and 65 percent of F’s common shares. • In 20X8, D sold 5 percent of E’s common shares to an unrelated third party for $5,000. The book value of E (on E’s books) was $92,000 at the time of the sale. • At the beginning of 20X9, D owned 75 percent of E’s common shares and 65 percent of F’s common shares. • In 20X9, D purchased an additional 5 percent of F’s common shares from an unrelated third party for $4,100. The book value of F (on F’s books) was $70,000 at the time of the purchase. • At the end of 20X9, D owned 75 percent of E’s common shares and 70 percent of F’s common shares.

114 Chapter 8 — Presentation and Disclosure

Example 8-5 (continued)

The schedule below shows the effects of changes in D’s ownership interest in E and F for 20X8 and 20X9 in a manner consistent with the illustrative example in ASC 810-10-55-4M.

Net Income Attributable to Company D and Transfers From (to) the Noncontrolling Interest — Years Ended December 31, 20X9, and December 31, 20X8, Respectively

20X9 20X8

Net income attributable to Company D shareholders $ 41,500 $ 39,300

Transfers from (to) the noncontrolling interest

Increase in D’s paid-in capital for sale of Subsidiary E’s common stock* — 400

Decrease in D’s paid-in capital for purchase of Subsidiary F’s common stock** (600) —

Net transfers from (to) noncontrolling interest (600) 400

Changes from net income attributable to D shareholders and transfers from (to) noncontrolling interest $ 40,900 $ 39,700

* In 20X8, D sold common shares of E to an unrelated third party for $5,000, which exceeded book value by $400. As a result of the five-step process described inSection 7.1.2, both APIC and the value of the noncontrolling interest increased. ** In 20X9, D purchased additional common shares of F from an unrelated third party for $4,100, which exceeded book value by $600. As a result of the five-step process described inSection 7.1.2, both APIC and the value of the noncontrolling interest decreased.

8.5.3 Presenting Effects of the Noncontrolling Interest in the AOCI Reclassification Adjustments Disclosure

ASC 220-10

45-14A An entity shall present, either on the face of the financial statements or as a separate disclosure in the notes, the changes in the accumulated balances for each component of other comprehensive income included in that separate component of equity, as required in paragraph 220-10-45-14. In addition to the presentation of changes in accumulated balances, an entity shall present separately for each component of other comprehensive income, current period reclassifications out of accumulated other comprehensive income and other amounts of current-period other comprehensive income. Both before-tax and net-of-tax presentations are permitted provided the entity complies with the requirements in paragraph 220-10-45-12. Paragraph 220-10-55-15 illustrates the disclosure of changes in accumulated balances for components of other comprehensive income as a separate disclosure in the notes to financial statements.

45-17 An entity shall separately provide information about the effects on net income of significant amounts reclassified out of each component of accumulated other comprehensive income if those amounts all are required under other Topics to be reclassified to net income in their entirety in the same reporting period. An entity shall provide this information together, in one location, in either of the following ways: a. On the face of the statement where net income is presented b. As a separate disclosure in the notes to the financial statements. The following paragraph describes the information requirements for presentation on the face of the statements where net income is presented, and paragraph 220-10-45-17B describes the information requirements for disclosure in the notes to the financial statements.

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Entities are required to provide information about changes in AOCI as described in ASC 220-10-45-14A and ASC 220-10-45-17 through 45-17B. Specifically, ASC 220-10-45-14A requires entities to disaggregate the total change of each component of AOCI (e.g., unrealized gains or losses on available-for-sale securities or foreign currency items) and separately present amounts related to (1) reclassification adjustments and (2) current-period OCI on the face of the financial statements or in the footnotes. In addition, ASC 220-10-45-17 requires entities to present “information about the effects on net income of significant amounts reclassified out of each component of accumulated other comprehensive income if those amounts all are required under other Topics to be reclassified to net income in their entirety in the same reporting period.”

As discussed in Section 6.6, ASC 810-10-45-20 requires that “[n]et income or loss and comprehensive income or loss . . . shall be attributed to the parent and the noncontrolling interest.”

However, there is no guidance in U.S. GAAP on how or whether a parent entity should present the attribution of consolidated OCI between the parent and the noncontrolling interest when making the reclassification disclosures required by ASC 220-10-45-14A and ASC 220-10-45-17 through 45-17B.

Information about changes in AOCI (see ASC 220-10-45-14A) should reflect those amounts of OCI attributable to the parent since AOCI represents an accumulation of amounts for the parent only. Current-period OCI attributable to the noncontrolling interest in a subsidiary would be accumulated in the parent entity’s noncontrolling interest balance sheet line item and thus would not be included in AOCI. However, because ASC 220 is silent on the presentation of OCI information related to the noncontrolling interest in a subsidiary, the parent entity would not be precluded from separately disclosing information about components of OCI related to the noncontrolling interest.

ASC 220-10-45-17 requires an entity to present information about items reclassified out of AOCI, specifically the amount and income statement line item affected. The guidance does not address the presentation of information about significant amounts reclassified from an entity’s noncontrolling interest balance sheet line item to the income statement. However, an entity may elect to disclose information about the income statement effects of significant reclassification adjustments that include a noncontrolling interest portion. Doing so would be consistent with presenting consolidated net income (i.e., an entity view) and attributing an amount to the noncontrolling interest in accordance with ASC 810-10. If an entity presents income statement effects that include a noncontrolling interest amount, it may disclose the (1) aggregate noncontrolling interest amount related to all of the significant reclassification adjustments or (2) noncontrolling interest amount affecting each income statement line item. Regardless of how the noncontrolling interest is presented in this disclosure, if at all, the subtotal by component must agree with the reclassification adjustments presented in the changes in AOCI balances by component. Therefore, a reconciliation may be necessary.

Under SEC Regulation S-X, Rule 3-04, a public company is required to include the disclosures described above on a comparative basis in a manner consistent with how the changes in stockholders’ equity and noncontrolling interests are presented in the financial statements.

116 Chapter 9 — Redeemable Noncontrolling Interests

Common and preferred shares of a consolidated subsidiary are sometimes subject to redemption rights held by the noncontrolling shareholder. The combination of a noncontrolling interest and a redemption feature (e.g., a put option) may result in what is referred to as a redeemable noncontrolling interest. Redemption features can be important to the noncontrolling interest holder because they enable the holder to liquidate its investment when there is no readily accessible market. As described in Section 3.2, noncontrolling interest classification is limited to instruments that are appropriately classified in the equity section of the reporting entity’s balance sheet. Because classification of equity instruments in the asset, liability, or equity section of a reporting entity’s balance sheet is outside the scope of this publication, we have presumed in this chapter that equity classification of a redeemable noncontrolling interest has already been determined to be appropriate.1

Accounting for redeemable noncontrolling interests is one of the more complex topics in U.S. GAAP, in part because the reporting entity’s accounting depends on the unique combination of the following: • The form of the redeemable noncontrolling interest (common-share vs. preferred-share). • Whether the redemption price is at fair value or other than fair value (see Sections 9.3.4.1 through 9.3.4.2.1.3). • The reporting entity’s policy for determining the amount of the adjustment to be recorded each period (see Sections 9.3.3 through 9.3.3.4). • The reporting entity’s policy for classifying the offsetting entry to such adjustments (seeSections 9.3.4 through 9.3.4.2.1.3). • When a common-share redeemable noncontrolling interest is redeemable at other than fair value, the reporting entity’s policy for incorporating such adjustments into its EPS computation (see Sections 9.3.4.2 through 9.3.4.2.1.3).

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

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

117 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

9.1 Examples of Redeemable Noncontrolling Interests Redemption of a noncontrolling interest can occur through mechanisms such as put option rights, a combination of put and call option rights, or a contingent forward purchase (sale) agreement (collectively, “redemption features”). Examples of redemption features embedded in noncontrolling interests include, but are not limited to: • Unilateral rights held by noncontrolling interest 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 noncontrolling interest holder, issuer, and controlling interest holder, and its occurrence (or nonoccurrence) triggers either (1) exercisability of a put option held by the noncontrolling interest holder or (2) settlement of a forward purchase agreement (referred to as a contingent put option or contingent forward).

Redeemable noncontrolling interests usually specify one of the following three methods (or some combination thereof) for determining the redemption price of the noncontrolling interest: • Redemption-date fair value — The redemption price is based on the fair value of the noncontrolling interest at redemption and is determined through a third-party appraisal or other fair value measurement technique.

Example 9-1

Company A is the parent of Subsidiary B. Entity X holds a 20 percent noncontrolling interest in B, and X’s noncontrolling interest 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 noncontrolling interest.

Example 9-2

Company C is the parent of Subsidiary D, and Entity Y purchases a 15 percent noncontrolling interest 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.

118 Chapter 9 — Redeemable Noncontrolling Interests

• Specified formula — The redemption price is calculated on the basis of redemption-date inputs incorporated into a formula specified at inception of the redeemable noncontrolling interest. 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 9-3

Company E is the parent of Subsidiary F, and Entity Z holds a 25 percent noncontrolling interest in F. Entity Z’s noncontrolling interest 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’ earnings before interest, taxes, depreciation, and amortization (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 noncontrolling interest 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 noncontrolling interest should be accounted for as a noncontrolling interest redeemable at other than fair value.

As further explored in Section 9.3.4, there are two models for subsequently measuring common-share redeemable noncontrolling interests. One model applies to common-share redeemable noncontrolling interests that are redeemable at fair value. The other model applies to common-share redeemable noncontrolling interests that are redeemable at other than fair value (i.e., both noncontrolling interests that are redeemable at a fixed price and noncontrolling interests that are redeemable at a specified formula value). The reporting considerations related to noncontrolling interests that are redeemable at other than fair value are significantly different from, and more complex than, those related to noncontrolling interests that are redeemable at fair value.

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9.2 Scope of ASC 480-10-S99-3A and Interaction With ASC 810-10

Are subsidiary ownership interests No Interests may not be reported as appropriately classified in noncontrolling interests. Apply other stockholders’ equity? applicable GAAP. (Section 3.2)

Yes

Are subsidiary Interests are not redeemable ownership interests No noncontrolling interests. subject to a redemption Measure and present in accordance feature? with ASC 810-10. (Section 3.2)

Yes

Is the Interests are not redeemable redemption noncontrolling interests. feature embedded Freestanding Apply ASC 480 or ASC 815 to the in the noncontrolling freestanding redemption feature. interests or freestanding? Measure and present the noncontrolling interests in accordance with ASC 810-10.

Embedded

Does the parent apply ASC 480-10- No S99-3A voluntarily or as an SEC registrant?

The noncontrolling interests are not Yes within the scope of ASC 480-10-S99-3A. Measure and present the noncontrolling interests in accordance with ASC 810-10.

Is the redemption feature solely within Yes the issuer’s control? (ASC 480-10-S99-3A(10) and (11))

No

Interests are considered redeemable noncontrolling interests. Classify in temporary equity. Subsequently measure in accordance with ASC 810-10 and ASC 480-10-S99-3A. Refer to the other decision trees in this chapter.

120 Chapter 9 — Redeemable Noncontrolling Interests

As stated previously, we have presumed in this chapter that the equity classification of a redeemable noncontrolling interest has already been determined to be appropriate. The flowchart above 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.

If a noncontrolling interest’s redemption feature is freestanding (i.e., not embedded in the noncontrolling interest), the redemption feature should be evaluated under ASC 480 and other applicable GAAP. However, if the redemption feature is embedded in the noncontrolling interest and does not require bifurcation under ASC 815-15, the redemption feature does not require separate evaluation under ASC 480 since the redemption feature is not a separate freestanding financial instrument. Rather, the noncontrolling interest, inclusive of the embedded redemption feature, would be analyzed for equity classification.

While the authoritative guidance applicable to all noncontrolling interests resides primarily in ASC 810-10, ASC 480-10-S99-3A contains an SEC staff announcement that provides guidance for SEC registrants on the classification and measurement of redeemable securities, including redeemable noncontrolling interests. The guidance in ASC 480-10-S99-3A arises from the SEC staff’s belief, as described in ASR 268, that SEC registrants should “highlight the future cash obligations attached to redeemable [shares] through appropriate balance sheet presentation and footnote disclosure.”

When a redeemable security is within the scope of ASC 810-10, the parent entity should first apply the accounting and disclosure guidance in ASC 810-10 to the noncontrolling interest in its consolidated financial statements. In addition to applying this guidance, a parent entity that is an SEC registrant or a parent entity that has elected to apply guidance applicable to SEC registrants must also consider whether the noncontrolling interest is a redeemable equity security within the scope of ASC 480-10-S99-3A.

Noncontrolling interests that include a redemption feature (i.e., that are puttable to the issuing entity, its parent entity, or a consolidated subsidiary of its parent entity) are within the scope of ASC 480-10- S99-3A provided that all three of the following conditions are met: • The parent entity is an SEC registrant or has elected to apply guidance applicable to SEC registrants. • The redemption feature is not considered a freestanding financial instrument. (If the redemption feature is considered a freestanding financial instrument, the parent entity would continue to apply the guidance in ASC 810-10 to the noncontrolling interest, but not to the freestanding redemption feature. Rather, the freestanding redemption feature would be evaluated and accounted for under the guidance in ASC 480-10 and ASC 815, as applicable.) • The redemption feature is not solely within the control of the issuer. (ASC 480-10-S99-3A(10) and (11) discuss circumstances in which the redemption of noncontrolling interests may be within the control of the issuer.)

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In the separate financial statements of the consolidated subsidiary, ASC 480-10-S99 need not be applied if either of the following conditions is met: • The subsidiary is not required, and has not elected, to apply the guidance applicable to SEC registrants. • Upon the redemption of an equity security, the parent entity, but not the subsidiary, is required to pay the redemption price. That is, in recognition that the objective of ASR 268 (as incorporated into ASC 480-10-S99-1) is to “highlight the future cash obligations attached to redeemable [shares],” ASC 480-10-S99-3A does not apply to a subsidiary’s separate financial statements when the redemption price is paid by the parent entity since a requirement for the parent to pay the redemption price does not represent a cash obligation of the reporting entity (i.e., the subsidiary).

In summary, if a reporting entity determines that the redeemable noncontrolling interest is within the scope of ASC 480-10-S99-3A, the accounting and disclosure guidance in ASC 480-10-S99-3A should be applied after the application of the accounting and disclosure guidance in ASC 810-10. A reporting entity’s application of ASC 480-10-S99-3A does not relieve the entity of the requirements of the accounting and disclosure guidance in ASC 810-10.

Connecting the Dots Although permitted, application of the guidance in ASC 480-10-S99-3A is not required for entities that are not SEC registrants. When an entity that is not an SEC registrant has previously elected not to apply SEC guidance, the entity’s subsequent adoption of ASC 480-10-S99-3A (either as a voluntary policy election or in anticipation of becoming an SEC registrant) does not constitute the correction of an accounting error under ASC 250. Rather, the adoption of ASC 480-10-S99-3A in such instances would be considered a change in accounting principle as defined in ASC 250. Further, financial statements that have been revised to reflect the adoption of ASC 480-10-S99-3A in anticipation that they will be filed with the SEC are not considered restated. However, if an error is identified in previously issued financial statements (e.g., the reporting entity previously elected a policy of applying the guidance in ASC 480-10-S99-3A but applied it incorrectly) and is corrected in conjunction with or in anticipation of the filing of the financial statements with the SEC, the reporting entity should consider the disclosure requirements in ASC 250-10-50 related to the correction of an error.

122 Chapter 9 — Redeemable Noncontrolling Interests

9.3 Accounting for Redeemable Noncontrolling Interests A redemption feature in a noncontrolling interest could potentially affect the following: • Classification of the noncontrolling interest in the equity section of the balance sheet. • Subsequent measurement of the noncontrolling interest. • Attribution of the subsidiary’s net income between the controlling and noncontrolling interests. • The parent’s EPS computation.

Specifically: • Redeemable noncontrolling interests are typically classified outside of permanent equity, in a separate component of equity typically referred to as “temporary” equity (see Section 9.3.1). • Subsequent measurement of a redeemable noncontrolling interest is driven by the nature of the redemption feature (contingent vs. noncontingent) and the policy elected for measuring noncontrolling interests that are not currently redeemable but whose redemption is probable (see Section 9.3.3). • The amount of a subsidiary’s net income that is attributed to noncontrolling interests on the face of the consolidated reporting entity’s income statement is affected by classification of the offsetting entry (hereafter referred to as the ASC 480 offsetting entry) arising from ASC 480 adjustments to the redeemable noncontrolling interest’s carrying amount (hereafter referred to as the ASC 480 measurement adjustments). Classification of the ASC 480 offsetting entry is affected, in turn, by a cascading series of variables. The first gating variable is related to the form of the redeemable noncontrolling interest (common-share vs. preferred-share). For a common-share redeemable noncontrolling interest, the next variable is related to the nature of the redemption price (fair value vs. other than fair value). For a common-share redeemable noncontrolling interest that is redeemable at other than fair value, the final gating variable is related to classification of the ASC 480 offsetting entry, which is driven by the reporting entity’s policy election for recording such adjustments (income attributable to noncontrolling interests vs. retained earnings). It is this series of cascading variables that makes the accounting for redeemable noncontrolling interests one of the more complex aspects of U.S. GAAP to apply (see Section 9.3.4). • The implications of a redeemable noncontrolling interest on the parent’s EPS computation are driven by:

o The parent’s policy for classifying the ASC 480 offsetting entry as either a component of equity or a component of net income attributable to noncontrolling interests.

o The form of the redeemable noncontrolling interest (common-share vs. preferred-share).

o The nature of the redemption price (fair value vs. other than fair value) for a common-share redeemable noncontrolling interest.

o The entity’s policy for incorporating into its EPS calculation the fair value component of changes in a redemption price that is valued at other than fair value. These topics are addressed in Sections 9.3.4 through 9.3.4.3.

The table below summarizes the impacts of the various forms of redeemable noncontrolling interests on the parent’s financial statements. These impacts are further discussed in subsequent sections of this chapter.

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Form of Noncontrolling Classification/ Impact on Interest/Redemption Initial Subsequent Attribution of Impact on EPS Price Measurement Measurement Earnings Calculation

Preferred-share/any Temporary Measure in accordance Depends on ASC Direct or indirect price equity/typically with ASC 480-10-S99-3A 480 offsetting (see Section fair value (see if applicable entry policy 9.3.4.3 and Sections 9.3.1 election (see Example 9-9) and 9.3.2) Section 9.3.4.3 and Example 9-9)

Common-share/fair Temporary Measure at higher of: None (see None (see value equity/typically Section 9.3.4.1) Section 9.3.4.1) Carrying amount fair value (see • after applying ASC Sections 9.3.1 810-10 and 9.3.2) • Carrying amount after applying ASC 480-10-S99-3A (if applicable) (See Sections 9.3.3 through 9.3.3.4)

Common-share/other Temporary Measure at higher of: Depends on ASC Direct or indirect than fair value equity/typically 480 offsetting (see Section Carrying amount fair value (see • entry policy 9.3.4.2 and after applying ASC Sections 9.3.1 election (see Examples 9-6 810-10 and 9.3.2) Section 9.3.4.2 through 9-8) • Carrying amount and Examples after applying ASC 9-6 through 9-8) 480-10-S99-3A (if applicable) (See Sections 9.3.3 through 9.3.3.4)

9.3.1 Classification of Redeemable Noncontrolling Interests

ASC 480-10 — SEC Materials — SEC Staff Guidance

SEC Staff Announcement: Classification and Measurement of Redeemable Securities S99-3A(2) ASR 268 requires preferred securities that are redeemable for cash or other assets to be classified outside of permanent equity if they are redeemable (1) at a fixed or determinable price on a fixed or determinable date, (2) at the option of the holder, or (3) upon the occurrence of an event that is not solely within the control of the issuer. As noted in ASR 268, the Commission reasoned that “[t]here is a significant difference between a security with mandatory redemption requirements or whose redemption is outside the control of the issuer and conventional equity capital. The Commission believes that it is necessary to highlight the future cash obligations attached to this type of security so as to distinguish it from permanent capital.”

A reporting entity should classify, outside of permanent equity (i.e., in temporary equity), all equity securities that are within the scope of ASC 480-10-S99-3A, including common-share and preferred-share redeemable noncontrolling interests.

124 Chapter 9 — Redeemable Noncontrolling Interests

9.3.2 Initial Measurement of Redeemable Noncontrolling Interests

ASC 480-10 — SEC Materials — SEC Staff Guidance

SEC Staff Announcement: Classification and Measurement of Redeemable Securities S99-3A(12) Initial measurement. The SEC staff believes the initial carrying amount of a redeemable equity instrument that is subject to ASR 268 should be its issuance date fair value, except as follows: . . . c. For noncontrolling interests, the initial amount presented in temporary equity should be the initial carrying amount of the noncontrolling interest pursuant to Section 805-20-30. . . .

Establishing the initial measurement amount for a redeemable noncontrolling interest is important because, in certain instances, after ASC 810-10 attribution of a subsidiary’s earnings to noncontrolling interests (hereafter referred to as the ASC 810-10 attribution adjustment), the reporting entity must record an ASC 480 measurement adjustment to accurately reflect potential claims on the reporting entity’s net assets that are held by redeemable noncontrolling interest holders. It therefore follows that establishing the correct initial carrying amount for a redeemable noncontrolling interest ensures that subsequent ASC 480 measurement adjustments accurately isolate reporting-period changes in redemption-related claims on the subsidiary’s net assets. As explained in more detail in Chapter 5 of this Roadmap, the initial measurement of noncontrolling interests is typically at fair value, subject to certain exceptions provided in ASC 805.

In addition to ASC 805, ASC 810-10 provides guidance on the initial recognition of noncontrolling interests. While ASC 810-10 follows the general principle of requiring that noncontrolling interests be initially recognized at fair value, ASC 810-10-30-1 and ASC 810-10-30-7 through 30-8C provide for certain exceptions to this principle when noncontrolling interests in a subsidiary are recognized concurrently with the parent’s initial consolidation of the subsidiary. Specifically: • When a VIE and its primary beneficiary are under common control, the primary beneficiary of the VIE should initially recognize the assets, liabilities, and noncontrolling interests of the VIE at their carryover basis (see ASC 810-10-30-1). • When a primary beneficiary first consolidates a VIE, the noncontrolling interest should be initially measured at its “carrying amount” in either of the following circumstances:

o Earlier consolidation was prevented because of lack of information (see ASC 810-10-30-7).

o Consolidation results from the initial application of ASU 2015-02 (see ASC 810-10-30-8 through 30-8C). The term “carrying amount” is defined by ASC 810-10 as the amount at which the noncontrolling interest would have been carried in the primary beneficiary’s financial statements if the information required to consolidate the VIE (or if the guidance in ASU 2015-02) had always been available (applicable). Under ASC 810-10-30-7 through 30-8C, if determining the carrying amount is not practicable, initial measurement at fair value is an acceptable alternative.

Incremental to the exceptions described above, an additional exception to recognizing noncontrolling interests at fair value may arise when a parent experiences a change in ownership in an existing (as opposed to newly consolidated) subsidiary without an accompanying loss of control (see Chapter 7). In such situations, the noncontrolling interest is initially recognized at an amount equal to the fair value of the consideration received in exchange for establishment of the noncontrolling interest. An immediate adjustment to the carrying amount of the noncontrolling interest may result from the five-step process outlined in Section 7.1.2 that is required to rebalance the subsidiary’s equity accounts between controlling and noncontrolling interests. In such circumstances, the carrying amount of a redeemable noncontrolling interest after application of that five-step process (which may not equal fair value)

125 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020) represents the initial carrying amount of the redeemable noncontrolling interest to which all subsequent ASC 810-10 attribution adjustments and ASC 480 measurement adjustments will be applied.

9.3.3 Subsequent Measurement of Redeemable Noncontrolling Interests

Is the redeemable noncontrolling interest No Measure and present in accordance with within the scope of ASC 810-10. ASC 480-10-S99-3A? (Section 9.2)

Yes

Is the Present the noncontrolling interest in redemption temporary equity. amount higher Subsequent measurement of the than the noncontrolling No noncontrolling interest in the current interest’s carrying amount reporting period is limited to adjustments after the ASC 810-10 required under ASC 810-10 as well as attribution potential reversals of prior adjustments adjustment? recorded under ASC 480. (Chapter 6) (Section 9.3.3.2)

Yes

Present the noncontrolling interest in temporary equity. Record the ASC 810-10 attribution Is the noncontrolling interest Yes adjustment (Chapter 6) first. currently redeemable? Subsequently adjust the noncontrolling interest to the maximum redemption amount (if higher) after dividends payable upon redemption are taken into account. (ASC 480-10-S99-3A(14))

No

Present the noncontrolling interest in Is it probable that temporary equity. the noncontrolling interest will become No Record the ASC 810-10 attribution redeemable (e.g., upon the adjustment (Chapter 6). Subsequent passage ASC 480-10 measurement adjustment is of time)? not required until redemption becomes probable. (ASC 480-10-S99-3A(15))

Yes

Present the noncontrolling interest in temporary equity. Record the ASC 810-10 attribution adjustment (Chapter 6) first. Perform a subsequent ASC 480-10 measurement adjustment by using a method (accretion or immediate) that is consistent with the entity’s policy election (ASC 480-10-S99-3A(15)). Refer to the decision tree in Section 9.3.4.

126 Chapter 9 — Redeemable Noncontrolling Interests

ASC 480-10 — SEC Materials — SEC Staff Guidance

SEC Staff Announcement: Classification and Measurement of Redeemable Securities S99-3A(14) If an equity instrument subject to ASR 268 is currently redeemable (for example, at the option of the holder), it should be adjusted to its maximum redemption amount at the balance sheet date. If the maximum redemption amount is contingent on an index or other similar variable (for example, the fair value of the equity instrument at the redemption date or a measure based on historical EBITDA), the amount presented in temporary equity should be calculated based on the conditions that exist as of the balance sheet date (for example, the current fair value of the equity instrument or the most recent EBITDA measure). The redemption amount at each balance sheet date should also include amounts representing dividends not currently declared or paid but which will be payable under the redemption features or for which ultimate payment is not solely within the control of the registrant (for example, dividends that will be payable out of future earnings).FN13 FN13 See also Section 260-10-45.

S99-3A(15) If an equity instrument subject to ASR 268 is not currently redeemable (for example, a contingency has not been met), subsequent adjustment of the amount presented in temporary equity is unnecessary if it is not probable that the instrument will become redeemable. If it is probable that the equity instrument will become redeemable (for example, when the redemption depends solely on the passage of time), the SEC staff will not object to either of the following measurement methods provided the method is applied consistently: a. Accrete changes in the redemption value over the period from the date of issuance (or from the date that it becomes probable that the instrument will become redeemable, if later) to the earliest redemption date of the instrument using an appropriate methodology, usually the interest method. Changes in the redemption value are considered to be changes in accounting estimates. b. Recognize changes in the redemption value (for example, fair value) immediately as they occur and adjust the carrying amount of the instrument to equal the redemption value at the end of each reporting period. This method would view the end of the reporting period as if it were also the redemption date for the instrument.

S99-3A(16) The following additional guidance is relevant to the application of the SEC staff’s views in paragraphs 14 and 15: . . . e. [R]egardless of the accounting method applied in paragraphs 14 and 15, the amount presented in temporary equity should be no less than the initial amount reported in temporary equity for the instrument. That is, reductions in the carrying amount of a redeemable equity instrument from the application of paragraphs 14 and 16 are appropriate only to the extent that the registrant has previously recorded increases in the carrying amount of the redeemable equity instrument from the application of paragraphs 14 and 15.

9.3.3.1 Sequencing of ASC 810-10 Attribution and ASC 480 Measurement Adjustments A reporting entity with a common-share redeemable noncontrolling interest within the scope of ASC 480-10-S99-3A (see Section 9.2) should first apply the subsequent measurement guidance in ASC 810-10 and then apply the subsequent measurement guidance in ASC 480-10-S99-3A. As a result, the noncontrolling interest will be recorded at the higher of (1) the cumulative amount that would result from applying the measurement guidance in ASC 810-10 (i.e., initial carrying amount, increased or decreased for the noncontrolling interest’s share of net income or loss, OCI or other comprehensive loss, and dividends) or (2) the redemption price. Sometimes, this sequencing may result in the need to subsequently reverse all or part of a prior-period ASC 480 measurement adjustment (e.g., recording the ASC 810-10 attribution adjustment in the current period may increase the carrying amount of the redeemable noncontrolling interest to an amount greater than both (1) and (2), making it necessary to reverse all or part of a prior-period ASC 480 measurement adjustment).

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9.3.3.2 Methods of Determining ASC 480 Measurement Adjustment Amount While ASC 480-10-S99-3A(14) through (16) are written in the context of redeemable equity interests (as opposed to being written specifically in the context of redeemable noncontrolling interests), these paragraphs are instructive for determining the subsequent measurement of a redeemable noncontrolling interest. After applying the measurement guidance in ASC 810-10 to a noncontrolling interest that is redeemable currently, an entity is required to adjust the noncontrolling interest’s carrying amount as of each balance sheet date to its current redemption price.2

For noncontrolling interests that are not currently redeemable but whose redemption is probable, a reporting entity may elect, in accordance with ASC 480-10-S99-3A(15), a policy of applying either of the following methods of determining the amount of the ASC 480 measurement adjustment after applying the measurement guidance in ASC 810-10: • Accretion method — “Accrete changes in the redemption [price of the instrument] over the period from the date of issuance (or from the date that it becomes probable that the instrument will become redeemable, if later) to the earliest redemption date of the instrument using an appropriate methodology.” • Immediate method — “Recognize changes in the redemption [price] immediately as they occur.”

The policy elected should be consistently applied to all similar redeemable equity instruments of the reporting entity. For example, some reporting entities choose to apply the accretion method to all redeemable noncontrolling interests that are redeemable at a fixed price while applying the immediate method to all redeemable noncontrolling interests that are redeemable at fair value or a formula.

Connecting the Dots While ASC 480-10-S99-3A(16)(e) states that “the amount presented in temporary equity should be no less than the initial amount reported in temporary equity for the instrument,” this guidance is not intended to preclude the attribution of a subsidiary’s losses to a redeemable noncontrolling interest (in accordance with ASC 810-10-45-19 through 45-21) from reducing the carrying amount of the redeemable noncontrolling interest below the instrument’s initial carrying amount. That is, while ASC 480-10-S99-3A(16)(e) does not allow for cumulative “negative” ASC 480 measurement adjustments to be applied to the carrying amount of a redeemable noncontrolling interest, it also does not preclude cumulative “negative” ASC 810-10 attribution adjustments from being recorded. Note that if the carrying amount of a redeemable noncontrolling interest after the ASC 810-10 attribution adjustment is less than the redeemable noncontrolling interest’s redemption price, a subsequent ASC 480 measurement adjustment should be recorded to adjust the redeemable noncontrolling interest’s carrying amount to its redemption price. This concept is illustrated in the years ended 20X9 and 20Y0 in Example 9-5.

2 As required under ASC 480-10-S99-3A(14), the “redemption amount at each balance sheet date should also include amounts representing dividends not currently declared or paid but which will be payable under the redemption features or for which ultimate payment is not solely within the control of the registrant (for example, dividends that will be payable out of future earnings).”

128 Chapter 9 — Redeemable Noncontrolling Interests

9.3.3.3 Impact of an IPO-Triggered Mandatory Conversion Feature Sometimes, a reporting entity that is not yet public may issue redeemable equity instruments that mandatorily convert to the entity’s common shares upon an IPO. The existence of an IPO-triggered mandatory conversion feature can affect the entity’s assessment of whether it is probable that the interest will become redeemable. Reporting entities that are party to such instruments should refer to Section 9.5.4.3 of Deloitte’s A Roadmap to Distinguishing Liabilities From Equity, which contains guidance on the impact of an IPO-triggered mandatory conversion feature on a reporting entity’s redemption probability assessment.

9.3.3.4 Illustrative Examples of Subsequent Measurement of Redeemable Noncontrolling Interests

Example 9-4

Assume the following: • Company A owns all of the outstanding common shares and is the parent of Subsidiary B. • Subsidiary B issued a preferred-share noncontrolling interest to Entity C on January 1, 20X7, for $1 million. The interest represents all of B’s outstanding preferred securities. • The preferred securities are not entitled to dividends but are redeemable by A at the security holder’s option for $1.25 million beginning on December 31, 20X8 (two years after issuance). • Company A has elected to apply the accretion method and uses the interest method to accrete the redeemable noncontrolling interest to the interest’s redemption price. The parties’ interests are illustrated in the diagram below.

Company A Entity C

100% of the $1 million in common shares preferred shares

Subsidiary B

Company A has determined that an effective interest rate of 11.803 percent results in the redeemable noncontrolling interest being fully accreted to its redemption price by December 31, 20X8. Company A subsequently measures the noncontrolling interest at the following amounts:

December 31, 20X7 — $1,118,034

December 31, 20X8 — $1,250,000 The ASC 480 measurement adjustments that A records for 20X7 and 20X8 to measure the noncontrolling interest at the amounts above will affect A’s EPS computation. The exact impact on A’s EPS computation will depend on A’s policy elections for classifying the offsetting entry to its ASC 480 measurement adjustment (see Section 9.3.4.3 and Example 9-9).

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Example 9-5

Assume the following: • Company X is the parent of Subsidiary Y. • Entity Z holds a 20 percent noncontrolling interest in the common shares of Y. Entity Z acquired that noncontrolling interest from X on January 1, 20X7, for $1 million (which is the initial carrying amount of the noncontrolling interest). The parties’ interests are illustrated in the diagram below.

Company X Entity Z

80% of the common 20% common-share shares in Y redeemable noncontrolling interest in Y

Subsidiary Y

Further assume the following: • The noncontrolling interest is redeemable at the option of Z at any time for a price equal to fair value.3 • When X recorded its ASC 810-10 attribution adjustment for the years ended December 31 of 20X7, 20X8, 20X9, and 20Y0, respectively, it attributed portions of Y’s net income (loss) to Z’s redeemable noncontrolling interest in Y as follows: o Year ended December 31, 20X7 — $100,000. o Year ended December 31, 20X8 — $128,000. o Year ended December 31, 20X9 — ($500,000). o Year ended December 31, 20Y0 — ($75,000). • Company X had a valuation of Z’s redeemable noncontrolling interest in Y performed for the years ended December 31 of 20X7, 20X8, 20X9, and 20Y0, respectively. On the basis of that valuation, X determined that the fair value of the redeemable noncontrolling interest was as follows: o As of December 31, 20X7 — $1.25 million. o As of December 31, 20X8 — $1.2 million. o As of December 31, 20X9 — $718,000. o As of December 31, 20Y0 — $675,000.

3 Since the noncontrolling interest is currently redeemable, once the ASC 810-10 attribution adjustment is recorded (Chapter 6), the noncontrolling interest should be adjusted to the maximum redemption amount (if higher) after dividends payable upon redemption are taken into account (ASC 480-10-S99-3A(14)).

130 Chapter 9 — Redeemable Noncontrolling Interests

Example 9-5 (continued)

The table below shows, as of each of those year-ends, the (1) ASC 810-10 attribution adjustment, (2) cumulative ASC 810-10 attribution adjustments, (3) appraised fair value of the redeemable noncontrolling interest, and (4) carrying amount of the redeemable noncontrolling interest after application of ASC 810-10 and ASC 480-10-S99-3A.

Carrying Amount After Year Cumulative Application Ended ASC 810-10 ASC 810-10 of ASC 810- December Attribution Attribution Appraised 10 and ASC 31 Adjustment Adjustments Fair Value 480-10-S99-3A Comments

20X7 $100,000 $100,000 $1,250,000 $1,250,000 Carried at fair value (ASC 480 value) since this is higher than the carrying amount after cumulative ASC 810-10 attribution adjustments (i.e., $1,100,000).

20X8 $128,000 $228,000 $1,200,000 $1,228,000 Carried at amount equal to initial measurement of $1 million plus cumulative ASC 810-10 attribution adjustments since this is higher than fair value.

Reversal of prior ASC 480 measurement adjustment will be required in current period.

20X9 ($500,000) ($272,000) $718,000 $728,000 Carried at amount equal to initial measurement of $1 million plus cumulative ASC 810-10 attribution adjustments of ($272,000) since this is higher than fair value.

Carrying amount below initial temporary equity measurement of $1 million is required since this is a result of the application of ASC 810-10 (as opposed to a cumulative “negative” ASC 480 measurement adjustment).

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Example 9-5 (continued)

(Table continued)

Carrying Amount After Year Cumulative Application Ended ASC 810-10 ASC 810-10 of ASC 810- December Attribution Attribution Appraised 10 and ASC 31 Adjustment Adjustments Fair Value 480-10-S99-3A Comments

20Y0 ($75,000) ($347,000) $675,000 $675,000 Carried at amount equal to fair value since this is higher than initial measurement of $1 million plus cumulative ASC 810-10 attribution adjustments (losses) of $347,000.

Carrying amount below initial temporary equity measurement of $1 million is required since the $653,000 carrying amount of the redeemable noncontrolling interest after the ASC 810-10 attribution adjustments is less than the fair value redemption price. Note that the subsequent ASC 480 measurement adjustment of $22,000, while still resulting in a noncontrolling interest carrying amount below the initial temporary equity measurement of $1 million, is required since it increases the redeemable noncontrolling interest’s carrying amount after the ASC 810-10 attribution adjustment to reflect the impact of the fair value redemption option.

As explained in more detail in Section 9.3.4, the ASC 480 measurement adjustments (if any) that X records to measure the noncontrolling interest at the amount indicated in the fourth column of the table above will not affect the parent’s EPS computation because the common-share noncontrolling interest is redeemable at fair value.

132 Chapter 9 — Redeemable Noncontrolling Interests

9.3.4 Determining the Offsetting Entry and the EPS Impact of ASC 480 Measurement Adjustments

Apply the preferred-share income classification method or preferred-share Is the equity classification method to classify redeemable the ASC 480 offsetting entry noncontrolling Preferred and determine the EPS impact of the interest in the form of ASC 480 measurement adjustment. preferred shares or (Example 9-9) common shares? A consistent method should be used for all preferred-share redeemable noncontrolling interests.

Common Record an ASC 480 measurement adjustment when the redemption price exceeds the ASC 810-10 carrying amount. Classify the ASC 480 offsetting entry in Is the whichever of the following components redeemable of equity is consistent with the policy noncontrolling Yes elected for similar instruments: interest’s redemption • APIC. price equal to fair value? • Retained earnings (or APIC in the absence of retained earnings). The ASC 480 measurement adjustment does not affect income attributable to the controlling and noncontrolling interests or the parent’s EPS calculation. No

Record an ASC 480 measurement adjustment when the redemption price exceeds the ASC 810-10 carrying amount. When doing so, apply whichever of the following adjustment methods is consistent with the policy elected for common-share noncontrolling interests in all partially owned subsidiaries: • Income classification — entire adjustment method (Example 9-6). • Equity classification — entire adjustment method (Example 9-6). • Income classification — excess adjustment method (Example 9-7).* • Equity classification — excess adjustment method (Example 9-8).* * This adjustment method has subpolicies that must also be consistently applied.

ASC 480-10 — SEC Materials — SEC Staff Guidance

SEC Staff Announcement: Classification and Measurement of Redeemable Securities S99-3A(21) Common stock instruments issued by a parent (or single reporting entity). Regardless of the accounting method selected in paragraph 15, the resulting increases or decreases in the carrying amount of redeemable common stock should be treated in the same manner as dividends on nonredeemable stock and should be effected by charges against retained earnings or, in the absence of retained earnings, by charges against paid-in capital. However, increases or decreases in the carrying amount of a redeemable common stock should not affect income available to common stockholders. Rather, the SEC staff believes that to the extent that a common shareholder has a contractual right to receive at share redemption (in other than a liquidation event that meets the exception in paragraph 3(f)) an amount that is other than the fair value of the issuer’s common shares, then that common shareholder has, in substance, received a distribution different from other common shareholders. Under Paragraph 260-10-45-59A, entities with capital structures that include a class of common stock with different dividend rates from those of another class of common stock but without prior or senior rights, should apply the two-class method of calculating earnings per share. Therefore, when a class of common stock is redeemable at other than fair value, increases or decreases in the carrying amount of the redeemable instrument should be reflected in earnings per share using the two-class method.FN17 For common stock redeemable at fair value, the SEC staff would not expect the use of the two-class method, as a redemption at fair value does not amount to a distribution different from other common shareholders. [Footnote references 18 and 19 omitted] 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

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ASC 480-10 — SEC Materials — SEC Staff Guidance (continued)

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. [Footnotes 18 and 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: a. 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. b. 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. FN20 Subtopic 810-10 does not provide detailed guidance on the attribution of net income to the parent and the noncontrolling interest. The SEC staff understands that when a noncontrolling interest is redeemable at other than fair value some registrants consider the terms of the redemption feature in the calculation of net income attributable to the parent (as reported on the face of the income statement), while others only consider the impact of the redemption feature in the calculation of income available to common stockholders of the parent (which is the control number for earnings per share purposes).

As explained in Section 9.3, classification of the ASC 480 offsetting entry is driven by the nature of the redemption price (fair value vs. other than fair value) and, for common-share redeemable noncontrolling interests that are redeemable at other than fair value and all preferred-share redeemable noncontrolling interests, the entity’s policy for recording the ASC 480 measurement adjustments and for incorporating them into the parent’s EPS computation.

9.3.4.1 Common-Share Noncontrolling Interests Redeemable at Fair Value When the redemption price of a common-share redeemable noncontrolling interest exceeds the noncontrolling interest’s ASC 810-10 carrying amount (i.e., its carrying amount after the attribution

134 Chapter 9 — Redeemable Noncontrolling Interests of income or loss to the noncontrolling interest), a reporting entity that is within the scope of ASC 480-10-S99-3A should record an ASC 480 measurement adjustment in accordance with that guidance. Although a fair value redemption feature provides the holder of the instrument with an important source of liquidity, some believe that the ASC 480 offsetting entry should be classified in APIC because fair value redemption features do not convey value to their holder that is incremental to what could be achieved in a transaction conducted at fair value with an unrelated marketplace participant. This view is consistent with the guidance in ASC 810-10-45-23 that requires changes in a parent’s ownership interest in a subsidiary over which the parent retains a controlling financial interest to be accounted for as equity transactions. Others believe that the guidance in ASC 480-10-S99-3A(21) on classifying ASC 480 offsetting entries for redeemable parent common shares indicates that the ASC 480 offsetting entry for the common-share redeemable noncontrolling interest should be classified in retained earnings (or APIC in the absence of retained earnings). We believe that either approach is acceptable as long as the classification is consistently applied to similar instruments. Regardless of classification, for a common- share redeemable noncontrolling interest that is redeemable at fair value, the ASC 480 offsetting entry has no impact on consolidated net income of the parent, net income attributable to the parent, or income available to common stockholders of the parent.

9.3.4.2 Common-Share Noncontrolling Interests Redeemable at Other Than Fair Value The ASC 480 measurement adjustment for a common-share noncontrolling interest redeemable at other than fair value is intended, in part, to reflect the liquidity being provided to the redeemable noncontrolling interest holder for the entire redemption price and to also identify the noncontrolling interest’s potential to convey value to its holder that is incremental to the value that the holder of a nonredeemable common-share noncontrolling interest could receive in a transaction conducted at fair value with an unrelated marketplace participant. The multiple financial reporting objectives of the ASC 480 measurement adjustment, coupled with the accepted diversity in practice for achieving these objectives, makes classification of the ASC 480 offsetting entry one of the more complex aspects of U.S. GAAP to apply to redeemable noncontrolling interests.

To set the stage for the ensuing discussion and illustration of the various approaches that we believe are acceptable for achieving these financial reporting objectives, we note that a reporting entity must answer the following threshold questions before it can determine the impact of the ASC 480 measurement adjustment on its consolidated financial statements: • To what extent does the reporting entity wish the ASC 480 measurement adjustment to affect net income attributable to the parent, the parent’s reported EPS, or both? The reporting entity may elect one of the following approaches:

o Have the entire amount of the reporting period’s ASC 480 measurement adjustment affect net income attributable to the parent, the parent’s reported EPS, or both.

o Limit the impact of the reporting period’s ASC 480 measurement adjustment to the portion of the ASC 480 measurement adjustment necessary to ensure that on a cumulative basis, net income attributable to the parent, the parent’s reported EPS, or both has been reduced by the amount, if any, that the redeemable noncontrolling interest’s redemption price exceeds both (1) the redeemable noncontrolling interest’s fair value and (2) the redeemable noncontrolling interest’s ASC 810-10 carrying amount. This portion is hereafter referred to as the excess portion of the ASC 480 measurement adjustment or the excess portion of the ASC 480 offsetting entry. The remaining portion of the ASC 480 measurement adjustment necessary to ensure that the redeemable noncontrolling interest’s period-end carrying amount equals the greater of its ASC 810-10 carrying amount or its redemption price is hereafter referred to as the

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base portion of the ASC 480 measurement adjustment or the base portion of the ASC 480 offsetting entry. On a cumulative basis, this will be the amount, if any, by which the redeemable noncontrolling interest’s current redemption price is equal to or less than fair value but greater than the redeemable noncontrolling interest’s ASC 810-10 carrying amount. This portion of the ASC 480 measurement adjustment does not affect net income attributable to the parent, the parent’s reported EPS, or both. Note that while the latter approach may reduce the impact of the ASC 480 measurement adjustment on net income attributable to the parent, the parent’s reported EPS, or both (as illustrated in the diagram and table below), it is also significantly more complex to apply. This is because the focus of the latter approach is on ensuring that the cumulative impact of the redemption feature is isolated to the amount by which the redemption price exceeds both the redeemable noncontrolling interest’s fair value and its ASC 810-10 carrying amount. Consequently, classification of each period’s ASC 480 measurement adjustment is affected by both (1) the noncontrolling interest’s redemption price, its ASC 810-10 carrying amount, and its fair value in the current period and (2) the amount and treatment of the ASC 480 measurement adjustment recognized in prior periods. As a result of this approach’s focus on the cumulative impact of redeemable noncontrolling interests on net income attributable to the parent, the parent’s reported EPS, or both, the ASC 480 measurement adjustment may comprise a positive base portion and a negative excess portion (or a negative base portion and a positive excess portion) in any given reporting period. • If the reporting entity elects to have the entire amount of the ASC 480 measurement adjustment affect net income attributable to the parent, the parent’s reported EPS, or both, how does the reporting entity wish to classify the entire ASC 480 offsetting entry? • If the reporting entity elects to limit the impact of the ASC 480 measurement adjustment to the excess portion of the ASC 480 measurement adjustment, how does the reporting entity wish to classify:

o The base portion of the ASC 480 measurement adjustment?

o The excess portion of the ASC 480 measurement adjustment?

The following approaches are acceptable for reflecting in consolidated financial reporting the ASC 480 measurement adjustment for common-share redeemable noncontrolling interests redeemable at other than fair value and represent the possible responses to the threshold questions above: • Income classification — entire adjustment method — Use net income (loss) attributable to noncontrolling interests to classify the entire ASC 480 offsetting entry. Because net income (loss) attributable to noncontrolling interests directly affects net income attributable to the parent’s common shareholders, which is the control number used for the parent’s EPS computation, use of this method does not require the reporting entity to make additional adjustments to the control number of the parent’s EPS computation to accurately reflect the impact of the redemption feature (see Example 9-6). • Equity classification — entire adjustment method — Use retained earnings to classify the entire ASC 480 offsetting entry. Because adjustments to retained earnings are not directly considered in net income attributable to the parent’s common shareholders, the parent must first apply the two-class method of calculating EPS (as discussed in ASC 260) at the subsidiary level, treating the entire amount of the ASC 480 offsetting entry as an adjustment to the control number of the subsidiary’s EPS computation. The resulting EPS amount determined at the subsidiary level for the class of subsidiary shares owned by the parent should then be used for determining the amount of subsidiary income that must be incorporated into the control number of the parent’s own EPS computation (see Example 9-6).

136 Chapter 9 — Redeemable Noncontrolling Interests

• Income classification — excess adjustment method — Use net income (loss) attributable to noncontrolling interests to classify only the excess portion of the ASC 480 offsetting entry. The base portion of the ASC 480 offsetting entry may be consistently classified in either of the following:

o Retained earnings (or APIC in the absence of retained earnings) — The guidance in ASC 480-10- S99-3A(21) on classifying ASC 480 offsetting entries for redeemableparent common shares in retained earnings (or APIC in the absence of retained earnings) informs the acceptability of this approach for classifying in retained earnings the base portion of the ASC 480 offsetting entry (see Example 9-7).

o APIC — The guidance in ASC 810-10-45-23 that requires changes in a parent’s ownership interest to be accounted for as equity transactions informs the acceptability of this approach for classifying in APIC the base portion of the ASC 480 offsetting entry (see Example 9-7). Because the income classification — excess adjustment method appropriately incorporates into net income (loss) attributable to the parent’s common shareholders the excess portion of the ASC 480 offsetting entry, the reporting entity does not need to make additional adjustments to the control number of the parent’s EPS computation to accurately reflect the impact of the redemption feature. • Equity classification — excess adjustment method — Always use retained earnings (or APIC in the absence of retained earnings) to classify the excess portion of the ASC 480 offsetting entry. The base portion of the ASC 480 offsetting entry may be consistently classified as either:

o Retained earnings (or APIC in the absence of retained earnings) — As noted above in the description of the income classification — excess adjustment method, ASC 480-10-S99- 3A(21) informs the acceptability of this approach for classifying in retained earnings the base portion of the ASC 480 offsetting entry (seeExample 9-8).

o APIC — As noted above in the description of the income classification — excess adjustment method, ASC 810-10-45-23 informs the acceptability of this approach for classifying in APIC the base portion of the ASC 480 offsetting entry (see Example 9-8). As would be the case under the equity classification — entire adjustment method, because adjustments to retained earnings are not directly considered in net income attributable to the parent’s common shareholders, the parent must first apply the two-class method at the subsidiary level when using the equity classification — excess adjustment method, treating the excess portion of the ASC 480 offsetting entry as an adjustment to the control number of the subsidiary’s EPS computation. The resulting EPS amount determined at the subsidiary level (for the class of subsidiary shares owned by parent) should then be used for determining the amount of subsidiary income that must be incorporated into the control number of the parent’s own EPS computation.

The first two approaches are driven by the parent’s election (in accordance with footnote 17 of ASC 480-10-S99-3A) to reflect the entire amount of the ASC 480 measurement adjustment as being akin to a dividend that directly (income classification — entire adjustment method) or indirectly (equity classification — entire adjustment method) affects the parent’s EPS computation. The second two main approaches are driven by the parent’s election (in accordance with footnote 17 of ASC 480-10-S99-3A) to reflect only the excess portion of the ASC 480 measurement adjustment as being akin to a dividend that directly (income classification — excess adjustment method) or indirectly (equity classification — excess adjustment method) affects the parent’s EPS computation. Each of the excess adjustment methods has acceptable subpolicies that must be elected to clarify what component of stockholders’ equity (retained earnings or APIC) is used to classify the base portion of the ASC 480 measurement adjustment.

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While we believe that the approaches above are acceptable alternatives, we would generally expect a reporting entity to consistently apply (and appropriately disclose) the same method across its entire portfolio of less than wholly owned subsidiaries. Further, as previously noted, although the excess adjustment methods could potentially reduce the cumulative impact of a redeemable noncontrolling interest on net income attributable to the parent or the parent’s reported EPS, the cumulative focus of these approaches makes them significantly more complex to apply (which is why many reporting entities elect to apply one of the entire adjustment methods in practice). Given the significance of both net income attributable to the parent and net income attributable to the parent’s common shareholders (the control number of the parent’s EPS computation), reporting entities that elect to apply one of the excess adjustment methods should ensure that they have adequate internal control over financial reporting to minimize the risk of a material misstatement.

Entities may find the diagram and table below helpful when evaluating the potential application of the above concepts.

Cumulative Classification of ASC 480-10 Offsetting Entries

ASC 810-10 Carrying Amount Fair Value Redemption Price

Cumulative Base Portion Cumulative Excess Portion

ASC 810-10 Carrying Amount Redemption Price Fair Value

Redemption Price < Fair Value = Cumulative Base Portion No Cumulative Excess Portion on the Reporting Date*

ASC 810-10 Fair Value Redemption Price Carrying Amount

ASC 810-10 Carrying Amount > Redemption Price = No Cumulative ASC 480-10 Measurement Adjustment Required on the Reporting Date*

ASC 810-10 Fair Value Carrying Amount Redemption Price

Fair Value < ASC 810-10 Carrying Amount < Redemption Price = Cumulative Excess Portion No Cumulative Base Portion on the Reporting Date*

ASC 810-10 Redemption Price Fair Value Carrying Amount

ASC 810-10 Carrying Amount > Redemption Price = No Cumulative ASC 480-10 Measurement Adjustment Required on the Reporting Date*

ASC 810-10 Redemption Price Carrying Amount Fair Value

ASC 810-10 Carrying Amount > Redemption Price = No Cumulative ASC 480-10 Measurement Adjustment Required on the Reporting Date*

* Although no cumulative ASC 480-10 measurement adjustment is required on the reporting date, an ASC 480-10 measurement adjustment may be required in the current reporting period, depending on opening balances, to achieve the desired cumulative result.

138 ). Section 9.3.3.2 sive of any ASC 480-10 measurement Comments ASC 480-10 does not permit a redeemable noncontrolling interest’s carrying amount to be reduced below its ASC 810-10 carrying amount (see Further, there is no cumulative prior-period ASC 480-10 measurement adjustment that would require reversal in the current period. Because the interest’s redemption price does not exceed its period-end ASC 810-10 carrying amount, the reporting entity’s cumulative ASC 480-10 measurement adjustments should equal zero. Since the reporting entity on a cumulative basis has previously recorded ASC 480-10 measurement adjustments classified as base portion, the current-period ASC 480-10 measurement adjustment that is required to adjust the interest its ASC 810-10 carrying amount (i.e., the reversing entry) will be classified as base portion. Consequently, the current-period ASC 480-10 measurement adjustment will have no direct or indirect impact on the parent’s EPS computation. What is the current- period ASC 480-10 measurement adjustment classification? None Base portion Does the interest’s redemption price exceed its fair value in the current period? N/A N/A Is a portion of the cumulative ASC 480- 10 measurement adjustments recorded in prior periods related to a redemption price that exceeded the noncontrolling interest’s then fair value? That is, were any of the interest’s cumulative ASC 480-10 measurement adjustments classified as excess portion? N/A No On a cumulative basis, has the reporting entity recorded any ASC 480-10 measurement adjustments through the end of the prior period? No Yes

4 As used in this table, “ASC 810-10 carrying amount” refers to the interest’s amount after cumulative attribution of earnings under ASC but exclu adjustments. Does the interest’s redemption price exceed its ASC 810-10 carrying amount after attribution of current- period earnings? No No 4

139

6 , 5 carrying amount as compared with its s base portion or excess through the Comments Because the interest’s redemption price does not exceed its period-end ASC 810-10 carrying amount, the reporting entity’s cumulative ASC 480-10 measurement adjustments should equal zero. Since the reporting entity has previously recorded on a cumulative basis ASC 480-10 measurement adjustments classified as base portion, excess portion, or both, the current-period ASC 480-10 measurement adjustment that is required to adjust the interest to its ASC 810-10 carrying amount (i.e., reversing entry) will be classified as base portion, excess portion, or both in amounts that equal and offset the cumulative amounts classified as such in prior periods. Only the excess portion (if any) of current-period ASC 480-10 measurement adjustment will have a direct or indirect impact on the parent’s EPS computation. What is the current- period ASC 480-10 measurement adjustment classification? Base portion, excess portion, or both Does the interest’s redemption price exceed its fair value in the current period? N/A Is a portion of the cumulative ASC 480- 10 measurement adjustments recorded in prior periods related to a redemption price that exceeded the noncontrolling interest’s then fair value? That is, were any of the interest’s cumulative ASC 480-10 measurement adjustments classified as excess portion? Yes On a cumulative basis, has the reporting entity recorded any ASC 480-10 measurement adjustments through the end of the prior period? Yes Cumulative classification of ASC 480-10 measurement adjustments as base portion, excess or both depends on the interest’s (1) current-period 810-10 redemption price and (2) fair value. Classification of an individual reporting period’s ASC 480-10 measurement adjustment will be determined by comparing amounts classified (on a cumulative basis) end of the prior reporting period with amounts required to be so classified (on a cumulative basis) at current period. Consequently, as base portion, excess or both may be positive or negative in any given reporting period. (Table continued) Does the interest’s redemption price exceed its ASC 810-10 carrying amount after attribution of current- period earnings? No 5 6

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5,6 Only the excess portion 5,6 Comments Because the interest’s redemption price exceeds its period-end ASC 810-10 carrying amount, the reporting entity’s cumulative ASC 480-10 measurement adjustments should equal the excess of interest’s redemption price over its ASC 810-10 carrying amount. Since the reporting entity has not previously recorded on a cumulative basis any ASC 480-10 measurement adjustments and the interest’s redemption price is less than its fair value, the current-period ASC 480-10 measurement adjustment that is required to adjust the interest its redemption price will be classified as base portion and not have a direct or indirect impact on the parent’s EPS computation. Because the interest’s redemption price exceeds its period-end ASC 810-10 carrying amount, the reporting entity’s cumulative ASC 480-10 measurement adjustments should equal the excess of interest’s current-period redemption price over its current-period ASC 810-10 carrying amount. Since the reporting entity has not previously recorded on a cumulative basis any ASC 480-10 measurement adjustments and the interest’s redemption price exceeds its fair value, the current-period ASC 480-10 measurement adjustment that is required to adjust the interest to its redemption price will be classified as base portion, excess or both. (if any) will have a direct or indirect impact on the parent’s EPS computation. What is the current- period ASC 480-10 measurement adjustment classification? Base portion Base portion, excess portion, or both Does the interest’s redemption price exceed its fair value in the current period? No Yes Is a portion of the cumulative ASC 480- 10 measurement adjustments recorded in prior periods related to a redemption price that exceeded the noncontrolling interest’s then fair value? That is, were any of the interest’s cumulative ASC 480-10 measurement adjustments classified as excess portion? N/A N/A On a cumulative basis, has the reporting entity recorded any ASC 480-10 measurement adjustments through the end of the prior period? No No (Table continued) Does the interest’s redemption price exceed its ASC 810-10 carrying amount after attribution of current- period earnings? Yes Yes

141 Comments Because the interest’s redemption price exceeds its period-end ASC 810-10 carrying amount, the reporting entity’s cumulative ASC 480-10 measurement adjustments should equal the excess of interest’s current-period redemption price over its current-period ASC 810-10 carrying amount. The redemption price’s status below the interest’s fair value requires reporting entity’s ASC 480-10 measurement adjustments to be classified entirely as base portion on a cumulative basis. Since the reporting entity has not classified on a cumulative basis any portion of its ASC 480-10 measurement adjustments as excess portion, 100 percent of the current-period ASC 480-10 measurement adjustment that is required to adjust the interest to its redemption price will be classified as base portion. Consequently, the current-period ASC 480-10 measurement adjustment will have no direct or indirect impact on the parent’s EPS computation. What is the current- period ASC 480-10 measurement adjustment classification? Base portion Does the interest’s redemption price exceed its fair value in the current period? No Is a portion of the cumulative ASC 480- 10 measurement adjustments recorded in prior periods related to a redemption price that exceeded the noncontrolling interest’s then fair value? That is, were any of the interest’s cumulative ASC 480-10 measurement adjustments classified as excess portion? No On a cumulative basis, has the reporting entity recorded any ASC 480-10 measurement adjustments through the end of the prior period? Yes (Table continued) Does the interest’s redemption price exceed its ASC 810-10 carrying amount after attribution of current- period earnings? Yes

142 Only the excess 6 The reporting entity will 5,6 The reporting entity will classify the portion 5 Comments Because the interest’s redemption price exceeds its period-end ASC 810-10 carrying amount, the reporting entity’s cumulative 480-10 measurement adjustments should equal the excess of interest’s current-period redemption price over its ASC 810-10 carrying amount. The redemption price’s status above the interest’s fair value requires reporting entity’s ASC 480-10 measurement adjustments to be classified on a cumulative basis as base portion and excess portion. classify the portion of its current-period ASC 480-10 measurement adjustments as base portion, excess or both in the amounts necessary to ensure that cumulative classification is correct. Only the excess portion (if any) of current-period ASC 480-10 measurement adjustment will have a direct or indirect impact on the parent’s EPS computation. Because the interest’s redemption price exceeds its period-end ASC 810-10 carrying amount, the reporting entity’s cumulative 480-10 measurement adjustments should equal the excess of interest’s current-period redemption price over its ASC 810-10 carrying amount. The redemption price’s status below the interest’s fair value requires reporting entity’s ASC 480-10 measurement adjustments to be classified on a cumulative basis as only base portion. of its current-period ASC 480-10 measurement adjustments as base portion, excess or both in the amounts necessary to ensure that cumulative classification is correct. portion (if any) of the current-period ASC 480-10 measurement adjustment will have a direct or indirect impact on the parent’s EPS computation. What is the current- period ASC 480-10 measurement adjustment classification? Base portion, excess portion, or both Base portion, excess portion, or both Does the interest’s redemption price exceed its fair value in the current period? Yes No Is a portion of the cumulative ASC 480- 10 measurement adjustments recorded in prior periods related to a redemption price that exceeded the noncontrolling interest’s then fair value? That is, were any of the interest’s cumulative ASC 480-10 measurement adjustments classified as excess portion? No Yes On a cumulative basis, has the reporting entity recorded any ASC 480-10 measurement adjustments through the end of the prior period? Yes Yes (Table continued) Does the interest’s redemption price exceed its ASC 810-10 carrying amount after attribution of current- period earnings? Yes Yes

143

5 Only the 6 Comments Because the interest’s redemption price exceeds its period-end ASC 810-10 carrying amount, the reporting entity’s cumulative ASC 480-10 measurement adjustments should equal the excess of interest’s current-period redemption price over its current-period ASC 810-10 carrying amount. The redemption price’s status above the interest’s fair value requires reporting entity’s ASC 480-10 measurement adjustments to be classified on a cumulative basis as base portion and excess portion. The reporting entity will classify the portion of its current- period ASC 480-10 measurement adjustments as base portion, excess or both in the amounts necessary correct. is classification cumulative that ensure to excess portion (if any) of the current-period ASC 480-10 measurement adjustment will have a direct or indirect impact on the parent’s EPS computation. What is the current- period ASC 480-10 measurement adjustment classification? Base portion, excess portion, or both Does the interest’s redemption price exceed its fair value in the current period? Yes Is a portion of the cumulative ASC 480- 10 measurement adjustments recorded in prior periods related to a redemption price that exceeded the noncontrolling interest’s then fair value? That is, were any of the interest’s cumulative ASC 480-10 measurement adjustments classified as excess portion? Yes On a cumulative basis, has the reporting entity recorded any ASC 480-10 measurement adjustments through the end of the prior period? Yes (Table continued) Does the interest’s redemption price exceed its ASC 810-10 carrying amount after attribution of current- period earnings? Yes

144 Chapter 9 — Redeemable Noncontrolling Interests

We believe that the acceptability of the income classification and equity classification methods (provided that the method selected is consistently applied across the parent’s entire portfolio of less than wholly owned subsidiaries) is consistent with the diversity in practice acknowledged by the SEC staff in footnote 20 of ASC 480-10-S99-3A, which states, in part:

The SEC staff understands that when a noncontrolling interest is redeemable at other than fair value some registrants consider the terms of the redemption feature in the calculation of net income attributable to the parent (as reported on the face of the income statement), while others only consider the impact of the redemption feature in the calculation of income available to common stockholders of the parent (which is the control number for earnings per share purposes).

Note that unless otherwise indicated, all of the adjustment methods, as well as Examples 9-6 through 9-8, presume that the common-share noncontrolling interest is redeemable by the subsidiary itself (as opposed to being redeemable or guaranteed by the parent). In a manner consistent with this presumption, and as illustrated in Examples 9-6 through 9-8, the financial statements of Subsidiary H are directly affected by the ASC 480 measurement adjustment that is used to record the redemption feature held by Entity I (the noncontrolling interest holder). Once recorded by H, the entire impact of the ASC 480 measurement adjustment is attributed to Company G as the sole holder of H’s nonredeemable common shares (i.e., G’s controlling interest in H). If I’s common-share noncontrolling interest were redeemable directly by the parent, H’s financial statements would not be affected by the ASC 480 measurement adjustment; rather, the entire amount of such adjustment would be directly attributed to G as a consolidating entry. Thus, although the mechanics may be different, we would expect the accounting outcomes to be the same on a consolidated basis when the adjustment methods illustrated in Examples 9-6 through 9-8 are applied, regardless of whether the common-share noncontrolling interest is redeemable by the subsidiary itself or by the parent.

Connecting the Dots As noted in Chapter 3, noncontrolling interests exist only from the perspective of the parent that prepares consolidated financial statements. Accordingly, classification of ASC 480 offsetting entries in net income attributable to the parent, retained earnings, or APIC under any of the adjustment methods outlined above refers to the accounts presented in the parent’s consolidated financial statements. Further, the EPS discussion that accompanies the description of each adjustment method presumes that the common-share noncontrolling interest is redeemable by the subsidiary that issued the interest (as opposed to the subsidiary’s parent). As with all consolidated reporting, achieving the outcomes summarized above depends on a combination of the subsidiary’s own accounting policies and the subsequent consolidation and eliminating entries applied during the consolidation process to achieve the consolidated financial reporting results described in the illustrative examples below. Preparers looking for guidance applicable to the preparation of the subsidiary’s stand-alone financial statements should refer to ASC 480-10-S99-3A(15) and ASC 480-10- S99-3A(21).

145 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

9.3.4.2.1 Illustrative Examples of Adjustment Methods 9.3.4.2.1.1 Application of Entire Adjustment Methods Related to Income Classification and Equity Classification, Respectively

Example 9-6

Assume the following: • Company G is the parent of Subsidiary H. • Entity I holds a 20 percent noncontrolling interest in the common shares of H, which it acquired from G on January 1, 20X6, for $1.1 million (which is the initial carrying amount of the noncontrolling interest). • The noncontrolling interest is redeemable at the option of I at a formulaic redemption price that does not equal fair value. • Company G has elected to use the immediate method to record ASC 480 measurement adjustments. • Company G determines the fair value of I’s noncontrolling interest at the end of each reporting period. • Neither G nor H has any outstanding securities other than those described above. • There are no intercompany transactions between G and H that require the elimination of intercompany profit or loss. • Company G has sufficient retained earnings to cover any portion of ASC 480 offsetting entries that are classified in retained earnings. • To classify its ASC 480 offsetting entry and calculate EPS, G applies either (1) the income classification — entire adjustment method or (2) the equity classification — entire adjustment method. The parties’ respective interests are illustrated in the diagram below.

Company G Entity I

80% of the common 20% common-share shares in H redeemable noncontrolling interest in H

Subsidiary H

146 Chapter 9 — Redeemable Noncontrolling Interests

Example 9-6 (continued)

The following amounts will be relevant to G’s financial reporting for the periods ended 20X6, 20X7, 20X8, and 20X9 (all numbers in thousands):

= = –

Carrying (CY) + (PY) NCI’s Amount Redemption Carrying After Carrying Price in Excess G’s Net Amount Application Amount of Carrying Income H’s Income Absent of ASC 810- Before Amount (Exclusive Attributed Redemption NCI’s 10 and ASC Current-Year Before of to the NCI Feature Formulaic Appraised 480 (Higher ASC 480 ASC 480 Year Investment H’s Net Under ASC (i.e., ASC Redemption Fair Value of or Measurement Measurement Ended in H) Income 810-10 810-10 Only) Price of NCI ) Adjustment Adjustment

20X6 $ 1,200 $ 775 $ 155 $ 1,255* $ 1,278 $ 1,350 $ 1,278 $ 1,255** $ 23

20X7 $ 1,350 $ 950 $ 190 $ 1,445*** $ 1,414 $ 1,375 $ 1,445 $ 1,468 N/A

20X8 $ 1,400 $ 1,500 $ 300 $ 1,745† $ 1,760 $ 1,425 $ 1,760 $ 1,745 $ 15

20X9 $ 1,300 $ 1,000 $ 200 $ 1,945‡ $ 2,000 $ 1,962 $ 2,000 $ 1,960 $ 40

* $1,255,000 = $1,100,000 initial measurement + $155,000 income of H attributed to the noncontrolling interest (20X6). ** For 20X6 (initial year), = $1,100,000 initial measurement of noncontrolling interest + $155,000 income of H attributed to the noncontrolling interest (20X6). *** $1,445,000 = $1,100,000 initial measurement + $345,000 cumulative income of H attributed to the noncontrolling interest (20X7). † $1,745,000 = $1,100,000 initial measurement + $645,000 cumulative income of H attributed to the noncontrolling interest (20X8). ‡ $1,945,000 = $1,100,000 initial measurement + $845,000 cumulative income of H attributed to the noncontrolling interest (20X9).

20X6 ASC 810-10 Attribution Adjustment/ASC 480 Measurement Adjustment/Offsetting Entry For the period ended December 31, 20X6, G uses the journal entries below to subsequently measure I’s noncontrolling interest in H.

To record the ASC 810-10 attribution adjustment for the period ended December 31, 20X6:

Net income attributable to noncontrolling interest 155,000 Noncontrolling interest — temporary equity 155,000

To record the ASC 480 measurement adjustment as of December 31, 20X6:

Net income attributable to noncontrolling interest (income classification method) 23,000* Noncontrolling interest — temporary equity 23,000

or Retained earnings (equity classification method) 23,000* Noncontrolling interest — temporary equity 23,000

* $23,000 = (20X6) – (20X6) = $1,278,000 – $1,255,000.

147 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

Example 9-6 (continued)

EPS Impact Income Classification — Entire Adjustment Method For the period ended December 31, 20X6, and each subsequent period presented in this example, because net income (loss) attributable to the noncontrolling interest directly affects net income attributable to G’s common shareholders, use of the income classification — entire adjustment method does not require additional adjustments to the control number of G’s EPS computation. Company G will report net income attributable to G of $1,797,000, as shown in the table below.

Income Classification — Entire Adjustment Method (as of December 31, 20X6) G’s net income (exclusive of investment in H) $ 1,200,000 H’s net income 775,000 Consolidated net income 1,975,000 ASC 810-10 attribution adjustment (155,000) ASC 480 measurement adjustment (23,000) Net income attributable to G $ 1,797,000

Equity Classification — Entire Adjustment Method Company G first applies the two-class method at the subsidiary level, recognizing the entire amount of the ASC 480 offsetting entry as an adjustment to the control number in H’s EPS computation. Company G then uses the resulting EPS amount determined at the subsidiary level for the class of H shares owned by G to determine the amount of H’s income that must be incorporated into the control number of G’s own EPS computation. Company G will report net income attributable to G’s common shareholders (the control number for G’s EPS computation) of $1,797,000, as shown in the table below.

Equity Classification — Entire Adjustment Method (as of December 31, 20X6)

Attributable to Attributable to Nonredeemable Common Redeemable Common Shares Held by G Shares Held by I H’s net income $ 620,000* $ 155,000** H’s numerator adjustment arising from ASC 480 measurement adjustment (23,000) 23,000 Net income attributable to each class of common shareholder $ 597,000 $ 178,000 H’s EPS 0.74625 0.89 G’s net income (exclusive of investment in H) $ 1,200,000 H’s net income attributable to G 597,000***

Consolidated net income attributable to G’s common shareholders $ 1,797,000

* $775,000 net income of H × (800,000 H common shares held by G ÷ 1,000,000 H common shares outstanding). ** $775,000 net Income of H × (200,000 H common shares held by I ÷ 1,000,000 H common shares outstanding). *** 800,000 nonredeemable H common shares × $0.74625.

For this period and all subsequent reporting periods, application of the two-class method at the subsidiary level has been simplified by the lack of any other participating securities or common-share equivalents at the subsidiary or parent level.

148 Chapter 9 — Redeemable Noncontrolling Interests

Example 9-6 (continued)

20X7 ASC 810-10 Attribution Adjustment/ASC 480 Measurement Adjustment/Offsetting Entry For the period ended December 31, 20X7, G uses the journal entries below to subsequently measure I’s noncontrolling interest in H.

To record the ASC 810-10 attribution adjustment for the period ended December 31, 20X7:

Net income attributable to noncontrolling interest 190,000 Noncontrolling interest — temporary equity 190,000

To record the ASC 480 measurement adjustment as of December 31, 20X7:

Noncontrolling interest — temporary equity 23,000*

Net income attributable to noncontrolling interest (income classification method) 23,000 or Noncontrolling interest — temporary equity 23,000* Retained earnings (equity classification method) 23,000

* $23,000 = (20X7) – (20X7) = $1,468,000 – $1,445,000. As noted in Section 9.3.3.1, recording the ASC 810-10 attribution adjustment in the current period increased the carrying amount of the redeemable noncontrolling interest above both the cumulative amount that would result from solely applying ASC 810-10 and the redemption price, making it necessary to reverse all of the prior-period ASC 480 measurement adjustment.

EPS Impact Income Classification — Entire Adjustment Method Company G will report net income attributable to G of $2,133,000, as shown in the table below.

Income Classification — Entire Adjustment Method (as of December 31, 20X7) G’s net income (exclusive of investment in H) $ 1,350,000 H’s net income 950,000 Consolidated net income 2,300,000 ASC 810-10 attribution adjustment (190,000) ASC 480 measurement adjustment 23,000 Net income attributable to G $ 2,133,000

149 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

Example 9-6 (continued)

Equity Classification — Entire Adjustment Method Company G will report net income attributable to G’s common shareholders (the control number for G’s EPS computation) of $2,133,000, as shown in the table below.

Equity Classification — Entire Adjustment Method (as of December 31, 20X7)

Attributable to Attributable to Nonredeemable Common Redeemable Common Shares Held by G Shares Held by I H’s net income $ 760,000* $ 190,000** H’s numerator adjustment arising from ASC 480 measurement adjustment 23,000 (23,000) Net income attributable to each class of common shareholder $ 783,000 $ 167,000 H’s EPS 0.97875 0.835 G’s net income (exclusive of investment in H) 1,350,000 H’s net income attributable to G 783,000***

Consolidated net income attributable to G’s common shareholders $ 2,133,000

* $950,000 net income of H × (800,000 H common shares held by G ÷ 1,000,000 H common shares outstanding). ** $950,000 net income of H × (200,000 H common shares held by I ÷ 1,000,000 H common shares outstanding). *** 800,000 nonredeemable H common shares × $0.97875.

20X8 ASC 810-10 Attribution Adjustment/ASC 480 Measurement Adjustment/Offsetting Entry For the period ended December 31, 20X8, G uses the journal entries below to subsequently measure I’s noncontrolling interest in H.

To record the ASC 810-10 attribution adjustment for the period ended December 31, 20X8:

Net income attributable to noncontrolling interest 300,000 Noncontrolling interest — temporary equity 300,000

To record the ASC 480 measurement adjustment as of December 31, 20X8:

Net income attributable to noncontrolling interest (income classification method) 15,000* Noncontrolling interest — temporary equity 15,000 or Retained earnings (equity classification method) 15,000* Noncontrolling interest — temporary equity 15,000

* $15,000 = (20X8) – (20X8) = $1,760,000 – $1,745,000.

150 Chapter 9 — Redeemable Noncontrolling Interests

Example 9-6 (continued)

EPS Impact Income Classification — Entire Adjustment Method Company G will report net income attributable to G of $2,585,000, as shown in the table below.

Income Classification — Entire Adjustment Method (as of December 31, 20X8) G’s net income (exclusive of investment in H) $ 1,400,000 H’s net income 1,500,000 Consolidated net income 2,900,000 ASC 810-10 attribution adjustment (300,000) ASC 480 measurement adjustment (15,000) Net income attributable to G $ 2,585,000

Equity Classification — Entire Adjustment Method Company G will report net income attributable to G’s common shareholders (the control number for G’s EPS computation) of $2,585,000, as shown in the table below.

Equity Classification — Entire Adjustment Method (as of December 31, 20X8)

Attributable to Attributable to Nonredeemable Common Redeemable Common Shares Held by G Shares Held by I H’s net income $ 1,200,000* $ 300,000** H’s numerator adjustment arising from ASC 480 measurement adjustment (15,000) 15,000 Net income attributable to each class of common shareholder $ 1,185,000 $ 315,000 H’s EPS 1.48125 1.575 G’s net income (exclusive of investment in H) 1,400,000 H’s net income attributable to G 1,185,000***

Consolidated net income attributable to G’s common shareholders $ 2,585,000

* $1,500,000 net income of H × (800,000 H common shares held by G ÷ 1,000,000 H common shares outstanding). ** $1,500,000 net income of H × (200,000 H common shares held by I ÷ 1,000,000 H common shares outstanding). *** 800,000 nonredeemable H common shares × $1.48125.

151 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

Example 9-6 (continued)

20X9 ASC 810-10 Attribution Adjustment/ASC 480 Measurement Adjustment/Offsetting Entry For the period ended December 31, 20X9, G uses the journal entries below to subsequently measure I’s noncontrolling interest in H.

To record the ASC 810-10 attribution adjustment for the period ended December 31, 20X9:

Net income attributable to noncontrolling interest 200,000 Noncontrolling interest — temporary equity 200,000

To record the ASC 480 measurement adjustment as of December 31, 20X9:

Net income attributable to noncontrolling interest (income classification method) 40,000* Noncontrolling interest — temporary equity 40,000

or Retained earnings (equity classification method) 40,000* Noncontrolling interest — temporary equity 40,000

* $40,000 = (20X9) – (20X9) = $2,000,000 – $1,960,000.

EPS Impact Income Classification — Entire Adjustment Method Company G will report net income attributable to G of $2,060,000, as shown in the table below.

Income Classification — Entire Adjustment Method (as of December 31, 20X9) G’s net income (exclusive of investment in H) $ 1,300,000 H’s net income 1,000,000 Consolidated net income 2,300,000 ASC 810-10 attribution adjustment (200,000) ASC 480 measurement adjustment (40,000) Net income attributable to G $ 2,060,000

152 Chapter 9 — Redeemable Noncontrolling Interests

Example 9-6 (continued)

Equity Classification — Entire Adjustment Method Company G will report net income attributable to G’s common shareholders (the control number for G’s EPS computation) of $2,060,000, as shown in the table below.

Equity Classification — Entire Adjustment Method (as of December 31, 20X9)

Attributable to Attributable to Nonredeemable Common Redeemable Common Shares Held by G Shares Held by I H’s net income $ 800,000* $ 200,000** H’s numerator adjustment arising from ASC 480 measurement adjustment (40,000) 40,000 Net income attributable to each class of common shareholder $ 760,000 $ 240,000 H’s EPS 0.95 1.20 G’s net income (exclusive of investment in H) $ 1,300,000 H’s net income attributable to G 760,000***

Consolidated net income attributable to G’s common shareholders $ 2,060,000

* $1,000,000 net income of H × (800,000 H common shares held by G ÷ 1,000,000 H common shares outstanding). ** $1,000,000 net Income of H × (200,000 H common shares held by I ÷ 1,000,000 H common shares outstanding). *** 800,000 nonredeemable H common shares × $0.95.

9.3.4.2.1.2 Application of Income Classification — Excess Adjustment Method (Additional Paid-In Capital or Retained Earnings)

Example 9-7

Assume the same facts as in Example 9-6, except that G has elected to apply the income classification — excess adjustment method, including one of the method’s required subpolicies (APIC or retained earnings). This illustrative example highlights the financial reporting and EPS impact of applying the method and each subpolicy. For ease of reference, we have repeated the facts and figures that will be relevant to G’s financial reporting for the periods ended 20X6, 20X7, 20X8, and 20X9.

In this example: • Subsidiary H has 1 million common shares outstanding, of which G holds 800,000 and Entity I holds 200,000. • Subsidiary H has no securities outstanding other than those described above.

153 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

Example 9-7 (continued)

Key figures associated with G, H, and the noncontrolling interest that I holds in H are as follows (all numbers in thousands):

= = – = (CY) = Lesser of + (PY) + (CY) (PY) or [( – ) – NCI’s Carrying NCI’S Carrying Redemption (CY)

Amount Absent Amount After NCI’s Carrying Price in Excess of (PY)] G’s Net Income H’s Income Redemption NCI’s Application of Amount Before Carrying Amount Cumulative (Exclusive of Attributed to Feature Formulaic Appraised ASC 810-10 and Current-Year ASC Before ASC 480 Current-Year “Excess” Year Investment H’s Net the NCI Under (i.e., ASC 810-10 Redemption Fair Value ASC 480 (Higher 480 Measurement Measurement “Excess” Adjustments Ended in H) Income ASC 810-10 Only) Price of NCI of or ) Adjustment Adjustment Adjustment* Recorded

20X6 $ 1,200 $ 775 $ 155 $ 1,255** $ 1,278 $ 1,350 $ 1,278 $ 1,255*** $ 23 N/A N/A

20X7 $ 1,350 $ 950 $ 190 $ 1,445† $ 1,414 $ 1,375 $ 1,445 $ 1,468 N/A N/A N/A

20X8 $ 1,400 $ 1,500 $ 300 $ 1,745†† $ 1,760 $ 1,425 $ 1,760 $ 1,745 $ 15 $ 15 $ 15

20X9 $ 1,300 $ 1,000 $ 200 $ 1,945‡ $ 2,000 $ 1,962 $ 2,000 $ 1,960 $ 40 $ 23§ $ 38

* Applicable only if both is applicable and exceeds . ** $1,255,000 = $1,100,000 initial measurement + $155,000 income of H attributed to the noncontrolling interest (20X6). *** For 20X6 (initial year), = $1,100,000 initial measurement of the noncontrolling interest + $155,000 income of H attributed to the noncontrolling interest (20X6). † $1,445,000 = $1,100,000 initial measurement + $345,000 cumulative income of H attributed to the noncontrolling interest (20X7). †† $1,745,000 = $1,100,000 initial measurement + $645,000 cumulative income of H attributed to the noncontrolling interest (20X8). ‡ $1,945,000 = $1,100,000 initial measurement + $845,000 cumulative income of H attributed to the noncontrolling interest (20X9). § $23,000 = lesser of (20X9) or [((20X9) – (20X9)) – (20X8)] = lesser of $40,000 or [($2,000,000 – $1,962,000) – $15,000].

20X6 ASC 810-10 Attribution Adjustment/ASC 480 Measurement Adjustment/Offsetting Entry For the period ended December 31, 20X6, G uses the journal entries below to subsequently measure I’s noncontrolling interest in H under the income classification — excess adjustment method (APIC/retained earnings).

To record the ASC 810-10 attribution adjustment for the period ended December 31, 20X6:

Net income attributable to noncontrolling interest 155,000 Noncontrolling interest — temporary equity 155,000

To record the ASC 480 measurement adjustment as of December 31, 20X6:

APIC/retained earnings 23,000* Noncontrolling interest — temporary equity 23,000

* $23,000 = (20X6) – (20X6) = $1,278,000 – $1,255,000. Note that because (20X6) does not exceed (20X6), (20X6) is not applicable for this reporting period.

154 Chapter 9 — Redeemable Noncontrolling Interests

Example 9-7 (continued)

EPS Impact Because G has elected to apply the income classification — excess adjustment method (including one of the method’s required subpolicies), net income attributable to G’s common shareholders will be directly affected by the portion of the ASC 480 offsetting entry that reflects the cumulative excess (if any) of the noncontrolling interest’s redemption price over the instrument’s fair value. Accordingly, regardless of G’s classification (APIC or retained earnings) of the portion of the ASC 480 offsetting entry arising from redemption prices below fair value, no additional adjustment to net income attributable to G’s common shareholders (the control number for G’s EPS computation) is required. Specific to this period, because 100 percent of the ASC 480 measurement adjustment is related to a redemption price that is less than fair value, none of the ASC 480 offsetting entry is classified in net income attributable to noncontrolling interests. Accordingly, G reports net income attributable to G of $1,820,000 for 20X6, as shown in the table below.

Income Classification — Excess Adjustment Method (as of December 31, 20X6) G’s net income (exclusive of investment in H) $ 1,200,000 H’s net income 775,000 Consolidated net income 1,975,000 ASC 810-10 attribution adjustment (155,000) ASC 480 measurement adjustment (excess portion) N/A Net income attributable to G $ 1,820,000

For this period and in all subsequent reporting periods, application of the two-class method at the subsidiary has been simplified by the lack of any other participating securities or common-share equivalents.

20X7 ASC 810-10 Attribution Adjustment/ASC 480 Measurement Adjustment Offsetting Entry For the period ended December 31, 20X7, G uses the journal entries below to subsequently measure I’s noncontrolling interest in H.

To record the ASC 810-10 attribution adjustment for the period ended December 31, 20X7:

Net income attributable to noncontrolling interest 190,000 Noncontrolling interest — temporary equity 190,000

To record the ASC 480 measurement adjustment as of December 31, 20X7:

Noncontrolling interest — temporary equity 23,000* APIC/retained earnings 23,000

* $23,000 = (20X7) – (20X7) = $1,468,000 – $1,445,000. Note that (20X7) is not applicable for this reporting period for the reasons explained below in the discussion about the EPS impact.

155 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

Example 9-7 (continued)

EPS Impact The 20X7 period-end carrying amount of the noncontrolling interest is solely related to the noncontrolling interest’s initial measurement ($1,100,000) plus cumulative attribution of earnings to the noncontrolling interest ($345,000) since this amount ($1,445,000) exceeds the noncontrolling interest’s redemption price ($1,414,000). Consequently, 100 percent of the ASC 480 measurement adjustment for 20X7 reflects a reversal of the 20X6 ASC 480 measurement adjustment. Because the 20X6 ASC 480 measurement adjustment arose from a 20X6 redemption price ($1,278,000) that was less than the noncontrolling interest’s 20X6 fair value ($1,350,000), the 20X6 ASC 480 measurement adjustment was classified in equity under the income classification — excess adjustment method and did not affect net income attributable to noncontrolling interests. As a result, the entire amount of the 20X7 ASC 480 measurement adjustment is also classified in equity and does not affect net income attributed to G. Otherwise, G would be provided with an EPS benefit in 20X7 related to the reversal of a 20X6 item that did not itself negatively affect the 20X6 EPS calculation. Accordingly, for 20X7, G reports net Income attributable to G of $2,110,000, as shown in the table below.

Income Classification — Excess Adjustment Method (as of December 31, 20X7) G’s net income (stand-alone) $ 1,350,000 H’s net income (stand-alone) 950,000 Consolidated net income 2,300,000 ASC 810-10 attribution adjustment (190,000) ASC 480 measurement adjustment (excess portion) N/A Net income attributable to G $ 2,110,000

20X8 ASC 810-10 Attribution Adjustment/ASC 480 Measurement Adjustment/Offsetting Entry For the period ended December 31, 20X8, G uses the journal entries below to subsequently measure I’s noncontrolling interest in H.

To record the ASC 810-10 attribution adjustment for the period ended December 31, 20X8:

Net income attributable to noncontrolling interest 300,000 Noncontrolling interest — temporary equity 300,000

To record the ASC 480 measurement adjustment as of December 31, 20X8:

Net income attributable to noncontrolling interest 15,000* Noncontrolling interest — temporary equity 15,000

* (20X8).

156 Chapter 9 — Redeemable Noncontrolling Interests

Example 9-7 (continued)

EPS Impact Because 100 percent of the ASC 480 measurement adjustment for 20X8 arises from a redemption price that exceeds the redeemable noncontrolling interest’s fair value, all of the ASC 480 offsetting entry is classified in net income attributable to noncontrolling interests. Accordingly, G reports net income attributable to G of $2,585,000, as shown in the table below.

Income Classification — Excess Adjustment Method (as of December 31, 20X8) G’s net income (stand-alone) $ 1,400,000 H’s net income (stand-alone) 1,500,000 Consolidated net income 2,900,000 ASC 810-10 attribution adjustment (300,000) ASC 480 measurement adjustment (excess portion) (15,000) Net income attributable to G $ 2,585,000

20X9 ASC 810-10 Attribution Adjustment/ASC 480 Measurement Adjustment/Offsetting Entry For the period ended December 31, 20X9, G uses the journal entries below to subsequently measure I’s noncontrolling interest in H.

To record the ASC 810-10 attribution adjustment for the period ended December 31, 20X9:

Net income attributable to noncontrolling interest 200,000 Noncontrolling interest — temporary equity 200,000

To record the ASC 480 measurement adjustment as of December 31, 20X9:

Net income attributable to noncontrolling interest 23,000* APIC/retained earnings 17,000** Noncontrolling interest — temporary equity 40,000***

* (20X9).

** $17,000 = (20X9) – (20X9) = $40,000 – $23,000.

*** $40,000 = (20X9) – (20X9) = $2,000,000 – $1,960,000.

157 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

Example 9-7 (continued)

EPS Impact Of the ASC 480 measurement adjustment for 20X9, $23,000 is related to the amount necessary to recognize (on a cumulative basis) in net income attributable to noncontrolling interests the excess of the redemption price over the redeemable noncontrolling interest’s fair value. The remaining $17,000 of the ASC 480 offsetting entry is classified in APIC or retained earnings (depending on G’s policy election). Accordingly, for 20X9, the parent reports net income attributable to G of $2,077,000, as shown in the table below.

Income Classification — Excess Adjustment Method (as of December 31, 20X9) G’s net income (stand-alone) $ 1,300,000 H’s net income (stand-alone) 1,000,000 Consolidated net income 2,300,000 ASC 810-10 attribution adjustment (200,000) ASC 480 measurement adjustment (excess portion) (23,000) Net income attributable to G $ 2,077,000

9.3.4.2.1.3 Application of Equity Classification — Excess Adjustment Method (Additional Paid-In Capital or Retained Earnings)

Example 9-8

Assume the same facts as in Example 9-6, except that G has elected to apply the equity classification — excess adjustment method, including one of the method’s required subpolicies (APIC or retained earnings). This illustrative example highlights the financial reporting and EPS impact of applying the method and each subpolicy. For ease of reference, we have repeated the facts and figures that will be relevant to G’s financial reporting for the periods ended 20X6, 20X7, 20X8, and 20X9.

In this example: • Subsidiary H has 1 million common shares outstanding, of which G holds 800,000 and Entity I holds 200,000. • Subsidiary H has no securities outstanding other than those described above.

158 Chapter 9 — Redeemable Noncontrolling Interests

Example 9-8 (continued)

Key figures associated with G, H, and the noncontrolling interest that I holds in H are as follows (all numbers in thousands):

= = – = Lesser of or = (PY) + (CY) (CY) [( – ) – NCI’s Carrying NCI’S Carrying Redemption (PY) + (CY)

G’s Net H’s Income Amount Absent Amount After NCI’s Carrying Price in Excess of (PY)] Income Attributed Redemption NCI’s Application of Amount Before Carrying Amount Cumulative (Exclusive of to the NCI Feature (i.e., Formulaic Appraised ASC 810-10 and Current-Year ASC Before ASC 480 Current-Year “Excess” Year Investment H’s Net Under ASC ASC 810-10 Redemption Fair Value ASC 480 (Higher 480 Measurement Measurement “Excess” Adjustments Ended in H) Income 810-10 Only) Price of NCI of or ) Adjustment Adjustment Adjustment* Recorded

20X6 $ 1,200 $ 775 $ 155 $ 1,255** $ 1,278 $ 1,350 $ 1,278 $ 1,255*** $ 23 N/A N/A

20X7 $ 1,350 $ 950 $ 190 $ 1,445† $ 1,414 $ 1,375 $ 1,445 $ 1,468 N/A N/A N/A

20X8 $ 1,400 $ 1,500 $ 300 $ 1,745†† $ 1,760 $ 1,425 $ 1,760 $ 1,745 $ 15 $ 15 $ 15

20X9 $ 1,300 $ 1,000 $ 200 $ 1,945‡ $ 2,000 $ 1,962 $ 2,000 $ 1,960 $ 40 $ 23§ $ 38

* Applicable only if both is applicable and exceeds . ** $1,255,000 = $1,100,000 initial measurement + $155,000 income of H attributed to the noncontrolling interest (20X6). *** For 20X6 (initial year), = $1,100,000 initial measurement of the noncontrolling interest + $155,000 income of H attributed to the noncontrolling interest (20X6). † $1,445,000 = $1,100,000 initial measurement + $345,000 cumulative income of H attributed to the noncontrolling interest (20X7). †† $1,745,000 = $1,100,000 initial measurement + $645,000 cumulative income of H attributed to the noncontrolling interest (20X8). ‡ $1,945,000 = $1,100,000 initial measurement + $845,000 cumulative income of H attributed to the noncontrolling interest (20X9). § $23,000 = lesser of (20X9) or [((20X9) – (20X9)) – (20X8)] = lesser of $40,000 or [($2,000,000 – $1,962,000) – $15,000].

20X6 ASC 810-10 Attribution Adjustment/ASC 480 Measurement Adjustment/Offsetting Entry For the period ended December 31, 20X6, G uses the journal entries below to subsequently measure I’s noncontrolling interest in H under the equity classification — excess adjustment method (APIC/retained earnings).

To record the ASC 810-10 attribution adjustment for the period ended December 31, 20X6:

Net income attributable to noncontrolling interest 155,000 Noncontrolling interest — temporary equity 155,000

To record the ASC 480 measurement adjustment as of December 31, 20X6:

APIC (retained earnings) 23,000* Noncontrolling interest — temporary equity 23,000

* $23,000 = (20X6) – (20X6) = $1,278,000 – $1,255,000. Note that because (20X6) does not exceed (20X6), (20X6) is not applicable for this reporting period.

159 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

Example 9-8 (continued)

EPS Impact Because G has elected to apply the equity classification — excess adjustment method (including one of the method’s subpolicies), net income attributable to G’s common shareholders will not be directly affected by the portion of the ASC 480 offsetting entry that reflects the excess (if any) of the noncontrolling interest’s redemption price over the instrument’s fair value. Accordingly, G recognizes the excess portion of the ASC 480 offsetting entry as an adjustment to the control number of H’s EPS computation. Company G then uses the resulting EPS amount determined at the subsidiary level for the class of H shares owned by G to determine the amount of H’s income that must be incorporated into the control number of G’s own EPS computation. Company G will report net income attributable to G’s common shareholders (the control number for G’s EPS computation) of $1,820,000, as shown in the table below.

Equity Classification — Excess Adjustment Method (as of December 31, 20X6)

Attributable to Attributable to Nonredeemable Common Redeemable Common Shares Held by G Shares Held by I H’s net income $ 620,000* $ 155,000** H’s numerator adjustment for ASC 480 measurement adjustment (excess portion) — — Net income attributable to each class of common shareholder 620,000 155,000 H’s EPS 0.775 0.775 G’s net income (exclusive of investment in H) 1,200,000 H’s net income attributable to G 620,000*** Consolidated net income attributable to G’s common shareholders $ 1,820,000

* $775,000 net income of H × (800,000 H common shares held by G ÷ 1,000,000 H common shares outstanding). ** $775,000 net income of H × (200,000 H common shares held by I ÷ 1,000,000 H common shares outstanding). *** 800,000 nonredeemable H common shares × $0.775.

For this period and all subsequent reporting periods, application of the two-class method at the subsidiary level has been simplified by the lack of any other participating securities or common-share equivalents.

20X7 ASC 810-10 Attribution Adjustment/ASC 480 Measurement Adjustment/Offsetting Entry For the period ended December 31, 20X7, G uses the journal entries below to subsequently measure I’s noncontrolling interest in H.

To record the ASC 810-10 attribution adjustment for the period ended December 31, 20X7:

Net income attributable to noncontrolling interest 190,000 Noncontrolling interest — temporary equity 190,000

To record the ASC 480 measurement adjustment as of December 31, 20X7:

Noncontrolling interest — temporary equity 23,000* APIC/retained earnings 23,000

* $23,000 = (20X7) – (20X7) = $1,468,000 – $1,445,000. Note that (20X7) is not applicable for this reporting period for the reasons explained below in the discussion about the EPS impact.

160 Chapter 9 — Redeemable Noncontrolling Interests

Example 9-8 (continued)

EPS Impact The 20X7 period-end carrying amount of the noncontrolling interest is solely related to the noncontrolling interest’s initial measurement ($1,100,000) plus the cumulative attribution of earnings to the noncontrolling interest ($345,000) since this amount ($1,445,000) exceeds the noncontrolling interest’s redemption price ($1,414,000). Consequently, 100 percent of the ASC 480 measurement adjustment for 20X7 reflects a reversal of the 20X6 ASC 480 measurement adjustment. Because the 20X6 ASC 480 measurement adjustment arose from a 20X6 redemption price ($1,278,000) that was less than the noncontrolling interest’s 20X6 fair value ($1,350,000), the 20X6 ASC 480 measurement adjustment under the equity classification — excess adjustment method did not affect (reduce) the net income (of H) attributable to G’s shareholders. As a result, the entire amount of the 20X7 ASC 480 measurement adjustment is excluded from the net income (of H) attributable to G’s shareholders. Otherwise, G would be provided with an EPS benefit in 20X7 related to the reversal of a 20X6 item that did not itself negatively affect the 20X6 EPS calculation. Accordingly, for 20X7, G reports net income attributable to G’s shareholders of $2,110,000, as shown in the table below.

Equity Classification — Excess Adjustment Method (as of December 31, 20X7)

Attributable to Attributable to Nonredeemable Common Redeemable Common Shares Held by G Shares Held by I H’s net income $ 760,000* $ 190,000** H’s numerator adjustment for the ASC 480 measurement adjustment (excess portion) — — Net income attributable to each class of common shareholder $ 760,000 $ 190,000 H’s EPS 0.95 0.95 G’s net income (exclusive of investment in H) $ 1,350,000

H’s net income attributable to G 760,000***

Consolidated net income attributable to G’s common shareholders $ 2,110,000

* $950,000 net income of H × (800,000 H common shares held by G ÷ 1,000,000 H common shares outstanding). ** $950,000 net income of H × (200,000 H common shares held by I ÷ 1,000,000 H common shares outstanding). *** 800,000 nonredeemable H common shares × $0.95.

20X8 ASC 810-10 Attribution Adjustment/ASC 480 Measurement Adjustment/Offsetting Entry For the period ended December 31, 20X8, G uses the journal entries below to subsequently measure I’s noncontrolling interest in H.

To record the ASC 810-10 attribution adjustment for the period ended December 31, 20X8: Net income attributable to noncontrolling interest 300,000 Noncontrolling interest — temporary equity 300,000

To record the ASC 480 measurement adjustment as of December 31, 20X8: Retained earnings 15,000* Noncontrolling interest — temporary equity 15,000

* (20X8).

161 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

Example 9-8 (continued)

For 20X8, all of the 20X8 ASC 480 offsetting entry is classified in retained earnings under either subpolicy of the equity classification — excess adjustment method. This is because under that method, retained earnings (or APIC in the absence of retained earnings) are used to classify the excess portion of the ASC 480 offsetting entry and for 20X8, there is no base portion of the ASC 480 offsetting entry. Further, as stated in the facts, G has sufficient retained earnings to absorb the $15,000 debit arising from the ASC 480 measurement adjustment.

EPS Impact For 20X8, the entire ASC 480 offsetting entry arises from a redemption price in excess of the redeemable noncontrolling interest’s fair value. Accordingly, 100 percent of the ASC 480 offsetting entry is incorporated as an adjustment to the subsidiary’s two-class calculation. Further, G reports net income attributable to G’s common shareholders (the control number for G’s EPS computation) of $2,585,000 for 20X8, as shown in the table below.

Equity Classification — Excess Adjustment Method (as of December 31, 20X8)

Attributable to Attributable to Nonredeemable Common Redeemable Common Shares Held by G Shares Held by I H’s net income $ 1,200,000* $ 300,000** H’s numerator adjustment for ASC 480 measurement adjustment (excess portion) (15,000) 15,000 Net income attributable to each class of common shareholder 1,185,000 315,000 H’s EPS 1.48125 1.575 G’s net income (exclusive of investment in H) 1,400,000 H’s net income attributable to G 1,185,000***

Consolidated net income attributable to G’s common shareholders $ 2,585,000

* $1,500,000 net income of H × (800,000 H common shares held by G ÷ 1,000,000 H common shares outstanding). ** $1,500,000 net income of H × (200,000 H common shares held by I ÷ 1,000,000 H common shares outstanding). *** 800,000 nonredeemable H common shares × $1.48125.

20X9 ASC 810-10 Attribution Adjustment/ASC 480 Measurement Adjustment/Offsetting Entry For the period ended December 31, 20X9, G uses the journal entries below to subsequently measure I’s noncontrolling interest in H.

To record the ASC 810-10 attribution adjustment for the period ended December 31, 20X9: Net income attributable to noncontrolling interest 200,000 Noncontrolling interest — temporary equity 200,000

To record the ASC 480 measurement adjustment as of December 31, 20X9: Retained earnings 23,000* APIC/retained earnings 17,000** Noncontrolling interest — temporary equity 40,000***

* (20X9).

** $17,000 = (20X9) – (20X9) = $40,000 – $23,000.

*** $40,000 = (20X9) – (20X9) = $2,000,000 – $1,960,000.

162 Chapter 9 — Redeemable Noncontrolling Interests

Example 9-8 (continued)

Of the ASC 480 measurement adjustment for 20X9, $23,000 is related to the amount necessary to recognize (on a cumulative basis) in net income attributable to noncontrolling interests the amount by which the redemption price exceeds the redeemable noncontrolling interest’s fair value. Under the equity classification — excess adjustment method, this amount (i.e., the excess portion of the ASC 480 measurement adjustment) must be classified in retained earnings. The remaining $17,000 of the ASC 480 offsetting entry (i.e., the base portion of the ASC measurement adjustment) is classified in APIC or retained earnings (depending on G’s policy election).

EPS Impact For 20X9, $23,000 of ASC 480 offsetting entry is the amount necessary to recognize in retained earnings (on a cumulative basis) the excess of the redemption price over the redeemable noncontrolling interest’s fair value. This amount must also be incorporated as an adjustment to the subsidiary’s two-class calculation. In 20X9, G reports net income attributable to G’s common shareholders (the control number of G’s EPS computation) of $2,077,000, as shown in the table below.

Equity Classification — Excess Adjustment Method (as of December 31, 20X9)

Attributable to Attributable to Nonredeemable Common Redeemable Common Shares Held by G Shares Held by I H’s net income $ 800,000* $ 200,000** H’s numerator adjustment for ASC 480 measurement adjustment (excess portion) (23,000) 23,000 Net income attributable to each class of common shareholder 777,000 223,000

H’s EPS 0.97125 1.115 G’s net income (stand-alone) 1,300,000 H’s net income attributable to G 777,000***

Consolidated net income attributable to G’s common shareholders $ 2,077,000

* $1,000,000 net income of H × (800,000 H common shares held by G ÷ 1,000,000 H common shares outstanding). ** $1,000,000 net income of H × (200,000 H common shares held by I ÷ 1,000,000 H common shares outstanding). *** 800,000 nonredeemable H common shares × $0.97125.

9.3.4.3 Preferred-Share Redeemable Noncontrolling Interests Like the ASC 480 measurement adjustment used for common-share redeemable noncontrolling interests, the ASC 480 measurement adjustment for preferred-share redeemable noncontrolling interests is partly intended to reflect the liquidity provided by such features and the potential for the interests to convey value to their holder in excess of their initial carrying amount and any associated dividend rights. A reporting entity should classify ASC 480 offsetting entries for preferred-share redeemable noncontrolling interest by applying the same classification policy it elected for recording preferred dividends of a subsidiary in the parent’s financial statements (seeSection 6.7). However, unlike in situations involving ASC 480 offsetting entries for common-share redeemable noncontrolling interests, it is not appropriate to bifurcate the periodic measurement adjustment for preferred-share redeemable noncontrolling interests into components corresponding to changes in redemption price in excess of fair value (i.e., the excess portion) and changes less than fair value (i.e., the base portion). Rather, the entire amount of the ASC 480 offsetting entry is recorded in a manner akin to the

163 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020) recording of a dividend to reflect that changes in the redemption price of preferred-share redeemable noncontrolling interests ultimately affect net assets that would otherwise be available to common shareholders of the parent. The following classification methods may be used: • Preferred-share income classification method — Use net income (loss) attributable to preferred- share noncontrolling interests to classify the entire ASC 480 offsetting entry. • Preferred-share equity classification method — Classify the ASC 480 offsetting entry as an adjustment to retained earnings (or APIC in the absence of retained earnings).

The method applied must be used for all preferred-share redeemable noncontrolling interests. Under either classification method, ASC 480-10-S99-3A(22) requires that “[i]f the redemption feature was issued, or is guaranteed, by the parent, the entire [ASC 480 offsetting entry] reduces or increases income available to common stockholders of the parent. Otherwise, the adjustment is attributed to the parent and the noncontrolling interest.”

The example below illustrates the application of the two classification methods to preferred-share noncontrolling interests that are redeemable by the parent.

Example 9-9

Recall the following facts from Example 9-4: • Company A owns all of the outstanding common shares of Subsidiary B. • On January 1, 20X7, Subsidiary B issued a preferred-share noncontrolling interest to Entity C, an unrelated third party, for $1 million. The interest represents all of B’s outstanding preferred securities. • The preferred securities are not entitled to dividends but are redeemable by A at their holder’s option for $1.25 million beginning on December 31, 20X8 (two years after issuance). • Company A has elected to apply the accretion method and uses the interest method to accrete the redeemable noncontrolling interest to the interest’s redemption price. Company A has determined that an effective interest rate of 11.803 percent results in the redeemable noncontrolling interest’s being fully accreted to its redemption price by December 31, 20X8. Company A subsequently measures the noncontrolling interest at the following amounts:

December 31, 20X7 $ 1,118,034

December 31, 20X8 $ 1,250,000

Assume also that: • Company A and Subsidiary B report the following net income for 20X7 and 20X8:

Year Company A Subsidiary B

20X7 $ 10,187,000 $ 4,250,000

20X8 $ 12,762,000 $ 3,825,000

For A, the amounts reported are exclusive of A’s investment in B. • Company A and its subsidiary have no intercompany transactions that require elimination. • Company A has sufficient retained earnings to cover ASC 480 offsetting entries that are classified in retained earnings.

164 Chapter 9 — Redeemable Noncontrolling Interests

Example 9-9 (continued)

ASC 480 Measurement Adjustment/Offsetting Entry Company A uses the journal entries below to subsequently measure C’s noncontrolling interest in B.

To record the ASC 480 measurement adjustment as of December 31, 20X7: Net income attributable to noncontrolling interest (income classification) 118,034 Noncontrolling interest — temporary equity 118,034 or Retained earnings (equity classification) 118,034

Noncontrolling interest — temporary equity 118,034

To record the ASC 480 measurement adjustment as of December 31, 20X8:

Net income attributable to noncontrolling interest (income classification) 131,966 Noncontrolling interest — temporary equity 131,966 or Retained earnings (equity classification) 131,966 Noncontrolling interest — temporary equity 131,966

EPS Impact Preferred-Share Income Classification Method For the periods ended December 31, 20X7, and December 31, 20X8, the income classification method will directly affect net income attributable to A, which is the starting point of A’s EPS computation. As shown in the tables below, A will report net income attributable to A of $14,318,966 and $16,455,034 in 20X7 and 20X8, respectively.

Income Classification Method (as of December 31, 20X7) A’s net income (exclusive of investment in B) $ 10,187,000 B’s net income 4,250,000 Consolidated net income 14,437,000 ASC 810-10 attribution adjustment N/A ASC 480 measurement adjustment (118,034) Net income attributable to A $ 14,318,966

Income Classification Method (as of December 31, 20X8) A’s net income (exclusive of investment in B) $ 12,762,000 B’s net income 3,825,000 Consolidated net income 16,587,000 ASC 810-10 attribution adjustment N/A ASC 480 measurement adjustment (131,966) Net income attributable to A $ 16,455,034

165 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

Example 9-9 (continued)

Preferred-Share Equity Classification Method For the periods ended December 31, 20X7, and December 31, 20X8, the equity classification method will not directly affect net income attributable to A, which is the starting point of A’s EPS computation. Consequently, even in the absence of a common-share noncontrolling interest, A will be required to record an adjustment to net income attributable to A to arrive at net income attributable to A’s common shareholders. As shown in the tables below, A will report net income attributable to A of $14,437,000 and $16,587,000 in 20X7 and 20X8, respectively, and net income attributable to A’s common shareholders of $14,318,966 and $16,455,034 for the same periods.

Equity Classification Method (as of December 31, 20X7) A’s net income (exclusive of investment in B) $ 10,187,000 B’s net income 4,250,000 Consolidated net income 14,437,000 ASC 810-10 attribution adjustment N/A Net income attributable to A 14,437,000 ASC 480 measurement adjustment (118,034) Net income attributable to A’s common shareholders $ 14,318,966

Equity Classification Method (as of December 31, 20X8) A’s net income (exclusive of investment in B) $ 12,762,000 B’s net income 3,825,000 Consolidated net income 16,587,000 ASC 810-10 attribution adjustment N/A Net income attributable to A 16,587,000 ASC 480 measurement adjustment (131,966) Net income attributable to A’s common shareholders $ 16,455,034

Connecting the Dots As previously discussed, a reporting entity can use either an entire adjustment method or an excess adjustment method to classify a common-share redeemable noncontrolling interest’s ASC 480 offsetting entry and determine the EPS impact of a common-share redeemable noncontrolling interest’s ASC 480 measurement adjustment. However, we believe that in circumstances such as those in Example 9-9 that involve a preferred-share redeemable noncontrolling interest, it is not acceptable to bifurcate the ASC 480 offsetting entry into an excess portion and a base portion. Rather, the entire amount of the preferred-share redeemable noncontrolling interest’s ASC 480 measurement adjustment should affect the parent’s EPS calculation directly (through application of the income classification method) or indirectly (through application of the equity classification method and an accompanying adjustment to net income attributable to the parent’s common shareholders).

166 Chapter 9 — Redeemable Noncontrolling Interests

Example 9-9 assumes that the preferred-share noncontrolling interest held by Entity C is redeemable by Company A, the 100 percent owner of Subsidiary B’s common shares. Consequently, 100 percent of the ASC 480 measurement adjustment has been attributed to A as the counterparty to the redemption feature. If the preferred-share noncontrolling interest held by C were redeemable by B itself, the resulting impact of the ASC 480 measurement adjustment would be attributed to B’s common shareholder(s). Although the mechanics may differ, because A is the sole common shareholder of B, we would expect the accounting outcome to be the same on a consolidated basis regardless of whether the preferred-share noncontrolling interest is redeemable by the subsidiary itself or by the parent. If, on the other hand, B’s common shares were held by multiple investors (rather than by A alone) and there were no other contractual arrangements that could shift the allocation of income or loss between the common shareholders, the impact of the ASC 480 measurement adjustment would be attributed to the parent and the common-share noncontrolling interest holders on the basis of their common-share ownership percentages.

9.3.4.4 Additional SEC Reporting Considerations In accordance with SAB Topic 6.B, an SEC registrant that elects to use an equity classification method must present earnings attributable to common stockholders on the face of the consolidated statement of income “when [those earnings are] materially different in quantitative terms from reported net income or loss [attributable to the parent] or when [those earnings are] indicative of significant trends or other qualitative considerations.” Otherwise, an SEC registrant that elects to use an equity classification method can present such amounts in the footnotes to the consolidated financial statements.

Footnote 2 of SAB Topic 6.B states that “absent concerns about trends or other qualitative considerations, the [SEC] staff generally will not insist on the reporting of income or loss applicable to common stock if the amount differs from net income or loss by less than ten percent.” In accordance with SAB Topic 6.B, if adjustments between net income attributable to the parent and net income attributable to the common stockholders are material, the adjustments between the two amounts should be included on the face of the consolidated statement of income. Such adjustments, including any applicable ASC 480 measurement adjustment that has not already been recognized as a component of net income or loss attributable to the noncontrolling interest holders, should be presented on separate lines on the face of the consolidated statement of income as adjustments to reported net income attributable to the parent. The adjustments are necessary to reconcile net income attributable to the parent to net income attributable to the parent’s common stockholders, which is the control number for EPS purposes. This presentation is consistent with the presentation under the equity classification method inExample 9-9.

9.3.5 Redemption Accounting An entity should apply the guidance in ASC 810-10-45-23 to account for the acquisition of a noncontrolling interest. ASC 810-10-45-23 states that “[c]hanges in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary shall be accounted for as equity transactions.” Step acquisition accounting no longer applies. Refer to Sections 7.1.2 through 7.1.2.7 for additional details on accounting for changes in a parent’s ownership interest.

167 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

9.3.5.1 Redemptions of Common-Share Noncontrolling Interests Specifically with respect to redemptions of noncontrolling interests in the form of common shares, we observe that reporting entities may apply different accounting policies to reflect the actual repurchase of such interests. Some reporting entities that apply the equity classification adjustment methods first reverse ASC 480 measurement adjustments that were previously recognized in retained earnings before accounting for the actual redemption. Other reporting entities choose not to make such reversing entries. These alternative policies only affect whether the excess (shortfall) of the repurchase price over (below) the initial amount recorded to equity is reflected as a reduction (increase) in retained earnings or a reduction (increase) in APIC. For an entity that applies a reversal policy (i.e., reverses previously recorded ASC 480 measurement adjustments in retained earnings before reflecting the redemption), the reversing entry should be limited to amounts previously recognized in retained earnings that did not affect EPS.

For more information about these equity classification adjustment methods and to understand the extent to which they affect the reporting entity’s EPS calculation, refer to the discussion of common- share noncontrolling interests redeemable at fair value (Section 9.3.4.1) and the discussion of common-share noncontrolling interests redeemable at other than fair value (Section 9.3.4.2).

9.3.5.2 Redemptions of Preferred-Share Noncontrolling Interests Specifically with respect to redemptions of noncontrolling interests in the form of preferred shares, ASC 260-10-S99-2 states, in part:

The SEC staff believes that the difference between the fair value of the consideration transferred to the holders of the preferred stock and the carrying amount of the preferred stock in the registrant’s balance sheet represents a return to (from) the preferred stockholder that should be treated in a manner similar to the treatment of dividends paid on preferred stock.

Thus, if the price at which the preferred shares are redeemed differs from the price stated in the redemption feature (which would already have been properly reflected in the application of the subsequent measurement guidance discussed in Sections 9.3.3 and 9.3.4), the reporting entity should: • Rebalance the equity accounts between the controlling and noncontrolling interests (as discussed in Section 7.1.2.7). • Apply the accounting guidance in ASC 260-10-S99-2 to determine whether there is an additional EPS impact related to the difference in price.

9.3.6 Accounting for the Expiration of a Redemption Feature If the redemption feature embedded in the noncontrolling interest expires without being exercised, the carrying amount of the noncontrolling interest should be reclassified into permanent equity of the parent. The previously recorded excess amounts should not be reversed. Specifically, ASC 480-10-S99- 3A(18) states, in part:

[T]he existing carrying amount of the equity instrument should be reclassified to permanent equity at the date of the event that caused the reclassification. Prior financial statements are not adjusted. Additionally, the SEC staff believes that it would be inappropriate to reverse any adjustments previously recorded to the carrying amount of the equity instrument (pursuant to paragraphs 14–16) in conjunction with such reclassifications.

168 Chapter 9 — Redeemable Noncontrolling Interests

9.4 Disclosures Related to Redeemable Noncontrolling Interests As discussed in Connecting the Dots in Section 9.2, the guidance in ASC 480-10-S99-3A applies to all SEC registrants and can also be elected by entities that are not SEC registrants. The disclosure requirements outlined below are applicable to all entities applying the guidance in ASC 480-10-S99-3A.

9.4.1 Equity Reconciliation Disclosures Related to Redeemable Noncontrolling Interests

ASC 810-10

50-1A A parent with one or more less-than-wholly-owned subsidiaries shall disclose all of the following for each reporting period: . . . c. Either in the consolidated statement of changes in equity, if presented, or in the notes to consolidated financial statements, a reconciliation at the beginning and the end of the period of the carrying amount of total equity (net assets), equity (net assets) attributable to the parent, and equity (net assets) attributable to the noncontrolling interest. That reconciliation shall separately disclose all of the following: 1. Net income 2. Transactions with owners acting in their capacity as owners, showing separately contributions from and distributions to owners 3. Each component of other comprehensive income. . . .

SEC Regulation S-X, Rule 3-04

Changes in stockholders’ equity and noncontrolling interests. An analysis of the changes in each caption of stockholders’ equity and noncontrolling interests presented in the balance sheets shall be given in a note or separate statement. This analysis shall be presented in the form of a reconciliation of the beginning balance to the ending balance for each period for which a statement of comprehensive income is required to be filed with all significant reconciling items described by appropriate captions with contributions from and distributions to owners shown separately. Also, state separately the adjustments to the balance at the beginning of the earliest period presented for items which were retroactively applied to periods prior to that period. With respect to any dividends, state the amount per share and in the aggregate for each class of shares. Provide a separate schedule in the notes to the financial statements that shows the effects of any changes in the registrant’s ownership interest in a subsidiary on the equity attributable to the registrant.

As discussed in Section 8.5, ASC 810-10-50-1A(c) requires a parent entity with one or more subsidiaries that are less than wholly owned to present a reconciliation of the beginning and ending balances of (1) total equity, (2) equity attributable to the parent, and (3) equity attributable to the noncontrolling interest for each reporting period. SEC Regulation S-X, Rule 3-04, requires SEC registrants to provide a similar reconciliation “for each period for which an income statement is required to be filed.” In their interim filings, SEC registrants with noncontrolling interests should provide, as required under ASC 810-10-50-1A(c), equity reconciliations for the period between the end of the preceding fiscal year and the end of the most recent fiscal quarter, as well as the corresponding periods of the preceding fiscal year.

Because ASC 480-10-S99-3A does not change the conclusion in ASC 810-10-45-15 and 45-16 that noncontrolling interests represent equity in the consolidated financial statements of the parent, redeemable noncontrolling interests remain subject to the disclosure and reconciliation requirements of ASC 810-10-50-1A(c) and Rule 3-04 even if such interests are classified in the temporary equity section of the reporting entity’s balance sheet.

169 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

An entity can satisfy the equity reconciliation disclosure requirements of ASC 810-10-50-1A(c) and Rule 3-04 by applying either of the following disclosure alternatives: • Disclosure Alternative 1 — Provide a separate consolidated statement of changes in stockholders’ equity. There are several acceptable approaches for preparing the separate consolidated statement of changes in stockholders’ equity. Two acceptable approaches are illustrated in Example 9-10 below. • Disclosure Alternative 2 — Provide footnote disclosure.

When reconciling redeemable noncontrolling interests, entities should consider the following: • Common-share redeemable noncontrolling interests — Consideration should be given to providing separate reconciliations (e.g., separate columns in a consolidated statement of changes in stockholders’ equity) when a parent entity has different types of common-share redeemable noncontrolling interests (e.g., noncontrolling interests redeemable at fair value and noncontrolling interests redeemable at other than fair value). • Preferred-share redeemable noncontrolling interests — In accordance with ASR 268 (as incorporated into ASC 480-10-S99-1), the reconciliation of changes in preferred-share redeemable noncontrolling interest should be presented in a footnote separately from the reconciliation of other equity balances. It would not be appropriate to include the reconciliation of a redeemable preferred security within a consolidated statement of changes in stockholders’ equity. • Totals that include redeemable noncontrolling interests — The SEC staff has indicated that on the basis of ASR 268, it would object to a registrant’s presentation in an equity reconciliation of any total that combines the carrying amount of redeemable equity securities classified in temporary equity (including redeemable noncontrolling interests) with total permanent equity. In addition, the SEC staff would object to the presentation of any such total irrespective of the form of the noncontrolling interest (i.e., common-share or preferred-share) and regardless of whether the equity reconciliation is presented in a separate statement of changes in stockholders’ equity or in a footnote.

Example 9-10

Assume the following facts, which are similar to those in Examples 8-1, 8-2, and 8-3: • Company D, an SEC registrant, is the parent of Subsidiaries E and F, which are both capitalized with only common stock. • Other than the noncontrolling interests held by third parties, all equity interests issued by E and F are held by D. • At the beginning of 20X8, D owned 80 percent of E’s common shares and 65 percent of F’s common shares. • In 20X8, D sold 5 percent of E’s common shares to an unrelated third party for $5,000. The book value of E (on E’s books) was $92,000 at the time of the sale. • At the beginning of 20X9, D owned 75 percent of E’s common shares and 65 percent of F’s common shares. • In 20X9, D purchased an additional 5 percent of F’s common shares from an unrelated third party for $4,100. The book value of F (on F’s books) was $70,000 at the time of the purchase. • At the end of 20X9, D owned 75 percent of E’s common shares and 70 percent of F’s common shares.

170 Chapter 9 — Redeemable Noncontrolling Interests

Example 9-10 (continued)

Also assume the following additional facts: • Company D is the parent of Subsidiary G, which is capitalized with only common stock. However, G has also issued a common-share redeemable noncontrolling interest to a third party. This interest is classified in temporary equity in accordance with ASC 480-10-S99-3A. • Other than the redeemable noncontrolling interest held by the third party, all equity interests issued by G are held by D. • At the beginning of 20X8, D owned 80 percent of G’s common stock and consolidated G. The remaining 20 percent of G’s common stock was owned by the third party and was redeemable outside of D’s control. Therefore, this remaining 20 percent was classified in temporary equity. Company D applied the equity classification — entire adjustment method as defined inSection 9.3.4.2. • As of December 31, 20X8, the redeemable noncontrolling interest in G was recorded on D’s consolidated balance sheet in the amount of $25,700, which exceeds the interest’s ASC 810-10 carrying amount by $2,000. This excess represents the cumulative amount of ASC 480-10 measurement adjustments that D recorded under the equity classification — entire adjustment method through December 31, 20X8. • On January 2, 20X9, D repurchased 50 percent of the redeemable noncontrolling interest in G for $13,350. This repurchase price differs from the noncontrolling interest’s stated redemption price and also exceeds the amount recorded for the noncontrolling interest on D’s December 31, 20X8, balance sheet (i.e., the sum of the interest’s $11,850 ASC 810-10 carrying amount and the cumulative $1,000 ASC 480-10 measurement adjustment recorded for this repurchased portion of the redeemable noncontrolling interest for periods through December 31, 20X8). • For the period ending December 31, 20X9, D recorded a $400 attribution adjustment to the redeemable noncontrolling interest’s ASC 810-10 carrying amount and a $1,150 ASC 480-10 measurement adjustment to the redeemable noncontrolling interest in G outstanding for the entire year (i.e., the remaining 50 percent that was not repurchased). After these adjustments were made, the redeemable noncontrolling interest was recorded on D’s consolidated balance sheet in the amount of $14,400, which exceeds the interest’s ASC 810-10 carrying amount by $2,150. The parties’ respective interests are illustrated in the diagram below.

As of January 1, 20X8:

80% Unrelated Third Party Company D

Unrelated Third Party* 80% 20% Unrelated Third 65% Party 20% 35%

Subsidiary E Subsidiary F Subsidiary G

* Unlike the noncontrolling interests in Subsidiaries E and F, the noncontrolling interest in Subsidiary G is held through redeemable common stock.

171 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

Example 9-10 (continued)

Disclosure Alternative 1 — Separate Consolidated Statement of Changes in Stockholders’ Equity Company D may comply with the equity reconciliation disclosure requirements of ASC 810-10-50-1A(c) and SEC Regulation S-X, Rule 3-04, by presenting a separate consolidated statement of changes in stockholders’ equity. The illustrative disclosures below have been adapted from ASC 810-10-55-4L. Although these illustrations include an equity reconciliation for only one period, parent entities are required to present comparative equity reconciliations for the appropriate prior period(s). Also, while ASC 810-10-50-1A(c) requires the inclusion of certain items within the equity reconciliation, it stops short of prescribing a specific format. Thus, other formats may be acceptable.

The two approaches described below (“Approach 1” and “Approach 2”) are acceptable for D to use when presenting its consolidated statement of changes in stockholders’ equity. In these approaches, we have assumed for simplicity that (1) the beginning equity balances are the same as in Example 8-3 and (2) G did not have cash flow hedges or foreign currency translation adjustments.

Approach 1 Under Approach 1, D would present a consolidated statement of changes in stockholders’ equity that includes a separate column for the redeemable noncontrolling interests (see table below).7 Company D should not include totals that combine the beginning or ending balances of the redeemable noncontrolling interests and total permanent stockholders’ equity.

Statement of Changes in Equity (Approach 1)

Company D Shareholders

Total Redeemable Permanent NCI Retained Common Stockholders’ (Temporary Net Earnings AOCI Stock APIC NCI Equity Equity) Income

January 1, 20X8 $ 135,200 $ 32,200 $ 155,000 $ 94,600 $ 37,950 $ 454,950 $ 24,000

Sale of E’s common stock 400 4,600 5,000

Adjustment to redemption value (1,000) (1,000) 1,000

Comprehensive income:

Net income* 42,300 6,800 49,100 700 $ 49,800†

OCI (other comprehensive loss):

Unrealized gain on cash flow hedges** 3,650 700 4,350

Foreign currency translation loss*** (350) (50) (400)

December 31, 20X8 $ 176,500 $ 35,500 $ 155,000 $ 95,000 $ 50,000 $ 512,000‡ $ 25,700

7 As previously discussed, this approach would not be acceptable if the redeemable noncontrolling interests were in the form of preferred stock. In accordance with ASR 268, the reconciliation of a redeemable preferred security should be provided in a separate note to the consolidated financial statements.

172 Chapter 9 — Redeemable Noncontrolling Interests

Example 9-10 (continued)

Statement of Changes in Equity (Approach 1) (continued)

Company D Shareholders

Total Redeemable Permanent NCI Retained Common Stockholders’ (Temporary Net Earnings AOCI Stock APIC NCI Equity Equity) Income

January 1, 20X9 $ 176,500 $ 35,500 $ 155,000 $ 95,000 $ 50,000 $ 512,000 $ 25,700

Purchase of F’s common stock (600) (3,500) (4,100)

Purchase of G’s redeemable common stock (500) (500) (12,850)

Adjustment to redemption value (1,150) (1,150) 1,150

Comprehensive income:

Net income* 43,500 6,600 50,100 400 $ 50,500†

OCI (other comprehensive loss):

Unrealized loss on cash flow hedges** (2,720) (640) (3,360)

Foreign currency translation gain*** 210 50 260

December 31, 20X9 $ 218,850 $ 32,990 $ 155,000 $ 93,900 $ 52,510 $ 553,250‡ $ 14,400

* Net income represents the earnings of D in the year indicated, which are attributable to both the parent and the noncontrolling interest holders. ** In 20X8, D recorded an unrealized gain on cash flow hedges of $4,350, of which $700 was attributable to the noncontrolling interest holders. In 20X9, D recorded an unrealized loss on cash flow hedges of $3,360, of which $640 was attributable to the noncontrolling interest holders. *** In 20X8, D recorded a foreign currency translation loss of $400, of which $50 was attributable to the noncontrolling interest holders. In 20X9, D recorded a foreign currency translation gain of $260, of which $50 was attributable to the noncontrolling interest holders. † ASC 810-10-50-1A(c), as amended, requires separate disclosure of net income in the equity reconciliation. ‡ Amount should equal total permanent stockholders’ equity as presented on the consolidated statement of financial position.

173 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

Example 9-10 (continued)

Approach 2 Under Approach 2, D would present a consolidated statement of changes in stockholders’ equity that does not include a column for the redeemable noncontrolling interests (see table below).

Statement of Changes in Equity (Approach 2)

Company D Shareholders

Total Permanent Retained Common Stockholders’ Earnings AOCI Stock APIC NCI Equity

January 1, 20X8 $ 135,200 $ 32,200 $ 155,000 $ 94,600 $ 37,950 $ 454,950

Sale of E’s common stock 400 4,600 5,000

Adjustment to redemption value (1,000) (1,000)

Comprehensive income:

Net income* 42,300 6,800 49,100

OCI (other comprehensive loss):

Unrealized gain on cash flow hedges** 3,650 700 4,350

Foreign currency translation loss*** (350) (50) (400)

December 31, 20X8 $ 176,500 $ 35,500 $ 155,000 $ 95,000 $ 50,000 $ 512,000 †

174 Chapter 9 — Redeemable Noncontrolling Interests

Example 9-10 (continued)

Statement of Changes in Equity (Approach 2) (continued)

Company D Shareholders

Total Permanent Retained Common Stockholders’ Earnings AOCI Stock APIC NCI Equity

January 1, 20X9 $ 176,500 $ 35,500 $ 155,000 $ 95,000 $ 50,000 $ 512,000

Purchase of F’s common stock (600) (3,500) (4,100)

Purchase of G’s redeemable common stock (500) (500)

Adjustment to redemption value (1,150) (1,150)

Comprehensive income:

Net income* 43,500 6,600 50,100

OCI (other comprehensive loss):

Unrealized loss on cash flow hedges** (2,720) (640) (3,360)

Foreign currency translation gain*** 210 50 260

December 31, 20X9 $ 218,850 $ 32,990 $ 155,000 $ 93,900 $ 52,510 $ 553,250 †

* Net income represents the earnings of D in the year indicated, which are attributable to both the parent and the noncontrolling interest holders. ** In 20X8, D recorded an unrealized gain on cash flow hedges of $4,350, of which $700 was attributable to the noncontrolling interest holders. In 20X9, D recorded an unrealized loss on cash flow hedges of $3,360, of which $640 was attributable to the noncontrolling interest holders. *** In 20X8, D recorded a foreign currency translation loss of $400, of which $50 was attributable to the noncontrolling interest holders. In 20X9, D recorded a foreign currency translation gain of $260, of which $50 was attributable to the noncontrolling interest holders. † Amount should equal total permanent stockholders’ equity as presented on the consolidated statement of financial position.

175 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

Example 9-10 (continued)

In the manner illustrated below, D should then present a reconciliation of the changes in the redeemable noncontrolling interests either (1) at the bottom of the consolidated statement of changes in stockholders’ equity8 or (2) in the notes to the consolidated financial statements.

Redeemable Noncontrolling Interest Reconciliation — Temporary Equity

Beginning balance — January 1, 20X8 $ 24,000

Adjustment to redemption value 1,000

Repurchase of G’s redeemable common stock —

Net income 700

Ending balance — December 31, 20X8 $ 25,700

Beginning balance — January 1, 20X9 $ 25,700

Purchase of G’s redeemable common stock (12,850)

Adjustment to redemption value 1,150

Net income 400

Ending balance — December 31, 20X9 $ 14,400

Disclosure Alternative 2 — Footnote Disclosure of Changes in Stockholders’ Equity Company D may comply with the equity reconciliation disclosure requirements of ASC 810-10-50-1A(c) and SEC Regulation S-X, Rule 3-04, by presenting a footnote that discloses a reconciliation of equity balances. In a manner similar to the two approaches illustrated for Disclosure Alternative 1 above, D should include in its footnote disclosure a separate column or table to show the changes in the carrying amount of the redeemable noncontrolling interests.9 In its reconciliation of equity balances, D should not include totals that combine the beginning or ending balances of the redeemable noncontrolling interests and total permanent stockholders’ equity.

Connecting the Dots Although this Roadmap section addresses only the reconciliation of redeemable noncontrolling interests, the same considerations apply to redeemable equity securities issued by the parent.

9.4.2 Effect of Changes in Parent’s Ownership Interest in Subsidiaries (Without an Accompanying Change in Control) on Redeemable Noncontrolling Interests

ASC 810-10

50-1A A parent with one or more less-than-wholly-owned subsidiaries shall disclose all of the following for each reporting period: . . . d. In notes to the consolidated financial statements, a separate schedule that shows the effects of any changes in a parent’s ownership interest in a subsidiary on the equity attributable to the parent. . . .

8 See footnote 7. 9 When the equity reconciliation is included in a footnote, any redeemable noncontrolling interest in the form of preferred stock should be shown separately from the reconciliation of all other equity balances in accordance with SEC Regulation S-X, Rule 5-02(31).

176 Chapter 9 — Redeemable Noncontrolling Interests

As discussed in Sections 9.3.2 and 9.3.3, the guidance in ASC 480-10-S99-3A may require a reporting entity to make ASC 480 measurement adjustments to the carrying amount of redeemable noncontrolling interests each reporting period. ASC 810-10-50-1A(d) requires reporting entities to disclose a separate schedule for any period in which the parent’s ownership interest in a subsidiary changes. The interaction between ASC 810-10-50-1A(d) and ASC 480-10-S99-3A presents an interesting question: Should the amounts disclosed in the separate schedule required by ASC 810-10-50-1A(d) include the impact of applying the measurement guidance in ASC 480-10-S99-3A to redeemable noncontrolling interests?

We believe that there are two acceptable methods for complying with these requirements. While a reporting entity may apply one method to one type of redeemable noncontrolling interest (e.g., common-share noncontrolling interests redeemable at fair value) and the other method to a second type of redeemable noncontrolling interest (e.g., common-share noncontrolling interests redeemable at formula value), the reporting entity should consistently apply the same method to similar redeemable noncontrolling interests. The reporting entity should also provide adequate disclosures in the notes to the consolidated financial statements that specify (1) its basis for the presentation of the separate schedule and (2) how the amounts included in the separate schedule reconcile to the consolidated balance sheet and the equity reconciliation required by ASC 810-10-50-1A(c) (as described in Section 9.4.1).

The two disclosure methods are as follows: • Disclosure Method 1 — A reporting entity should exclude the adjustments made as a result of applying the measurement guidance in ASC 480-10-S99-3A from the amounts included in the separate schedule required by ASC 810-10-50-1A(d). The separate schedule includes only the impact of actual repurchases or issuances of noncontrolling interests and is prepared as though ASC 480-10-S99-3A did not apply. Consequently, although the consolidated statement of changes in stockholders’ equity will reflect the reversal of previous adjustments the entity recorded as a result of applying this measurement guidance, for purposes of preparing the separate schedule required by ASC 810-10-50-1A(d), the previous adjustments should be disregarded so that the impact of purchases or sales of noncontrolling interests can be isolated. See Example 9-11. Supporters of Disclosure Method 1 believe that the separate schedule is required only when there is a change in a parent’s ownership interest in a consolidated subsidiary (i.e., when an actual repurchase occurs). • Disclosure Method 2 — A reporting entity should include the adjustments made as a result of applying the measurement guidance in ASC 480-10-S99-3A in the amounts included in the separate schedule required by ASC 810-10-50-1A(d) (e.g., as a separate line item for such adjustments).10 The manner in which the ASC 480 measurement adjustments affect the amounts in this separate schedule will depend on the entity’s accounting policy for reflecting actual redemptions of redeemable noncontrolling interests, as illustrated in Examples 9-12 and 9-13. Supporters of Disclosure Method 2 believe that (1) ASC 810-10-50-1A(d) requires disclosure of how the parent’s equity is affected by noncontrolling interests and (2) this disclosure should be presented in a manner consistent with the amounts reported in the consolidated balance sheet.

10 Reporting entities applying one of the income classification adjustment methods described inSection 9.3.4.2 will have already included at least a portion of such adjustment in net income attributable to the parent. In these situations, there is no need to include the portion of the ASC 480 measurement adjustment included in net income attributable to the parent as an additional amount in the schedule. To do so would result in double counting.

177 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

Note that ASC 810-10-50-1A(d) does not require an entity to use a specific format to meet its disclosure objective. The illustrative examples below are based on the format used in ASC 810-10-55-4M. Other formats may also be acceptable.

Example 9-11

Disclosure Method 1 — ASC 480 Measurement Adjustments Excluded Assume the same facts as in Example 9-10.

Company D would present the separate schedule required by ASC 810-10-50-1A(d) for the year ended December 31, 20X9, as follows:11

Net income attributable to D $ 43,500

Transfers (to)/from the holder of the noncontrolling interest in Subsidiary G

Decrease in D’s paid-in capital for repurchase of shares in Subsidiary F (600)

Decrease in D’s paid in capital for repurchase of shares in G (1,500)*

Net transfers (to)/from the holder of the noncontrolling interest in G $ (2,100)

Net income attributable to D and transfers (to)/from the holder of the noncontrolling interest in G $ 41,400

* Calculated as the excess of the noncontrolling interest’s repurchase price ($13,350) over the redeemable noncontrolling interest’s ASC 810-10 carrying amount ($11,850). That is, although the redeemable noncontrolling interest that has been repurchased is carried on D’s consolidated balance sheet in the amount of $12,850 immediately before repurchase ($11,850 ASC 810-10 carrying amount plus $1,000 of cumulative ASC 480 measurement adjustments), all ASC 480 measurement adjustments, including the $1,000 of cumulative ASC 480 measurement adjustments recorded in prior periods, are disregarded when Disclosure Method 1 is applied.

11 Note that although D must provide this reconciliation on an interim and annual basis for all periods in which it presents a consolidated statement of income, only one year is shown.

178 Chapter 9 — Redeemable Noncontrolling Interests

Example 9-12

Disclosure Method 2 — ASC 480 Measurement Adjustments Included (Reversing Entry Made) Assume the same facts as in Example 9-11, except that Company D elects to apply Disclosure Method 2. In addition, assume that D’s accounting policy is to reverse the ASC 480 measurement adjustments (associated with any repurchased shares) previously recorded in retained earnings in prior periods before recording its repurchase of redeemable noncontrolling interests in the current period (i.e., D treats the repurchase as a transfer between retained earnings and APIC in the manner described in Section 9.3.5.1). Note also that because the common-share noncontrolling interests are redeemable at fair value, ASC 480 measurement adjustments previously recorded in retained earnings were not included in D’s calculation of EPS. Consequently, the limitations on the reversal entries that are discussed in Section 9.3.5.1 do not apply. Company D records the following reversing entry as of December 31, 20X8:

Noncontrolling interest — temporary equity 1,000 Retained earnings 1,000

Company D would present the separate schedule required by ASC 810-10-50-1A(d) for the year ended December 31, 20X9, as follows:12

Net income attributable to D $ 43,500

Transfers (to)/from the holder of the noncontrolling interest in Subsidiary G

Decrease in D’s paid-in capital for repurchase of shares in Subsidiary F (600)

Decrease in D’s paid in capital for repurchase of shares in G (1,500)*

Decrease in D’s retained earnings for remeasurement of noncontrolling interest in G to current redemption amount (150)**

Net transfers (to)/from the holder of the noncontrolling interest in G $ (2,250)

Net income attributable to D and transfers (to)/from the holder of the noncontrolling interest in G $ 41,250

* Calculated as the excess of the noncontrolling interest’s repurchase price ($13,350) over the redeemable noncontrolling interest’s ASC 810-10 carrying amount ($11,850). ** Calculated as the sum of (1) the $1,000 increase in retained earnings due to the current- period reversal of prior-period ASC 480-10 measurement adjustments related to the repurchased shares and (2) the $1,150 decrease in retained earnings due to recording current-period ASC 480-10 measurement adjustments for shares that have not been repurchased.

12 See footnote 11.

179 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

Example 9-13

Disclosure Method 2 — ASC 480 Measurement Adjustments Included (No Reversing Entry Made) Assume the same facts as in Example 9-11, except that Company D elects Disclosure Method 2. In addition, assume that D’s accounting policy is not to reverse the ASC 480 measurement adjustments (associated with any repurchased shares) previously recorded in retained earnings in prior periods before recording its repurchase of redeemable noncontrolling interests in the current period (i.e., D does not treat the repurchase as a transfer between retained earnings and APIC in the manner described in Section 9.3.5.1).

Company D would present the separate schedule required by ASC 810-10-50-1A(d) for the year ended December 31, 20X9, as follows:13

Net income attributable to D $ 43,500

Transfers (to)/from the holder of the noncontrolling interest in Subsidiary G

Decrease in D’s paid-in capital for repurchase of shares in Subsidiary F (600)

Decrease in D’s paid in capital for repurchase of shares in G (500)*

Decrease in D’s retained earnings for remeasurement of noncontrolling interest in G to current redemption amount (1,150)**

Net transfers (to)/from the holder of the noncontrolling interest in G $ (2,250)

Net income attributable to D and transfers (to)/from the holder of the noncontrolling interest in G $ 41,250

* Calculated as the difference obtained by reducing (1) the excess of the noncontrolling interest’s repurchase price ($13,350) over its ASC 810-10 carrying amount ($11,850) by (2) the cumulative amount of ASC 480-10 measurement adjustments recorded for the noncontrolling interest in periods before its repurchase ($1,000). ** This represents the $1,150 decrease in retained earnings due to recording an ASC 480-10 measurement adjustment in 20X9 for shares that have not been repurchased.

13 See footnote 11.

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

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

Subject U.S. GAAP IFRS Standards

Initial measurement of If a reporting entity acquires a Under IFRS 3(2008), an entity noncontrolling interests controlling financial interest in a legal may choose, on an acquisition- when a reporting entity entity that meets the definition of a by-acquisition basis, to measure first consolidates a partially business, it should account for the noncontrolling interest components owned subsidiary transaction as a business combination that “are present ownership interests under ASC 805. That guidance and entitle their holders to a generally requires an acquiring entity proportionate share of the [acquiree’s] to initially recognize the assets and net assets in the event of liquidation” liabilities of, and noncontrolling as of the acquisition date at either interests in, the acquired business (1) the present ownership instruments’ at fair value. Regardless of whether proportionate share in the recognized all assets or liabilities are recognized amounts of the acquiree’s identifiable at fair value, noncontrolling interests net assets (often referred to as the recognized as the result of a business “proportionate share method”) or combination are always measured (2) fair value. All other noncontrolling initially at fair value. interest components are measured at fair value. For additional information, see Section 5.1. For additional information, see A25.7.3.1 of Deloitte’s iGAAP publication.

1 In addition to the differences in the table, a reporting entity should consider any potential differences that could arise as a result of respective regulatory requirements. For example, the SEC staff announcement codified in ASC 480-10-S99-3A indicates that when an equity instrument (e.g., a common-share or preferred-share redeemable noncontrolling interest) has a redemption feature not solely within the control of the issuer, an SEC registrant is required to present the instrument on the balance sheet between permanent equity and liabilities in a section labeled “temporary equity” or “mezzanine equity.” Under IFRS Standards, however, there is no concept of temporary equity (noncontrolling interests that qualify for temporary equity presentation under ASC 480-10-S99-3A would typically need to be classified as liabilities under IFRS Standards). For additional information related to that difference specifically, seeSection 9.3.1 of this publication and Section 10.2 of Deloitte’s A Roadmap to Distinguishing Liabilities From Equity.

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(Table continued)

Subject U.S. GAAP IFRS Standards

Scope — decreases in ASC 810-10-45-21A provides separate IFRS 10 does not contain similar scope ownership without an scope guidance on the applicability of guidance. accompanying change in ASC 810-10-45-22 through 45-24 to a control reporting entity parent’s decreases in For additional information, see ownership (without an accompanying A24.11.4.1 of Deloitte’s iGAAP change in control) of (1) certain publication. subsidiaries that are businesses or nonprofit activities and (2) certain other subsidiaries that are not businesses or nonprofit activities.

Essentially, ASC 810-10-45-21A(b) precludes a reporting entity from ignoring other applicable U.S. GAAP (e.g., guidance on conveyances of oil and gas mineral rights) simply because the parent has transferred an equity interest in a subsidiary to effect the transaction.

For additional information, see Section 7.1.1.

Attribution of eliminated ASC 810-10-35-3 specifies that the IFRS 10 requires that intragroup income or loss (VIEs) effect of the eliminating entry for transactions and the resulting intercompany transactions between unrealized profits and losses be a primary beneficiary and its VIE eliminated in full. This requirement subsidiary should not be attributed to applies equally to all subsidiaries that the noncontrolling interests. are consolidated.

For additional information, see For additional information, see Section 6.4. A24.10.1.3.1 of Deloitte’s iGAAP publication.

182 Appendix B — Titles of Standards and Other Literature

AICPA Literature Proposed Statement of Position Accounting for Investors’ Interests in Unconsolidated Real Estate Investments

Technical Questions and Answers Section 4110.09, “Issuance of Capital Stock: Costs Incurred to Acquire Treasury Stock”

FASB Literature ASC Topics ASC 220, Income Statement — Reporting Comprehensive Income

ASC 230, Statement of Cash Flows

ASC 235, Notes to Financial Statements

ASC 250, Accounting Changes and Error Corrections

ASC 260, Earnings per Share

ASC 320, Investments — Debt and Equity Securities

ASC 323, Investments — Equity Method and Joint Ventures

ASC 350, Intangibles — Goodwill and Other

ASC 360, Property, Plant, and Equipment

ASC 470, Debt

ASC 480, Distinguishing Liabilities From Equity

ASC 605, Revenue Recognition

ASC 606, Revenue From Contracts With Customers

ASC 610, Other Income

ASC 718, Compensation — Stock Compensation

ASC 740, Income Taxes

ASC 805, Business Combinations

ASC 810, Consolidation

183 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

ASC 815, Derivatives and Hedging

ASC 830, Foreign Currency Matters

ASC 842, Leases

ASC 845, Nonmonetary Transactions

ASC 860, Transfers and Servicing

ASC 932, Extractive Activities — Oil and Gas

ASC 958, Not-for-Profit Entities

ASC 970, Real Estate — General

ASC 976, Real Estate — Retail Land

ASC 980, Regulated Operations

ASUs ASU 2010-02, Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership of a Subsidiary — a Scope Clarification

ASU 2014-09, Revenue From Contracts With Customers (Topic 606)

ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis

ASU 2016-02, Leases (Topic 842)

ASU 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting

ASU 2017-05, Other Income — Gains and Losses From the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets

ASU 2018-02, Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income

ASU 2020-05, Revenue From Contracts With Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities

IFRS Literature IFRS 3 (Revised 2008), Business Combinations

IFRS 10, Consolidated Financial Statements

SEC Literature Accounting Series Release No. 268 (FRR Section 211), Redeemable Preferred Stocks

Final Rule No. 33-10532, Disclosure Update and Simplification

184 Appendix B — Titles of Standards and Other Literature

Regulation S-X Rule 3-04, “Changes in Stockholders’ Equity and Noncontrolling Interests”

Rule 3A-02, “Consolidated Financial Statements of the Registrant and Its Subsidiaries”

Rule 5-02, “Commercial and Industrial Companies: Balance Sheets”

Rule 8-03, “Financial Statements of Smaller Reporting Companies: Interim Financial Statements”

Rule 10-01, “Interim Financial Statements”

SAB Topics Topic 5.A, “Miscellaneous Accounting: Expenses of Offering”

Topic 6.B (SAB 98), “Accounting Series Release 280 — General Revision of Regulation S-X: Income or Loss Applicable to Common Stock”

Superseded Literature AICPA Accounting Research Bulletin No. 51, Consolidated Financial Statements

FASB Statements No. 141, Business Combinations

No. 141(R), Business Combinations

No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities — an interpretation of ARB No. 51

EITF Issues Topic D-96, “Accounting for Management Fees Based on a Formula”

Topic D-98, “Classification and Measurement of Redeemable Securities”

Issue 98-2, “Accounting by a Subsidiary or Joint Venture for an Investment in the Stock of Its Parent Company or Joint Venture Partner”

185 Appendix C — Abbreviations

Abbreviation Description Abbreviation Description

AICPA American Institute of Certified GAAP generally accepted accounting Public Accountants principles

AOCI accumulated other comprehensive HLBV hypothetical liquidation at book income value

APIC additional paid-in capital IFRS International Financial Reporting Standard ARB AICPA Accounting Research Bulletin IPO initial public offering ASC FASB Accounting Standards Codification IRC Internal Revenue Code

ASR SEC Accounting Series Release IRR internal rate of return

ASU FASB Accounting Standards Update LIHTC low-income housing tax credit

CTA cumulative translation adjustment LLC limited liability company

DART Deloitte Accounting Research Tool LP limited partnership

DTA deferred tax asset NCI noncontrolling interest

DTL deferred tax liability OCI other comprehensive income

EBITDA earnings before interest, taxes, PCAOB Public Company Accounting depreciation, and amortization Oversight Board

EITF Emerging Issues Task Force SAB SEC Staff Accounting Bulletin

EPS earnings per share SEC Securities and Exchange Commission ETR effective tax rate SOP AICPA Statement of Position FASB Financial Accounting Standards Board UP-C umbrella partnership C corporation

FRR SEC Financial Reporting Release VIE variable interest entity

186 Appendix D — Changes Made in the 2020 Edition of This Publication

The tables below summarize the substantive changes made since the issuance of last year’s edition.

New Content

Section Title Description

4.1.2 Parent and Subsidiary Accounting Added a discussion about the need to conform the Policies accounting policies of a parent and its subsidiaries in the parent’s consolidated financial statements unless differences between the parent’s accounting policies and those of its subsidiaries can be justified.

6.7.1 Noncontrolling Interests Held by Added a discussion, including an illustrative example, Preferred Shareholders about how to attribute a subsidiary’s net income or loss to the controlling and noncontrolling interests held in the subsidiary when the subsidiary is capitalized with classes of equity that have different rights and preferences.

6.10 Adoption of a New Accounting Added a discussion related to attribution of a transition Standard adjustment associated with the adoption of a new accounting standard and how that transition adjustment affects the controlling and noncontrolling interest holders.

7.1.2.6.1 Parent’s Accounting for Added a discussion related to how a parent should account Subsidiary’s Issuance of Share- for its subsidiary’s issuance of equity-classified share-based Based Payment Awards payment awards to the subsidiary’s employees.

7.1.2.6.2 Reorganization Through an UP-C Added a discussion, including an illustrative example, related Structure to the accounting for UP-C structures used by private equity investors and other owners of private operating entities that seek liquidity through public equity offerings.

Amended Content

Section Title Description

3.1.1 Noncontrolling Interest in a Expanded discussion related to a first-tier subsidiary’s Subsidiary Owned by the Parent or consolidated financial statement presentation of a Affiliate of a Reporting Entity noncontrolling interest held by its parent or affiliate in a second-tier subsidiary.

8.5 Statement of Stockholders’ Equity Expanded discussion to include a summary of requirements Presentation in SEC Regulation S-X, Rule 3-04, related to a public company’s presentation of changes in stockholders’ equity and noncontrolling interests.

187 Deloitte | A Roadmap to Accounting for Noncontrolling Interests (2020)

(Table continued)

Section Title Description

8.5.1A Redeemable Noncontrolling Expanded discussion to clarify that redeemable Interests’ Impact on Disclosures noncontrolling interests are also subject to the SEC and Reconciliations of Regulation S-X reconciliation requirements of Rule 10-01(a)(7) Stockholders’ Equity for interim reporting periods and Rule 8-03(a)(5) for smaller reporting companies.

8.5.3 Presenting Effects of the Expanded discussion to reflect the alignment of SEC Noncontrolling Interest in the Regulation S-X, Rule 3-04, with the requirements in ASC AOCI Reclassification Adjustments 220-10-45. Disclosure

9.2 Scope of ASC 480-10-S99-3A and Expanded discussion on the interaction between ASC Interaction With ASC 810-10 480-10-S99-3A and ASC 810-10 to clarify the illustrative flowchart.

188