financialreportingdevelopments bb1577 noncontrollinginterests 23july2014

Financial reporting developments A comprehensive guide

Consolidated and other financial statements Noncontrolling interests, combined financial statements, parent company financial statements and consolidating financial statements Revised July 2014

To our clients and other friends

This Financial reporting developments (FRD) publication is primarily designed to help you understand financial reporting issues related to the accounting for noncontrolling interests. This publication also includes interpretive guidance on consolidation procedure and on the presentation of combined, parent-only, and consolidating financial statements. The publication reflects our current understanding of the relevant guidance in these areas, based on our experience with financial statement preparers and related discussions with the FASB and SEC staffs.

The accounting for noncontrolling interests is based on the economic entity concept of consolidated financial statements. Under the economic entity concept, all residual economic interest holders in an entity have an equity interest in the consolidated entity, even if the residual interest is relative to only a portion of the entity (that is, a residual interest in a subsidiary). Therefore, a noncontrolling interest is required to be displayed in the consolidated statement of financial position as a separate component of equity. Likewise, the consolidated net income or loss and comprehensive income or loss attributable to both controlling and noncontrolling interests is separately presented on the consolidated statement of comprehensive income.

Consistent with the economic entity concept, after control is obtained, increases or decreases in ownership interests that do not result in a loss of control should be accounted for as equity transactions. However, changes in ownership interests that result in a loss of control of a subsidiary or group of assets generally result in corresponding gain or loss recognition upon deconsolidation. The decrease in ownership guidance generally does not apply to transactions involving non-businesses, in-substance real estate or oil and gas mineral rights conveyances.

This edition has been updated to provide additional interpretive guidance in certain areas with frequently asked questions. Chapter 6 also has been updated to briefly highlight the FASB’s new revenue recognition standard, which will affect the accounting for certain transactions that are currently accounted for under the deconsolidation and derecognition guidance in ASC 810. These changes are summarized in Appendix C.

Practice and authoritative guidance continue to evolve and therefore readers should monitor developments in these areas closely.

July 2014

Financial reporting developments Consolidated and other financial statements | i

Contents

1 Consolidated financial statements .............................................................................. 1 1.1 Objectives and scope ............................................................................................................. 1 1.2 Consolidation procedure — time of acquisition.......................................................................... 4

1.2.1 Acquisition through a single step .................................................................................... 4 1.2.2 Acquisition through multiple steps ................................................................................. 4

1.3 Proportionate consolidation ................................................................................................... 5 1.4 Differing fiscal year-ends between parent and subsidiary ......................................................... 6 1.5 Using subsidiary financial statements prepared as of an earlier period end for consolidation

procedure in circumstances when the subsidiary has the same fiscal year-end as the parent ...... 8 1.6 Subsidiary’s accounting basis is not US GAAP .......................................................................... 8 1.7 Differing accounting policies between parent and subsidiary .................................................... 9

2 Nature and classification of a noncontrolling interest ................................................. 10 2.1 Noncontrolling interests ....................................................................................................... 10

2.1.1 Noncontrolling interests in consolidated variable interest entities (VIEs) ......................... 11 2.2 Equity contracts issued on the stock of a subsidiary ............................................................... 11

3 Attribution of net income or loss and comprehensive income or loss ........................... 13 3.1 Attribution procedure .......................................................................................................... 13

3.1.1 Substantive profit sharing arrangements ...................................................................... 13 3.1.2 Attribution of losses .................................................................................................... 17

3.1.2.1 Distributions in excess of the noncontrolling interest’s carrying amount ................ 17 3.1.3 Attribution to noncontrolling interests held by preferred shareholders ........................... 18 3.1.4 Attribution of goodwill impairment ............................................................................... 19 3.1.5 Attributions related to business combinations effected before Statement 160

and Statement 141(R) were adopted ........................................................................... 19 3.1.6 Effect on effective income tax rate ............................................................................... 20 3.1.7 Attributions related to dividends of a subsidiary payable in nonmonetary assets ............. 21 3.1.8 Attributions related to dividends of a consolidated trust issuing trust

preferred securities ..................................................................................................... 22 4 Changes in a parent’s ownership interest in a subsidiary while control is retained ........ 23

4.1 Increases and decreases in a parent’s ownership of a subsidiary ............................................. 23 4.1.1 Increases in a parent’s ownership interest in a subsidiary .............................................. 24

4.1.1.1 Accounting for contingent consideration ............................................................. 25 4.1.2 Decreases in a parent’s ownership interest in a subsidiary without loss of control ........... 26

4.1.2.1 Accounting for a stock option of subsidiary stock ................................................. 27 4.1.2.2 Scope exception for in-substance real estate transactions .................................... 28 4.1.2.3 Scope exception for oil and gas conveyances ....................................................... 28 4.1.2.4 Decreases in ownership of a subsidiary that is not a business or

nonprofit activity ................................................................................................ 29 4.1.2.5 Issuance of preferred stock by a subsidiary .......................................................... 29 4.1.2.6 Decreases in ownership through issuance of partnership units that

have varying profit or liquidation preferences ...................................................... 29 4.1.2.7 Issuance of subsidiary shares as consideration in a business combination .............. 31

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4.1.3 Accumulated other comprehensive income considerations ............................................ 31 4.1.3.1 Accounting for foreign currency translation adjustments ...................................... 32

4.1.4 Allocating goodwill upon a change in a parent’s ownership interest ................................ 32 4.1.5 Accounting for transaction costs incurred in connection with changes in ownership........ 33 4.1.6 Changes in a parent’s ownership interest in a consolidated VIE ...................................... 33 4.1.7 Chart summarizing the accounting for changes in ownership ......................................... 33 4.1.8 Income tax considerations ........................................................................................... 34 4.1.9 Noncontrolling interests in a common control transaction ............................................. 34

4.2 Comprehensive example ...................................................................................................... 34 4.2.1 Consolidation at the acquisition date ............................................................................ 35 4.2.2 Consolidation in year of combination ............................................................................ 36 4.2.3 Consolidation after purchasing an additional interest .................................................... 38 4.2.4 Consolidation in year 2 ................................................................................................ 40 4.2.5 Consolidation after selling an interest without loss of control ......................................... 43 4.2.6 Consolidation in year 3 ................................................................................................ 44

5 Intercompany eliminations ....................................................................................... 47 5.1 Procedures for eliminating intercompany balances and transactions ...................................... 47

5.1.1 Effect of noncontrolling interest on elimination of intercompany amounts ...................... 48 5.1.2 Subsidiary ownership interest in its parent in the consolidated financial statements ........ 49

5.1.2.1 Subsidiary ownership interest in its parent in the subsidiary’s separate financial statements ............................................................................. 50

5.1.3 Intercompany derivative transactions .......................................................................... 50 5.2 Comprehensive example ...................................................................................................... 50

6 Loss of control over a subsidiary or a group of assets ................................................ 62 6.1 Deconsolidation of a subsidiary or derecognition of certain groups of assets ........................... 62

6.1.1 Loss of control ............................................................................................................ 65 6.1.2 Nonreciprocal transfers to owners ............................................................................... 65 6.1.3 Gain/loss recognition................................................................................................... 65

6.1.3.1 Assignment of goodwill upon disposal of all or a portion of a reporting unit ............ 67 6.1.4 Measuring the fair value of consideration received and any retained

noncontrolling investment ........................................................................................... 67 6.1.4.1 Accounting for contingent consideration in deconsolidation .................................. 67 6.1.4.2 Accounting for a retained creditor interest in deconsolidation ............................... 70

6.1.5 Accounting for accumulated other comprehensive income in deconsolidation ................ 70 6.1.5.1 Foreign currency translation adjustments ............................................................ 71

6.1.6 Deconsolidation through multiple arrangements ........................................................... 71 6.1.7 Deconsolidation through a bankruptcy proceeding ........................................................ 72 6.1.8 Gain/loss classification and presentation ...................................................................... 73 6.1.9 Subsequent accounting for retained noncontrolling investment ..................................... 73 6.1.10 Transfer of a subsidiary or a group of assets to an equity method investee

or a joint venture ........................................................................................................ 73 6.1.11 Income tax considerations related to the loss of control over a subsidiary ...................... 74 6.1.12 Transfers between entities under common control ........................................................ 74

6.2 Comprehensive example ...................................................................................................... 74 6.2.1 Deconsolidation by selling entire interest ...................................................................... 75 6.2.2 Deconsolidation by selling a partial interest .................................................................. 76

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7 Combined financial statements ................................................................................. 79 7.1 Purpose of and procedures for combined financial statements ............................................... 79

7.1.1 Common management ................................................................................................ 79 7.1.2 Procedures applied in combining entities for financial reporting ..................................... 80

8 Parent-company financial statements ....................................................................... 81 8.1 Purpose of and procedures for parent-company financial statements ..................................... 81

8.1.1 Investments in subsidiaries .......................................................................................... 81 8.1.2 Investments in non-controlled entities .......................................................................... 82 8.1.3 Disclosure requirements .............................................................................................. 82

9 Consolidating financial statements ............................................................................ 83 9.1 Purpose of consolidating financial statements ....................................................................... 83 9.2 Guarantor financial information prepared under Rule 3-10..................................................... 83

9.2.1 Form and content of guarantor financial information .................................................... 83 9.2.2 Investments in subsidiaries .......................................................................................... 87 9.2.3 Cash flow information ................................................................................................. 89 9.2.4 Disclosure requirements under Rule 3-10 ..................................................................... 90 9.2.5 Example condensed consolidating financial information under Rule 3-10 ....................... 91

10 Presentation and disclosures .................................................................................... 97 10.1 Certain presentation and disclosure requirements related to consolidation ............................. 97

10.1.1 Consolidated statement of comprehensive income presentation .................................... 98 10.1.2 Reconciliation of equity presentation ........................................................................... 98

10.1.2.1 Presentation of redeemable noncontrolling interests in equity reconciliation ......... 99 10.1.2.2 Interim reporting period requirements ................................................................. 99

10.1.3 Consolidated statement of financial position presentation ........................................... 100 10.1.4 Consolidated statement of cash flows presentation ..................................................... 101

10.1.4.1 Presentation of transaction costs in statement of cash flow ................................ 101 10.1.5 Disclosure ................................................................................................................. 102

10.5.1 Additional AOCI disclosures required subsequent to the adoption of ASU 2013-02................................................................................................... 102

10.2 Comprehensive example .................................................................................................... 103 A Comprehensive example .......................................................................................... A-1 B Comparison of ASC 810 and IFRS 10 ....................................................................... B-1 C Summary of important changes ............................................................................... C-1 D Abbreviations used in this publication ...................................................................... D-1 E Index of ASC references in this publication ............................................................... E-1

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Financial reporting developments Consolidated and other financial statements | iv

Notice to readers:

This publication includes excerpts from and references to the FASB Accounting Standards Codification (the Codification or ASC). The Codification uses a hierarchy that includes Topics, Subtopics, Sections and Paragraphs. Each Topic includes an Overall Subtopic that generally includes pervasive guidance for the topic and additional Subtopics, as needed, with incremental or unique guidance. Each Subtopic includes Sections that in turn include numbered Paragraphs. Thus, a Codification reference includes the Topic (XXX), Subtopic (YY), Section (ZZ) and Paragraph (PP).

Throughout this publication references to guidance in the Codification are shown using these reference numbers. References are also made to certain pre-Codification standards (and specific sections or paragraphs of pre-Codification standards) in situations in which the content being discussed is excluded from the Codification.

This publication has been carefully prepared but it necessarily contains information in summary form and is therefore intended for general guidance only; it is not intended to be a substitute for detailed research or the exercise of professional judgment. The information presented in this publication should not be construed as legal, tax, accounting, or any other professional advice or service. Ernst & Young LLP can accept no responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. You should consult with Ernst & Young LLP or other professional advisers familiar with your particular factual situation for advice concerning specific audit, tax or other matters before making any decisions.

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Financial reporting developments Consolidated and other financial statements | 1

1 Consolidated financial statements

1.1 Objectives and scope Excerpt from Accounting Standards Codification Consolidation — Overall

Objectives

General

810-10-10-1 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.

Scope and Scope Exceptions

Entities

810-10-15-8 The usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity is a condition pointing toward consolidation. The power to control may also exist with a lesser percentage of ownership, for example, by contract, lease, agreement with other stockholders, or by court decree.

810-10-15-10 A reporting entity shall apply consolidation guidance for entities that are not in the scope of the Variable Interest Entities Subsections (see the Variable Interest Entities Subsection of this Section) as follows:

a. All majority-owned subsidiaries — all entities in which a parent has a controlling financial interest — shall be consolidated. However, there are exceptions to this general rule.

1. A majority-owned subsidiary shall not be consolidated if control does not rest with the majority owner — for instance, if any of the following are present:

i. The subsidiary is in legal reorganization

ii. The subsidiary is in bankruptcy

iii. The subsidiary operates under foreign exchange restrictions, controls, or other governmentally imposed uncertainties so severe that they cast significant doubt on the parent's ability to control the subsidiary.

iv. In some instances, the powers of a shareholder with a majority voting interest to control the operations or assets of the investee are restricted in certain respects by approval or veto rights granted to noncontrolling shareholder (hereafter referred to as noncontrolling rights). In paragraphs 810-10-25-2 through 25-14, the term noncontrolling shareholder refers to one or more noncontrolling shareholders. Those noncontrolling rights may have



little or no impact on the ability of a shareholder with a majority voting interest to control the investee's operations or assets, or, alternatively, those rights may be so restrictive as to call into question whether control rests with the majority owner.

v. Control exists through means other than through ownership of a majority voting interest, for example as described in (b) through (e).

2. A majority-owned subsidiary in which a parent has a controlling financial interest shall not be consolidated if the parent is a broker-dealer within the scope of Topic 940 and control is likely to be temporary.

3. Except as discussed in paragraph 946-810-45-3, consolidation by an investment company within the scope of Topic 946 of a non-investment-company investee is not appropriate.

b. Subtopic 810-20 shall be applied to determine whether the rights of the limited partners in a limited partnership overcome the presumption that the general partner controls, and therefore should consolidate, the partnership.

c. Subtopic 810-30 shall be applied to determine the consolidation status of a research and development arrangement.

d. The Consolidation of Entities Controlled by Contract Subsections of this Subtopic shall be applied to determine whether a contractual management relationship represents a controlling financial interest.

e. Paragraph 710-10-45-1 addresses the circumstances in which the accounts of a rabbi trust that is not a VIE (see the Variable Interest Entities Subsections for guidance on VIEs) shall be consolidated with the accounts of the employer in the financial statements of the employer.

ASC 810 defines a subsidiary as an entity in which a parent has a controlling financial interest, either through voting interests or other means (such as variable interests).

While consolidation policy is not the subject of this publication, in general, the first step in determining whether an entity has a controlling financial interest in a subsidiary is to establish the basis on which the investee is to be evaluated for control (that is, whether the consolidation determination should be based on ownership of the investee’s outstanding voting interests or its variable interests). Accordingly, the provisions of ASC 810-10’s Variable Interest Model1 should first be applied to determine whether the investee is a VIE. Only if the entity is determined not to be a VIE should the consolidation guidance for voting interest entities within ASC 810-10 be applied. See our FRD publication, Consolidation and the Variable Interest Model, for further discussion of ASC 810’s consolidation models.

Once a parent has determined that it has a controlling financial interest in an entity, the parent accounts for the assets, liabilities and any noncontrolling interests of that entity in its consolidated financial statements in accordance with the consolidation principles in ASC 810-10-45. These principles are generally the same for entities consolidated under the voting interest and Variable Interest models.

Illustration 1-1 summarizes how ASC 810’s control framework should generally be applied to interests in an entity.

1 ASC 810-10 includes guidance about the consolidation considerations for both voting interest entities and variable interest entities. In ASC 810-10, there are “General” subsections with consolidation guidance that applies to voting interest entities and that also may apply to variable interest entities in certain circumstances. The “Variable Interest Entities” subsections in ASC 810-10 contain guidance that applies exclusively to variable interest entities. By referring to the Variable Interest Model in ASC 810-10, we are referring to all of the guidance applicable to variable interest entities in each of ASC 810-10’s subsections.



Illustration 1-1: ASC 810, Consolidation decision tree

1 See our FRD publication, Consolidation and the Variable Interest Model, for guidance on silos and specified assets.

No Yes

Related party or de facto agent consolidates entity

Does the enterprise, including its related parties and de facto agents, collectively have power and benefits?

Yes

Variable Interest Model

Is the entity being evaluated for consolidation a legal entity?

No

Yes

No

Yes

Yes

No

Does a scope exception to consolidation guidance (ASC 810) apply? • Employee benefit plans • Governmental organizations • Certain investment companies

Does a scope exception to the Variable Interest Model apply? • Not-for-profit organizations • Separate accounts of life insurance companies • Lack of information • Certain businesses

Does the enterprise have a variable interest in a legal entity?

Consider whether fees paid to a decision maker or a service provider represent a variable interest

Apply other GAAP

Is the legal entity a variable interest entity? • Does the entity lack sufficient equity to finance its activities? • Do the equity holders, as a group, lack the characteristics of

a controlling financial interest? • Is the legal entity structured with non-substantive voting

rights (i.e., anti-abuse clause)?

Apply other GAAP

Consider whether silos exist or whether the interests or other contractual arrangements of the entity (excluding interests in silos) qualify as variable interests in the entity as a whole1

Yes No

Is the enterprise the primary beneficiary (i.e., does the enterprise individually have both power and benefits)?

Variable Interest Model (cont.)

No Yes

Consolidate entity Does a related party or de facto agent individually have power and benefits?

No

No Yes

Party most closely associated with VIE consolidates

Do not consolidate

Do the minority shareholders hold substantive participating rights or do certain other conditions exist (e.g., legal subsidiary is in bankruptcy)?

No Yes

Do not consolidate

No Yes

Do not consolidate Consolidate entity

Voting model

The general partner (GP) is presumed to have control unless that presumption can be overcome by one the following conditions:

• Can a simple majority vote of limited partners remove a general partner without cause and there are no barriers to the exercise that removal right?

• Do limited partners have substantive participating rights?

Consolidation of partnerships and similar entities

Consolidation of corporations and other legal entities

Does a majority shareholder, directly or indirectly, have greater than 50% of the outstanding voting shares?

No Yes

GP does not consolidate the entity. In limited circumstances a limited partner may consolidate (e.g., a single limited partner that has the ability to liquidate the limited partnership or kick out the general partner without cause).

GP consolidates entit



Note:

The FASB currently has a project on its agenda to make targeted changes to the consolidation guidance in ASC 810 that would remove the FAS 167 deferral for certain investment companies and address other concerns. The FASB’s tentative decisions in this project may affect consolidation conclusions for all entities, not just those currently subject to the deferral. The FASB has not indicated when it might issue a final standard. Readers should monitor developments in this area closely.

1.2 Consolidation procedure — time of acquisition An entity may acquire a controlling financial interest in a subsidiary through a single step or through multiple steps over time.

1.2.1 Acquisition through a single step ASC 805 provides guidance when an acquirer obtains control of an acquiree through a single investment, often referred to as a “single-step acquisition.” Single-step acquisitions may be the most familiar form of business combination. ASC 805 requires an acquirer to recognize the assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree, all generally measured at their fair values as of the acquisition date. These concepts are discussed further in our FRD publication, Business combinations. The comprehensive example in Chapter 4 includes an example of the accounting for a single-step acquisition. See Section 4.2, Illustration 4-10; Section 4.2.1, Illustration 4-11; and Section 4.2.2, Illustration 4-12.

1.2.2 Acquisition through multiple steps When an acquirer obtains control of an acquiree through a series of investments, the acquisition is called a “step acquisition” or, in ASC 805, a “business combination achieved in stages.” Under ASC 805, if the acquirer holds a noncontrolling equity investment in the acquiree immediately before obtaining control, the acquirer should first remeasure that investment at fair value as of the acquisition date and recognize any remeasurement gain or loss in earnings. If, before obtaining control, an acquirer recognized changes in the value of its noncontrolling investment in the target in other comprehensive income (that is, the investment was classified as available-for-sale in accordance with ASC 320), the amount recognized in other comprehensive income as of the acquisition date should be reclassified from other comprehensive income and included in the recognized remeasurement gain or loss as of the acquisition date. The acquirer then should apply ASC 805’s business combination guidance, as discussed in our FRD publication, Business combinations.

After taking control of a target company, further acquisitions of ownership interests (i.e., acquisitions of noncontrolling ownership interests with no changes in control) are accounted for as transactions among shareholders within equity pursuant to ASC 810 (see Chapter 4).

Illustration 1-2 summarizes these concepts.



Illustration 1-2: Summary of guidance applied for acquisitions of an interest in an entity

Acquisition of an interest prior to obtaining control

Apply other GAAP (e.g., ASC 320, ASC 323 or ASC 815).

Acquisition of an additional interest that provides control

First, remeasure the previously held interest (i.e., the interest held before obtaining control, if any) at fair value, recognizing any gain or loss in earnings. Next, measure and consolidate (generally at fair value) the net assets acquired and any noncontrolling interests, in accordance with ASC 805. (See our FRD publication, Business combinations, for further interpretive guidance).

Acquisition of an additional interest, after control has already been obtained

Reduce the carrying amount of the noncontrolling interest. Recognize any difference between the consideration paid and the reduction to the noncontrolling interest in equity attributable to the controlling interest. (See Section 4.1.1 for further discussion of this accounting).

1.3 Proportionate consolidation Excerpt from Accounting Standards Codification Consolidation — Overall

Other Presentation Matters

810-10-45-14 If the investor-venturer owns an undivided interest in each asset and is proportionately liable for its share of each liability, the provisions of paragraph 323-10-45-1 may not apply in some industries. For example, in certain industries the investor-venturer may account in its financial statements for its pro rata share of the assets, liabilities, revenues, and expenses of the venture. Specifically, a proportionate gross financial statement presentation is not appropriate for an investment in an unincorporated legal entity accounted for by the equity method of accounting unless the investee is in either the construction industry (see paragraph 910-810-45-1) or an extractive industry (see paragraphs 930-810-45-1 and 932-810-45-1). An entity is in an extractive industry only if its activities are limited to the extraction of mineral resources (such as oil and gas exploration and production) and not if its activities involve related activities such as refining, marketing, or transporting extracted mineral resources.

Real Estate — General — Investments — Equity Method and Joint Ventures

Recognition

970-323-25-12 If real property owned by undivided interests is subject to joint control by the owners, the investor-venturers shall not present their investments by accounting for their pro rata share of the assets, liabilities, revenues, and expenses of the ventures. Most real estate ventures with ownership in the form of undivided interests are subject to some level of joint control. Accordingly, such investments shall be presented in the same manner as investments in noncontrolled partnerships.



Using the proportionate gross financial statement presentation method (that is, proportionate consolidation, as described in ASC 810-10-45-14) is permitted only for the following: (1) investments in certain unincorporated legal entities in the extractive2 or construction3 industry that otherwise would be accounted for under the equity method of accounting (i.e., a controlling interest does not exist), and (2) ownership of an undivided interest in real property when each owner is entitled only to its pro rata share of income and expenses and is proportionately (i.e., severally) liable for its share of each liability, and the real property owned is not subject to joint control by the owners.

An investor applying proportionate consolidation to account for its undivided interest in each asset, its proportionate share of each liability and its share of the revenues and expenses of an investee would need to apply typical consolidation procedure. For example, it would need to evaluate intercompany balances and transactions to ensure they are properly eliminated, in the same manner that it would for consolidated entities.

1.4 Differing fiscal year-ends between parent and subsidiary Excerpt from Accounting Standards Codification Consolidation — Overall


810-10-15-11 A difference in fiscal periods of a parent and a subsidiary does not justify the exclusion of the subsidiary from consolidation.


Differing Fiscal Year-Ends Between Parent and Subsidiary

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

2 810-10-45-14 states: “An entity is in an extractive industry only if its activities are limited to the extraction of mineral resources

(such as oil and gas exploration and production) and not if its activities involve related activities such as refining, marketing, or transporting extracted mineral resources.”

3 To determine which entities are in the construction industry, ASC 910-810-45-1 points to ASC 910-10-15-3, which states that certain characteristics are common to entities in the industry. The most basic characteristic is that work is performed under contractual arrangements with customers. A contractor, regardless of the type of construction activity or the type of contractor, typically enters into an agreement with a customer to build or to make improvements on a tangible property to the customer’s specification. The contract with the customer specifies the work to be performed, specifies the basis of determining the amount and terms of payment of the contract price and generally requires total performance before the contractor’s obligation is discharged. Unlike the work of many manufacturers, the construction activities of a contractor are usually performed at job sites owned by customers rather than at a central place of business, and each contract usually involves the production of a unique property rather than repetitive production of identical products. Other characteristics common to contractors and significant to accountants and users of financial statements include the following: (1) A contractor normally obtains the contracts that generate revenue or sales by bidding or negotiating for specific projects. (2) A contractor bids for or negotiates the initial contract price based on an estimate of the cost to complete the project and the

desired profit margin, although the initial price may be changed or renegotiated. (3) A contractor may be exposed to significant risks in the performance of a contract, particularly a fixed-price contract. (4) Customers (usually referred to as owners) frequently require a contractor to post a performance and a payment bond as

protection against the contractor’s failure to meet performance and payment requirements. (5) The costs and revenues of a contractor are typically accumulated and accounted for by individual contracts or contract

commitments extending beyond one accounting period, which complicates the management, accounting, and auditing processes. (6) The nature of a contractor’s risk exposure varies with the type of contract. The several types of contracts used in the

construction industry are described in ASC 605-35. The four basic types of contracts used based on their pricing arrangements are fixed-price or lump-sum contracts, unit-price contracts, cost-type contracts, and time-and-materials contracts.



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

810-10-45-13 A parent or an investor should report a change to (or the elimination of) a previously existing difference between the parent's reporting period and the reporting period of a consolidated entity or between the reporting period of an investor and the reporting period of an equity method investee in the parent's or investor's consolidated financial statements as a change in accounting principle in accordance with the provisions of Topic 250. While that Topic generally requires voluntary changes in accounting principles to be reported retrospectively, retrospective application is not required if it is impracticable to apply the effects of the change pursuant to paragraphs 250-10-45-9 through 45-10. The change or elimination of a lag period represents a change in accounting principle as defined in Topic 250. The scope of this paragraph applies to all entities that change (or eliminate) a previously existing difference between the reporting periods of a parent and a consolidated entity or an investor and an equity method investee. That change may include a change in or the elimination of the previously existing difference (lag period) due to the parent's or investor's ability to obtain financial results from a reporting period that is more consistent with, or the same as, that of the parent or investor. This paragraph does not apply in situations in which a parent entity or an investor changes its fiscal year-end.

Disclosure

810-10-50-2

An entity should make the disclosures required pursuant to Topic 250. This paragraph applies to all entities that change (or eliminate) a previously existing difference between the reporting periods of a parent and a consolidated entity or an investor and an equity method investee. This paragraph does not apply in situations in which a parent entity or an investor changes its fiscal year-end.

A parent must consolidate a controlled subsidiary, even if it has a different fiscal year-end than the parent. If a subsidiary has a different fiscal year end, the parent can use the subsidiary’s financial statements for consolidation purposes, as long as the difference in fiscal year-ends is not more than about three months (e.g., 93 days under Rule 3A-02(b) of Regulation S-X). In these circumstances, the parent should disclose the effect of intervening events that, if recognized, would materially affect the consolidated financial position or results of operations.

When a parent uses a subsidiary’s financial statements that have a different fiscal year end for consolidation, the parent will need to carefully consider how it applies consolidation procedure. For example, intercompany transactions should be evaluated to ensure they are properly eliminated and that any assets (e.g., cash) transferred between the parent and the subsidiary during the intervening period are not double-counted in consolidation. Separately, the carrying amount of the subsidiary’s assets and liabilities would be reflected in the consolidated financial statements as of the period end of the subsidiary’s fiscal year end and not as of the parent’s fiscal year end. This includes situations in which certain subsidiary balances are reported at fair value. When a parent changes a subsidiary’s fiscal year-end, the parent would report this as a change in accounting principle in accordance with the provisions of ASC 250.4 Under ASC 250’s guidance, the parent is required to assess whether a change is preferable and, if so, report the change in accordance with ASC 250. ASC 250 requires retrospective application to prior-period financial statements of voluntary changes in accounting principle, unless it is impracticable to apply the effects of the change retroactively.

4 This guidance does not apply, however, in situations in which a parent entity changes its own fiscal year-end.



1.5 Using subsidiary financial statements prepared as of an earlier period end for consolidation procedure in circumstances when the subsidiary has the same fiscal year-end as the parent Excerpt from Accounting Standards Codification Investments — Equity Method and Joint Ventures — Overall

Subsequent Measurement

323-10-35-6 If financial statements of an investee are not sufficiently timely for an investor to apply the equity method currently, the investor ordinarily shall record its share of the earnings or losses of an investee from the most recent available financial statements. A lag in reporting shall be consistent from period to period.

ASC 810 does not specifically address whether it is acceptable for a parent that has the same fiscal year end as a subsidiary to use subsidiary financial statements that are prepared on a lag for consolidation purposes. Depending on the facts and circumstances, we believe it may be acceptable to do so.

For example, both a parent and a subsidiary may have a year-end of 31 December; however, the parent may not receive the subsidiary’s 31 December financial statements until mid-March. As a result, it might not be practical for the parent to use the subsidiary’s 31 December financial statements.

We believe the decision to apply consolidation procedure on a lag is a policy election that should be applied consistently from period to period and subsidiary by subsidiary. We believe a parent could have one subsidiary that is on a lag, and another that is not. We believe that a parent should apply the same maximum difference allowed in Rule 3A-02(b) of SEC Regulation S-X for consolidated subsidiaries with different fiscal year-ends (i.e., a lag of no more than 93 days). Intervening events that materially affect the financial position or results of operations should be disclosed.

When a parent uses a subsidiary’s financial statements that are on a lag for consolidation, the parent will need to carefully consider its consolidation procedure. For example, intercompany transactions should be evaluated to ensure they are properly eliminated and that any assets (e.g., cash) transferred between the parent and the subsidiary during the intervening period are not double-counted in consolidation. Separately, the carrying amount of the subsidiary’s assets and liabilities would be reflected in the consolidated financial statements as of the period end of the subsidiary’s most recently available financial statements and not as of the consolidated entity’s fiscal year end. This includes situations in which certain subsidiary balances are reported at fair value.

We believe a parent’s decision to change or eliminate an existing lag between the parent and the subsidiary is considered a change in accounting principle, in accordance with ASC 250. Under that guidance, the parent is required to assess whether the change is preferable and, if so, report the change in accordance with ASC 250. ASC 250 requires retrospective application to prior-period financial statements of voluntary changes in accounting principle, unless it is impracticable to apply the effects of the change retroactively.

1.6 Subsidiary’s accounting basis is not US GAAP A subsidiary may follow accounting principles that differ from US GAAP for separate reporting purposes (e.g., IFRS). When this is the case, the parent must adjust the subsidiary’s financial statements to US GAAP in consolidation. The consolidated financial statements must be prepared in accordance with the authoritative principles and standards in the Accounting Standards Codification in order for the parent to assert they are presented in conformity with GAAP in the United States. SEC registrants also must apply the rules and interpretive releases of the SEC, which are additional sources of authoritative GAAP for those entities.



1.7 Differing accounting policies between parent and subsidiary A parent and its subsidiaries may not have the same accounting policies, especially when a subsidiary was recently acquired, a subsidiary is a public company or a subsidiary has specialized industry accounting principles.

US GAAP does not require that a parent and its subsidiaries follow the same accounting policies. Therefore, if the subsidiary’s financial statements were prepared in accordance with US GAAP and the parent follows an acceptable alternative available in US GAAP for similar items in the financial statements, the financial statements of the subsidiary generally are not adjusted in consolidation.

For example, if a subsidiary applies the first-in, first-out (FIFO) method for inventory accounting but the parent applies the last-in, last-out (LIFO) method, adjustments to conform the inventory policies are not required.


2 Nature and classification of a noncontrolling interest

2.1 Noncontrolling interests Excerpt from Accounting Standards Codification Consolidation — Overall

Glossary

810-10-20 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.


Nature and Classification of the Noncontrolling Interest in the Consolidated Statement of Financial Position

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.

810-10-45-16 The noncontrolling interest shall be reported in the consolidated statement of financial position within equity, separately from the parent’s equity. That amount shall be clearly identified and labeled, for example, as noncontrolling interest in subsidiaries (see paragraph 810-10-55-41). An entity with noncontrolling interests in more than one subsidiary may present those interests in aggregate in the consolidated financial statements.

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.

810-10-45-17 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.



810-10-45-17A 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.

ASC 810-10 states that a noncontrolling interest in an entity is any equity interest in a consolidated entity that is not attributable to the parent. ASC 810-10 requires that a noncontrolling interest be classified as a separate component of consolidated equity.

In ASC 810-10, the FASB concluded that a noncontrolling interest in an entity meets the definition of equity in Concepts Statement 6, which defines equity (or net assets) as, “the residual interest in the assets of an entity that remains after deducting its liabilities.” A noncontrolling interest represents a residual interest in the assets of a subsidiary within a consolidated group and is, therefore, consistent with the definition of equity in Concepts Statement 6. A noncontrolling interest is presented separately from the equity of the parent so that users of the consolidated financial statements can distinguish the parent’s equity from the equity attributable to the noncontrolling interest (that is, equity of the subsidiary held by owners other than the parent).

To be classified as equity in the consolidated financial statements, the instrument issued by the subsidiary should be classified as equity by the subsidiary based on other authoritative literature. If the instrument is classified as a liability in the subsidiary’s financial statements, it cannot be presented as noncontrolling interest in the consolidated entity’s financial statements because that instrument does not represent an ownership interest in the consolidated entity under US GAAP.

For example, mandatorily redeemable preferred shares issued by a subsidiary would be classified as a liability in the subsidiary’s financial statements according to ASC 480. The preferred shares would not be classified as a noncontrolling interest in the consolidated financial statements.

2.1.1 Noncontrolling interests in consolidated variable interest entities (VIEs) ASC 810-10 requires an entity to present assets and liabilities of a consolidated VIE separately on the balance sheet, when certain conditions exist. ASC 810 does not address the presentation of noncontrolling interests in a consolidated VIE. We believe an entity is permitted to present noncontrolling interests of a consolidated VIE separately from other noncontrolling interests in the equity section of the balance sheet, as long as it makes an accounting policy choice and applies that choice to all consolidated VIEs. See Chapter 14 of our FRD publication, Consolidation and the Variable Interest Model, for further discussion of the presentation requirements for consolidated VIEs.

2.2 Equity contracts issued on the stock of a subsidiary An acquirer (i.e., a new parent) that acquires a controlling financial interest (but less than 100%) in an acquiree (i.e., a subsidiary) may want the right to obtain the noncontrolling interest at a later date. The acquirer could execute a call option (a right) or a forward contract (an unconditional obligation) on the noncontrolling interest with the seller, which in effect would give the acquirer flexibility in the timing and financing to acquire the noncontrolling interest. When the seller wants to retain an equity interest to participate in the future performance of the acquiree but have the right to sell its noncontrolling interest after a period of time, it may execute a put option over the noncontrolling interest with the acquirer.



Acquirers and sellers may enter into such arrangements (referred to here as equity contracts) for the following reasons:

• Tax planning — A seller may want to defer capital gains that would result from selling 100% of an entity. The seller may be willing to sell a controlling interest with a put option giving it the right to sell the remaining interest or a call option giving the acquirer the right to acquire the remaining interest (or both)

• Flexibility for the acquirer — Call options and forward contracts provide flexibility for the acquirer in financing an acquisition

• Liquidity to the seller — Put options and forward contracts give the seller an exit strategy for its retained interest

• Seller retention — Call options, put options or forward contracts with a fair value exercise price create an incentive for the seller to remain involved with the acquiree and help make it successful

Similar arrangements also may be entered into between a parent and the noncontrolling interest holders subsequent to an acquisition. Agreements between a parent and the noncontrolling interest holders may:

• Grant the noncontrolling interest holders an option to sell their remaining interests in the subsidiary to the parent (i.e., a written put option from the parent’s perspective)

• Grant the parent an option to acquire the remaining interests held by the noncontrolling interest holders (i.e., a purchased call option from the parent’s perspective)

• Obligate the parent to acquire and the noncontrolling interest holders to sell their remaining interests (i.e., a forward contract to purchase shares from the parent’s perspective)

• Grant the parent a purchased call option and grant the noncontrolling interest holders a written put option (i.e., an arrangement similar to but not exactly the same as a forward contract)

Accounting for these types of arrangements can be difficult, due to the complexity and volume of authoritative guidance that needs to be considered. The accounting often is affected by whether (1) the feature (e.g., call option, put option, forward contract) is considered embedded or freestanding and (2) the strike price is fixed, variable (according to a formula) or at fair value. A parent would need to carefully evaluate how these arrangements affect the classification and measurement of the noncontrolling interest and future earnings and earnings per share of the consolidated entity, among other things.

See Section 5.10 of Chapter 5 of our FRD publication, Issuer’s accounting for debt and equity financings, and Appendix D to our FRD publication, Business combinations, for further interpretive guidance.


3 Attribution of net income or loss and comprehensive income or loss

3.1 Attribution procedure Excerpt from Accounting Standards Codification Consolidation — Overall


Attributing Net Income and Comprehensive Income to the Parent and the Noncontrolling Interest

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.

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.

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.

While ASC 810-10 requires net income or loss and comprehensive income or loss to be attributed to the controlling and noncontrolling interests, it does not prescribe a method for making these attributions. We believe that net income or loss and comprehensive income or loss of a partially owned subsidiary should be attributed between controlling and noncontrolling interests based on the terms of a substantive profit sharing agreement. If a substantive profit sharing agreement does not exist, we generally believe the relative ownership interests in the subsidiary should be used. In the latter case, the attribution may be as simple as multiplying the net income or loss and comprehensive income or loss of the partially owned subsidiary by the relative ownership interests in the subsidiary.

3.1.1 Substantive profit sharing arrangements We believe that, if substantive, a contractual arrangement that specifies how net income or loss, including comprehensive income or loss, is to be attributed among a subsidiary’s owners should be used for financial reporting purposes. To be substantive, the terms of an arrangement should retain their economic outcome over time, and subsequent events should not have the potential to retroactively affect or “unwind” prior attributions. Determining whether a profit sharing arrangement is substantive is a matter of individual facts and circumstances requiring the use of professional judgment. (If a substantive profit sharing arrangement does not exist, we generally believe the relative ownership interests in the subsidiary should be used).



For example, care should be exercised when taxable earnings are allocated using a different formula than cash distributions and liquidating distributions. In these situations, the tax allocation should be carefully evaluated to ensure that the basis used for financial reporting purposes reflects the allocations of earnings agreed to by the parties. ASC 970-323-35-17 provides guidance on this point.

“Specified profit and loss allocation ratios should not be used … if the allocation of cash distributions and liquidating distributions are determined on some other basis. For example, if … [an] 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.”

We believe a contractual term that could require one investor (e.g., the parent) to pay cash to another investor (e.g., a noncontrolling interest holder) should be considered carefully when understanding and evaluating the substance of a profit sharing arrangement. Depending on the facts and circumstances, the cash payment may be part of a separate arrangement among the investors that is not directly related to the operations or earnings of the entity (e.g., a payment for services provided by one investor to another investor outside of the entity). When cash payments of this nature do not clearly and directly link to prior attributions of earnings or losses among the investors under the agreement, we do not believe they would affect the attributions made for financial reporting purposes. Alternatively, in certain circumstances payments from a separate arrangement may be clearly and directly linked to prior attributions and considered to retroactively affecting or “unwinding” prior attribution. In these circumstances, the substance of that arrangement may represent a substantive profit sharing arrangement and would need to be considered when determining attribution for financial reporting purposes.

The SEC staff has asked public companies to enhance their disclosures by stating how such allocations among controlling and noncontrolling interests are made. Therefore, we believe that it would be appropriate to disclose the terms and effects of any material substantive profit sharing arrangement.

To determine how to allocate net income or loss (including other comprehensive income or loss) when a substantive profit sharing arrangement exists, the parent would need to analyze the agreements and arrangements to determine how a change in net assets of the less-than-wholly-owned subsidiary (determined in conformity with US GAAP) would affect cash payments to the parent over the life of the subsidiary and upon its liquidation. In some circumstances, an arrangement may attribute losses to the shareholders in a different manner than it attributes profits, and therefore a parent should be careful to evaluate all elements of the arrangement when making attributions.

Little implementation guidance exists on how to account for substantive profit sharing arrangements. One approach applied in practice is the hypothetical-liquidation-at-book-value (HLBV) method. As described in more detail below, the use of such an approach is appropriate when the terms of the substantive profit-sharing arrangement are consistent with the calculation of HLBV. Under the HLBV approach, the parent’s share of the subsidiary’s earnings or loss is calculated by:

• The parent’s capital account at the end of the period assuming that the subsidiary was liquidated or sold at book value, plus

• Cash distributions received by the parent during the period, minus

• The parent’s new investments in the subsidiary during the period, minus

• The parent’s capital account at the beginning of the period assuming that the subsidiary were liquidated or sold at book value



The HLBV method would be applied using the subsidiary’s book values in accordance with US GAAP.

The HLBV method was discussed in detail in a proposed Statement of Position (SOP), Accounting for Investors’ Interests in Unconsolidated Real Estate Investments. However, the proposed SOP was never adopted. As a result, there is no authoritative guidance requiring the HLBV method. The HLBV method therefore should be considered only as an approach for how a parent might allocate net income or loss, including comprehensive income or loss, when a substantive profit-sharing arrangement exists and when the application of HLBV is consistent with such terms. Said differently, the parent should ensure that the application of the HLBV method is consistent with the economic substance of an arrangement and does not conflict with authoritative guidance. Therefore, using the HLBV method (or any other methodology) to make such attributions is appropriate only if doing so reflects the terms of an existing substantive profit-sharing arrangement.

Determining whether the terms of an arrangement are substantive and whether the HLBV method (or any other allocation methodology) reflects that substance requires the use of professional judgment and a careful evaluation of the individual facts and circumstances. In evaluating the substance of the terms, the parent should consider whether the terms retain their economic outcome over time and whether subsequent events have the potential to retroactively affect or unwind prior allocations.

Again, if a substantive profit sharing arrangement does not exist, we generally believe the relative ownership interests in the subsidiary should be used. In these circumstances, the attribution may be as simple as multiplying the net income or loss and comprehensive income or loss by the relative ownership interests in the subsidiary.

Illustration 3-1: Application of a substantive profit sharing arrangement

Entity Z was formed as a partnership on 1 January 20X1 by two unrelated investors. Investor A contributed $200 in exchange for 80% of the common stock of Entity Z. Investor B made a nominal contribution. Investor B provides certain technical knowledge and background for Entity Z to operate.

For illustrative purposes, assume Entity Z is not a VIE and Investor A (i.e., Parent) controls and consolidates Entity Z (i.e., Subsidiary) under ASC 810’s Voting Model. Upon consolidation, Investor B is the holder of the noncontrolling interest.

There have not been any changes in investment levels, and there were no additional contributions from or distributions to the investors from 1 January 20X1 through 31 December 20X3. Under the terms of the substantive profit-sharing arrangement, Parent is guaranteed its investment of $200, plus an additional return of $200. After Parent has received these amounts, all remaining profits and losses are allocated based on ownership percentages (80/20) between it and the noncontrolling interest.

Subsidiary has an operating loss of $(50) in 20X1, income of $170 in 20X2 and income of $240 in 20X3. Subsidiary does not distribute any dividends in any period. Intra-entity transactions and the effect of income taxes have been ignored to simplify this illustration.

Subsidiary’s book value of net assets is as follows:

1/1/X1 12/31/X1 12/31/X2 12/31/X3 Net assets $ 200 $ 150 $ 320 $ 560



Based on the above net assets and the terms of the substantive profit-sharing arrangement, the claim to net assets at book value would be as follows:

1/1/X1 12/31/X1 12/31/X2 12/31/X3 Book value of net assets $ 200 $ 150 $ 320 $ 560 Return of capital to Parent (up to original investment of $200) [1] (200) (150) (200) (200) Remaining profits to allocate – – 120 360 Guaranteed return to Parent (up to a maximum of $200) [2] – – (120) (200) Remaining profits to allocate – – – 160 80% pro-rata to Parent [3] – – – (128) 20% pro-rata to the noncontrolling interest [4] – – - (32) $ – $ – $ - $ – HLBV capital of Parent [1+2+3] $ 200 $ 150 $ 320 $ 528 HLBV capital of the noncontrolling interest [4] – – – 32

20X1:

If Subsidiary hypothetically liquidated its assets and liabilities at book value at 31 December 20X1, it would have $150 available to distribute. Parent would receive $150 as its return of capital according to the substantive profit-sharing arrangement. Therefore, during 20X1, Parent’s claim on Subsidiary’s book value decreased by $50 ($150 capital less initial capital of $200), which Parent would recognize in 20X1 as its share of Subsidiary’s losses. Since the entire loss under HLBV has been allocated to Parent, no income or losses would be attributed to the noncontrolling interest in the consolidated financial statements during 20X1, and 100% of the $50 loss would be attributed to Parent.

20X2:

If Subsidiary hypothetically liquidated its assets and liabilities at book value at 31 December 20X2, it would have $320 available to distribute. Parent would receive $200 as its return of capital, plus $120 as part of its guaranteed return, according to the substantive profit-sharing arrangement. Therefore, during 20X2, Parent’s capital increased to $320. Parent’s share of Subsidiary income for the year would be $170 ($320 in capital at 31 December 20X2 less $150 in hypothetically liquidated capital at 31 December 20X1). Since all income under HLBV was allocated to Parent, no income or losses would be attributed to the noncontrolling interest in the consolidated financial statements during 20X2, and 100% of the $170 income would be attributed to Parent.

20X3:

If Subsidiary hypothetically liquidated its assets and liabilities at book value at 31 December 20X3, it would have $560 available to distribute. Parent would receive $200 as its return of capital, plus $200 as its guaranteed return, according to the substantive profit-sharing arrangement. Therefore, during 20X3, Parent’s HLBV capital increased to $528 (Parent’s $200 return of capital, $200 in guaranteed return for the year plus 80% share of the remaining net assets available to distribute [$160 × 80% = 128]). Parent’s share of Subsidiary income for the year would be $208 ($528 in capital at 31 December 20X3 less $320 in hypothetically liquidated capital at 31 December 20X3). Parent would record the following journal entry to attribute $32 of Subsidiary’s $240 of income to the noncontrolling interest:

Dr. Net income attributable to the noncontrolling interest 32 Cr. Noncontrolling interest 32



In summary, under HLBV, $208 of Subsidiary income was allocated to the Parent and $32 was allocated to the noncontrolling interest in the consolidated financial statements during 20X3.

Question 3.1 How do equity contracts (e.g., call options, put options, forward contracts) on the stock of a subsidiary affect the attribution of net income or loss and comprehensive income or loss between the controlling and noncontrolling interests?

See Chapter 5 of our FRD publication, Issuer’s accounting for debt and equity financings, for detailed interpretive guidance on the accounting for equity contracts on noncontrolling interests, including their effect on attributing net income or loss and comprehensive income or loss between the controlling and noncontrolling interests.

3.1.2 Attribution of losses Before Statement 160 was adopted, losses that otherwise would have been attributed to the noncontrolling interest were allocated to the controlling interest after the noncontrolling interest was reduced to zero. If the subsidiary subsequently became profitable, 100% of the net earnings would have been allocated to the controlling interest until it recovered the losses that were absorbed.

Importantly, Statement 160 amended previous guidance to say that losses are attributed to the noncontrolling interest, even when the noncontrolling interest’s basis in the partially owned subsidiary has been reduced to zero. Under the economic entity concept, the noncontrolling interest is considered equity of the consolidated group and participates in the risks and rewards of an investment in the subsidiary. Therefore, the noncontrolling interest should be attributed its share of losses just like the parent, even if the noncontrolling interest balance becomes a deficit. Any excess loss attributed to the noncontrolling interest is reported in consolidated financial statements as a deficit balance in the noncontrolling interest line in the equity section.

3.1.2.1 Distributions in excess of the noncontrolling interest’s carrying amount

We generally believe that because the noncontrolling interest balance can be reduced below zero under ASC 810 (that is, the noncontrolling interest can have a debit balance), the controlling interest is not required to recognize a loss when distributions exceed the noncontrolling interest’s carrying value. Instead, the noncontrolling interest balance is reduced below zero when the transaction is recorded. Illustration 3-2 demonstrates this concept using an example from the real estate industry, where these transactions may be more common.

Illustration 3-2: Distributions in excess of the noncontrolling interest’s carrying amount

A real estate entity often refinances appreciated property and distributes the proceeds to its owners. Assume a real estate subsidiary has $100 of equity. The parent and noncontrolling interest own 80% and 20%, respectively, of the entity. As a result, the balance of noncontrolling interest is $20. The subsidiary’s only asset is a building with a carrying amount of $100, but with a fair value of $1,100.

Assume the subsidiary refinances the building by mortgaging the building for $1,000 and distributes the proceeds, proportionately, to its owners.



The journal entries to record these transactions in the consolidated financial statements follow:

Cash $ 1,000 Mortgage liability 1,000

To record the proceeds from the refinancing transaction Noncontrolling interest $ 200

Cash 200 To record the distribution to the noncontrolling interest

As a result of this transaction, the noncontrolling interest would have a debit balance of $180.

3.1.3 Attribution to noncontrolling interests held by preferred shareholders When a consolidated subsidiary is funded with a combination of common and preferred stock, care should be taken when attributing net income or loss and comprehensive income or loss between the controlling and noncontrolling interests.

Unlike common stock, preferred stock is typically entitled to a liquidation preference, which generally will include a par amount and, in some cases, cumulative unpaid dividends. Preferred stock typically is entitled to a share of the subsidiary’s earnings up to the stated dividend, and losses of the subsidiary typically do not reduce the amount due to the preferred stockholders in liquidation (although economically a portion of those losses may be funded by the preferred stock). For these reasons, unlike common stock, preferred stock normally does not represent a residual equity interest in the subsidiary even though preferred stock is classified as a noncontrolling interest in the consolidated financial statements of the parent.

We believe that a noncontrolling interest in a subsidiary that consists of preferred stock should be accounted for similar to preferred stock issued by the parent. Accordingly, any net income and comprehensive income of the subsidiary are allocated to the noncontrolling interest based on the preferred stock’s stated dividend and liquidation rights, and any net losses and comprehensive losses of the subsidiary normally are not allocated to preferred stock. In other words, the balance of the preferred stock classified as noncontrolling interest generally should be equal to its liquidation preference.

In some cases, the preferred stock does not have a liquidation preference and truly represents a residual equity interest in the entity (e.g., the equity interest may be called preferred stock because it participates disproportionally in returns but otherwise participates in the same preference and proportion as common stock in losses). In these instances, the interest is tantamount to common stock and we believe it would be appropriate for the parent to attribute net losses and comprehensive losses to the preferred stock noncontrolling interest, as the parent would with the common stock.

The guidance above only relates to preferred stock and should not necessarily be analogized to residual equity interests that provide preferential returns, which are common in partnerships. However, we believe an analogy may be appropriate for a class of security issued by the subsidiary that has a preference in distribution or liquidation rights over all other classes of equity security issued by the subsidiary.

Illustration 3-3: Attribution to noncontrolling interests held by preferred shareholders

Background

Companies A and B form Entity X, which is designed to buy and manage an apartment building. Company A contributes $70 million and owns 100% of the common equity. Company B contributes $30 million in exchange for preferred shares that receive a 6% stated dividend per annum. The preferred stock is entitled to a liquidation preference, which includes the par amount and any cumulative unpaid dividends. Company A consolidates Entity X.



The results of operations for Entity X in Years 1 through 3 are as follows (in thousands):

Year 1 Year 2 Year 3 Net income (loss) 5,040 (1,260) 3,780

Analysis

Company B is entitled to a 6% stated dividend per annum on its $30 million in preferred shares. Therefore, Company A would attribute $1.8 million in net income to the noncontrolling interest each year in its consolidated financial statements, as follows:

Year 1 Year 2 Year 3 Net income (loss) 5,040 (1,260) 3,780 Net income attributable to the noncontrolling interest 1,800 1,800 1,800 Net income (loss)attributable to the controlling interest 3,240 (3,060) 1,980

3.1.4 Attribution of goodwill impairment ASC 350-20-35-57A states that if a reporting unit is less than wholly owned, the fair value of the reporting unit and the implied fair value of its goodwill is determined in the same manner as it would be in a business combination under ASC 805. Any goodwill impairment that results from applying step two of the goodwill impairment model should be attributed to the controlling and noncontrolling interests on a rational basis.

While allocating net income or loss and comprehensive income or loss to the controlling and noncontrolling interests may be as straightforward as multiplying earnings by the relative ownership percentages (when a substantive profit sharing arrangement does not exist), that approach may not be appropriate for allocating a goodwill impairment. Particular care must be taken in this instance because a premium may be paid to obtain control of an entity. And, as a result, the controlling and noncontrolling interests’ bases in acquired goodwill may not be proportional to their ownership interests because the premium may not be allocated proportionately to the controlling and noncontrolling interests.

See Section 3.1.6 in Chapter 3 of our FRD publication, Intangibles — Goodwill and other, for more guidance on goodwill impairment testing when a noncontrolling interest exists.

3.1.5 Attributions related to business combinations effected before Statement 160 and Statement 141(R) were adopted Statement 160 was effective for the first annual reporting period beginning on or after 15 December 2008 (that is, 1 January 2009, for calendar year-end companies) and was required to be adopted concurrently with Statement 141(R). Statement 141(R) had the same effective date and was required to be adopted prospectively.

Business combinations achieved in stages before the adoption of Statement 141(R) (e.g., business combinations accounted for under Statement 141) generally followed step-acquisition accounting (that is, the noncontrolling interest was not initially measured at fair value). When attributing net income or loss related to acquisitions that were completed before the adoption of Statement 141(R), it is inappropriate to use the calculation of the parent’s relative ownership in the subsidiary to determine the noncontrolling interest’s basis in the assets and liabilities. Because of the prohibition against retroactively applying Statement 141(R), the controlling and noncontrolling interests’ bases in assets and liabilities recognized before the adoption of Statement 141(R) should continue to be used.



Illustration 3-4: Attributions related to an acquisition prior to Statement 141(R)

Assume that Acquirer acquired a 60%-controlling interest in Target on 1 January 2005, and the business combination was accounted for under Statement 141. Target had, on the acquisition date, a definite-lived intangible asset with a $100 fair value, but no book value. Under Statement 141, Acquirer would have measured the intangible asset in its financial statements at $60 (60% acquired plus carryover basis for the noncontrolling interest’s ownership in the intangible asset, that is, zero).

Assume at the acquisition date the intangible asset had a 10-year remaining useful life. Accordingly, Acquirer would have recognized annual amortization expense of $6 in its consolidated financial statements. Because the noncontrolling interest has no basis in the intangible asset, no amortization expense is allocated to the noncontrolling interest.

This concept extends to attributing impairment charges to the controlling and noncontrolling interests. Because the noncontrolling interest does not have a basis in the intangible asset, if the intangible asset becomes impaired after the acquisition date, the entire impairment charge would be allocated to the controlling interest. Also, as described in ASC 350-20-35-57A, if a reporting unit includes goodwill that is attributable only to a parent’s basis in a partially owned subsidiary for which acquisition accounting was completed according to Statement 141, any goodwill impairment charge (whether recognized before or after the effective date of Statement 160) would be attributed entirely to the parent.

3.1.6 Effect on effective income tax rate In certain instances, an entity’s reported effective tax rate may be affected by the attribution of net income and losses and comprehensive income and losses to noncontrolling interests. This is particularly true for entities that consolidate subsidiaries that pay no income tax but instead distribute any taxable income to their respective investors, such as limited liability companies and limited partnerships. In certain cases, the effective tax rate computed from the amounts included on the income statement may be significantly affected, requiring additional disclosure in the notes to the financial statements.

Illustration 3-5 demonstrates the potential effect of attributions on an entity’s effective tax rate.

Illustration 3-5: Effect of attributions on an entity’s effective tax rate

Assume that Entity A (a corporation) owns 60% of LP (a limited partnership) and consolidates LP. Also assume that Entity A’s statutory income tax rate and standalone effective tax rate are both 35%, while LP pays no income tax because it distributes its taxable earnings to its investors. Each entity has the following standalone financial information.

Entity A LP Income before income taxes $ 1,000 $ 900 Income taxes 350 – Net income $ 650 $ 900

Entity A is required to pay income taxes on its portion of LP’s earnings. Therefore, the income tax expense related to LP in Entity A’s consolidated financial statements would be $189 ($900 x 60% interest x 35% tax rate).



The consolidated financial information for Entity A would be presented as follows.

Entity A - Consolidated

Income before income taxes ($1,000+$900) $ 1,900 Income taxes ($350+$189) 539 Net income 1,361 Net income attributable to noncontrolling interest ($900 x 40%) 360 Net income attributable to controlling interest $ 1,001

Based on the amounts from the consolidated financial information, Entity A’s consolidated effective tax rate would be 28.4% ($539 / $1,900). This difference from 35% occurs because income before income taxes includes earnings allocable to the noncontrolling interest for which there is no tax expense provided.

We believe that this is required to be explained in the effective income tax rate reconciliation disclosed in the footnotes to the consolidated financial statements under ASC 740. An effective income tax rate reconciliation for Entity A follows:

Effective income tax rate reconciliation Statutory income tax rate 35.0% Book income of consolidated partnership attributable to noncontrolling interest (6.6) Effective tax rate for controlling interest 28.4%

See Chapter 12 of our FRD publication, Income taxes, for discussion of additional income tax considerations related to attributing consolidated income taxes between the controlling and noncontrolling interests.

3.1.7 Attributions related to dividends of a subsidiary payable in nonmonetary assets In some circumstances, a subsidiary may issue dividends payable in assets other than cash or monetary assets, which may include merchandise, real estate, investments in unrelated entities or other assets. Pursuant to ASC 845-10-30-1 through 30-3 and ASC 845-10-30-10, nonmonetary dividends paid to noncontrolling interests should generally be recorded at the fair value of the property to be distributed, provided fair value is objectively measurable and would be clearly realizable to the distributing entity in an outright sale at or near the time of the distribution. Otherwise, carrying amounts should be used in recording the dividend. When recognized at fair value, differences between the fair value and carrying amount of the nonmonetary assets distributed should be recognized as a gain or loss only to the extent of dividends paid to noncontrolling interests (if any) and any gain or loss recognized should be allocated entirely to the noncontrolling interests. Special guidance applies to the dividend (that is, distribution or spinoff) of a consolidated subsidiary or an equity method investment that is a business; see ASC 505-60 and ASC 845 for additional guidance.

Nonmonetary dividends received by a parent or other companies under common control should be recorded at the subsidiary’s carrying amount pursuant to ASC 805-50. See Appendix C of our FRD publication, Business combinations.

Also see Section 3.4.5.2 of Chapter 3 of our FRD publication, Issuer’s accounting for debt and equity financings, for more information on the accounting for dividends.



3.1.8 Attributions related to dividends of a consolidated trust issuing trust preferred securities In the rare circumstances in which a trust issuing trust preferred securities is consolidated by the sponsoring entity and classified as a redeemable noncontrolling interest in temporary equity, dividends should be reported as an allocation of income to the noncontrolling interest holders in the income statement. See Section 5.6 of Chapter 5 of our FRD publication, Issuer’s accounting for debt and equity financings, for more information on accounting for trusts issuing trust preferred securities.


4 Changes in a parent’s ownership interest in a subsidiary while control is retained

4.1 Increases and decreases in a parent’s ownership of a subsidiary Excerpt from Accounting Standards Codification Consolidation — Overall


Changes in a Parent’s Ownership Interest in a Subsidiary

810-10-45-21A 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. 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.

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.



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.

810-10-45-24 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 810 requires that transactions that result in an increase in ownership of a subsidiary be accounted for as equity transactions. That is, no purchase accounting adjustments are made. ASC 810 further requires transactions that result in a decrease in ownership interest while the parent retains its controlling financial interest to be accounted for as equity transactions. ASC 810-10-45-21A(b) clarifies that the guidance related to decreases in a parent’s ownership interest applies to interests in:

• A subsidiary that is a business or a nonprofit activity5, except for either a sale of in-substance real estate or a conveyance of oil and gas mineral rights

• A subsidiary that is not a business or a nonprofit activity but the substance of the transaction is not addressed directly by guidance in other ASC Topics

Neither gains nor losses on these transactions are recognized in net income, and the carrying values of the subsidiary’s assets (including goodwill) and liabilities should not be changed.

The remainder of this chapter focuses on the accounting for increases in a parent’s ownership interest in a subsidiary and decreases in ownership that do not result in a loss of control. For a discussion of the accounting for decreases in ownership that result in a loss of control of a subsidiary or a group of assets that constitute a business or a nonprofit activity, see Chapter 6, Loss of control over a subsidiary or a group of assets.

4.1.1 Increases in a parent’s ownership interest in a subsidiary A parent may increase its ownership interest in a subsidiary by:

• Directly purchasing additional outstanding shares of the subsidiary

• Causing the subsidiary to reacquire a portion of its outstanding shares (a treasury stock buy-back)

• Causing the subsidiary to issue additional shares to the parent

5 ASC 810-10-20 defines a nonprofit activity as “(a)n integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing benefits, other than goods or services at a profit or profit equivalent, as a fulfillment of an entity’s purpose or mission (for example, goods or services to beneficiaries, customers, or members). As with a not-for-profit entity, a nonprofit activity possesses characteristics that distinguish it from a business or a for-profit business entity.”



Under ASC 810, accounting for an increase in ownership of a subsidiary is generally similar to accounting for a decrease in ownership interest without a loss of control. That is, the carrying amount of the noncontrolling interest is adjusted (decreased, in this case) to reflect the controlling interest’s increased ownership interest in the subsidiary’s net assets. Any difference between the consideration paid by the parent to a noncontrolling interest holder (or contributed by the parent to the net assets of the subsidiary) and the adjustment to the carrying amount of the noncontrolling interest in the subsidiary is recognized directly in equity attributable to the controlling interest (that is, additional paid-in capital).

Illustration 4-1: Increase in a parent’s ownership interest in a subsidiary

To illustrate this concept, assume Parent owns an 80% interest in Subsidiary, which has net assets of $4,000. The carrying amount of the noncontrolling interest’s 20% interest in Subsidiary is $800. Parent acquires an additional 10% interest in Subsidiary from the noncontrolling interest for $500, increasing its controlling interest to 90%. Under ASC 810, Parent would account for its increased ownership interest in Subsidiary as a capital transaction as follows:

Stockholders’ equity — noncontrolling interest $ 400

Additional paid-in capital 100

Cash $ 500

4.1.1.1 Accounting for contingent consideration

An increase in a parent’s ownership interest in a subsidiary may involve contingent consideration. For example, when acquiring an additional interest in a subsidiary, the parent may promise to deliver cash, additional equity interests or other assets to the seller after the acquisition date if certain specified events occur or conditions are met in the future. These contingencies may be based on future earnings or changes in the market price of the subsidiary’s stock over specified periods after the date of the sale. However, they might be based on other factors (e.g., components of earnings, product development milestones, cash flow levels, the successful completion of third-party contract negotiations).

The basis for recognition and measurement of contingent consideration is not addressed in ASC 810, so it is necessary to look to other guidance. If contingent consideration meets the definition of a derivative, it should be accounted for under ASC 815. If the arrangement is not a derivative, the parent should evaluate the arrangement to determine if it represents payments to employees or selling shareholders that are compensatory. If the parent determines that the arrangement is compensatory, the parent would not recognize a liability at the transaction date. Instead, the parent would recognize compensation expense for the arrangement based on other applicable GAAP (e.g., ASC 710-10-25-9). See Chapter 6 of our FRD publication, Business combinations, for further guidance on evaluating whether contingent payments to employees or selling shareholders are compensatory.

When contingent consideration does not meet the definition of a derivative and is not compensatory, the Codification does not provide detailed guidance. In this circumstance, we believe the basis for recognition and measurement of contingent consideration payable by the buyer is an accounting policy choice that should be applied on a consistent basis. Illustration 4-2 illustrates one possible policy alternative that is applied in practice. Other alternatives also may be acceptable.



Illustration 4-2: Contingent consideration over the acquisition of noncontrolling interests

Parent currently owns 80% of Subsidiary A. Parent acquires the remaining 20% in Subsidiary A for an up-front cash payment, plus a contingent cash payment based on cumulative EBITDA of Subsidiary A at the end of 3 years. The contingent consideration arrangement is not a derivative and is not compensatory in nature.

ASC 805 Approach

Because Parent controls Subsidiary A, the acquisition of the noncontrolling interest is accounted for as a transaction among shareholders within equity. ASC 810-10-45-23 states that "[a]ny 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." However, ASC 810 does not specifically address the accounting for contingent consideration in connection with the acquisition of noncontrolling interests.

Under the ASC 805 approach, Parent would analogize to the contingent consideration guidance in ASC 805. Therefore, Parent would record the contingent consideration liability at fair value at the acquisition date. Any subsequent changes in the fair value of the contingent consideration liability would be recognized in earnings. Other alternatives also may be acceptable.

4.1.2 Decreases in a parent’s ownership interest in a subsidiary without loss of control A parent may decrease its ownership interest in a subsidiary by (1) selling a portion of the subsidiary’s shares it holds or (2) causing the subsidiary to issue shares. In accounting for such transactions under ASC 810, assuming they meet the scope of ASC 810-10-45-21A(b), the carrying amount of the noncontrolling interest should be increased to reflect the change in the noncontrolling interest’s ownership in the subsidiary’s net assets (that is, the amount attributed to the additional noncontrolling interests should reflect its proportionate ownership percentage in the subsidiary’s net assets acquired).

Any difference between the consideration received (whether by the parent or the subsidiary) and the adjustment made to the carrying amount of the noncontrolling interest should be recognized directly in equity attributable to the controlling interest (that is, as an adjustment to additional paid-in capital).

Illustration 4-3: Decrease in a parent’s ownership through parent selling shares

Assume Subsidiary A, a widget manufacturer, has 10,000 shares of common stock outstanding, all of which are owned by its parent, ABC Co. The carrying amount of Subsidiary A’s equity is $200,000. ABC Co. sells 2,000 of its shares in Subsidiary A to an unrelated entity for $50,000 cash, reducing its ownership interest to 80% from 100%.

Under ASC 810, a noncontrolling interest of $40,000 is recognized ($200,000 x 20%). The excess $10,000 of the cash received ($50,000) over the adjustment to the carrying amount of the noncontrolling interest ($40,000) is recognized as an increase in additional paid-in capital attributable to ABC Co. as follows:

Cash $ 50,000 Additional paid-in capital $ 10,000 Stockholders’ equity — noncontrolling interest 40,000



Illustration 4-4: Decrease in a parent’s ownership through a subsidiary issuing new shares

Assume Subsidiary A, a widget manufacturer, has 10,000 shares of common stock outstanding. The parent, ABC Co., owns 9,000 of the outstanding shares and other shareholders own the remaining 1,000 shares. The carrying amount of Subsidiary A’s equity is $300,000, with $270,000 attributable to ABC Co. and $30,000 attributable to the noncontrolling interest holders.

Assume Subsidiary A sells 2,000 previously unissued shares to an unrelated entity for $120,000 cash, increasing the carrying amount of Subsidiary A’s equity to $420,000 ($300,000 + $120,000).

The transaction would reduce ABC Co.’s ownership interest to 75% from 90% (i.e., to 9,000/12,000 from 9,000/10,000). However, the transaction would increase ABC Co.’s Investment in Subsidiary A to $315,000 (75% of $420,000), an increase of $45,000 ($315,000 - $270,000). Therefore, the entry recorded by ABC Co. would be:

Investment in Subsidiary A $ 45,000 Additional paid-in capital $ 45,000

In addition, the carrying amount of the noncontrolling interest would increase to $105,000 (25% of $420,000). This increase of $75,000 ($105,000 - $30,000) would be recorded by Subsidiary A as:

Cash $ 120,000 Additional paid-in capital $ 45,000 Stockholders’ equity — noncontrolling interest 75,000

In consolidation, the increase to Investment in Subsidiary A recorded on ABC Co.’s balance sheet would be eliminated against the increase in additional paid-in capital recorded on Subsidiary A’s balance sheet. See Chapter 5, Intercompany eliminations, for further discussion of elimination entries.

Question 4.1 How should a company account for changes in ownership of a subsidiary that it acquired before adopting Statement 160 and Statement 141(R) and that it still controls?

We believe that all subsequent acquisitions or dispositions of ownership interests in subsidiaries meeting the scope of ASC 810-10-45-21A while the parent maintains control — including those related to business combinations before the adoption of Statement 160 — should be accounted for under Statement 160.

According to ASC 805, as amended by Statement No. 141(R), assets and liabilities that arose from business combinations whose acquisition dates preceded Statement 141(R)’s effective date are not to be adjusted upon application of Statement 141(R). Accordingly, acquisitions of the noncontrolling interest by the parent while it maintains its controlling financial interest should not be accounted for as step acquisitions. Similarly, a parent’s sales of its ownership interests in a subsidiary meeting the scope of ASC 810-10-45-21A over which it continues to maintain control should be accounted for as equity transactions.

4.1.2.1 Accounting for a stock option of subsidiary stock

A subsidiary may grant a share-based payment award of its own stock to its employees that would result in a decrease in ownership and a noncontrolling interest when exercised. Questions arise as to whether these awards should be classified in the consolidated financial statements as a noncontrolling interest or as additional paid-in capital before exercise.

Awards of this nature may arise in a business combination when the acquirer is not obligated to replace the acquiree’s awards and the awards continue to exist after the transaction. The accounting for these awards is addressed in Section 6.3 of our FRD publication, Business combinations. We believe this accounting would also apply to awards of subsidiary stock that do not arise in a business combination.



4.1.2.2 Scope exception for in-substance real estate transactions The decrease in ownership guidance in ASC 810-10 does not apply if a transaction is a sale of in-substance real estate, even if that real estate is considered a business. Entities should apply the sale of real estate guidance in ASC 360-20 and ASC 976-605 to such transactions. However, guidance on noncontrolling interests in consolidated financial statements within ASC 810-10 will continue to apply to increases in ownership of an entity that is in-substance real estate.

4.1.2.3 Scope exception for oil and gas conveyances Any conveyance of an oil and gas mineral right that is accounted for under ASC 932-360-40 is outside the scope of ASC 810’s derecognition provisions as well as ASC 810’s provisions regarding decrease in ownership in circumstances in which a controlling interest is retained. Therefore, if a company is conveying a mineral interest, the transaction would be accounted for under ASC 932. However, in a transaction in which a company sells all or a portion of a subsidiary or a group of assets that include oil and gas mineral rights (or contributes it to another entity), the transaction may be more appropriately accounted for under ASC 810. Consideration of the illustrations and guidance in ASC 932 is required to determine whether a transaction represents a conveyance of a mineral property. If a transaction does not fall within the guidance of ASC 932, it should be accounted for under ASC 810.

The following illustrates a transaction that is not in the scope of ASC 810:

Illustration 4-5: Applying ASC 810’s scope exception for oil and gas conveyances

Facts O&G Co. owns a 100% gas mineral interest in a property in Colorado. O&G Co. assigns an operating interest to Drilling Co. and retains a non-operating interest in the property. The transaction requires Drilling Co. to drill, develop and operate the property. O&G Co. will participate in the production profits after Drilling Co. recoups its costs.

Analysis The accounting for this transaction (a pooling of assets in a joint undertaking) is addressed in ASC 932-360-55-3. Therefore, the transaction should be accounted for in accordance with ASC 932, not ASC 810.

The following illustrates a transaction that is in the scope of ASC 810:

Illustration 4-6: Oil and gas transaction is in the scope of ASC 810

Facts O&G Co. owns an operating subsidiary, Foreign Sub. Foreign Sub has oil and gas mineral properties as well as other energy-related operations. O&G Co. sells a 55% interest in those operations to Purchase Co. and loses control.

Analysis In this fact pattern, O&G Co. is selling 55% of its equity in Foreign Sub, which results in the loss of control.6 Because this transaction does not represent an oil or gas mineral property conveyance as contemplated in the guidance of ASC 932 or any of ASC 932’s implementation guidance illustrations, it should be accounted for under the derecognition guidance in ASC 810.

6 A transaction with the same fact pattern, but in which there is a decrease in ownership without loss of control (for example, a sale

of 20% of the equity), would result in the same conclusion (that is, the transaction is in the scope of ASC 810).



We believe, in this circumstance, ASC 810 is the most appropriate guidance because this transaction represents the sale of a business that happens to include oil and gas mineral properties. This type of transaction is not addressed in the mineral property conveyance guidance in ASC 932.

4.1.2.4 Decreases in ownership of a subsidiary that is not a business or nonprofit activity If a decrease in ownership occurs in a subsidiary that is not a business or nonprofit activity, an entity first needs to evaluate the substance of the transaction and identify whether other literature (e.g., transfers of financial assets as discussed in ASC 860, revenue recognition as discussed in ASC 605) may provide relevant guidance. If no such guidance exists, an entity should apply the guidance in ASC 810-10. For example, if an enterprise sells the equity securities of a subsidiary that is not a business and all of the assets in the subsidiary are financial assets, the substance of the transaction should be evaluated under ASC 860.

However, guidance on noncontrolling interests in consolidated financial statements within ASC 810-10 will continue to apply to increases in ownership of an entity that is not a business or nonprofit activity.

4.1.2.5 Issuance of preferred stock by a subsidiary Under ASC 810-10-45-23, changes in a parent’s ownership interest while the parent retains control of a subsidiary should be accounted for as equity transactions. We generally believe that the preferred stock issuance by a subsidiary to noncontrolling interest holders should be reflected as a noncontrolling interest in the financial statements of the parent at the amount of the cash proceeds received (e.g., the par amount).

Unlike common stock, preferred stock of a subsidiary often does not represent a residual equity interest. The holders of preferred stock often are entitled to a liquidation preference, which generally includes a par amount and, in some cases, cumulative unpaid dividends. Preferred stock holders of a subsidiary also are typically entitled to a share of the subsidiary’s earnings up to the stated dividend. Unlike an issuance of common stock by a subsidiary (which generally results in a change in the parent’s ownership interest), the issuance of preferred stock by a subsidiary does not change the parent’s ownership interest. When recording the issuance of preferred stock by a subsidiary that is not a residual interest, we would not expect to see an adjustment to the parent’s equity accounts. (See Section 3.1.3 for interpretive guidance on attributions to noncontrolling interests held by preferred shareholders).

4.1.2.6 Decreases in ownership through issuance of partnership units that have varying profit or liquidation preferences Under ASC 810-10-45-23, changes in a parent’s ownership interest while the parent retains control of a subsidiary (e.g., partnership) should be accounted for as equity transactions.

Partnerships can take various forms. Frequently, there is a substantive profit sharing arrangement through which the profits of the partnership are allocated to the partners based on a predetermined formula. In some cases, the profit sharing arrangement may provide certain partners with preferences in profits from operations or in liquidation. In other cases, the substantive profit sharing arrangement may not provide for preferences in profits or in liquidation.

If an entity determines that issuing partnership units represents the issuance of preferential units (e.g., such units have preference in operating or liquidating cash flows), we believe that the guidance on the issuance of preferred stock by a subsidiary should be followed (see Section 4.1.2.5). That is, when recording the issuance of preferential units by a partnership subsidiary, there is generally no adjustment to the parent’s equity accounts. Alternatively, if partnership units are issued without preferences, we believe that a parent of a partnership would follow the guidance in ASC 810-10-45-23. See Question 4.2 for discussion of the accounting on expiration of a preference period.

We would expect a parent of a partnership to develop a reasonable policy with respect to this accounting and apply that policy consistently.



Question 4.2 How should the provisions of ASC 810-10 be applied to a consolidated Master Limited Partnership’s issuance of preferential limited partnership units?

A Master Limited Partnership (MLP) is a limited partnership whose units are available to investors and traded on public exchanges, just like corporate stock. MLPs usually involve (1) a general partner (GP), who typically holds a small percentage (commonly 2%) of the outstanding partnership units and manages the operations of the partnership, and (2) limited partners (LPs), who provide capital and hold most of the ownership but have limited influence over the operations. Enterprises that form MLPs typically do so to take advantage of the special tax treatment of the partnership structure (although MLPs may also provide an attractive exit strategy for owners of private equity assets). To qualify for the tax benefits, 90% of an MLP’s income must be derived from activities in natural resources, real estate or commodities. As a result, the energy industry has experienced a dramatic rise in the use of the MLP structure.

The GP frequently consolidates the MLP. For the issuance of LP interests, all sales first should be evaluated to determine whether they represent in-substance sales or partial sales of real estate under ASC 360-20-15-2 through 15-10 (see our FRD publication, Real estate sales, for further guidance). Assuming the sale is not in substance a sale or partial sale of real estate, a consolidated subsidiary that issues shares while the parent maintains control of the subsidiary should be accounted for as a capital transaction pursuant to the decrease-in-ownership guidance.

However, the decrease-in-ownership guidance may not apply when an MLP issues limited partnership units that have a preference in distributions or liquidation rights (referred to as the common LP units). It is common for an MLP partnership agreement to provide that, during a subordination period, the common LP units will have the right to receive distributions of available cash each quarter based on a minimum quarterly distribution, plus any arrearages, before any distributions of available cash may be made on the subordinated LP units. Furthermore, no arrearages will be paid on the subordinated units.

The practical effect of the subordinated LP units is to increase the likelihood that during the subordination period there will be available cash to be distributed on the common LP units. When subordinated LP units are held by the parent/GP of an MLP, common LP units do not possess the characteristics of a residual equity interest given the common LP units’ preference over the subordinated LP units. We believe that the accounting guidance related to changes in a parent’s ownership interest in a subsidiary would not apply. Therefore, if the parent/GP owns subordinated LP units in the MLP, the parent/GP should reflect the proceeds from issuance of common LP units as noncontrolling interest in its financial statements with no adjustment to additional paid-in capital. We believe that if the class of security issued by the subsidiary has a preference in distribution or liquidation rights over any other class of equity security, it is analogous to preferred stock. As such, we do not believe the guidance above would apply to such transactions. See 4.1.2.6 above for additional discussion.

MLP partnership agreements include provisions for the subordination period to expire after a specific period of time if the minimum quarterly distributions have been made to the holders of the common LP units. Upon the expiration of the subordination period, all subordinated LP units held by the parent/GP have the same distribution and liquidation rights as the other common LP units. Although the common LP units previously issued by the MLP to the holders of the noncontrolling interest no longer have a preference in distributions due to the expiration of the subordination period, we believe this loss of preference has no immediate accounting consequences. The accounting for changes in noncontrolling interests applies only to changes in a parent’s ownership interest in a subsidiary, which includes circumstances in which, “(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, or (d) the subsidiary issues additional ownership interests” (ASC 810-10-45-22). We believe the expiration of the subordination period is not a change in the parent’s ownership interest in



a subsidiary because the expiration does not result in a change in ownership interest in the MLP. As such, there is no adjustment to be recognized to the equity accounts of the parent (that is, no adjustment to additional paid-in capital) or noncontrolling interest as a result of the expiration of the preferences.

4.1.2.7 Issuance of subsidiary shares as consideration in a business combination

See Chapter 6 of our FRD publication, Business combinations, for discussion of the accounting when an acquirer issues subsidiary shares as consideration for a controlling interest in another entity.

4.1.3 Accumulated other comprehensive income considerations Excerpt from Accounting Standards Codification Consolidation — Overall


Changes in a Parent’s Ownership Interest in a Subsidiary

810-10-45-24 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.

When a change in a parent’s ownership interest that does not result in the loss of control occurs in a subsidiary meeting the scope of ASC 810-10-45-21A that has a balance of accumulated other comprehensive income (AOCI), the AOCI balance is adjusted to reflect a change in the parent’s proportionate interest in that AOCI balance by an adjustment to the parent’s consolidated additional paid-in-capital.

Illustration 4-7: Accounting for AOCI when a parent’s ownership interest increases

Assume Parent owns an 80% interest in Subsidiary, a retailer of children’s toys, which has net assets of $4,000. The carrying amount of the noncontrolling shareholders’ 20% interest in Subsidiary is $800, which includes $200 that represents the noncontrolling interest’s share of $1,000 of AOCI credits. Parent acquires an additional 10% interest from a third party in Subsidiary for $500, increasing its controlling ownership interest to 90%.

As a result of this purchase, Parent’s interest in Subsidiary’s AOCI balance increases by $100 ($1,000 x 10%). Under ASC 810, Parent will account for its increased ownership interest in Subsidiary as follows:



Cash $ 500

AOCI 100

If a decrease in a parent’s controlling ownership interest that does not result in a loss of control occurs in a subsidiary meeting the scope of ASC 810-10-45-21A(b) and that has AOCI, the accounting under ASC 810 is similar to that described in the example above. That is, a proportionate share of AOCI is attributed to the noncontrolling interest.



Illustration 4-8: Accounting for AOCI when a parent’s ownership interest decreases

Assume Parent owns 100% of Subsidiary, which has net assets of $4,000, including $1,000 of AOCI. Assume Subsidiary is a business and is in the scope of ASC 810-10-45-21A(b). Parent sells a 10% interest in Subsidiary for $500, decreasing its interest to 90%. As a result of the sale, Parent’s interest in Subsidiary’s AOCI balance decreases by $100 ($1,000 x 10%). Under ASC 810, Parent will account for the change in its ownership interest in Subsidiary as follows:

Cash $ 500

AOCI 100



4.1.3.1 Accounting for foreign currency translation adjustments

Excerpt from Accounting Standards Codification Foreign Currency Matters — Translation of Financial Statements

Derecognition

Partial Sale of Ownership Interest

830-30-40-2 For guidance if an entity sells a noncontrolling interest in a consolidated foreign entity, but still retains a controlling financial interest in the foreign entity, see paragraph 810-10-45-23 through 45-24.

When a change in a parent’s ownership interest that does not result in the loss of control occurs in a foreign entity meeting the scope of ASC 810-10-45-21A, the accounting for the currency translation adjustment balance is the same as the accounting for other items of AOCI described in Section 4.1.3. That is, the balance should be reallocated between the parent and the noncontrolling interest to reflect a change in the parent’s proportionate interest in that balance. A foreign entity may include a subsidiary, division, branch, joint venture that contains an equity method investment or equity method investment by itself. That is, a foreign entity as defined by ASC 830 may differ from a legal entity. See Section 1.2.2 of our FRD publication, Foreign currency matters, for additional discussion on the definition of a foreign entity under ASC 830, and Section 4.4.4 of that FRD publication for additional guidance on how to treat any cumulative translation adjustment in this scenario.

4.1.4 Allocating goodwill upon a change in a parent’s ownership interest Although the total goodwill balance is not adjusted upon a change in parent’s ownership interest, for the purposes of testing for impairment, goodwill should be reallocated between the controlling and noncontrolling interests based on the changes in ownership interests.

Illustration 4-9: Allocating goodwill upon a change in a parent’s ownership interest

Assume Parent initially acquires 80% of Subsidiary. The business combination is accounted for under ASC 805 and $100 of goodwill is recognized ($80 attributable to Parent and $20 attributable to the noncontrolling interest, assuming no control premium). If Parent acquires an additional 10% interest in Subsidiary, the consolidated amount of goodwill does not change, but the goodwill balance is reallocated between Parent and the noncontrolling interest based on the revised percentage ownership interest (that is, $90 would be attributable to Parent and $10 would be attributable to the noncontrolling interest).

https://asc.fasb.org/link&sourceid=SL34753664-110899&objid=34752795



4.1.5 Accounting for transaction costs incurred in connection with changes in ownership ASC 810 provides that gains or losses should not be recognized upon changes in a parent’s ownership of a subsidiary meeting the scope of ASC 810-10-45-21A if it retains control because the entities are considered one economic entity. We believe these transactions are analogous to treasury stock transactions.

Based on this, we believe that specific, direct and incremental costs (but not management salaries or other general and administrative expenses) related to changes in a parent’s ownership percentage when control is maintained may be accounted for as part of the equity transaction. However, the provisions of ASC 810-10-40-6, which address multiple arrangements that are to be considered as a single transaction, should be considered.

We note that some observers believe that transaction costs incurred in connection with changes in ownership of consolidated subsidiaries meeting the scope of ASC 810-10-45-21A while control is retained are not analogous to treasury stock transactions and, therefore, should be expensed as incurred.

We believe that until further guidance is issued, a reporting enterprise should adopt and consistently apply an accounting policy for these costs.

4.1.6 Changes in a parent’s ownership interest in a consolidated VIE A primary beneficiary may subsequently acquire or dispose of a noncontrolling interest in an existing consolidated VIE. A primary beneficiary’s acquisition or disposal of additional ownership interests is a reconsideration event that requires a reassessment of whether the entity is a VIE and whether the party designated as the primary beneficiary has changed. See our FRD, Consolidation and the Variable Interest Model, for further discussion of this guidance.

If after making these reassessments, the primary beneficiary remains the same (i.e., a controlling financial interest is maintained), we believe the acquisition or disposal of a noncontrolling interest should be treated as an equity transaction, consistent with the principles of ASC 810-10-45-23. Any difference between the price paid and the carrying amount of the noncontrolling interest should not be reflected in net income, but instead reflected directly in equity. See Sections 4.1.1 and 4.1.2 for further discussion of this accounting.

4.1.7 Chart summarizing the accounting for changes in ownership The following chart summarizes ASC 810-10’s accounting in the consolidated financial statements for changes in a parent’s ownership interest in a subsidiary (within the scope of ASC 810-10-45-21A) while maintaining a controlling financial interest:

Parent acquires additional ownership interest Parent sells a portion of its ownership interest

Reduce noncontrolling interest based on proportion acquired

APIC adjusted for difference between the amount by which noncontrolling interest is reduced and the amount of consideration paid

Adjust AOCI with corresponding adjustment to APIC, as appropriate

Increase noncontrolling interest for proportion of parent’s ownership interest it sold

Adjust APIC for difference between the amount by which noncontrolling interest is increased and the amount of consideration received




Subsidiary acquires noncontrolling interest Subsidiary issues shares to noncontrolling interest

Calculate shares effectively acquired by parent and decrease noncontrolling interest for proportion of parent’s ownership interest acquired

Adjust APIC for difference between the amount by which noncontrolling interest is reduced and the amount of consideration paid

Adjust AOCI with corresponding adjustment to APIC, as appropriate.

Calculate shares effectively sold by parent and increase noncontrolling interest for proportion of parent’s ownership interest sold

Adjust APIC for difference between the amount by which noncontrolling interest is reduced and the amount of consideration paid


4.1.8 Income tax considerations See Chapter 12 of our FRD publication, Income taxes, for discussion of income tax considerations related changes in ownership interest in a subsidiary that do not result in a loss of control.

4.1.9 Noncontrolling interests in a common control transaction See Appendix C of our FRD publication, Business combinations, for discussion of the accounting for any changes in noncontrolling interests from a combination of entities under common control that does not result in a loss of control.

4.2 Comprehensive example The following example illustrates the accounting in consolidation for changes in a parent’s ownership interest when the parent maintains control of the subsidiary meeting the scope of ASC 810-10-45-21A. Work paper adjusting entries are numbered sequentially.

Illustration 4-10: Accounting for initial acquisition

Assume that on 1 January 20X1, Company P, which is newly formed, raises $45,000 of capital. Company P issues 1,500 shares of $1 par stock for $36,000 and raises $9,000 by issuing debt. Company P acquires 70% (7,000 shares) of the $1 par common stock of Company S for $45,000. Company S is a distributor of video games that qualifies as a business under ASC 805 and its fair value is $64,286. Company S’s acquisition-date balance sheet is presented in Figure 4-1. Income taxes have been ignored.

This example includes certain assumptions for simplicity that are not common in practice. For example, it would be unusual for no identifiable intangible assets to be recognized as part of the business combination (and for all the excess purchase price to be allocated to goodwill). Additionally, this example assumes there is no control premium.

Figure 4-1: Acquisition-date balance sheet for Company S at 1 January 20X1 (all amounts in dollars)

Book value Fair Value Cash 3,000 3,000 Marketable securities (available-for-sale) 12,000 12,000 Inventory 30,000 34,500 Buildings and equipment, net 60,000 85,500 105,000 135,000 Accounts payable 75,000 75,000 Common stock 25,000 Accumulated other comprehensive income 5,000 105,000



For illustrative purposes, Company S’s income statement has been made constant for each year of this example and is presented in Figure 4-2.

Figure 4-2: Income statement for Company S for each year (all amounts in dollars)

Revenues 96,000 Cost of revenues 42,000 Gross profit 54,000 Selling and administrative (including 6,000 of depreciation) 24,000 Net income 30,000

4.2.1 Consolidation at the acquisition date ASC 805 generally requires the acquirer to measure the identifiable assets acquired, the liabilities assumed and noncontrolling interest in the acquiree at their acquisition-date fair values if the acquiree meets ASC 805’s business definition. Except for the requirement to recognize goodwill, ASC 805’s provisions are also generally followed for initially recognizing consolidated variable interest entities under ASC 810-10’s Variable Interest Model.

Illustration 4-11: Consolidation at the acquisition date

The consolidation procedures illustrated in this example reflect the revaluation of the subsidiary’s assets and liabilities on the subsidiary’s financial statements. That is, this example assumes push down accounting is required pursuant to other literature.

Figure 4-3: Acquisition-date consolidating work paper to arrive at consolidated balance sheet, 1 January 20X1 (all amounts in dollars)

Company P

Company S Adjustments

Consolidated Debit Credit Cash – 3,000 3,000 Marketable securities – 12,000 12,000 Inventory – (1) 34,500 34,500 Buildings and equipment, net – (2) 85,500 85,500 Investment in Company S 45,000 – (3) 45,000 – Goodwill – (4) 4,286 4,286

Total assets 45,000 139,286 139,286 Accounts payable – 75,000 75,000 Debt 9,000 – 9,000

Total liabilities 9,000 75,000 84,000 Common stock 1,500 7,000 (5) 7,000 1,500 Additional paid-in capital 34,500 38,000 (5) 38,000 34,500 Retained earnings – – –

Total parent shareholders’ equity 36,000 45,000 36,000

Noncontrolling interest – (6) 19,286 19,286 Total equity 36,000 64,286 55,286

Total liabilities and equity 45,000 139,286 139,286



Figure 4-3 illustrates the elimination of Company P’s investment in Company S and allocation of the purchase price ($45,000) to the acquired assets, liabilities and noncontrolling interest, as follows:

(1) Inventory is measured at fair value.

(2) Buildings and equipment are measured at fair value.

(3) Company P’s investment in Company S is eliminated.

(4) Goodwill is determined by subtracting the fair value of Company S’s net identifiable assets from the fair value of Company S. As stated above, the fair value of Company S is $64,286. Because the fair value of Company S’s net identifiable assets is $60,000, goodwill is calculated to be $4,286. Although this comprehensive example does not illustrate goodwill impairment testing, if the goodwill was tested for impairment, 70% and 30% of the goodwill would be allocable to Company P and Company S, respectively, because no control premium is assumed in this example for simplicity (that is, the goodwill would be allocated to the controlling and noncontrolling interests proportionately). See also Section 4.1.4 for further discussion on allocating goodwill upon a change in a parent’s ownership interest.

(5) Company S’s equity accounts are eliminated.

(6) Noncontrolling interest is calculated by subtracting the fair value of Company S’s net assets acquired by Company P ($64,286 x 70% = $45,000) from Company S’s total net assets ($64,286). As indicated in note (4), no control premium has been assumed.

4.2.2 Consolidation in year of combination

Illustration 4-12: Consolidation in year of combination

Assume that on 31 December 20X1, Company S pays cash dividends of $36,000 and Company P’s share is $25,200. The fair value of Company S’s marketable securities at that date is $17,000. Company S’s income statement for the year ended 31 December 20X1 is based on the amounts in Figure 4-2 (which exclude the effects of push down adjustments).

Figure 4-4: Consolidating work paper to arrive at consolidated income statement, year of combination, 31 December 20X1 (all amounts in dollars)

Company P


Consolidated Debit Credit Revenues – 96,000 96,000 Cost of revenues – (7) 46,500 46,500 Gross profit – 49,500 49,500 Income from Investment in

Company S 16,065 – (8) 16,065 – Selling and administrative – (9) 26,550 26,550 Net income 16,065 22,950 22,950 Net income attributable to

noncontrolling interest – (10) 6,885 6,885 Net income attributable to

controlling interest 16,065 16,065 16,065



Importantly, consolidated net income includes the portion attributable to the noncontrolling interest. Figure 4-4 presents a consolidating work paper, which includes the following adjustments to arrive at the consolidated income statement in the year of combination:

(7) As noted in Figure 4-2, prior to push down accounting, Company S recognized 42,000 in cost of revenues. This example assumes that all acquisition-date inventory was sold. Therefore, to reflect push down accounting, cost of revenues has been adjusted to include the effects of the entry to measure inventory at fair value at the acquisition date (increase of $4,500).

(8) Income from Investment in Company S recognized by Company P ($22,950 x 70%) is eliminated.

(9) To reflect push down accounting, selling and administrative expenses includes additional depreciation because buildings and equipment were recognized at fair value at the acquisition date. As noted in Figure 4-2, prior to push down accounting, Company S recognized depreciation expense of $6,000 (on a beginning balance in buildings and equipment of $60,000). Accordingly, for purposes of this example, the equipment has a 10-year estimated useful life ($60,000 / $6,000). Applying this useful life to the excess fair value of buildings and equipment of $25,500 ($85,500 - $60,000) creates additional depreciation expense of $2,550 ($25,500 / 10), and total depreciation expense of $8,550.

(10) Because net income is attributed based on outstanding voting interests in this example, net income attributable to the controlling and noncontrolling interests is $16,065 ($22,950 x 70%) and $6,885 ($22,950 x 30%), respectively.

Figure 4-5: Consolidating work paper to arrive at consolidated balance sheet, year of combination, 31 December 20X1 (all amounts in dollars)

Company P


Consolidated Debit Credit Cash (11) 25,200 3,000 28,200 Marketable securities – 17,000 17,000 Inventory – 30,000 30,000 Buildings and equipment, net – (13) 76,950 76,950 Investment in Company S (12) 39,365 – (14) 39,365 – Goodwill – (15) 4,286 4,286

Total assets 64,565 131,236 156,436

Accounts payable – 75,000 75,000 Debt 9,000 – 9,000

Total liabilities 9,000 75,000 84,000 Common stock 1,500 7,000 (19) 7,000 1,500 Additional paid-in capital 34,500 38,000 (19) 38,000 34,500 Accumulated other comprehensive income

(16) 3,500 3,500 (20) 3,500 3,500

Retained earnings (deficit) (17) 16,065 (18) (9,135) (21) 9,135 16,065 Total parent shareholders’

equity 55,565 39,365 55,565 Noncontrolling interest – (22) 16,871 16,871 Total equity 55,565 56,236 72,436 Total liabilities and equity 64,565 131,236 156,436



Figure 4-5 presents a consolidating work paper, which includes the following adjustments to arrive at the 31 December 20X1 consolidated balance sheet:

(11) Cash is increased by $25,200 for the cash dividend received from Company S ($36,000 x 70%).

(12) The balance of the investment in Company S is adjusted for the earnings and dividends of the investee as follows:

Beginning balance $ 45,000 Attributed earnings 16,065 Attributed other comprehensive income 3,500 Attributed dividends (25,200) Ending balance $ 39,365

(13) Buildings and equipment are recorded at fair value (Item 2 in Figure 4-3), and reduced by the current year depreciation (Item 9 in Figure 4-4) ($85,500 — $8,550).

(16) Company P’s proportion of other comprehensive income from the increase in value of Company S’s marketable securities ($5,000 x 70%).

(17) Company P’s retained earnings reflects the attributed earnings from Company S (see calculation in Item 10 in Figure 4-4).

(18) Company S’s retained deficit reflects net income attributable to the controlling interest of $16,065 (Item 17), less cash dividends attributable to the controlling interest of $25,200 (Item 11).

(20) Elimination of Company S’s AOCI.

(21) Elimination of Company S’s retained deficit.

(22) Noncontrolling interest is rolled forward from 1 January 20X1 (see Figure 4-3), as follows:


Items (14), (15) and (19) are consistent with Items (3), (4) and (5), respectively, in the acquisition-date consolidating balance sheet work paper in Figure 4-3 of Illustration 4-11.

4.2.3 Consolidation after purchasing an additional interest

Illustration 4-13: Consolidation after purchasing an additional interest

Assume that on 1 January 20X2, Company P borrows $18,000 and uses that cash, plus $21,000 of the cash from the cash dividend received from Company S, to purchase for $39,000 an additional 20% interest (2,000 shares) in Company S, bringing its total interest to 90% (9,000 shares). The fair value of Company S’s net assets at the date of the additional investment by Company P is $75,000 (20% of which is $15,000).



Figure 4-6: Consolidating work paper to arrive at consolidated balance sheet, 1 January 20X2 (all amounts in dollars)

Company P



Total assets 54,812 131,236 135,436

Accounts payable – 75,000 75,000 Debt (28) 27,000 – 27,000

Total liabilities 27,000 75,000 102,000 Common stock 1,500 (35) 9,000 (32) 9,000 1,500 Additional paid-in capital (35) 5,747 (35) 46,247 (32) 46,247 5,747 Accumulated other comprehensive income (29) 4,500 (35) 4,500 (33) 4,500 4,500 Retained earnings (deficit) (30) 16,065 (31) (9,135) (34) 9,135 16,065




Once a company obtains control, subsequent purchases and sales of noncontrolling interests when the company maintains control are accounted for as equity transactions in consolidation. Therefore, the 1 January 20X2 consolidated balance sheet work paper in Figure 4-6 reflects the following adjustments:

(23) The cash balance is calculated as follows:

Beginning balance $ 25,200 Cash received from loan 18,000 Cash paid for additional interest (39,000) Ending balance $ 4,200

(24) The investment in Company S is increased for the purchase of an additional interest in Company S:

Beginning balance $ 39,365 Additional proportionate interest in net assets purchased 11,247 Ending balance $ 50,612

(28) Company P incurred additional debt of $18,000 to partially fund the purchase of the additional interest in Company S, resulting in a balance of $27,000 ($9,000 +$18,000). (See also Item 35 below).

(29) AOCI of Company P is increased from $3,500 to $4,500 to reflect the portion of the AOCI that was purchased from the noncontrolling interest and is now attributable to Company P ($5,000 x 20%).

(35) APIC of Company P is reduced by $28,753, resulting in a balance of $5,747 ($34,500 — $28,753).



In summary, the adjustment recorded by Company P for this transaction is as follows:

Investment in Company S (Item 24) $ 11,247

APIC 28,753

Cash (Item 23) $ 21,000

Debt (Items 23 and 28) 18,000

AOCI (Item 29) 1,000

Common stock of Company S increases from $7,000 to $9,000, to reflect the acquisition of 2,000 shares of $1 par stock. Further, APIC of Company S increases by $8,247, resulting in a balance of $46,247 ($38,000 + $8,247).

In addition, AOCI of Company S is increased from $3,500 to $4,500 to reflect the portion of the AOCI that was purchased from the noncontrolling interest and is now attributable to Company P ($5,000 x 20%).

The 31 December 20X1 balance for noncontrolling interest of Company S was $16,871 (see Figure 4-5). This amount represented a 30% interest in Company S. Company P purchased an additional 20% interest in Company S from the noncontrolling interest holders, which was equivalent to two-thirds of this balance ($16,871 x 2/3 = $11,247). Accordingly, the noncontrolling interest balance is reduced by $11,247, resulting in a balance of $5,624 ($16,871 — $11,247).7

In summary, the adjustment recorded by Company S for this transaction is as follows:

Noncontrolling interest $ 11,247

AOCI $ 1,000

Common stock 2,000

APIC 8,247

Items (25) through (27) and (30) through (34) are consistent with Items (13) through (15) and (17) through (21) in Figure 4-5 of Illustration 4-12.

4.2.4 Consolidation in year 2 Illustration 4-14: Consolidation in year 2

Assume that on 31 December 20X2, Company S pays cash dividends of $36,000, including $32,400 to Company P. The current market value of Company S’s marketable securities has decreased to $15,500.

Figure 4-7: Consolidating work paper to arrive at consolidated income statement for year ended 31 December 20X2 (all amounts in dollars)

Company P Company S Adjustments Consolidated

7 In this example, the adjustment to the carrying amount of noncontrolling interest is determined by comparing the percentage change in the parent’s ownership interest to the percentage owned by the noncontrolling interest holders on the date of the transaction. An alternative method to calculate this adjustment would be to apply the percentage change in the parent’s ownership interest to the total carrying amount of the subsidiary’s net assets as of the date of the transaction. However, determining the carrying amount of a subsidiary’s net assets for this calculation may be difficult. For example, the entity may not apply push down accounting or may not allocate certain intercompany eliminations to the subsidiary in its accounting records. In these circumstances, deriving the adjustment using the method reflected in this example may be more practical.



Debit Credit Revenues – 96,000 96,000 Cost of revenues – 42,000 42,000 Gross profit – 54,000 54,000 Income from investment in



controlling interest 24,705 (38) 24,705 24,705

Figure 4-7 presents the consolidating work paper, which includes the following adjustments to arrive at the 31 December 20X2 income statement:

(38) Net income is attributed to the controlling and noncontrolling interests based on ownership. The controlling and noncontrolling interests own 90% and 10% of the outstanding stock, respectively. Thus, net income attributable to the controlling and noncontrolling interests is $24,705 ($27,450 x 90%) and $2,745 ($27,450 x 10%), respectively.

See Figure 4-4 of Illustration 4-12, Items (8) and (9), for descriptions of Items (36) and (37), respectively.

Figure 4-8: Consolidating work paper to arrive at consolidated balance sheet, 31 December 20X2 (all amounts in dollars)

Company P




Total liabilities 27,000 75,000 102,000 Common stock 1,500 9,000 (47) 9,000 1,500 Additional paid-in capital 5,747 46,247 (48) 46,247 5,747 Accumulated other comprehensive income (44) 3,150 (48) 3,150 (49) 3,150 3,150 Retained earnings (deficit) (45) 40,770 (46) (16,830) (50) 16,830 40,770






Figure 4-8 presents the consolidating work paper to arrive at the year-end consolidated balance sheet in the year in which the additional interest was purchased, and includes the following adjustments:

(39) The parent received $32,400 as a cash dividend from Company S ($36,000 x 90%). The cash balance is as follows:

Beginning balance $ 4,200 Dividends received 32,400 Ending balance $ 36,600

(40) The investment in Company S was adjusted for the earnings and dividends of the investee:

Beginning balance (after purchase of additional interest) $ 50,612 Attributed earnings 24,705 Attributed other comprehensive loss (1,350) Attributed dividends (32,400) Ending balance $ 41,567

(44) Company P recognized its proportion of other comprehensive loss for the year (from the decrease in value of Company S’s marketable securities) ($1,500 x 90%). This amount was subtracted from last year’s balance ($4,500 — $1,350) to arrive at Company P’s AOCI. For this example, Company P has no comprehensive income other than its proportionate share of Company S’s comprehensive income.

(45) Retained earnings for Company P reflect the attributed earnings from Company S. Although a statement of shareholders’ equity would generally be presented, for illustrative purposes, the statement has been excluded. A rollforward of retained earnings follows:

Beginning balance $ 16,065 Earnings recognized on investment in Company S 24,705 Ending balance $ 40,770

(46) Retained deficit for Company S is rolled forward as follows:

Beginning balance $ (9,135) Net income 24,705 Dividends declared (32,400) Ending balance $ (16,830)

(51) Noncontrolling interest is calculated by rolling forward the balance from 1 January 20X2 (see Figure 4-6), as follows:

Beginning balance $ 5,624 Attributed earnings 2,745 Attributed other comprehensive loss (150) Attributed dividends (3,600) Ending balance $ 4,619

Items (41) through (43) and (47) through (50) are consistent with Items (25) through (27) and (32) through (35) in the prior year in Figure 4-6 of Illustration 4-13.



4.2.5 Consolidation after selling an interest without loss of control

Illustration 4-15: Consolidation after selling an interest without loss of control

Assume that on 1 January 20X3, Company P sells a 30% interest (3,000 shares) in Company S for $22,500 cash, decreasing its total interest to 60% (6,000 shares).

Figure 4-9: Consolidating work paper to arrive at consolidated balance sheet, 1 January 20X3 (all amounts in dollars)

Company P




Total liabilities 27,000 75,000 102,000 Common stock 1,500 (64) 6,000 (60) 6,000 1,500 Additional paid-in capital (64) 15,440 (64) 36,440 (60) 36,440 15,440 Accumulated other comprehensive income (57) 2,100 (62) 2,100 (63) 2,100 2,100 Retained earnings (deficit) (58) 40,770 (59) (16,830) (61) 16,830 40,770




Once a company obtains control, purchases and sales of noncontrolling interests are accounted for as equity transactions. Therefore, the 1 January 20X3 consolidated balance sheet work paper in Figure 4-9 reflects the following adjustments:

(52) The cash balance rollforward is as follows:

Beginning balance $ 36,600 Cash received from sale (see also Item 64 below) 22,500 Ending balance $ 59,100

(53) The investment in Company S adjusted for the sale of a partial interest in Company S is as follows:

Beginning balance $ 41,567 Proportionate interest in net assets sold (see also Item 64 below) (13,857) Ending balance $ 27,710

(62) The 31 December 20X2 balance for noncontrolling interest was $4,619. This amount represented a 10% interest in Company S. Company P sold a 30% interest in Company S, which was equivalent to three times this balance. Accordingly, the noncontrolling interest balance is adjusted to $18,476 ($4,619 + $13,857).8

8 Refer also to footnote 6 in Illustration 4-13.



In addition, AOCI is adjusted to reflect the portion of the AOCI that was sold ($1,050) and is no longer attributable to Company P ($3,500 x 30%).

(63) This eliminates the accumulated other comprehensive income of Company S.

(64) The APIC of Company P increases by $9,693, resulting in a balance of $15,440 ($5,747 + $9,693).

In summary, the adjustment recorded by Company P for the change in ownership transaction is as follows:

Cash (Item 52) $ 22,500


Investment in Company S (Item 53) $ 13,857

APIC 9,693

Common stock of Company S decreases from $9,000 to $6,000, to reflect the sale of 3,000 shares of $1 par stock. Further, APIC of Company S decreases by $9,807, resulting in a balance of $36,440 ($46,247 - $9,807).

In summary, the adjustment recorded by Company S for the change in ownership transaction is as follows:

Common stock $ 3,000


APIC 9,807

Noncontrolling interest (Item 62) $ 13,857

Items (54) through (62) are consistent with (41) through (48), and (50) in the prior year in Figure 4-8 of Illustration 4-14.

4.2.6 Consolidation in year 3

Illustration 4-16: Consolidation in year 3

On 31 December 20X3, Company S pays cash dividends of $36,000, including $21,600 to Company P. The fair value of Company S’s marketable securities has increased to $17,500.

Figure 4-10: Consolidating work paper to arrive at consolidated income statement, for year ended 31 December 20X3 (all amounts in dollars)

Company P


Consolidated Debit Credit Revenues – 96,000 96,000 Cost of revenues – 42,000 42,000 Gross profit – 54,000 54,000 Income from investment in






Figure 4-10 presents the consolidating work paper to arrive at the 31 December 20X3 income statement, and includes the following adjustments:

(67) Net income is attributed to the controlling and noncontrolling interest based on ownership interests. The controlling and noncontrolling interests own 60% and 40% of the outstanding stock, respectively. Net income attributable to the controlling and noncontrolling interests is $16,470 ($27,450 x 60%) and $10,980 ($27,450 x 40%), respectively.

See Figure 4-4 of Illustration 4-13, Items (8) and (9), for explanations of Items (65) and (66), respectively.


Company P




Total liabilities 27,000 75,000 102,000 Common stock 1,500 6,000 (76) 6,000 1,500 Additional paid-in capital (77) 15,440 (79) 36,440 (77) 36,440 15,440 Accumulated other

comprehensive income (73) 3,300 3,300 (78) 3,300 3,300 Retained earnings (deficit) (74) 57,240 (75) (21,960) (80) 21,960 57,240




Figure 4-11 presents the consolidating work paper to arrive at the balance sheet as of 31 December 20X3, and includes the following adjustments:

(68) Company P received $21,600 as a cash dividend from Company S ($36,000 x 60%). The cash balance rollforward is as follows:

Beginning balance $ 59,100 Dividend received 21,600 Ending balance $ 80,700

(69) The rollforward of the investment in Company S, adjusted for earnings and dividends is as follows:




(73) Company P recognized its proportion of other comprehensive income for the year (from the increase in value of Company S’s marketable securities) ($2,000 x 60%), which was added to last year’s balance of $2,100.

(74) Retained earnings for Company P reflect the attributed earnings from Company S. Although a statement of shareholders’ equity would generally be presented, for illustrative purposes the statement has been excluded. A rollforward of retained earnings is as follows:

Beginning balance $ 40,770 Earnings recognized of Company S 16,470 Ending balance $ 57,240

(75) Retained deficit for Company S is rolled forward as follows:

Beginning balance $ (16,830) Net income 16,470 Dividends declared (21,600) Ending balance $ (21,960)

(78) To eliminate the AOCI of Company S ($5,500), as well as last year’s adjustment related to the sale of a partial interest in Company S ($1,050).

(81) The rollforward of the noncontrolling interest balance from 1 January 20X3 (see Figure 4-9), as follows:

Beginning balance $ 18,476 Attributed earnings 10,980 Attributed other comprehensive income 800 Attributed dividends (14,400) Ending balance $ 15,856

Items (70) through (72), (76), (77), (79) and (80) are consistent with Items (54) through (56), (60) through (62), and (64) in Figure 4-9 of Illustration 4-15.


5 Intercompany eliminations

5.1 Procedures for eliminating intercompany balances and transactions Excerpt from Accounting Standards Codification Consolidation — Overall


Procedures

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).

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.

810-10-45-4 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.

810-10-45-8 If income taxes have been paid on intra-entity profits on assets remaining within the consolidated group, those taxes shall be deferred or the intra-entity profits to be eliminated in consolidation shall be appropriately reduced.

An entity required to consolidate another entity must apply consolidation procedures to present the results of operations and financial position of the group (that is, the parent and the entities required to be consolidated) as a single consolidated entity. Only transactions and ownership interests with parties outside the consolidated group are presented. Therefore, the separate financial statements of each entity are combined and adjusted to eliminate intercompany transactions and ownership interests. This is consistent with the economic entity concept.

Consolidated financial statements should not include any intercompany receivables, payables, investments, capital, revenues, costs of sales or profits or losses between the entities within the consolidated group. Any intercompany profit or loss on assets or liabilities remaining within the consolidated entity should be eliminated, resulting in the carrying value of the assets and liabilities being adjusted to the historical carrying value that existed before the intercompany transaction.



The elimination of intercompany receivables and payables is not complex if balance sheet date cut-offs for intercompany transactions are consistent among entities within the consolidated group. If inventories or other assets of a consolidated group are transferred between members of the consolidated group, intercompany revenues, cost of sales and profit or loss recorded by the transferor should be eliminated in consolidation.

The goal of intercompany income elimination is to remove the income (or loss) arising from transactions between companies within the consolidated entity and to adjust the carrying amount of the assets to their historical cost basis (as compared with the intercompany asset transfer price basis) of the transferred asset in the consolidated financial statements. This practice is continued until the income is realized through a sale to outside parties or, in the case of depreciable assets, the asset is depreciated over its estimated useful life.

The elimination of intercompany losses should be consistent with the elimination of intercompany profits. If losses have been recognized on inventory acquired in an intercompany transaction, those losses must be eliminated to state the inventory in the consolidated statement of financial position at its cost to the consolidated entity. Careful consideration should be given to the lower-of-cost-or-market test of inventory for the purchasing company. The market value of the inventory must not be less than the selling company’s cost. If the market value is exceeded by the consolidated inventory cost, the loss that would have otherwise been eliminated in consolidation should be adjusted downward. That is, intercompany losses should not be eliminated if they represent a lower-of-cost-or-market adjustment.

US GAAP provides a limited exception to these general principles on intercompany eliminations. Under ASC 980-810-45-1 and -2, if an inventory sale is from a non-regulated subsidiary to a regulated subsidiary (as defined in ASC 980), profits on these sales should not be eliminated in consolidation, if certain conditions are met.

5.1.1 Effect of noncontrolling interest on elimination of intercompany amounts Excerpt from Accounting Standards Codification Consolidation — Overall


Procedures

810-10-45-18 The amount of intra-entity income or loss to be eliminated 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.”

When eliminating intercompany profits, the existence of a noncontrolling interest in the consolidated group creates complexities. ASC 810-10-45-18 provides guidance for preparing consolidated financial statements, including the treatment of noncontrolling interest.

ASC 810 provides for no distinction between wholly owned and partially owned entities with respect to the need for the elimination of intercompany transactions. In both cases, all transactions with members of the consolidated group are considered internal transactions that must be eliminated fully, regardless of the percentage ownership.



Because individual companies in a consolidated group generally record transactions with members of the consolidated group in a manner similar to transactions with entities outside of the group, sales, cost of goods sold and profit may be recognized by the selling entity even though there has not been a transaction outside of the consolidated group. Because income cannot be recognized by the consolidated group until it has been realized in a transaction with a third party, there may be unrealized intercompany profit or loss requiring elimination.

Because noncontrolling interest is a component of equity, transfers of assets between entities in the consolidated group are accounted for as internal transfers for which no earnings are recognized until they are realized through an exchange transaction with a party outside of the consolidated group.

Unrealized intercompany income and losses are always eliminated fully in preparing consolidated financial statements. While the entire amount must be eliminated, the entity must sometimes determine how that elimination should be allocated between the controlling and noncontrolling interests.

When a sale is from a parent to a subsidiary (downstream transaction), profit or loss is recognized by the parent. We believe the full amount of the elimination of the intercompany profit or loss should be against the controlling interest. Otherwise, the parent would continue to recognize a portion of the unrealized income or loss in income even though ASC 810-10-45-1 requires intercompany transactions to be eliminated fully.

When a subsidiary sells to the parent (upstream transaction) and intercompany profit or loss arises, the profit or loss may be eliminated against the controlling and noncontrolling interest proportionately.

In either case, the amount of profit eliminated from the consolidated carrying amount of the asset is not affected by the existence of noncontrolling interest in the subsidiary.

Variable interest entities Question 5.1 How should intercompany eliminations be attributed to the noncontrolling interests for consolidated

variable interest entities?

The principles described above (see Section 5.1.1) and reflected in the illustrations apply to all consolidated entities, including variable interest entities. It is common for variable interest entities to have substantive profit sharing arrangements and therefore the use of relative ownership percentages may not always be appropriate. Our FRD publication, Consolidation and the Variable Interest Model, provides more guidance and examples on attributing intercompany eliminations to noncontrolling interests.

5.1.2 Subsidiary ownership interest in its parent in the consolidated financial statements Excerpt from Accounting Standards Codification Consolidation — Overall


Procedures

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.



Shares of the parent held by a subsidiary should not be reflected as outstanding shares in consolidated financial statements of the parent. Instead, they should be reflected as treasury shares in the consolidated financial statements. When there are noncontrolling interests in the subsidiary that holds the treasury shares, the noncontrolling interest holders have an interest in the earnings or losses of the parent. Thus, the subsidiary's equity in the earnings or losses of the parent company should be included in determining the noncontrolling interest in the subsidiary.

Illustration 5-1: Presentation of a subsidiary ownership interest in its parent in consolidated financial statements

Assume that P owns 80% of S, and S owns 10% of P. Net income of P and S is $200,000 and $100,000, respectively. In the consolidated financial statements of P, income attributable to the noncontrolling interest (and increase to the noncontrolling interest account on the balance sheet) would be calculated as follows:

Net income of P $ 200,000 S ownership percentage in P 10% S interest in net income of P 20,000 Noncontrolling ownership percentage in S 20% $ 4,000 Net income of S 100,000 Noncontrolling ownership percentage in S 20% 20,000 Total income attributable to the noncontrolling interest $ 24,000

5.1.2.1 Subsidiary ownership interest in its parent in the subsidiary’s separate financial statements

While ASC 810-10 addresses the accounting for a subsidiary investment in the parent in the consolidated financial statements, it does not address the accounting for such an investment in the separate financial statements of the subsidiary. Although a consensus was not reached, EITF 98-2 stated that a subsidiary should disclose its policy with regard to the accounting for investments in the stock of its parent or investor. Generally, we believe an investment of a subsidiary in the stock of its parent should be treated in a manner similar to treasury stock. That is, we believe the subsidiary should present the investment as a contra-equity account in its separate financial statements, which is consistent with the tentative conclusion reached in EITF 98-2.

5.1.3 Intercompany derivative transactions ASC 815 allows intercompany transactions to be used in hedging relationships, if certain conditions are met. See Chapter 7 of our FRD publication, Derivatives and hedging, for more information.

5.2 Comprehensive example The following example illustrates certain procedures for eliminating intercompany balances and transactions. Work paper adjusting entries are numbered sequentially.

Illustration 5-2: Parent sells to a majority-owned subsidiary (downstream transaction)

In a transaction in which a parent sells inventory to a majority-owned subsidiary, and some or all of the inventory remains on hand at a period-end, ASC 810 requires that the full amount of the profit arising from the intercompany transaction related to the inventory remaining on hand be eliminated against the parent’s interest and eliminated from the carrying amount of the asset. That is, because only the parent has recognized the revenues, costs of sale, and resultant profit and loss in its financial statements, no portion of these items may be allocated to noncontrolling interests.



Assume that Company P owns an 80% interest in Company S.

The 1 January 20X6, beginning-of-year balance sheets for Company P and Company S are as follows (all amounts in dollars):

Company P Company S Cash – 300,000 Inventory 200,000 50,000 Buildings and equipment, net – 150,000 Investment in Company S 400,000 – Total assets 600,000 500,000 Current liabilities 100,000 – Common stock 200,000 400,000 Retained earnings 300,000 – Noncontrolling interest – 100,000 Total liabilities and equity 600,000 500,000

Now assume that, during the year, Company P sells inventory to Company S. A summary of the effect of the transaction on Company P’s income statement is as follows:

Revenues $ 100,000 Cost of sales 70,000 Gross profit $ 30,000

Also assume that the inventory sale is the only transaction between Company P and Company S during 20X6. Further, the inventory remains on hand at Company S at year-end. Before consolidation, Company P accounts for its investment in Company S by recognizing its proportionate share of the carrying amount of the net assets of Company S, including its proportionate share of comprehensive income and losses and dividends.


Company P Company S Adjustments

Consolidated Debit Credit Revenues 500,000 270,000 (1) 100,000 670,000 Cost of revenues 200,000 100,000 (1) 70,000 230,000 Gross profit 300,000 170,000 440,000 Selling and administrative 100,000 20,000 120,000 Income from investment in

Company S 120,000

(2) 120,000

–

Net income 320,000 150,000 320,000 Net income attributable to

noncontrolling interest

– (3) 30,000 30,000 Net income attributable to

controlling interest

320,000 120,000 290,000

Figure 5-1 illustrates the elimination of intercompany transactions between Company P and Company S for the consolidated income statement, as follows:

(1) Intercompany revenue and intercompany cost of revenue from the downstream sale are eliminated.

(2) Intercompany income from investment recognized by Company P ($150,000 x 80%) is eliminated.

(3) Net income of Company S is attributed to the noncontrolling interest ($150,000 x 20%).




Adjustments Company P Company S Debit Credit Consolidated

Cash 200,000 450,000 650,000 Intercompany receivable 100,000 – (4) 100,000 – Inventory 200,000 150,000 (5) 30,000 320,000 Buildings and equipment, net – 150,000 150,000 Investment in Company S 520,000 – (6) 520,000 –

Total assets 1,020,000 750,000 1,120,000

Current liabilities 200,000 – 200,000 Intercompany payable – 100,000 (4) 100,000 –

Total liabilities 200,000 100,000 200,000 Common stock 200,000 400,000 (7) 400,000 200,000 Retained earnings (9) 620,000 120,000 (8) 150,000 590,000

Total parent shareholders’ equity

820,000 520,000 790,000


Total liabilities and equity 1,020,000 750,000 1,120,000

Figure 5-2 illustrates the elimination of intercompany transactions between Company P and Company S for the consolidated balance sheet, as follows:

(4) Intercompany receivable and payable from the downstream sale are eliminated.

(5) Intercompany profit remaining in inventory at year-end from the downstream sale is eliminated.

(6) Company P’s investment in Company S is eliminated.

(7) Company S’s common stock is eliminated.

(8) Company S’s retained earnings balance is eliminated ($120,000) and the intercompany profit on the downstream sale recognized by Company P is eliminated ($30,000).

(9) A rollforward of retained earnings is as follows:

Beginning balance $ 300,000 Current year earnings of Company P 320,000 Ending balance $ 620,000

(10) Noncontrolling interest is recognized at its initial balance of $100,000 ($500,000 x 20%) plus its proportionate share of income from Company S ($30,000).

Under the economic unit concept, 100% of intercompany sales, receivables, payables, purchases, cost of sales and unrealized intercompany profits and losses are eliminated. Profits and losses on downstream transactions are eliminated completely against the controlling interest.



No profit accrues to the stockholders of the selling entity under the economic unit concept because both the controlling and noncontrolling interests are owners of a single economic unit (albeit with different claims on the entity’s assets). After incorporating elimination entries, transfers of inventory are to be accounted for on the same basis as internal transfers between departments of a single entity at cost.

Illustration 5-3: Majority-owned subsidiary sells to parent (upstream transaction)

Assume the same facts as in Illustration 5-2, except that instead of the downstream transaction, S sells to P inventory that remains in P’s inventory at year-end. A summary of the result of the transaction on S’s income statement is as follows:

Revenues $ 100,000 Cost of sales 70,000 Gross profit $ 30,000

Under the economic unit concept, the transfer of inventory between a subsidiary and its parent is viewed as a transfer between departments or divisions/components of a single entity. When a subsidiary sells inventory to its parent, under ASC 810 the unrealized profit may be proportionately eliminated against the parent’s interest and the noncontrolling interest.



Consolidated Debit Credit Revenues 500,000 270,000 (11) 100,000 670,000 Cost of revenues 200,000 100,000 (11) 70,000 230,000 Gross profit 300,000 170,000 440,000 Selling and administrative 100,000 20,000 120,000 Income from investment in

Company S 120,000 (12) 120,000 – Net income 320,000 150,000 320,000 Net income attributable to

noncontrolling interest – 30,000 (13) 6,000 24,000 Net income attributable to



(13) The noncontrolling interest’s proportionate share of the elimination of the intercompany transaction ($30,000 x 20%) is attributed to the noncontrolling interest.

For explanations of Items (11) and (12), see Items (1) and (2), respectively, in Figure 5-1.




Company P

Company S

Adjustments Debit Credit Consolidated

Cash 300,000 350,000 650,000 Intercompany receivable – 100,000 (14) 100,000 – Inventory 200,000 150,000 (15) 30,000 320,000 Building, net – 150,000 150,000 Investment in Company S 520,000 – (16) 520,000 –

Total assets 1,020,000 750,000 1,120,000

Current liabilities 100,000 100,000 200,000 Intercompany payable 100,000 – (14) 100,000 –

Total liabilities 200,000 100,000 200,000 Common stock 200,000 400,000 (17) 400,000 200,000 Retained earnings 620,000 120,000 (18) 150,000 (19) 6,000 596,000


820,000 520,000 796,000

Noncontrolling interest – 130,000 (20) 6,000 124,000 Total equity 820,000 650,000 920,000

Total liabilities and equity 1,020,000 750,000 1,120,000


(19) This entry represents a reclassification adjustment to the noncontrolling interest for its proportionate share of the intercompany profit elimination (30,000 x 20%). Since the entire effect of eliminating the intercompany profit on the upstream sale ($30,000) has been attributed to the controlling interest via Item (18), the noncontrolling interest’s proportionate share must be reclassified via this entry. See Item (20) below for the other side of the reclassification.

(20) The noncontrolling interest’s proportionate share of the elimination of the intercompany transaction ($30,000 x 20%) is attributed to the noncontrolling interest.

For explanations of Items (14) — (18), see Items (4) — (8) in Figure 5-2.

The net income attributable to the controlling interest in Illustration 5-3 exceeds the net income attributable to the controlling interest in Illustration 5-2 by $6,000 because a portion of the elimination of the unrealized income, which is reflected in the subsidiary with the noncontrolling interest, has been allocated to the noncontrolling interest ($30,000 x 20% = $6,000). Net income of the consolidated entity is the same in both examples because of the requirement to fully eliminate the intercompany income or loss.

As described in Illustration 5-2, under the economic entity concept, 100% of intercompany sales, receivables, payables, purchases, cost of sales and unrealized intercompany profits and losses are eliminated. Profits and losses are eliminated in proportion to the interests in the selling entity.



No profit accrues to the stockholders of the selling entity under the economic entity concept because both the controlling and noncontrolling interests are owners of a single economic entity (albeit with different claims on the entity’s net assets). After incorporating elimination entries, transfers of inventory are to be accounted for on the same basis as internal transfers between departments of a single entity at cost.

Illustration 5-4: Parent makes an intercompany loan to a majority-owned subsidiary and the interest is expensed

Assume the same facts as in Illustration 5-2, except:

• On 1 January 2006, P makes an intercompany loan to S for $1,000,000 with an annual interest rate of 10%.

• S expenses the current-year interest on the intercompany loan and remits cash to P for the annual interest incurred on the intercompany loan.

• The loan is the only transaction between P and S during 20X6 (that is, the intercompany sales described in Illustration 5-2 did not occur).



Consolidated Debit Credit Revenues 500,000 270,000 770,000 Cost of revenues 200,000 100,000 300,000 Gross profit 300,000 170,000 470,000 Selling and administrative 100,000 20,000 120,000 Interest income 100,000 – (21) 100,000 – Interest expense – 100,000 (21) 100,000 – Income from investment in

Company S 40,000 (21) 40,000 – Net income 340,000 50,000 350,000 Net income attributable to




(21) Intercompany interest income, intercompany interest expense, and income from investment in Company S are eliminated.

(22) Net income of Company S is attributed to the noncontrolling interest.




Company P

Company S


Cash 300,000 1,350,000 1,650,000 Inventory 200,000 150,000 350,000 Buildings and equipment, net – 150,000 150,000 Intercompany loan 1,000,000 – (23) 1,000,000 – Investment in Company S 440,000 – (24) 440,000 –

Total assets 1,940,000 1,650,000 2,150,000

Current liabilities 1,100,000 100,000 1,200,000 Intercompany loan – 1,000,000 (23) 1,000,000 –

Total liabilities 1,100,000 1,100,000 1,200,000 Common stock 200,000 400,000 (25) 400,000 200,000 Retained earnings (27) 640,000 40,000 (26) 40,000 640,000


840,000 440,000 840,000


Total liabilities and equity 1,940,000 1,650,000 2,150,000


(23) Intercompany loan is eliminated.

(27) A rollforward of retained earnings is as follows:

Beginning balance $ 300,000 Current year earnings of Company P 340,000 Ending balance $ 640,000

(28) Noncontrolling interest is recognized at its initial balance of $100,000 plus its proportionate share of income from Company S ($10,000).

For explanations of Items (24) through (26), see Items (6) through (8) in Figure 5-2.

Before taking into consideration the noncontrolling interest in S, the elimination of the intercompany interest income and expense has no effect on the combined net income of P and S. However, because S has absorbed an expense of $100,000, P receives the benefit of the interest to the extent of the noncontrolling interest. This benefit is realized immediately because S recorded the full amount of the interest as a current period expense.



Illustration 5-5: Parent makes an intercompany loan to a majority-owned subsidiary and the interest is capitalized


• During the year, P makes an intercompany loan to S with a principal amount of $1,000,000 and an annual interest rate of 10%. The proceeds of the loan are used to construct a building.

• S capitalizes the current-year interest on the intercompany loan as part of the cost of the building and remits cash to P for the annual interest incurred on the intercompany loan.

• The loan is the only transaction between P and S during 20X6 (that is, the intercompany sales described in Illustration 5-2 did not occur).



Consolidated Debit Credit Revenues 500,000 270,000 770,000 Cost of revenues 200,000 100,000 300,000 Gross profit 300,000 170,000 470,000 Selling and administrative 100,000 20,000 120,000 Interest income 100,000 – (29) 100,000 – Interest expense – – – Income from investment in

Company S 120,000 – (29) 120,000 – Net income 420,000 150,000 350,000 Net income attributable to




(29) Interest income on the intercompany loan recognized by Company P and income from investment in Company S are eliminated.



Company P

Company S


Cash 300,000 350,000 650,000 Inventory 200,000 150,000 350,000 Buildings and equipment, net – 1,250,000 (31) 100,000 1,150,000 Intercompany loan 1,000,000 – (32) 1,000,000 – Investment in Company S 520,000 – (33) 520,000 –

Total assets 2,020,000 1,750,000 2,150,000 Current liabilities 1,100,000 100,000 1,200,000 Intercompany loan – 1,000,000 (32) 1,000,000 –

Total liabilities 1,100,000 1,100,000 1,200,000 Common stock 200,000 400,000 (34) 400,000 200,000 Retained earnings (36) 720,000 120,000 (35) 220,000 620,000


920,000 520,000 820,000






(31) Capitalized interest from outstanding intercompany loan is eliminated.

(32) The intercompany loan is eliminated.

(35) The retained earnings attributable to the controlling interest of Company S are eliminated ($150,000 x 80%), and the interest income recognized by Company P on the intercompany loan is eliminated ($100,000).

(36) Company P recognizes its proportionate share (80%) of income from Company S ($150,000 x 80%). A roll forward of this account is as follows:

Beginning balance $ 600,000 Attributable share of Company S net income 120,000 Ending balance $ 720,000


For explanations of Items (33) and (34), see Items (6) and (7), respectively, in Figure 5-2.

Because S has capitalized the intercompany interest expense it paid as part of the cost of the building, the interest has not been expensed in the income statement of S. P does not receive any benefit of the interest income until the expense is recognized, which will occur as the building is depreciated by S.

Year 2

In Year 2, assume S depreciates the newly constructed building over 10 years, which results in annual depreciation expense of $125,000 ($1,250,000 / 10 years = $125,000) that is included in S’s cost of revenues. This amount includes $10,000 of excess depreciation, resulting from the capitalization of intercompany interest in Year 1 ($100,000/10 years). Also, to simplify the example, assume that (1) P had no other transactions during Year 2 and (2) S does not incur any additional interest expense in Year 2.



Consolidated Debit Credit Revenues – 400,000 400,000 Cost of revenues – 250,000 (38) 10,000 240,000 Gross profit – 150,000 160,000 Income from investment in




Figure 5-9 illustrates the elimination of intercompany transactions between Company P and Company S for the Year 2 consolidated income statement, as follows:

(38) The excess depreciation from the capitalized interest on the intercompany loan ($10,000) and income from investment in Company S ($120,000) are eliminated.





Figure 5-10 illustrates the elimination of intercompany transactions between Company P and Company S for the consolidated balance sheet in Year 2, as follows:

(40) Capitalized interest expense from the prior year ($100,000) less current-year depreciation ($10,000) is eliminated.

(45) Retained earnings are eliminated for the prior year’s recognition of interest income ($100,000) by Company P.

(46) Current-year attributable share of income from Company S ($150,000 x 80%) is added to retained earnings. A roll forward of this account is as follows:

Beginning balance $ 720,000 Attributable share of Company S net income 120,000 Ending balance $ 840,000

(47) Excess depreciation from the capitalized interest on the intercompany loan is eliminated (see item (39) on Figure 5-9).

(48) Noncontrolling interest is recognized at its initial balance of $100,000 plus its proportionate share of income from Company S of $30,000 for both Years 1 and 2.

For explanations of Items (41) and (44), see Items (32) and (35) in Figure 5-8, respectively. For explanations of Items (42) and (43), see Items (6) and (7) in Figure 5-2.


Cash 300,000 625,000 925,000 Inventory 200,000 150,000 350,000 Buildings and equipment, net – 1,125,000 (40) 90,000 1,035,000 Intercompany loan 1,000,000 – (41) 1,000,000 – Investment in Company S 640,000 – (42) 640,000 –

Total assets 2,140,000 1,900,000 2,310,000

Current liabilities 1,100,000 100,000 1,200,000 Intercompany loan – 1,000,000 (41) 1,000,000 –

Total Liabilities 1,100,000 1,100,000 1,200,000 Common stock 200,000 400,000 (43) 400,000 200,000 Retained earnings (46) 840,000 240,000 (44) 240,000 750,000 (45) 100,000 (47) 10,000


1,040,000 640,000 950,000

Noncontrolling interest – (48) 160,000 160,000 Total equity 1,040,000 800,000 1,110,000




Illustration 5-6: Parent charges subsidiary a management fee


• During the year, Company P charges Company S a management fee of $1,500 for its accounting and finance services.

• The management fee is the result of a contractual arrangement negotiated between P and S.

• The management fee is the only transaction between P and S during 20X6 (that is, the intercompany sales described in Illustration 5-2 did not occur).



Consolidated Debit Credit Revenues 500,000 270,000 770,000 Cost of revenues 200,000 100,000 300,000 Gross profit 300,000 170,000 470,000 Selling and administrative 100,000 20,000 120,000 Intercompany expense – 1,500 (49) 1,500 – Intercompany revenue 1,500 – (49) 1,500 – Income from investment in





(49) Intercompany revenue and expense resulting from the management fee of $1,500 paid to Company P and income from investment in Company S are eliminated.

(50) Net income of Company S is attributed to the noncontrolling interest, including its attributable share of the management fee (($150,000 — $1,500) x 20%).



Cash 200,000 450,000 650,000 Inventory 200,000 150,000 350,000 Buildings and equipment, net – 150,000 150,000 Investment in Company S 518,800 – (51) 518,800 –

Total assets 918,800 750,000 1,150,000 Current liabilities 98,500 101,500 200,000

Total liabilities 98,500 101,500 200,000 Common stock 200,000 400,000 (52) 400,000 200,000 Retained earnings 620,300 118,800 (53) 118,800 (55) 1,500 620,300 (54) 1,500


820,300 518,800 820,300


Total liabilities and equity 918,800 750,000 1,150,000




(54) The income recognized by Company P from the management fee is eliminated from retained earnings.

(55) The expense recognized by Company S from the management fee is eliminated from retained earnings.


For explanations of Items (51) through (53), see Items (6) through (8) in Figure 5-2.


6 Loss of control over a subsidiary or a group of assets

6.1 Deconsolidation of a subsidiary or derecognition of certain groups of assets Excerpt from Accounting Standards Codification Consolidation — Overall

Derecognition

Deconsolidation of a Subsidiary or Derecognition of a Group of Assets

810-10-40-3A The deconsolidation and derecognition guidance in this Section applies to the following:

a. A subsidiary that is a nonprofit activity or a business, except for either of the following:

1. A sale of in substance real estate (for guidance on a sale of in substance real estate, see Subtopic 360-20 or Subtopic 976-605)

2. 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).

b. A group of assets that is a nonprofit activity or a business, except for either of the following:

1. A sale of in substance real estate (for guidance on a sale of in substance real estate, see Subtopic 360-20 or Subtopic 976-605)

2. 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).

c. A subsidiary that is not a nonprofit activity or a business 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:

1. Topic 605 on revenue recognition

2. Topic 845 on exchanges of nonmonetary assets

3. Topic 860 on transferring and servicing financial assets

4. Topic 932 on conveyances of mineral rights and related transactions

5. Topic 360 or 976 on sales of in substance real estate.

810-10-40-4 A parent shall deconsolidate a subsidiary or derecognize a group of assets specified in the preceding paragraph 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.



Implementation Guidance and Illustrations

Deconsolidation of a Subsidiary

810-10-55-4A All of the following are circumstances that result in deconsolidation of a subsidiary under paragraph 810-10-40-4:

a. A parent sells all or part of its ownership interest in its subsidiary, and as a result, the parent no longer has a controlling financial interest in the subsidiary.

b. The expiration of a contractual agreement that gave control of the subsidiary to the parent.

c. The subsidiary issues shares, which reduces the parent’s ownership interest in the subsidiary so that the parent no longer has a controlling financial interest in the subsidiary.

d. The subsidiary becomes subject to the control of a government, court, administrator, or regulator.

Derecognition


810-10-40-5 If a parent deconsolidates a subsidiary or derecognizes a group of assets through a nonreciprocal transfer to owners, such as a spinoff, the accounting guidance in Subtopic 845-10 applies. Otherwise, a parent shall account for the deconsolidation of a subsidiary or derecognition of a group of assets specified in paragraph 810-10-40-3A by recognizing a gain or loss in net income attributable to the parent, measured as the difference between:

a. The aggregate of all of the following:

1. The fair value of any consideration received

2. The fair value of any retained noncontrolling investment in the former subsidiary or group of assets at the date the subsidiary is deconsolidated or the group of assets is derecognized

3. The carrying amount of any noncontrolling interest in the former subsidiary (including any accumulated other comprehensive income attributable to the noncontrolling interest) at the date the subsidiary is deconsolidated.

b. The carrying amount of the former subsidiary’s assets and liabilities or the carrying amount of the group of assets.

810-10-40-6 A parent may cease to have a controlling financial interest in a subsidiary through two or more arrangements (transactions). Circumstances sometimes indicate that the multiple arrangements should be accounted for as a single transaction. In determining whether to account for the arrangements as a single transaction, a parent shall consider all of the terms and conditions of the arrangements and their economic effects. Any of the following may indicate that the parent should account for the multiple arrangements as a single transaction:

a. They are entered into at the same time or in contemplation of one another.

b. They form a single transaction designed to achieve an overall commercial effect.

c. The occurrence of one arrangement is dependent on the occurrence of at least one other arrangement.

d. One arrangement considered on its own is not economically justified, but they are economically justified when considered together. An example is when one disposal is priced below market, compensated for by a subsequent disposal priced above market.



Note:

The FASB and the International Accounting Standards Board (IASB) (collectively, the Boards) issued a joint revenue recognition standard that replaces most existing revenue recognition guidance and interpretations. The FASB’s new standard includes consequential amendments to ASC 810 that may result in certain transactions that previously were accounted for under the deconsolidation and derecognition guidance in ASC 810 now being accounted for following the principles in the new revenue recognition guidance. These transactions include any sale to a customer (e.g., a sale of a business) and any sale of an in-substance non-financial asset (whether it is a business or not). Readers should carefully review this new guidance.

Effective date and transition

The new standard is effective for public entities for fiscal years beginning after 15 December 2016, and for interim periods therein. Early adoption is not permitted for public entities. Nonpublic entities are required to adopt the new guidance for fiscal years beginning after 15 December 2017, and interim periods within fiscal years beginning after 15 December 2018, and may adopt it as early as the public entity effective date.

An entity can elect to apply either a “full retrospective” adoption in which the standard is applied to all of the periods presented (e.g., beginning as of January 1 2015 for a calendar year-end public entity) or a “modified retrospective” adoption.

A parent company deconsolidates a subsidiary or derecognizes a group of assets when that parent company no longer controls the subsidiary or group of assets specified in ASC 810-10-40-3A. Certain scope exceptions in ASC 810-10-40-3A are identical to those provided in ASC 810-10-45-21A for decreases in ownership that do not result in a loss of control. See Sections 4.1.2.2 and 4.1.2.3 of Chapter 4 for further discussion of the scope exceptions for in-substance real estate and oil and gas conveyances, respectively.

When control is lost, the parent-subsidiary relationship no longer exists and the parent derecognizes the assets and liabilities of the qualifying subsidiary or group of assets.

The FASB concluded that the loss of control and the related deconsolidation of a subsidiary or derecognition of a group of assets specified in ASC 810-10-40-3A is a significant economic event that changes the nature of the investment held in the subsidiary or group of assets.

Based on this consideration, a gain or loss is recognized upon the deconsolidation of a subsidiary or derecognition of a group of assets specified in ASC 810-10-40-3A. Any remaining ownership interest in the subsidiary or entity acquiring the group of assets specified in ASC 810-10-40-3A (which would be classified as a noncontrolling interest by the acquirer) is measured at its fair value. That ownership interest is subsequently accounted for in accordance with ASC 320, ASC 323 or other applicable GAAP.

If the retained noncontrolling interest is accounted for as an equity method investment, the former parent would be required to identify and determine the acquisition date fair value of the underlying assets and liabilities of the investee (with certain exceptions), under ASC 323. While the former parent would not recognize those identified assets and liabilities, it would be required to track its bases in them to account for the effect of any differences between its bases and the bases recognized by the investee. This process is often called “memo” accounting. See our FRD publication, Equity method investments, for more guidance on this accounting.



6.1.1 Loss of control We believe the guidance in ASC 810 applies to the loss of control and deconsolidation of any subsidiary or group of assets specified in ASC 810-10-40-3A, regardless of how control was lost (except for nonreciprocal transfers to owners). Several events may lead to a loss of control of a subsidiary specified in ASC 810-10-40-3A, and not all events are the direct result of actions taken by the parent company. The simplest example of the loss of control of a subsidiary is when a parent company decides to sell all of its interest in a subsidiary. A loss of control also can result from actions of the subsidiary. When a subsidiary issues shares to third parties, the parent’s interest is diluted, potentially to the point when the parent no longer controls the subsidiary. A loss of control can also result if a government, court, administrator or regulator takes legal control of a subsidiary or a group of assets as specified in ASC 810-10-40-3A.

6.1.2 Nonreciprocal transfers to owners ASC 810’s provisions do not apply to spinoffs or other nonreciprocal transactions with owners. A spinoff occurs when a parent company transfers the subsidiary’s stock or a group of assets that it owns to its own shareholders. Spinoffs should be accounted for in accordance with ASC 845.

6.1.3 Gain/loss recognition When a subsidiary or a group of assets specified in ASC 810-10-40-3A is deconsolidated or derecognized, the carrying amounts of the previously consolidated subsidiary’s assets and liabilities or group of assets are removed from the consolidated statement of financial position. Generally, a gain or loss is recognized as the difference between the following two amounts:

• The sum of the fair value of any consideration received, the fair value of any retained noncontrolling investment in the former subsidiary or group of assets at the date the subsidiary is deconsolidated or the group of assets is derecognized, and the carrying amount of any noncontrolling interest in the former subsidiary (including any AOCI attributable to the noncontrolling interest) at the date the subsidiary is deconsolidated

• The carrying amount of the former subsidiary’s assets and liabilities or the carrying amount of the group of assets

Importantly, because the loss of control is deemed to be a significant economic event, when an entity loses control of a subsidiary or a group of assets specified in ASC 810-10-40-3A but retains a noncontrolling interest in the former subsidiary or entity that acquired the group of assets, that retained interest is measured at fair value and is included in the calculation of the gain/loss on deconsolidation of the subsidiary or the derecognition of a group of assets.

When an entity recognizes a gain, SAB Topic 5-E (codified in ASC 810-10-S99-5) states that the entity should identify all of the elements of the divesture arrangement and allocate the consideration exchanged to each of those elements. For example, if the divesture arrangement included elements of guarantees and promissory notes, the entity would recognize the guarantees at fair value in accordance with ASC 460 and recognize the promissory notes in accordance with ASC 835, ASC 470 and ASC 310.

As indicated in ASC 810-10-40-5, the gain/loss calculation is affected by the carrying amount of any noncontrolling interest in the former subsidiary specified in ASC 810-10-40-3A. However, adjustments to the carrying amount of a redeemable noncontrolling interest from the application of ASC 480-10-S99-3A do not initially enter into the determination of net income (Section 5.10 of Chapter 5 of our FRD publication, Issuer’s accounting for debt and equity financings, for more discussion of the application of ASC 480-10-S99-3A). For this reason, the SEC staff believes9 that the carrying amount of the noncontrolling interest

9 The views of the SEC staff described here are codified in ASC 480-10-S99-3A, paragraph 19, Deconsolidation of a Subsidiary.

http://asc.fasb.org/link&sourceid=SL6540609-122764&objid=6758505



used in the gain/loss calculation should not include any adjustments made to that noncontrolling interest from the application of ASC 480-10-S99-3A. Previously recorded adjustments to the carrying amount of a noncontrolling interest from the application of ASC 480-10-S99-3A should be eliminated in the same manner in which they were initially recorded (that is, by recording a credit to equity of the parent).

Illustration 6-1: Calculating a gain or loss upon loss of control

Assume that Company A has a 90% controlling interest in Company B, a public retailer of athletic wear. On 31 December 20X6, the carrying amount of Company B’s net assets is $100 million, and the carrying amount attributable to the noncontrolling interest in Company B (including the noncontrolling interest’s share of AOCI) is $10 million. On 1 January 20X7, Company A sells 70% of Company B to a third party for cash proceeds of $108 million. As a result of the sale, Company A loses control of Company B but retains a 20% noncontrolling interest in Company B. The fair value of the retained interest on that date is $24 million. 10

The gain on sale of the 70% interest in Company B is calculated as follows (in millions):

Cash proceeds $ 108 Fair value of retained interest 24 Carrying amount of the nonredeemable noncontrolling interest 10 142 Less: Carrying amount of Company B’s net assets 100 Gain $ 42

The journal entry to record Company B’s deconsolidation follows:

Cash $ 108 Investment in Company B 24 Noncontrolling interest 10

Net assets of Company B $ 100 Gain on sale 42

Company A subsequently may account for its retained interest as an available-for-sale or trading security under ASC 320 (with a cost basis of $24).

If Company A’s retained 20% noncontrolling interest gave it significant influence over Company B and was to be accounted for as an equity method investment, Company A would be required to identify and determine the acquisition date fair value of the underlying assets and liabilities of the investee (with certain exceptions), in accordance with ASC 323. While Company A would not recognize those identified assets and liabilities, it must track its bases in them (often through memo accounting) to account for the effect of any differences between its bases and the bases recognized by the investee. See our FRD publication, Equity method investments, for more guidance on this accounting.

10 This number is assumed (and cannot be determined based on the acquisition of the 70% interest because that price may include a control premium).



6.1.3.1 Assignment of goodwill upon disposal of all or a portion of a reporting unit

See Chapter 3 of our FRD publication, Intangibles — Goodwill and other, for guidance on the assignment of goodwill upon the disposal of all or a portion of a reporting unit.

6.1.4 Measuring the fair value of consideration received and any retained noncontrolling investment To determine a gain or loss upon deconsolidation, an entity must first determine the fair value of any consideration received and the fair value of any retained noncontrolling investment in the former subsidiary or groups of assets. When the consideration received is cash or when the retained noncontrolling investment in the former subsidiary or group of assets is a publicly traded equity interest, this determination may be relatively straightforward. However, in other circumstances, the determination may prove more challenging. The facts and circumstances of a deconsolidating event should be evaluated carefully before recording a gain or loss. Consistent with the disclosure provisions included within ASC 810-10-50-1B and discussed further in Chapter 9, we believe it is appropriate to disclose the details of the computation of any material gain or loss.

Consideration received may take many forms, including cash, tangible and intangible assets, financial instruments and contingent consideration. Because ASC 810-10-40-5 indicates that the consideration received is to be measured at fair value, we generally believe that it is appropriate to measure consideration received at its fair value regardless of its form (see Section 6.1.4.1 below for further discussion of contingent consideration). In evaluating the nature and amount of consideration received, it may be helpful to consider ASC 805 regarding consideration transferred. See our FRD publication, Business combinations, for more discussion of this guidance.

We believe the determination of the fair value of any consideration received should contemplate any off-market executory contracts (e.g., leases). To illustrate: If upon deconsolidation, a favorable lease contract (from the reporting entity’s perspective) exists between the reporting entity and its former subsidiary, we believe that an intangible asset should be recorded by the reporting entity for the off-market component of the lease contract. The effect of this accounting is to increase the gain (or reduce the loss) recorded upon deconsolidation because presumably the consideration received was reduced by the favorable lease contract.

A retained noncontrolling investment may take many forms, including common stock investments, preferred stock investments and debt interests (see Section 6.1.4.2). We also generally believe it is appropriate to measure any noncontrolling investment at its fair value, regardless of its form.

6.1.4.1 Accounting for contingent consideration in deconsolidation

In certain instances, a transfer of a controlling interest in a subsidiary involves contingent consideration. For example, when an entity sells a controlling interest in a subsidiary, the acquirer may promise to deliver cash, additional equity interests or other assets to the seller after the sale date if certain specified events occur or conditions are met in the future. These contingencies frequently are based on future earnings or changes in the market price of the subsidiary’s stock over specified periods after the date of the sale. However, they might be based on other factors (e.g., components of earnings, product development milestones, cash flow levels, the successful completion of third-party contract negotiations).

The basis for recognition and measurement of contingent consideration in deconsolidation is not addressed in ASC 810, so it is necessary to look to other guidance. If contingent consideration meets the definition of a derivative, it should be accounted for under ASC 815. When contingent consideration does not meet the definition of a derivative, the Codification does not provide detailed guidance. In this circumstance, we believe the basis for recognition and measurement of contingent consideration receivable by the seller is an accounting policy choice that should be applied on a consistent basis. The EITF considered this matter and did not arrive at a consensus and therefore we believe that significant



diversity exists in practice. Companies should carefully consider the accounting for these transactions and consider preclearing the accounting with the Office of the Chief Accountant. Discussed below are two policy alternatives that are applied in practice.

Alternative 1: fair value approach

ASC 810-10-40-5 requires that the measurement of any gain or loss on deconsolidation of a subsidiary include the fair value of “any consideration received.” We believe that this could be interpreted to include contingent consideration. Thus, we believe the seller may initially recognize an asset from the buyer equal to the fair value of any contingent consideration received upon deconsolidation. We note that this view is consistent with ASC 805’s requirement that an acquirer recognize contingent consideration obligations as of the acquisition date as part of consideration transferred in exchange for an acquired business.

If a seller follows an accounting policy to initially recognize an asset equal to the fair value of the contingent consideration, we believe it also must elect an accounting policy to subsequently measure the contingent consideration under either of the following approaches:

• Remeasure at fair value by electing the fair value option provided in ASC 825-10-25 (assuming the gain contingency is a financial instrument eligible for the fair value option)

• Recognize increases in the carrying value of the asset using the gain contingency guidance in ASC 450-30 and recognize impairments based on the guidance in ASC 450-20-25-2

Alternative 2: loss recovery approach

We also believe it is reasonable to conclude that contingent consideration is not required to be measured at fair value. In that circumstance, we believe it is acceptable to apply a loss recovery approach by analogizing to the accounting for insurance recoveries on property and casualty losses.

Property and casualty losses are accounted for in accordance with ASC 605-40. Under that guidance, when a nonmonetary asset (e.g., property, equipment) is involuntarily converted to a monetary asset (e.g., receipt of insurance proceeds upon the occurrence of an insured event), the loss on the derecognition of the nonmonetary asset must be recognized, even when an entity reinvests or is obligated to reinvest the monetary assets in a replacement asset.

Anticipated insurance proceeds up to the amount of the loss recognized are called insurance recoveries and may be recognized when it is probable11 that they will be received. Some or all of the anticipated insurance recoveries therefore may be recognized. Specifically, anticipated insurance recoveries may be recognized at the lesser of the amount of (1) the proceeds for which the likelihood of receipt is probable or (2) the total loss recognized. Insurance proceeds in excess of the amount of the loss recognized are subject to the gain contingency guidance in ASC 450-30, and are not recognized until all contingencies related to the insurance claim are resolved.

When analogizing insurance recovery accounting to the initial recognition of contingent consideration in deconsolidation, an entity would compare the fair value of the consideration received, excluding the contingent consideration, to the carrying amount of the assets that are deconsolidated under ASC 810. If the fair value of the consideration received, excluding the contingent consideration, is less than the carrying amount of the deconsolidated assets, the initial measurement of the contingent consideration asset would be limited to the difference between those amounts. That is, if it is probable that contingent consideration will be received, an asset would be recognized and measured initially at the lesser of (1) the amount of probable future proceeds or (2) the difference between the fair value of the consideration received, excluding the contingent consideration, and the carrying amount of the deconsolidated assets.

11 The ASC master glossary defines probable as: “the future event or events are likely to occur.”



Subsequent recognition and measurement would be based on the gain contingency guidance in ASC 450-30-25-1 (i.e., a contingency that might result in a gain usually should not be reflected in the financial statements because doing so might recognize revenue before it is realized). Any subsequent impairments would be recognized based on ASC 450-20-25-2.

If the fair value of the consideration received, excluding the contingent consideration, is greater than the carrying amount of the deconsolidated assets, no contingent consideration asset would be recognized initially. Subsequent recognition and measurement of the contingent consideration would be based on the gain contingency model under ASC 450-30 and any subsequent impairment would be recognized based on ASC 450-20-25-2.

Illustration 6-2 demonstrates these two alternatives.

Illustration 6-2: Accounting for contingent consideration in deconsolidation

Assume that Company A has a 100% controlling interest in Company B, a public retailer of athletic wear. On 31 December 20X6, the carrying amount of Company B’s net assets is $150 million. On 1 January 20X7, Company A sells 100% of Company B to a third party for cash proceeds of $75 million and a promise by the third party to deliver additional cash annually over the next five years, based on a percentage of Company B’s annual earnings above an agreed upon target. The fair value of the contingent consideration is determined to be $175 million on 1 January 20x7. Company A determines it is probable that it will receive $225 million12 in total contingent consideration over the life of the arrangement.

Fair value approach

The gain on sale of the 100% interest in Company B is calculated as follows (in millions):

Cash proceeds $ 75 Fair value of the contingent consideration 175 250 Less: Carrying amount of Company B’s net assets 150 Gain $ 100

The journal entry to record Company B’s deconsolidation follows:

Cash $ 75 Contingent consideration receivable 175

Net assets of Company B $ 150 Gain on sale 100

If Company A applies the fair value accounting policy, we believe Company A also must elect an accounting policy to subsequently measure the contingent consideration under either of the following approaches:

• Subsequent remeasurement at fair value by electing the fair value option provided in ASC 825-10-25

• Recognizing increases in the carrying amount of the asset using the gain contingency guidance in ASC 450-30 and recognizing impairments based on ASC 450-20-25-2

12 This amount reflects the total cash that is probable of receipt under the terms of the arrangement, as determined using a reasonable estimate of the earnings of Company B over the next five years. No discount factor or other fair value adjustments are applied in determining this amount.



Loss recovery approach

Company A would compare the fair value of the consideration received, excluding the contingent consideration, to the carrying amount of the assets that are deconsolidated under ASC 810.

Cash proceeds $ 75 Less: Carrying amount of Company B’s net assets 150 Difference $ (75)

Because the fair value of the consideration received, excluding the contingent consideration, is less than the carrying amount of the deconsolidated assets, an asset would be recognized and measured initially at the lesser of the amount of probable future proceeds or the difference between those amounts.

In this example, the difference of $75 million calculated above is less than the probable future proceeds of $225 million. Therefore, the contingent consideration asset would be recognized and measured initially at $75 million. No gain would be recognized when initially recording this transaction.

The journal entry to record Company B’s deconsolidation would be as follows:

Cash $ 75 Contingent consideration receivable 75

Net assets of Company B $ 150

If Company A elects to apply this alternative, subsequent increases in the carrying amount of the asset would be recognized using the gain contingency guidance in ASC 450-30-25-1 and any subsequent impairments would be recognized based on ASC 450-20-25-2.

6.1.4.2 Accounting for a retained creditor interest in deconsolidation

The FASB concluded that the loss of control and the related deconsolidation of a subsidiary or derecognition of a group of assets specified in ASC 810-10-40-3A is a significant economic event that changes the nature of the investment held in the subsidiary or group of assets. Upon deconsolidation, an entity therefore is required to record any remaining noncontrolling investment in the subsidiary or a group of assets specified in ASC 810-10-40-3A at fair value. Consistent with this approach, we believe that a loan to the former subsidiary also should be measured at fair value at the deconsolidation date. Thus, any difference between the carrying amount of the loan to the subsidiary and the fair value should be included in the gain/loss calculation upon deconsolidation of the subsidiary.

6.1.5 Accounting for accumulated other comprehensive income in deconsolidation AOCI of a subsidiary or group of assets specified in ASC 810-10-40-3A is attributed to both the controlling and noncontrolling interests. As part of deconsolidation, the parent should derecognize any portion of AOCI attributable to the noncontrolling interest because the underlying asset or liability of the subsidiary or group of assets specified in ASC 810-10-40-3A that generated the AOCI is no longer recorded on the books of the parent.

While ASC 810 does not specify the treatment of the AOCI attributable to the parent, we believe that the reversal of any AOCI attributable to the parent should be included in the gain or loss recognized on deconsolidation. The basis for this conclusion is that the assets or liabilities of the former subsidiary or group of assets specified in ASC 810-10-40-3A that generated the amounts in AOCI have been derecognized upon the loss of control.



Other amounts recognized in equity outside of AOCI related to changes in ownership interests that did not result in a loss of control would not be included in determining the gain or loss. These amounts resulted from transactions among shareholders and are not directly attributable to the noncontrolling interest.

The fair value of any retained interest is its new carrying amount and if that investment is accounted for as an equity method investment, the former parent would be required to identify and determine the acquisition date fair value of the underlying assets and liabilities of the investee (with certain exceptions), under ASC 323. While the former parent would not recognize those identified assets and liabilities, it must track its bases in them (often through memo accounting) to account for the effect of any differences between its bases and the bases recognized by the investee. (See our FRD publication, Equity method investments, for more guidance on this accounting). Because the investment, as well as the underlying assets and liabilities of an equity method investment, is recognized with a new basis, no AOCI is recognized upon deconsolidation. However, subsequent accounting for the investment (for example, under ASC 320) or the underlying assets and liabilities (under ASC 323) may generate AOCI after deconsolidation.

6.1.5.1 Foreign currency translation adjustments

If the former subsidiary is a foreign entity or is within a foreign entity (as defined by ASC 830) special considerations apply. A foreign entity may include a subsidiary, division, branch, joint venture that contains an equity method investment or equity method investment by itself. That is, a foreign entity as defined by ASC 830 may differ from a legal entity. See Section 1.2.2 of our FRD publication, Foreign currency matters, for additional discussion on the definition of a foreign entity under ASC 830, and Section 4.4.3 of that FRD publication for guidance on how to treat any cumulative translation adjustment in this scenario.

6.1.6 Deconsolidation through multiple arrangements Changes in ownership interests while maintaining control generally are accounted for as equity transactions, while a loss of control generally gives rise to the recognition of a gain or loss. The FASB recognized that because of these accounting differences, transactions might be structured to achieve a specific accounting result. Consequently, ASC 810-10-40-6 provides the following considerations when determining whether multiple arrangements or transactions should be considered a single transaction:

• They are entered into at the same time or in contemplation of one another.

• They form a single transaction designed to achieve an overall commercial result.

• The occurrence of one arrangement depends on the occurrence of at least one other arrangement.

• One arrangement, on its own is not economically justified, but it is economically justified when considered together with another arrangement. An example would be a disposal priced below market, compensated for by a subsequent disposal priced above market.

Determining whether multiple transactions should be considered as a single transaction is a matter of facts and circumstances that requires the use of professional judgment. Such a determination should be clearly and contemporaneously documented.



6.1.7 Deconsolidation through a bankruptcy proceeding Excerpt from Accounting Standards Codification Consolidation — Overall

Objectives


810-10-15-10a

1. A majority-owned entity shall not be consolidated if control does not rest with the majority owner — for instance, if any of the following are present:

i. The subsidiary is in legal reorganization

ii. The subsidiary is in bankruptcy

iii. The subsidiary operates under foreign exchange restrictions, controls or other governmentally imposed uncertainties so severe that they cast significant doubt on the parent's ability to control the subsidiary.

The bankruptcy of an entity within a consolidated group may affect whether the entity continues to be consolidated. Consolidation considerations include the status of the bankruptcy proceedings as well as the facts and circumstances of the parent’s relationship with the subsidiary (that is, majority shareholder, priority debt holder or single largest creditor). See Chapter 2 of our FRD publication, Bankruptcies, liquidations and quasi-reorganizations, for more information on the consolidation implications related to entities in or entering bankruptcy.

Question 6.1 ASC 810-10-40-3A is clear that a parent entity must consider ASC 360-20 for sales of in-substance real estate. However, does ASC 360-20 also apply when a reporting entity loses control of an in-substance real estate subsidiary through means other than a sale?

In ASU 2011-10, the FASB clarified that ASC 360-20 applies when a reporting entity loses control of an in-substance real estate subsidiary as a result of a default by the subsidiary on its nonrecourse debt. ASU 2011-10 is effective for public companies for fiscal years beginning on or after 15 June 2012 and interim periods within those fiscal years. For nonpublic companies, the guidance is effective for fiscal years ending after 15 December 2013 and interim and annual periods thereafter. The standard is to be applied prospectively and early adoption is permitted. The accounting in ASU 2011-10 is not required for lenders.

However, when considering the issue, the EITF did not address other scenarios in which a reporting entity loses a controlling financial interest in an in-substance real estate subsidiary. For those transactions, we believe a reporting entity generally should consider the real estate sales guidance or other real estate literature (e.g., ASC 970-323) before removing the real estate from its statement of financial position. We believe that the real estate literature provides relevant considerations for evaluating whether it is appropriate to derecognize real estate in the statement of financial position.

See our FRD publication, Real estate sales, for more interpretive guidance.



6.1.8 Gain/loss classification and presentation ASC 810-10-40-5 does not provide guidance on the classification of the gain/loss on deconsolidation in the income statement.

We believe a gain/loss on deconsolidation of a subsidiary would in many cases be most appropriately presented as part of non-operating income because, in most cases, the deconsolidation will not be a part of an entity’s primary revenue- and expense-generating activities. Before Statement 160, the SEC staff’s view, articulated in SAB Topic 5-H, was that “gains (or losses) arising from issuances by a subsidiary of its own stock, if recorded in income by the parent, should be presented as a separate line item in the consolidated income statement without regard to materiality and clearly be designated as non-operating income.”

The SEC staff rescinded SAB Topic 5-H after Statement 160 was issued. Nonetheless, we believe SAB Topic 5-H provides a useful basis for classifying deconsolidation gains or losses as part of non-operating income. SAB Topic 5-H focused on a situation in which a gain or loss may have been recognized while control was maintained and the decrease in the parent’s ownership percentage resulted from the direct issuance of unissued shares by a consolidated subsidiary. We believe its guidance on classifying resulting gains or losses as non-operating income was consistent with the notion that these transactions are generally not an entity’s primary revenue- and expense-generating activity.

An entity should clearly disclose the income statement classification of significant gains or losses resulting from deconsolidation of a subsidiary. Entities should carefully evaluate the nature of the deconsolidation to appropriately determine the proper classification and presentation of related gain/loss and should consistently apply that evaluation. For example, it would not be appropriate to classify gains in operating income and losses in non-operating income for similar transactions.

Note that if a gain or loss is recognized from a deconsolidation that relates to a discontinued operation, that gain or loss should be included and presented as part of the income (loss) from discontinued operations.

6.1.9 Subsequent accounting for retained noncontrolling investment After the subsidiary or group of assets specified in ASC 810-10-40-3A is deconsolidated or derecognized, any retained ownership interest is initially recognized at fair value (see Section 6.1 for further discussion of this accounting). After initial recognition, the retained ownership interest is subject to other existing accounting literature, as appropriate.

If the former parent exercises significant influence over the investee, as defined in ASC 323-10-15-6 through 15-8, the investment should be accounted for under the equity method. The former parent would be required to identify and determine the acquisition date fair value of the underlying assets and liabilities of the investee (with certain exceptions) under ASC 323. While the former parent would not recognize those identified assets and liabilities, it would be required to track its bases in them (often through memo accounting) to account for the effect of any differences between its bases and the bases recognized by the investee. See our FRD, Equity method investments, for more guidance on applying the equity method.

If it is determined that the investor is not able to exercise significant influence over the investee, the investment is accounted for as an equity security, generally in accordance with ASC 320 or at cost, as appropriate.

6.1.10 Transfer of a subsidiary or a group of assets to an equity method investee or a joint venture ASC 810’s principles on the accounting for a loss of control over certain subsidiaries or groups of assets apply to transactions in which an investor transfers a subsidiary or a group of assets to an equity method investee or a joint venture in exchange for an equity interest. See our FRD publications Equity method investments and Joint ventures for further discussion of the accounting applied by the investor in these transactions.



6.1.11 Income tax considerations related to the loss of control over a subsidiary See Chapter 12 of our FRD publication, Income taxes, for discussion of income tax considerations related to the accounting for a loss of control over a subsidiary.

6.1.12 Transfers between entities under common control See Appendix C of our FRD publication, Business combinations, for a discussion of the accounting and reporting by the transferring entity for the transfer of certain subsidiaries or certain groups of assets between entities under common control.

6.2 Comprehensive example

Illustration 6-3: Beginning balance sheet

Assume that Company P acquired a controlling financial interest in Company S, a distributor of video games qualifying as a business under ASC 805, as of 1 January 20X1. As of 31 December 20X3, Company P owned 60% of Company S.

Figure 6-1 presents the consolidating work paper to arrive at the consolidated balance sheet of Company P as of 31 December 20X3. This consolidating work paper is taken from Figure 4-11 in Illustration 4-16 of Chapter 4.


Company P


Consolidated Debit (1) Credit (1) Cash 80,700 3,000 83,700 Marketable securities – 17,500 17,500 Inventory – 30,000 30,000 Buildings and equipment, net – 59,850 59,850 Investment in Company S 23,780 – 23,780 – Goodwill – 4,286 4,286

Total assets 104,480 114,636 195,336

Accounts payable – 75,000 75,000 Debt 27,000 – 27,000

Total liabilities 27,000 75,000 102,000 Common stock 1,500 6,000 6,000 1,500 Additional paid-in capital 15,440 36,440 36,440 15,440 Accumulated other comprehensive income 3,300 3,300 3,300 3,300 Retained earnings (deficit) 57,240 (21,960) 21,960 57,240


Noncontrolling interest – 15,856 15,856 Total equity 77,480 39,636 93,336


(1) The items reflected here are described in Figure 4-11 of Chapter 4.



6.2.1 Deconsolidation by selling entire interest

Illustration 6-4: Deconsolidation by selling entire interest

Assume that on 1 January 20X4, Company P sells its remaining 60% interest in Company S for $60,000 and repays its outstanding debt.

Company P no longer has a controlling financial interest in the subsidiary. So Company P derecognizes Company S and calculates its gain as follows:

Cash proceeds $ 60,000 Carrying amount of the noncontrolling interest 15,856 AOCI attributable to Company P 3,300 79,156 Carrying amount of Company S’s net assets (39,636) Gain $ 39,520

On a consolidated basis, Company S’s assets, liabilities and noncontrolling interest should be derecognized, and the cash proceeds and gain should be recognized through the following journal entry:

Cash $ 60,000

Noncontrolling interest 15,856

Accounts payable 75,000

AOCI 3,300

Cash (of Company S) $ 3,000

Marketable securities 17,500

Inventory 30,000

Buildings and equipment, net 59,850

Goodwill 4,286

Gain on sale of investment 39,520

Alternatively, on a parent-only basis, the investment in Company S and AOCI should be derecognized, and the gain and cash proceeds should be recognized.

Cash $ 60,000 AOCI 3,300

Investment in Company S $ 23,780 Gain on sale of investment 39,520

The entry to record the repayment of the outstanding debt is recorded separately and is not shown above.

Figure 6-2 presents Company P’s balance sheet at 1 January 20X4, after the sale of Company S.



Figure 6-2: Company P balance sheet, 1 January 20X4, entire interest sold (all amounts in dollars)

Company P

Cash Investment in Company S

(1) (2)

113,700 –

Total assets 113,700

Debt (2) –

Total liabilities –

Common stock 1,500

Additional paid-in capital 15,440

Accumulated other comprehensive income (2) –

Retained earnings (3) 96,760

Total parent shareholders’ equity 113,700

Noncontrolling interest –

Total liabilities and equity 113,700

(1) Cash is rolled forward as follows:

Beginning balance $ 80,700 Proceeds from sale 60,000 Repayment of debt (27,000) Ending balance $ 113,700

(2) The investment, debt and AOCI are zero after the sale of Company S and the repayment of Company P’s debt.

(3) The rollforward of the retained earnings balance is as follows:

Beginning balance $ 57,240 Gain from sale of investment 39,520 Ending balance $ 96,760

6.2.2 Deconsolidation by selling a partial interest

Illustration 6-5: Deconsolidation by selling a partial interest

Assume that instead of selling its entire interest in Company S on 1 January 20X4, Company P sells a 30% interest in Company S (leaving Company P with a remaining 30% interest) for $24,000. The fair value of the remaining 30% interest is also $24,000. Company P uses the proceeds to extinguish its outstanding debt.

In this example, Company P’s investment in Company S is recognized at fair value and is reflected as part of the sales proceeds.



Company P’s gain is calculated as follows:

Proceeds $ 24,000 Fair value of retained noncontrolling interest 24,000 Carrying value of noncontrolling interest 15,856 AOCI attributable to Company P 3,300 67,156 Carrying amount of Company S’s net assets (39,636) Gain $ 27,520

On a consolidated basis, Company S’s assets, liabilities and noncontrolling interest should be derecognized, and the cash proceeds, gain and retained interest in Company S should be recognized through the following journal entry:

Cash $ 24,000

Noncontrolling interest 15,856

Accounts payable 75,000

AOCI 3,300

Investment in Company S 24,000

Cash (of Company S) $ 3,000

Marketable securities 17,500

Inventory 30,000

Buildings and equipment, net 59,850

Goodwill 4,286

Gain on sale of investment 27,520

Alternatively, on a parent-only basis, the investment in Company S is adjusted to its fair value of $24,000, the AOCI balance is derecognized, and the gain and cash proceeds are recognized.

Cash $ 24,000

Investment in Company S 220

AOCI 3,300

Gain on sale of investment $ 27,520



Figure 6-3 presents Company P’s balance sheet at 1 January 20X4, reflecting the sale of Company S.

Figure 6-3 Company P balance sheet, 1 January 20X4, partial interest sold (all amounts in dollars)

Company P

Cash (5) 77,700

Investment in Company S (6) 24,000

Total assets 101,700

Debt (7) –

Total liabilities –

Common stock 1,500

Paid-in capital 15,440

Accumulated other comprehensive income (7) –

Retained earnings (8) 84,760

Total parent shareholders’ equity 101,700

Noncontrolling interest –

Total equity 101,700

Total liabilities and equity 101,700

(5) The rollforward of cash is as follows:

Beginning balance $ 80,700 Proceeds from sale 24,000 Repayment of debt (27,000)

Ending balance $ 77,700

(6) The investment in Company S account was adjusted to equal the fair value of the retained interest in Company S at the date of deconsolidation ($24,000).

(7) The debt and AOCI are zero after the sale of Company S and the repayment of Company P’s debt.

(8) The rollforward of retained earnings is as follows:

Beginning balance $ 57,240 Gain from sale of investment 27,520

Ending balance $ 84,760


7 Combined financial statements

7.1 Purpose of and procedures for combined financial statements Excerpt from Accounting Standards Codification Consolidation — Overall

Implementation Guidance and Illustrations

Combined Financial Statements

810-10-55-1B To justify the preparation of consolidated financial statements, the controlling financial interest shall rest directly or indirectly in one of the entities included in the consolidation. There are circumstances, however, in which combined financial statements (as distinguished from consolidated financial statements) of commonly controlled entities are likely to be more meaningful than their separate financial statements. For example, combined financial statements would be useful if one individual owns a controlling financial interest in several entities that are related in their operations. Combined financial statements might also be used to present the financial position and results of operations of entities under common management.


810-10-45-10 If combined financial statements are prepared for a group of related entities, such as a group of commonly controlled entities, intra-entity transactions and profits or losses shall be eliminated, and noncontrolling interests, foreign operations, different fiscal periods, or income taxes shall be treated in the same manner as in consolidated financial statements.

Control is the primary basis for presenting consolidated financial statements. However, there are times when combining the financial statements of related entities is more meaningful than presenting the financial statements of the entities separately. ASC 810 states that combined financial statements may be useful for related entities under common control or related entities with common management, though there are no conditions specified under which combined financial statements would be required. Combined financial statements are most frequently presented for filings in accordance with various statutory or regulatory requirements.

The fundamental difference between combined and consolidated financial statements is that there is no controlling financial interest present between or among the combined entities under either the variable interest or voting interest models.

7.1.1 Common management We believe that the determination of whether entities are under common management should be based on individual facts and circumstances. To justify combined presentation, we would expect evidence to exist that indicates that the subsidiaries are not operated as if they were autonomous. This evidence could include:

• A common chief executive officer

• Common facilities and costs

7 Combined financial statements


• Commitments, guarantees or contingent liabilities among the entities

• Commonly financed activities

There could be other factors relevant to determining whether subsidiaries are under common management.

The following illustration demonstrates these concepts.

Illustration 7-1: Presenting combined versus consolidated financial statements

Facts

Assume that Company S has 2,000 common shares and 1,000 preferred shares outstanding. The preferred shareholders have the same rights as the common shareholders, except they do not have the right to vote. Half of the 2,000 common shares outstanding are owned by Company P and the other half by an individual who also owns all of the outstanding common shares of Company P. The preferred shares of Company S are owned by a third party.

Analysis

In this situation, Company P does not control Company S directly or indirectly, and, therefore, consolidation under either the variable interest or voting interest models is not appropriate. Combined financial statements could be presented as long as combined statements are more meaningful than presenting Company S’s separate financial statements.

7.1.2 Procedures applied in combining entities for financial reporting The procedures applied to combining entities are the same as those applied when preparing consolidated financial statements. All transactions between the entities in the combined presentation and the related profit and loss must be eliminated. In addition, the accounting in combined financial statements for noncontrolling interests, foreign operations, different fiscal periods and income taxes is the same as that used in consolidated financial statements.

The reference to noncontrolling interests in ASC 810-10-45-10 relates to the noncontrolling interests in each of the combining entities’ subsidiaries as reflected in the individual combining entities’ financial statements. We believe interests held by parties outside of the control group in each of the respective combining entities themselves would not constitute noncontrolling interests in the combined financial statements. The fundamental difference between combined and consolidated financial statements is that there is no direct controlling financial interest present between or among the combined entities. Therefore, we believe equity holdings in each of the combining entities, regardless of who holds this equity (that is, whether the equity is held by parties outside of the control group or not) should be reflected as ownership interests in the combined financial statements.

Illustration 7-2: Noncontrolling interests in combined financial statements

Assume that Company P consolidates Subsidiaries A, B and C, none of which it wholly owns. If combined financial statements were to be prepared for Subsidiaries A and B, interests held by parties other than Company P would not constitute noncontrolling interests in the combined financial statements. Only the noncontrolling interests that would be reflected in Subsidiaries A and B’s individual financial statements, if any, would be reflected as such in the combined financial statements. For example, if Subsidiary A has an 80%-owned subsidiary (Subsidiary A1), the 20% noncontrolling interest held by a third party in Subsidiary A1 would be reflected as noncontrolling interest in the combined financial statements.


8 Parent-company financial statements

8.1 Purpose of and procedures for parent-company financial statements Excerpt from Accounting Standards Codification Consolidation — Overall


Parent Entity Financial Statements

810-10-45-11 In some cases parent-entity financial statements may be needed, in addition to consolidated financial statements, to indicate adequately the position of bondholders and other creditors or preferred shareholders of the parent. Consolidating financial statements, in which one column is used for the parent and other columns for particular subsidiaries or groups of subsidiaries, often are an effective means of presenting the pertinent information. However, consolidated financial statements are the general-purpose financial statements of a parent having one or more subsidiaries; thus, parent-entity financial statements are not a valid substitute for consolidated financial statements.

ASC 810 permits the presentation of parent-company financial statements but clarifies that these financial statements may not be issued as the primary financial statements of the reporting entity and are not a valid substitute for consolidated financial statements.

Certain SEC registrants must present condensed parent-company financial information under Regulation S-X, Rule 12-04, Condensed Financial Information of Registrant, in Schedule I of their Form 10-K. This schedule is required when restricted net assets of consolidated subsidiaries exceed 25% of consolidated net assets at the end of the fiscal year. Registrants are required to present information required by Rule 12-04 as a separate schedule or in the notes to the financial statements. Our publication, SEC annual reports, provides more guidance for applying these quantitative tests and summarizes the related disclosure requirements.

Not-for-profit entities13 such as health care providers also occasionally prepare parent-company financial statements. Consolidation with respect to not-for-profit entities is addressed in ASC 958.

8.1.1 Investments in subsidiaries Parent-company financial statements generally present the parent company’s investment in consolidated subsidiaries under the equity method in accordance with ASC 323. Under ASC 805 and ASC 810, additional investment activity in consolidated subsidiaries that does not result in a change in control is accounted for as an equity transaction. Importantly, because ASC 323 uses step-acquisition accounting, basis differences may exist between the application of the equity method and the parent’s proportion of the subsidiary’s equity.

13 ASC 810-10-20 defines a not-for-profit entity as “(a)n entity that possesses the following characteristics, in varying degrees, that distinguish it from a business entity: (a) contributions of significant amounts of resources from resource providers who do not expect commensurate or proportionate pecuniary return, (b) operating purposes other than to provide goods or services at a profit, (c) absence of ownership interests like those of business entities. Entities that clearly fall outside this definition include the following: (a) all investor-owned entities and (b) entities that provide dividends, lower costs or other economic benefits directly and proportionately to their owners, members or participants, such as mutual insurance entities, credit unions, farm and rural electric cooperatives and employee benefit plans.“

8 Parent-company financial statements


This accounting is not specifically addressed by the accounting literature. Therefore, we believe a parent that does not apply the equity method to their investments in consolidated subsidiaries and instead determines the value at an amount equal to its proportionate share of the carrying amount of the subsidiaries’ net assets should continue this practice. Otherwise, the equity and earnings of the parent company in the parent-company financial statements may differ from the corresponding amounts in the consolidated financial statements.

8.1.2 Investments in non-controlled entities Investments accounted for at cost or under the equity method in consolidated financial statements should follow that same basis in the parent-company financial statements. Also, their carrying amounts should generally be the same on the parent-company financial statements and the consolidated financial statements.

8.1.3 Disclosure requirements When parent-company financial statements are presented but aren’t the primary financial statements of the reporting entity, the notes to the financial statements should include a statement to that effect. In addition, the accounting policy note should describe the policy used to account for investments in subsidiaries. The following is an example of such a note.

Illustration 8-1: Noncontrolling interests in combined financial statements

Note A — Accounting Policies

Basis of Presentation. In the parent-company financial statements, the Company’s investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries since the date of acquisition. The Company’s share of net income of its unconsolidated subsidiaries is included in consolidated income using the equity method. Parent-company financial statements should be read in conjunction with the Company’s consolidated financial statements.


9 Consolidating financial statements

9.1 Purpose of consolidating financial statements Consolidating financial statements are briefly mentioned in ASC 810-10-45-11’s guidance on parent-entity financial statements, which says “Consolidating financial statements, in which one column is used for the parent and other columns for particular subsidiaries or groups of subsidiaries, often are an effective means of presenting the pertinent information.” Generally, they present the operating results, financial position and cash flows of a parent and its subsidiaries (individually, or in groups) on a stand-alone basis in separate columns, and include columns with consolidating adjustments (e.g., elimination entries) and totals for the consolidated reporting entity.

Reporting entities may present consolidating financial information for many reasons, including:

• As a footnote to the entity’s consolidated financial statements, following the relief provided for certain issuers and guarantors of securities under SEC Rule 3-10 of Regulation S-X (Rule 3-10)

• As supplementary information to the entity’s consolidated financial statements (commonly referred to as “other financial information” or, an “OFI”), for the benefit of certain financial statement users (e.g., for management; for banks pursuant to loan covenant requirements)

This chapter primarily discusses condensed consolidating financial information prepared under Rule 3-10. However, many of the concepts discussed in this chapter also could apply to consolidating financial statements prepared for other purposes.

9.2 Guarantor financial information prepared under Rule 3-10 Rule 3-10 generally requires subsidiaries to file separate financial statements if they are issuers of debt sold in an SEC registered offering or are guarantors of registered debt issued by a parent. However, if certain conditions are met, Rule 3-10 provides relief in which modified financial information (i.e., condensed consolidating financial information or disclosure only information) related to these subsidiaries may be presented in a footnote to the parent company’s financial statements instead. See our publication, SEC annual reports, and our publication Form 10-K and registration statement checklist — supplement to GAAP disclosure checklist (Ernst & Young Form No. A69) for more information on applying the provisions of Rule 3-10.

The remainder of this chapter focuses on preparing condensed consolidating financial information under the relief provided in Rule 3-10.

9.2.1 Form and content of guarantor financial information Excerpts from Accounting Standards Codification Debt — Overall

SEC Materials

470-10-S99-1 (Rule 3-10(h) of Regulation S-X) (i) Instructions for preparation of the condensed consolidating financial information required by paragraphs (c), (d), (e) and (f) of this section.

(1) Follow the general guidance in §210.10-01 for the form and content for condensed financial statements and present the financial information in sufficient detail to allow investors to determine the assets, results of operations and cash flows of each of the consolidating groups;



(2) The financial information should be audited for the same periods that the parent company financial statements are required to be audited;

(4) The parent company's basis shall be "pushed down" to the applicable subsidiary columns to the extent that push down would be required or permitted in separate financial statements of the subsidiary;

(6) Provide a separate column for each subsidiary issuer or subsidiary guarantor that is not 100% owned, whose guarantee is not full and unconditional, or whose guarantee is not joint and several with the guarantees of other subsidiaries. Inclusion of a separate column does not relieve that issuer or guarantor from the requirement to file separate financial statements under paragraph (a) of this section. However, paragraphs (b) through (f) of this section will provide this relief if the particular paragraph is satisfied except that the guarantee is not joint and several;

(7) Provide separate columns for each guarantor by legal jurisdiction if differences in domestic or foreign laws affect the enforceability of the guarantees;

When companies prepare condensed consolidating financial information, Rule 3-10(i) instructs them to follow the general guidance on interim financial statements in Article 10 of Regulation S-X regarding the form and content of the condensed information. Rule 3-10(i) states that the financial information should be presented in sufficient detail to allow investors to determine the assets, results of operations and cash flows of the consolidating groups. This means that the level of detail should be consistent with what a registrant is required to include in its interim financial statements on Form 10-Q (e.g., include all major captions on the face of the financial statements). Since registrants rarely fully utilize the condensed financial statements permitted by Article 10, a registrant may be able to present the Rule 3-10 information on an even more condensed level than its Form 10-Q presentation.

The condensed consolidating financial information should be presented for the same periods for which the parent company presents financial statements (and audited for any periods for which audited financial statements of the parent company are required). While Rule 3-10 does not address the presentation of comprehensive income, the SEC staff has stated that the condensed consolidating financial information should include a total for comprehensive income presented in either a single continuous statement or in two separate but consecutive statements, following the requirements in ASU 2011-05 (codified in ASC 220).14

The SEC staff also has emphasized the importance of the form and content of the condensed consolidating financial information by reminding registrants that the individual columns in the condensed consolidating financial information need to be in accordance with GAAP. 15

Included below is a list of the separate columns that may be required in preparing consolidating financial information under Rule 3-10, depending on the facts and circumstances:

• Parent

• Subsidiary issuer(s)

• Combined Subsidiary Guarantor(s)

• Column for each Subsidiary Issuer and Subsidiary Guarantor that is not 100% owned, whose guarantee is not full and unconditional, or whose guarantee is not joint and several16

14 See Section 2515 of the SEC staff’s Division of Corporation Finance Financial Reporting Manual. 15 Remarks by Craig Olinger, 4 December 2012, 2012 AICPA National Conference on Current SEC and PCAOB Developments 16 Under Rule 3-10, presenting this column does not relieve Subsidiary Issuers or Subsidiary Guarantors with these characteristics

from providing separate financial statements.



• Column for each Subsidiary Guarantor by Legal Jurisdiction17

• Combined Subsidiary Non-Guarantors (if not minor)18

• Consolidating adjustments

• Total consolidated amounts

Condensed consolidating financial information is prepared on a legal entity basis. Determining which legal entities of the consolidated group should be included in the separate columns involves understanding the terms of the underlying contractual agreements and other documents of the registered debt. These documents generally identify the issuers and guarantors by their legal entity names.

An entity’s legal department may need to be involved to verify that the groupings of legal entities by column are appropriate and that there have been no changes in entity structure. One of the objectives of this disclosure is that the columns should be as comparable as possible over time. Therefore, careful consideration should be given to how changes in an entity’s structure should be reflected. For example, a change in which a legal entity switches from being a guarantor to being a nonguarantor generally would result in retrospective adjustment of prior period financial statements to reflect the new entity structure.

For internal reporting, entities often group or summarize financial information by region, product line, brand, or industry (for example), but not by legal entity. Therefore, special adjustments will likely be required when preparing condensed consolidating financial information on a legal entity basis to ensure each column properly reflects all appropriate balances. Income taxes should be calculated on a separate return basis by legal entity, and any related assets and liabilities should be allocated to those legal entities. Likewise, other assets and liabilities (e.g., intellectual property intangibles) should be allocated to the subsidiary that has legal title to the underlying item.

Special adjustments also may be required to "push down" the parent’s basis in the net assets of a subsidiary to the applicable subsidiary column, in circumstances in which push down accounting would be required or permitted under relevant SEC rules in the separate financial statements of the subsidiary.

When preparing condensed consolidating financial information, an entity should consider relevant SEC rules, including those related to:

• Regulation S-X Rule 3-10, Financial Statements of Guarantors, and Affiliates Whose securities Collateralize an Issue Registered or Being Registered (ASC 470-10-S99-1)

• Allocating certain charges incurred by a parent on behalf of a subsidiary and the accounting for and disclosure of the subsidiary's income tax expense, in accordance with SAB Topic 1.B.1 (codified in ASC 225-10-S99-3)

• Pushing down balances from a parent to a subsidiary, in accordance with SAB Topic 5.J (codified in ASC 805-50-S99-1)19

Additional adjustments may be required to properly reflect intercompany balances. A common circumstance in which adjustments are required is when a parent entity performs a treasury function on behalf of its subsidiaries, and routinely transfers cash to and from the subsidiaries. Many times, there is

17 Under Rule 3-10, this column is required if domestic or foreign laws affect the enforceability of the guarantee. 18 Under Rule 3-10, this column is not required if the non-guarantor subsidiaries are minor (i.e., each of the subsidiary’s total assets,

stockholders’ equity, revenues income from continuing operations before income taxes, and cash flows from operating activities is less than 3% of the parent company’s corresponding consolidated amount).

19 See our FRD publication, Business combinations, which has an appendix on push down accounting and other new basis issues.



no formal policy for recording these transactions for internal reporting purposes. These transactions may be recorded inconsistently (e.g., as intercompany loans, intercompany payables and receivables, or as adjustments to the subsidiary equity and the investment in subsidiary accounts).

Making adjustments to properly reflect these transactions in the condensed consolidating financial information may require a detailed investigation of the nature of the transactions. For example, interest-bearing assets would need to be recorded as loans, and the underlying terms of the loans would need to be investigated to determine whether short-term or long-term classification is appropriate. Related adjustments to properly reflect intercompany interest income and charges also may be required. Additionally, intercompany transactions recorded as assets and liabilities that are noninterest bearing should be investigated to determine if they are capital activities that should be recorded within equity.

Certain intercompany consolidation adjustments also may need to be pushed down to the various columns. For example, see Section 9.2.2 for more information on how certain elimination entries are treated when adjusting a parent’s investment in subsidiary account for its equity in a subsidiary’s earnings or losses.

As mentioned earlier, the SEC staff has emphasized the importance of the form and content of the condensed consolidating financial information by reminding registrants that the individual columns in the condensed consolidating financial information need to be in accordance with GAAP. For example, intercompany receivables or liabilities should be classified as current or long-term assets or liabilities, not as liabilities with debit balances or assets with credit balances. It is important to remember that the “relief” to provide condensed consolidating financial information is allowed in lieu of filing separate, full audited financial statements with the SEC. Therefore, the SEC staff may be more likely to insist on amendments to correct errors than it would for errors in other notes to the financial statements.

Illustration 9-1 summarizes these and other common adjustments that may be required when preparing condensed consolidating financial information.

Illustration 9-1: Common adjustments that may be required when preparing condensed consolidating financial information

• Adjustments to push down the parent’s basis in a subsidiary’s assets and liabilities, including any goodwill and noncontrolling interest recognized as a result of the acquisition of such subsidiary (to the extent permitted or required in ASC 805-50-S99-1)

• Adjustments to properly classify intercompany balances, including investments in subsidiary accounts, intercompany payables and receivables, and intercompany debt

• Adjustments to allocate the effects of certain intercompany elimination entries to the controlling and noncontrolling interest in the parent and subsidiary columns

• Adjustments to properly allocate tax accounts and balances by legal entity

• Allocations of certain costs incurred by the parent on behalf of its subsidiaries

Once all adjustments are posted, certain amounts that may be reflected separately on the face of the condensed consolidating financial information often reconcile, based on the nature of their relationship to one another. Illustration 9-2 includes examples of amounts that may reconcile, when this information is prepared appropriately in accordance with Rule 3-10. Also, see Section 9.2.5 for example condensed consolidating financial information, which further illustrates how certain amounts may reconcile.



Illustration 9-2: Examples of amounts that may reconcile in condensed consolidating financial information

• Intercompany payables and intercompany receivables

• Intercompany income and intercompany charges

• Equity of the parent and consolidated equity attributable to the controlling interest

• Earnings of the parent and consolidated earnings attributable to the controlling interest

• Parent’s equity in the earnings of a subsidiary and earnings of the subsidiary attributable to the controlling interest

• Parent’s investment in subsidiary balance and equity of the subsidiary attributable to the controlling interest

• Certain cash flow activity relating to intercompany transactions

9.2.2 Investments in subsidiaries Excerpt from Accounting Standards Codification Debt — Overall

SEC Materials

470-10-S99-1 (Rule 3-10(h) of Regulation S-X) (i) Instructions for preparation of the condensed consolidating financial information required by paragraphs (c), (d), (e), and (f) of this section.

(3) The parent company column should present investments in all subsidiaries based upon their proportionate share of the subsidiary's net assets;

(5) All subsidiary issuer or subsidiary guarantor columns should present the following investments in subsidiaries under the equity method:

(i) Non-guarantor subsidiaries;

(ii) Subsidiary issuers or subsidiary guarantors that are not 100% owned or whose guarantee is not full and unconditional;

(iii) Subsidiary guarantors whose guarantee is not joint and several with the guarantees of the other subsidiaries; and

(iv) Subsidiary guarantors with differences in domestic or foreign laws that affect the enforceability of the guarantees;

Rule 3-10 requires that the parent company column present the parent’s investments in all subsidiaries based upon its proportionate share of each subsidiary’s net assets. The subsidiary issuer and subsidiary guarantor columns also should present their investments in any subsidiaries that are reflected in other columns in the same manner.



Investments in subsidiaries are initially recognized based on the amount of consideration transferred to obtain control of the subsidiary. The balance is subsequently adjusted for changes in ownership that do not result in a loss of control, subsidiary earnings or losses, the effects of elimination entries attributable to the controlling interest, intercompany dividends, and other items that result in changes to the net assets of the subsidiary (e.g., a contribution of assets by the parent). The investment in subsidiary balance generally eliminates against equity of the subsidiary attributable to the controlling interest in consolidation.

Illustration 9-3 provides an example rollforward of an investment in subsidiary account, to highlight the types of adjustments that are commonly made to an investment in subsidiary balance.

Illustration 9-3: Rollforward of an investment in subsidiary account

Assume that on 1 January 20x1, Parent acquires a 100% controlling financial interest in Subsidiary A for $100,000.

On 28 February 20x1, Parent transfers fixed assets with a carrying value of $10,000 to Subsidiary A.

On 31 March 20x1, Parent sells 10% of its interest in Subsidiary A to a third party, but retains control.

On 30 November 20x1, Parent sells inventory to Subsidiary A (downstream transaction) which Subsidiary A holds at year end. Parent recognizes $10,000 of revenues on the transaction and $8,000 in cost of revenues, for a net profit of $2,000. At year-end, the $2,000 in net profit is eliminated in consolidation and the elimination is attributable entirely to the controlling interest.

For fiscal year 20x1, Subsidiary A has net income of $50,000, other comprehensive income of $10,000, and declares of cash dividends $20,000 to its shareholders.

The carrying amount of the net assets of Subsidiary A at 31 December 20x1 is $150,000, excluding the effects of any eliminations.

Included below is a rollforward of Parent’s Investment in Subsidiary A account for fiscal year 20x1:

Beginning balance (31 December 20x0) $ –

Acquire 100% of Subsidiary A (1 January 20x1) 100,000

Transfer fixed assets to Subsidiary A (28 February 20x1) 10,000

Sell 10% of Subsidiary A stock (31 March 20x1) (11,000)

Equity in fiscal year 20x1 net income of Subsidiary A (90%) 45,000

Equity in fiscal year 20x1 other comprehensive income (90%) 9,000

Dividend from Subsidiary A to Parent (90%) (18,000)

Elimination of intercompany profit (100%) (2,000)

Ending balance (31 December 20x1) $ 133,000

The ending balance of Parent’s Investment in Subsidiary A account for fiscal year 20x1 equals its proportionate share of the net assets of Subsidiary A (i.e., $135,000 = $150,000 x 90%), less the effects of the elimination of intercompany profit attributable to the controlling interest ($2,000).



9.2.3 Cash flow information To prepare condensed consolidating cash flow information on a separate legal entity basis, registrants generally begin with the amounts determined for the condensed consolidating balance sheet and income statement information. General ledger balances often do not include the special adjustments that may be needed when preparing condensed consolidating financial information (see Illustration 9-1 for examples of these adjustments).

Following the guidance on condensed cash flow statements in SEC Regulation S-X Article 10.01.4,20 cash flows from operating activities can be presented net (i.e., as a single line item).

Registrants may need to make additional special adjustments to classify certain intercompany activity appropriately in the parent and subsidiary columns within the condensed consolidating cash flow statements. We believe a common misconception is that all intercompany activity is an operating activity, when some of it may relate to investing or financing activities or may be a noncash activity. Illustration 9-4 includes examples of common intercompany cash flow activity that should be evaluated carefully to determine the appropriate classification. Also, see Section 9.2.5 for example condensed consolidating statements of cash flows, which further illustrate how certain intercompany cash activity would be classified. All intercompany cash flow activity would be eliminated in consolidation.

Illustration 9-4: Examples of common intercompany cash flow activity

• Cash flow activity related to intercompany payables/receivables

• Cash flow activity related to the parent’s investment in subsidiary, including intercompany dividend activity

• Intercompany borrowing and repayment activity

• Intercompany capital contributions

• Purchases, sales and transfers of fixed and other assets among affiliates

Determining whether special adjustments are needed to classify intercompany activity appropriately requires a careful evaluation of the facts and circumstances. For example, a subsidiary that either receives or pays back intercompany loans or other advances from the parent or another subsidiary would classify those transactions as financing activities. The parent or other subsidiary providing the loans or other advances would classify the transactions as investing activities.

Cash flow activity related to the parent’s investment in subsidiary also generally requires special adjustments to present certain activity separately. For example, a parent’s initial investment in the subsidiary would be classified as an investing activity by the parent and a financing activity by the subsidiary. Further, the parent would need to evaluate dividends received from the subsidiary to determine whether they are a return on the investment (classified as operating activities) or a return of the investment (classified as investing activities). The subsidiary would classify all dividend payments as financing activities.

The classification of these and other similar items on the statement of cash flows requires judgment. See our FRD publication, Statements of cash flows, for further interpretive guidance in this area.

20 This guidance states that the condensed statement of cash flows may be abbreviated starting with a single figure of net cash flows from operating activities.



9.2.4 Disclosure requirements under Rule 3-10 Excerpt from Accounting Standards Codification Debt — Overall

SEC Materials

470-10-S99-1 (Rule 3-10(h) of Regulation S-X) (i) Instructions for preparation of the condensed consolidating financial information required by paragraphs (c), (d), (e), and (f) of this section.

(8) Include the following disclosure, if true:

(i) Each subsidiary issuer or subsidiary guarantor is 100% owned by the parent company;

(ii) All guarantees are full and unconditional; and

(iii) Where there is more than one guarantor, all guarantees are joint and several;

(9) Disclose any significant restrictions on the ability of the parent company or any guarantor to obtain funds from its subsidiaries by dividend or loan;

(10) Provide the disclosures prescribed by §210.4-08(e)(3) with respect to the subsidiary issuers and subsidiary guarantors;

(11) The disclosure:

(i) May not omit any financial and narrative information about each guarantor if the information would be material for investors to evaluate the sufficiency of the guarantee;

(ii) Shall include sufficient information so as to make the financial information presented not misleading; and

(iii) Need not repeat information that would substantially duplicate disclosure elsewhere in the parent company's consolidated financial statements; and

(12) Where the parent company's consolidated financial statements are prepared on a comprehensive basis other than U.S. Generally Accepted Accounting Principles, reconcile the information in each column to U.S. Generally Accepted Accounting Principles to the extent necessary to allow investors to evaluate the sufficiency of the guarantees. The reconciliation may be limited to the information specified by Item 17 of Form 20-F (§249.220f of this chapter). The reconciling information need not duplicate information included elsewhere in the reconciliation of the consolidated financial statements.



9.2.5 Example condensed consolidating financial information under Rule 3-10

Illustration 9-5: Condensed consolidating statements of income

Condensed consolidating statements of income Year ended 31 December 20x1 (all amounts in dollars)

Parent

Subsidiary guarantor

Non-guarantors

Eliminations

Consolidated

Net sales – 2,250 1,000 (100) 3,150 Cost of goods sold –

1,250

500

(100)

1,650

Gross profit – 1,000 500 – 1,500 Selling, distribution, and

administrative expenses 125

525

375

–

1,025

Operating profit (125) 475 125 – 475 Interest expense 80

(1) 15

–

(15)

80

Interest income (1) (15) – – 15 – Intercompany charges –

(2) 125

(2) 25

(150)

–

Intercompany income (2) (150) – – 150 – Income before income taxes and equity in net income of subsidiaries (40) 335 100 – 395 Income taxes 14

(120)

(35)

–

(141)

Income before equity in net income of subsidiaries (26) 215 65 254 Equity in net income of subsidiaries (3) 267 – – (267) – Net income 241 215 65 (267) 254 Net income attributable to noncontrolling interest –

– 13 – 13

Net income attributable to parent (4) 241 (3) 215 (3) 52 (267) (4) 241

Comprehensive income 297 255 85 (323) 314 Comprehensive income attributable to noncontrolling interest –

–

17 – 17

Comprehensive income attributable to parent 297 255 68 (323) 297

The following amounts in the example condensed consolidating statements of income above reconcile to one another (consistent with the guidance in Illustration 9-2):

(1) Intercompany interest income of the Parent ($15) equals intercompany interest expense recognized by the Subsidiary Guarantor ($15).

(2) Intercompany income of the Parent ($150) equals the intercompany charges recognized by the subsidiaries ($125 + $25 = $150).

(3) Parent’s equity in net income of subsidiaries ($267) equals the total net income attributable to Parent in the subsidiary columns ($215 + $52 = $267).

(4) Parent’s net income ($241) equals the consolidated net income attributable to the Parent ($241).



Illustration 9-6: Condensed consolidating statements of income

Condensed consolidating statements of income Year ended 31 December 20x2 (all amounts in dollars)

Parent


Non-guarantors

Eliminations

Consolidated

Net sales – 3,250 1,525 (200) 4,575 Cost of goods sold –

1,850

875

(200)

2,525

Gross profit – 1,400 650 – 2,050 Selling, distribution, and

administrative expenses 150

675

375

–

1,200 Operating profit (150) 725 275 – 850

Interest expense 95

(5) 25

–

(25)

95 Interest income (5) (25) – – 25 – Intercompany charges –

(6) 145

(6) 45

(190)

–

Intercompany income (6) (190) – – 190 – Income before income taxes and equity in net income of subsidiaries (30) 555 230 – 755 Income taxes 12

(120 )

(90 )

–

(198)

Income before equity in net income of subsidiaries (18) 435 140 – 557 Equity in net income of subsidiaries (7) 547 – – (547) – Net income 529 435 140 (547) 557 Net income attributable to noncontrolling interest – – 28 – 28 Net income attributable to parent (8) 529 (7) 435 (7) 112 (547) (8) 529

Comprehensive income 603 485 170 (621) 637 Comprehensive income attributable to noncontrolling interest – – 34 – 34 Comprehensive income attributable to parent 603 485 136 (621) 603

The following amounts in the example condensed consolidating statements of income above reconcile to one another (consistent with the guidance in Illustration 9-2):

(5) Intercompany interest income of the Parent ($25) equals intercompany interest expense recognized by the Subsidiary Guarantor ($25).

(6) Intercompany income of the Parent ($190) equals the intercompany charges recognized by the subsidiaries ($145 + $45 = $190).

(7) Parent’s equity in net income of subsidiaries ($547) equals the total net income attributable to the Parent in the subsidiary columns ($435 + $112 = $547).

(8) Parent’s net income ($529) equals consolidated net income attributable to the Parent ($529).



Illustration 9-7: Condensed consolidating balance sheets

Condensed consolidating balance sheets 31 December 20x1 (all amounts in dollars)

Parent


Non-guarantors

Eliminations

Consolidated

Assets Current assets:

Cash and cash equivalents 375 5 45 – 425 Accounts receivable, net – 235 50 – 285 Intercompany receivables (9) 50 (9) 50 (9) 10 (110) – Inventories – 200 90 – 290 Other current assets 5 25 15 – 45

Total current assets 430 515 210 (110) 1,045 Property, plant, and equipment, net – 125 30 – 155 Goodwill – 300 45 – 345 Intangible assets – 95 5 – 100 Investments in subsidiaries (10) 466 – – (466) –

Total assets 896 1,035 290 (576) 1,645 Liabilities and stockholders’ equity Current liabilities:

Accounts payable 10 275 15 – 300 Intercompany payable (9) 5 (9) 80 (9) 25 (110) – Other accrued liabilities 15 240 15 – 270

Total current liabilities 30 595 55 (110) 570 Long-term debt 300 – – – 300 Deferred income taxes – 150 15 – 165

Stockholders’ equity: Total parent’s stockholders’ equity (11) 566 (10) 290 (10) 176 (466) (11) 566 Noncontrolling interest – – 44 – 44

Total stockholders’ equity 566 290 220 (466) 610 Total stockholders’ equity and liabilities 896 1,035 290 (576) 1,645

The following amounts in the example condensed consolidating balance sheets above reconcile to one another (consistent with the guidance in Illustration 9-2):

(9) Total intercompany receivables ($50 + $50 + $10 = $110) equal total intercompany payables ($5 + $80 + $25 = $110).

(10) The Parent’s investment in subsidiaries ($466) equals total equity of the subsidiaries attributable to the Parent ($290 + $176 = $466).

(11) The Parent’s equity ($566) equals consolidated equity attributable to the Parent ($566).



Illustration 9-8: Condensed consolidating balance sheets

Condensed consolidating balance sheets 31 December 20x2 (all amounts in dollars)

Parent


Non-guarantors

Eliminations

Consolidated

Assets Current assets:

Cash and cash equivalents 267 90 40 – 397 Accounts receivable, net – 378 120 – 498 Intercompany receivables (12) 100 (12) 60 (12) 15 (175) – Inventories – 375 200 – 575 Other current assets 5 20 35 – 60

Total current assets 372 923 410 (175) 1,530 Property, plant, and equipment, net – 120 29 – 149 Goodwill – 300 45 – 345 Intercompany notes receivable (13) 225 – – (225) – Intangible assets – 90 5 – 95 Investments in subsidiaries (14) 937 – – (937) –

Total assets 1,534 1,433 489 (1,337) 2,119 Liabilities and stockholders’ equity Current liabilities:

Accounts payable 5 218 35 – 258 Intercompany payable (12) 60 (12) 105 (12) 10 (175) – Other accrued liabilities – 95 25 – 120

Total current liabilities 65 418 70 (175) 378 Long-term debt 300 – – – 300 Intercompany notes payable – (13) 225 – (225) – Deferred income taxes – 165 29 – 194 Stockholders’ equity:

Total parent’s stockholders’ equity (15) 1,169 (14) 625 (14) 312 (937) (15) 1,169 Noncontrolling interests – – 78 – 78

Total stockholders’ equity 1,169 625 390 (937) 1,247 Total stockholders’ equity and liabilities 1,534 1,433 489 (1,337) 2,119 The following amounts in the example condensed consolidating balance sheets above reconcile to one another (consistent with the guidance in Illustration 9-2):

(12) Total intercompany receivables ($100 + $60 + $15 = $175) equal total intercompany payables ($60 + $105 + $10 = $175).

(13) Intercompany notes receivable ($225) equal intercompany notes payable ($225).

(14) The parent’s investment in subsidiaries account ($937) equals total equity of subsidiaries attributable to the parent ($625 + $312 = $937). Also, the roll forward of this account is as follows:

Beginning balance (Illustration 9-7) $ 466

Share of comprehensive income of subsidiary guarantor (Illustration 9-6) 485

Share of comprehensive income of subsidiary non-guarantor (Illustration 9-6) 136

Dividends received from subsidiary guarantor (Illustration 9-10) (150)

Ending balance $ 937

(15) The Parent’s equity ($1,169) equals consolidated equity attributable to the Parent ($1,169).



Illustration 9-9: Condensed consolidating statements of cash flows

Condensed consolidating statements of cash flows Year ended 31 December 20x1 (all amounts in dollars)

Parent


Non-guarantors

Eliminations

Consolidated

Net Cash Provided by (Used for) Operating Activities 15 25 40 (17) (150) (70) Cash Provided by (Used for) Investing Activities:

Purchases of property, plant, and equipment – (5) – – (5) Net Cash Used for Investing Activities –

(5)

–

–

(5)

Cash Provided by (Used for) Financing Activities:

Additions to long-term debt 300

–

–

–

300 Proceeds from stock option exercises and

other 6

–

–

–

6 Excess tax benefits from share-based

payments 4 – – – 4 Intercompany dividends – (16) (150) – (17) 150 –

Net Cash (Used for) Provided by Financing Activities 310 (150) - 150 310

Net Change in Cash and Cash Equivalents 325 (130) 40 – 235 Cash and Cash Equivalents at Beginning of Year 50

135

5

–

190

Cash and Cash Equivalents at End of Year 375 5 45 – 425

The following intercompany amounts have been separately classified in the example condensed consolidating statements of cash flows above (consistent with the guidance in Illustration 9-4):

(16) Intercompany dividends paid to the Parent are classified as cash used for financing activities by the Subsidiary Guarantor.

(17) The Parent classifies the intercompany dividends received from the Subsidiary Guarantor as operating activities, since they are a return on the investment (see Section 9.2.3 for further discussion). Since cash provided by (or used for) operating activities is presented at a net amount as a single line item, the intercompany dividends received are not reflected separately here. They eliminate against the intercompany dividend activity in Item (16) in consolidation.



Illustration 9-10: Condensed consolidating statements of cash flows

Condensed consolidating statements of cash flows Year ended 31 December 20x2 (all amounts in dollars)

Parent


Non-guarantors

Eliminations

Consolidated

Net Cash Provided by (Used for) Operating Activities 107

230

(230)

(20) (150)

(43)

Cash Provided by (Used for) Investing Activities:

Intercompany notes issued (18) (225)

–

–

(18) 225

–

Purchases of property, plant, and equipment –

5

–

–

5 Net Cash Used for Investing Activities (225)

5

–

225

5

Cash Provided by (Used for) Financing Activities: Proceeds from stock option exercises and

other 6

–

–

–

6 Excess tax benefits from share-based

payments 4

–

–

–

4 Intercompany notes borrowing –

–

(18) 225

(18) (225)

–

Intercompany dividends –

(19) (150)

–

(20) 150

– Net Cash (Used for) Provided by Financing

Activities 10

(150)

225

(75)

10 Net Change in Cash and Cash Equivalents (108)

85

(5)

–

(28)

Cash and Cash Equivalents at Beginning of Year 375

5

45

–

425 Cash and Cash Equivalents at End of Year 267

90

40

–

397

The following intercompany amounts have been separately classified in the example condensed consolidating statements of cash flows above (consistent with the guidance in Illustration 9-4):

(18) As reflected in Illustration 9-8, the Parent issued intercompany notes to the Subsidiary Guarantor in 20x2. The Parent classifies the issuance of the intercompany notes as cash used for investing activities. The Subsidiary Guarantor classifies the borrowing as cash provided by financing activities. (See Section 9.2.3 for further discussion). These amounts are eliminated in consolidation.

(19) Intercompany dividends paid to the Parent are classified as cash used for financing activities by the Subsidiary Guarantor.

(20) The Parent classifies the intercompany dividends received from the Subsidiary Guarantor as operating activities, since they are a return on the investment (see Section 9.2.3 for further discussion). Since cash provided by (or used for) operating activities is presented at a net amount as a single line item, the intercompany dividends received are not reflected separately here. They eliminate against the intercompany dividend activity in Item (16) in consolidation.


10 Presentation and disclosures

10.1 Certain presentation and disclosure requirements related to consolidation Excerpt from Accounting Standards Codification Consolidation — Overall

Disclosure

Consolidation Policy

810-10-50-1 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 footnote is required.

Parent with a Less-than-Wholly-Owned Subsidiary

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:

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. Extraordinary items.

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.




810-10-50-1B In the period that either a subsidiary is deconsolidated or a group of assets is derecognized in accordance with paragraph 810-10-40-3A, the parent shall disclose all of the following:

a. The amount of any gain or loss recognized in accordance with paragraph 810-10-40-5

b. The portion of any gain or loss related to the remeasurement of any retained investment in the former subsidiary or group of assets to its fair value

c. The caption in the income statement in which the gain or loss is recognized unless separately presented on the face of the income statement

d. A description of the valuation technique(s) used to measure the fair value of any direct or indirect retained investment in the former subsidiary or group of assets

e. Information that enables users of the parent’s financial statements to assess the inputs used to develop the fair value in item (d)

f. The nature of continuing involvement with the subsidiary or entity acquiring the group of assets after it has been deconsolidated or derecognized

g. Whether the transaction that resulted in the deconsolidation or derecognition was with a related party

h. Whether the former subsidiary or entity acquiring a group of assets will be a related party after deconsolidation.

10.1.1 Consolidated statement of comprehensive income presentation ASC 810 requires that consolidated net income and consolidated comprehensive income of the consolidated entity include the revenues, expenses, gains and losses from both the parent and the noncontrolling interest. The FASB believes that consolidated financial statements are more relevant if the user is able to distinguish between amounts attributable to both the owners of the parent company and the noncontrolling interest. For the user to make that determination, the amounts of consolidated net income and consolidated comprehensive income allocable to both the parent’s owners and the noncontrolling interest should be presented on the face of the financial statements. In addition, the amounts attributable to the parent for income from continuing operations, discontinued operations and extraordinary items should be disclosed either on the face of the income statement or in the notes to the consolidated financial statements. Earnings per share will continue to be calculated based on consolidated net income allocable to the parent’s owners. (See Chapter 7 of our FRD publication, Earnings per share, for additional discussion of how consolidated net income allocable to the noncontrolling interest is treated in the calculation of earnings per share).

10.1.2 Reconciliation of equity presentation ASC 810 also requires a reconciliation of the carrying amount of total equity from the beginning of the period to the end of the period. This reconciliation includes total equity, equity allocable to the parent and equity allocable to the noncontrolling interest. It should separately disclose net income, transactions with owners acting in their capacity as owners (showing separately contributions from and distributions to owners) and each component of other comprehensive income. For SEC registrants, this requirement is satisfied by including equity allocable to the noncontrolling interest in the statement of changes in equity. Entities not registered with the SEC are not required to include a statement of changes in equity. The



disclosure requirements related to this reconciliation can be satisfied by including a statement of changes in equity or including the required information in the notes to the consolidated financial statements. In addition to the reconciliation of the carrying amount of equity, the effect of any changes in the parent’s ownership interest in a subsidiary on equity allocable to the parent should be disclosed in the notes to the consolidated financial statements.

If material, Rule 5-02(31) of Regulation S-X requires registrants to present noncontrolling interest amounts represented by preferred stock and applicable dividend requirements separately in a note.

10.1.2.1 Presentation of redeemable noncontrolling interests in equity reconciliation

The SEC staff has indicated that registrants with redeemable noncontrolling interests (that is, mezzanine equity) should not include these items in any caption titled “total equity” in the reconciliation of equity required under ASC 810-10-50-1A(c).

ASC 810-10-50-1A(c) and the SEC’s technical amendments to Regulation S-X Rule 3-04 require registrants to reconcile total equity at the beginning of the period to total equity at the end of the period. ASC 480-10-S99-3A specifies that securities that are redeemable at the option of the holder or outside the control of the issuer are to be presented outside permanent equity (in the mezzanine section of the statement of financial position) and prohibits such instruments from being included in any caption titled “total equity.”

The SEC staff21 has identified two potentially acceptable means of presentation to satisfy the requirements of both ASC 480-10-S99-3A and ASC 810-10-50-1A(c):

• Provide a column for redeemable noncontrolling interests in the equity reconciliation but exclude the related amounts from any “total” column. For example, this column could be presented separately to the right of the column reconciling total equity. In that case, the reconciliation could include a row for net income or a supplemental table identifying the allocation of net income among controlling interests, noncontrolling interests and redeemable noncontrolling interests.

• Exclude redeemable noncontrolling interests from the equity reconciliation but provide a supplemental table, reconciling the beginning and ending balance of redeemable noncontrolling interests. The supplemental table may be in either the notes to the financial statements or the “statement of changes in equity and noncontrolling interests.” In this case, the caption “net income” in the equity reconciliation could note parenthetically the amount related to redeemable noncontrolling interests.

Other means of presenting the reconciliation of total equity may be acceptable and the appropriateness of such presentation would be evaluated by the SEC staff based on the specific facts and circumstances.

10.1.2.2 Interim reporting period requirements

ASC 810-10-50-1A(c) requires that a parent with one or more less-than-wholly-owned subsidiaries must disclose equity reconciliations for each reporting period, which includes interim reporting periods. Some reporting entities may choose to present this reconciliation in the form of a consolidated statement of changes in equity. If a consolidated statement of changes in equity is not presented on an interim basis, a reporting entity must provide the disclosure in the notes to the consolidated financial statements.

21 The SEC staff’s views described here are included in the publicly available minutes of the Center for Audit Quality’s 23 June 2009 SEC Regulations Committee meeting.



We believe that the reconciliation 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 should be presented on a year-to-date basis. This approach is consistent with the presentation requirements for the statement of cash flows, which provides information about the activity of balance sheet amounts (that is, cash and cash equivalents) between periods.

However, it would also be acceptable for an issuer to provide a reconciliation of the relevant equity amounts on a quarter-to-date basis in addition to the year-to-date disclosures.

10.1.3 Consolidated statement of financial position presentation Although ASC 810 does not explicitly require that a subtotal for “total parent shareholders’ equity” be presented on the face of the statement of financial position, we believe that, based on the example in ASC 810-10-55-41, such presentation should be made. ASC 810-10-50-1A(c) requires that an entity disclose a reconciliation at the beginning and the end of the period of the carrying amount of equity attributable to the parent, either in the consolidated statement of changes in equity, if presented, or in the notes to the consolidated financial statements. The illustrative example in ASC 810-10-55-41 presents a subtotal for the total parent shareholders’ equity. Therefore, we believe that an entity should present a subtotal for the total parent shareholders’ equity on the face of the statement of financial position separately from noncontrolling interest and before arriving at total equity.

Question 10.1 How should an insurer consolidate a controlled investment fund if a portion of the consolidated investment fund is owned by the insurer’s separate accounts?

In accordance with ASC 944-80-25-12, the insurer should consolidate the investment fund in the following manner:

• The portion of the fund assets representing the contract holder’s interests should be included as separate account assets and liabilities in accordance with ASC 944-80-25-3.

• The remaining portion of the fund assets (including the portion owned by any other investors) should be included in the general account of the insurer on a line-by-line basis.

• Noncontrolling interests should not be included in the separate account liability but rather classified as a liability or equity based on other applicable guidance.

It should be noted that under ASC 944-80-25-3,22 when evaluating an entity for consolidation, an insurer should not consider any separate account interests held for the benefit of policy holders to be the insurer’s interests, nor should it combine any separate account interests held for the benefit of policy holders with the insurer’s general account interest in the same investment.

See our FRD publication, Consolidation and the Variable Interest Model, for additional consolidation considerations related to these funds.

22 The guidance applies if the separate account meets the conditions in ASC 944-80-25-2.



10.1.4 Consolidated statement of cash flows presentation ASC 810 does not affect the statement of cash flow and therefore entities with noncontrolling interests should continue to look to ASC 230 for guidance. ASC 230 requires entities to provide a reconciliation of net income to net cash flows from operating activities regardless of whether the direct or indirect method is used for presenting net cash flows from operating activities. Therefore, entities should start with net income in their statement of cash flow presentation when applying the indirect method rather than net income attributable to the parent. Illustration 10-1 provides an example of this presentation.

Illustration 10-1: Starting point for indirect method

For Company A, assume for the years ended 31 December 20x9 and 20x8:

• Net income was $1,200 and $1,000, respectively

• Net income attributable to the noncontrolling interests was $240 and $200, respectively

• Net income attributable to the Parent was $960 and $800, respectively

In preparing the statement of cash flows under the indirect method, Company A would begin with net income including income attributable to the noncontrolling interests. Therefore, Company A would begin with net income amounts of $1,200 and $1,000 for the years ended 31 December 20x9 and 20x8, respectively.

While ASC 230 does not provide specific guidance on the statement of cash flow presentation for transactions with noncontrolling interest holders (e.g., dividends and purchases/sales of noncontrolling interest while control is maintained), ASC 230-10-45-14 and 45-15 state that “proceeds from issuing equity instruments” and “payment of dividends and other distributions to owners, including outlays to reacquire the enterprise’s equity instruments” are financing activities. We believe that transactions with noncontrolling interest holders, while control is maintained, should generally be reported as financing activities in the statement of cash flows. This view is consistent with the economic entity concept that all residual economic interest holders have an equity interest in the consolidated entity, even if the residual interest is relative to a subsidiary, and with ASC 810’s requirement to present noncontrolling interests in the consolidated statement of financial position as a separate component of equity. This view is also consistent with ASC 810’s requirement that, with certain exceptions, changes in a parent’s ownership interest in a subsidiary while the parent retains control must be accounted for as equity transactions.

10.1.4.1 Presentation of transaction costs in statement of cash flow

As discussed in Chapter 4 (See Section 4.1.5), companies will have to make a policy election concerning whether to reflect transaction costs associated with purchases and sales of noncontrolling interests as an expense in the consolidated statement of income or as a direct charge to equity. We believe the most appropriate classification of transaction costs in the consolidated statement of cash flows would be consistent with that accounting. Accordingly, if transaction costs are reflected as an expense, we believe the related cash flows would be most appropriately reflected as an operating activity. Alternatively, if the transaction costs are reflected as a direct charge to equity, we believe the related cash flows would be most appropriately classified as a financing activity.



10.1.5 Disclosure ASC 810 also requires disclosure of any gain/loss recognized on the deconsolidation of a subsidiary or derecognition of a group of assets. The amount and classification of the gain/loss in the income statement (see Section 6.1.8) are disclosed in the notes to the consolidated financial statements along with the amount of the gain/loss related to the remeasurement of any retained interest in the deconsolidated subsidiary or group of assets.

ASC 810 requires disclosure of a description of the valuation technique(s) used to measure the fair value of any direct or indirect retained investment in a deconsolidated subsidiary or group of assets (e.g., a discounted cash flow approach). Disclosure is also required of the information that enables users of the parent’s financial statements to assess the inputs used to develop the fair value measurements for the retained interest in the former subsidiary or group of assets.

For example, for a discounted cash flow approach, disclosures may include information on discount rates and the assumed capital structure, capitalization rates for terminal cash flows, assumptions about expected growth in revenues, expected profit margins, expected capital expenditures, expected depreciation and amortization, expected working capital requirements and other assumptions that may have a significant effect on the valuation, such as discounts for lack of marketability or lack of control, as applicable. For a market approach, disclosures may include information on the valuation multiples used in the analysis, a description of the population of the guideline companies or similar transactions from which the multiples were derived, the timeliness of the market data used, the method by which the multiples were selected (e.g., use of the median, use of an average, the extent to which the financial performance of the subject company was compared to the relative performance of the guideline companies), discounts for lack of marketability and lack of control, as applicable. An entity also is required to disclose the valuation techniques used to measure an equity interest in an acquiree held by the entity immediately before the acquisition date in a business combination achieved in stages.

An entity also must disclose the nature of its continuing involvement with the deconsolidated subsidiary or the entity acquiring the group of assets and whether a related-party relationship exists. This disclosure is intended to highlight circumstances in which a gain or loss is recognized, but the continuing relationship may affect the ultimate amounts realized from the sale and resulting relationship.

10.1.5.1 Additional AOCI disclosures required subsequent to the adoption of ASU 2013-02

ASU 2013-02 amended ASC 220 to require an entity to report, in one place, information about reclassifications out of AOCI. Entities also are required to present reclassifications by component when reporting changes in AOCI balances. Refer to our 27 February 2013 Technical Line, What the new AOCI disclosures will look like, for further information on these disclosure requirements. The Technical Line includes examples of how to apply the requirements when an entity has noncontrolling interests.

Public companies must make the disclosures in fiscal years and interim periods within those years beginning after 15 December 2012. For nonpublic companies, the requirements are effective for fiscal years beginning after 15 December 2013 and interim and annual periods thereafter. The guidance should be applied prospectively.



10.2 Comprehensive example

Illustration 10-2: Presentation and disclosure example

The following financial statements and selected notes for Company P illustrate ASC 810’s presentation and disclosure requirements and are based on the comprehensive example in Chapters 4 and 6. The quantitative disclosures required by ASC 810-10-50-1A(c) reflected in the consolidated statement of changes in equity in this example may instead be reflected in the notes to the consolidated financial statements. This example does not include the qualitative disclosure requirements of ASC 810-10-50-1B(d)-(h).

Company P Consolidated Statement of Financial Position

(all amounts in dollars) 31 December, 20X3 20X2 Assets:

Cash 83,700 39,600 Marketable securities 17,500 15,500 Inventory 30,000 30,000 Buildings and equipment, net 59,850 68,400 Goodwill 4,286 4,286

Total assets 195,336 157,786

Liabilities:

Accounts payable 75,000 75,000 Debt 27,000 27,000

Total liabilities 102,000 102,000 Equity:

Company P shareholders’ equity: Common stock 1,500 1,500 Additional paid-in capital 15,440 5,747 Accumulated other comprehensive income 3,300 3,150 Retained earnings 57,240 40,770

Total Company P shareholders’ equity 77,480 51,167 Noncontrolling interest 15,856 4,619

Total equity 93,336 55,786 Total liabilities and equity 195,336 157,786

In the consolidated statement of financial position, Company P separately identifies Company P’s shareholders’ equity and the noncontrolling interest.

Consolidated net income is attributed to the controlling and noncontrolling interests.



Company P Consolidated Statement of Income

(all amounts in dollars, except share amounts) Year Ended 31 December, 20X3 20X2 20X1 Revenues 96,000 96,000 96,000 Cost of revenues 42,000 42,000 46,500

Gross profit 54,000 54,000 49,500 Selling and administrative 26,550 26,550 26,550

Consolidated net income 27,450 27,450 22,950 Less: Net income attributable to noncontrolling interest 10,980 2,745 6,885

Net income attributable to Company P 16,470 24,705 16,065

Earnings per share — basic and diluted: Net income attributable to Company P common shareholders 10.98 16.47 10.71

Weighted-average shares outstanding 1,500 1,500 1,500

Company P Consolidated Statement of Comprehensive income

(all amounts of dollars) Year Ended 31 December, 20X3 20X2 20X1 Net income 27,450 27,450 22,950 Other comprehensive income and reclassification adjustments:

Unrealized holding gain (loss) on available-for-sale securities and reclassification adjustments 2,000 (1,500) 5,000

Total other comprehensive income and reclassification adjustments 2,000 (1,500) 5,000 Comprehensive income 29,450 25,950 27,950

Less: Comprehensive income attributable to noncontrolling interest 11,780 2,595 8,385

Comprehensive income attributable to Company P 17,670 23,355 19,565

The consolidated statement of changes in equity includes an additional column representing the changes in noncontrolling interest.



Company P also discloses the effects of changes in Company P’s ownership interest in its subsidiary on Company P’s equity. This schedule would be presented as a note in the company’s financial statements, as follows.

Company P Notes to Consolidated Financial Statements

Years Ended 31 December, 20X3, 20X2, 20X1 (all amounts in dollars)

Net Income Attributable to Company P and Transfers (to) from the Noncontrolling Interest 20X3 20X2 20X1 Net income attributable to Company P 16,470 24,705 16,065 Transfers (to) from the noncontrolling interest

Increase in Company P’s paid-in capital for sale of 9,000 Company S common shares 9,693 – –

Decrease in Company P’s paid-in capital for purchase of 6,000 Company S common shares – (28,753) – Net transfers (to) from noncontrolling interest 9,693 (28,753) –

Change from net income attributable to Company P and transfers (to) from noncontrolling interest 26,163 (4,048) 16,065

Financial reporting developments Consolidated and other financial statements | A-1

A Comprehensive example

This appendix provides a comprehensive example of the concepts described in this publication:

• Control resulting from an increase in ownership interest

• Changes in a parent’s ownership interest while the parent maintains control of the subsidiary meeting the scope of ASC 810-10-45-21A

• The elimination of intercompany transactions

• Deconsolidation of a subsidiary

Work paper consolidating entries are numbered sequentially. While there are different ways to apply consolidation procedures, this comprehensive example illustrates consolidation based on push down accounting to the subsidiary (with the exception that certain elimination entries have not been pushed back to the parent or subsidiary columns, as might otherwise be appropriate for the external reporting of consolidating financial statements — see Chapter 9 for more information). The subsidiary is a retailer of luxury handbags qualifying as a business under ASC 805.

Illustration A-1: Year 20X2

Facts:

• As of 31 December 20X1, Company P (P) owns 40,000 shares of $1 par stock of Company S (S), representing a 40% investment in S. S is a retailer of luxury handbags and a voting interest entity, with net assets of $650,000. The carrying amount of Company P’s 40% investment in Company S is $260,000.

• P purchases an additional 40,000 shares of $1 par stock of S on 1 January 20X2 for $400,000, increasing its ownership interest to 80% (assume no control premium). The fair value of S is $1,000,000 and the fair value of the identifiable net assets of S is $800,000.

• During the year, S sells inventory to P (upstream transaction) which P holds at year-end. A summary of the effect of the transaction on S’s income statement is as follows:

Revenues $ 100,000 Cost of revenues 70,000

Gross profit $ 30,000

• During the year, P sells inventory to S (downstream transaction) which S holds at year end. A summary of the effect of the transaction on P’s income statement is as follows:

Revenues $ 150,000 Cost of revenues 80,000

Gross profit $ 70,000

• During the year, P makes an intercompany loan to S with principal of $1,000,000 and an annual interest rate of 10%. S capitalizes the current year’s interest on the intercompany loan as part of the cost to construct a building and remits cash to P for the annual interest incurred on the intercompany loan.



• During the year, P charges S a management fee of $1,500 for management services.

• Company S has other comprehensive income of $25,000 from unrealized gains on available-for-sale securities for the year.

• The remaining useful life of the buildings and equipment at 1 January 20X2 is 10 years.

• Assume inventory held by S at the beginning of the year and affected by the step up to fair value on 1 January 20X2 is sold in the current year.

• S pays cash dividends of $50,000 during the year, of which P’s share is $40,000.

Figure A-1: Balance sheet for Company P, 31 December 20X1 (all amounts in dollars) Cash 640,000 Accounts receivable 190,000 Inventory 184,000 Buildings and equipment, net 220,000 Investment in Company S 260,000

1,494,000

Accounts payable 125,000 Other liabilities 250,000 Common stock 200,000 Additional paid-in capital 500,000 Retained earnings 419,000 1,494,000

Figure A-2: Acquisition-date balance sheet for Company S, 1 January 20X2 (all amounts in dollars)

Book value Fair value Cash 250,000 250,000

Available-for-sale securities 100,000 100,000

Accounts receivable 100,000 100,000

Inventory 150,000 200,000

Buildings and equipment, net 200,000 300,000

800,000 950,000

Accounts payable 150,000 150,000

Common stock 100,000

Additional paid-in capital 550,000

800,000



Figure A-3: Acquisition-date consolidating work paper to arrive at consolidated balance sheet, 1 January 20X2 (all amounts in dollars)

Company P

Company S

Adjustments

Consolidated Debit Credit Cash 240,000 250,000 490,000 Available-for-sale securities – 100,000 100,000 Accounts receivable 190,000 100,000 290,000 Inventory 184,000 (1) 200,000 384,000 Buildings and equipment, net 220,000 (2) 300,000 520,000 Investment in Company S (3) 800,000 – (5) 800,000 – Goodwill – (4) 200,000 200,000

Total assets 1,634,000 1,150,000 1,984,000

Accounts payable 125,000 150,000 275,000 Other liabilities 250,000 – 250,000

Total liabilities 375,000 150,000 525,000 Common stock 200,000 80,000 (9) 80,000 200,000 Additional paid-in capital 500,000 720,000 (9) 720,000 500,000 Retained earnings (6) 559,000 – 559,000


1,259,000 (7) 800,000 1,259,000

Noncontrolling interest – (8) 200,000 200,000 Total equity 1,259,000 1,000,000 1,459,000


Figure A-3 illustrates the consolidating entries between P and S for the 1 January 20X2 business combination.

(1) Inventory of S is adjusted to fair value.

(2) Buildings and equipment of S are adjusted to fair value.

(3) The $400,000 investment purchased on 1 January 20X2 is added to the book value of the original investment ($260,000). In addition, a gain is recognized on the original investment to increase it to fair value. This gain on investment of $140,000 is calculated as the fair value of the original 40% investment ($400,000) less the book value of the original investment.

(4) Goodwill is determined by subtracting the fair value of S’s net identifiable assets acquired ($800,000) from the fair value of S’s net assets ($1,000,000). In push down accounting, the goodwill is recorded on the books of S.

(5) P’s investment in S is eliminated.

(6) Retained earnings include the original retained earnings of P ($419,000) and the gain on the investment in S ($140,000).

(7) In push down accounting, the basis of the equity is increased to equal the fair value of S less the noncontrolling interest.

(8) Noncontrolling interest is calculated by taking the fair value of S ($1,000,000) and subtracting the fair value of P’s 80% investment in S ($800,000). For illustrative purposes, no control premium is assumed. In push down accounting, the noncontrolling interest is recorded on the books of S.

(9) S’s common stock and additional paid-in capital are eliminated.



Figure A-4: Work paper of consolidated income statement, for year ended 31 December 20X2 (all amounts in dollars)

Company P Company S

Adjustments

Consolidated Debit Credit Revenues 500,000 300,000 (13) 250,000 550,000 Cost of revenues 200,000 (10) 145,000 (14) 150,000 195,000 Gross profit 300,000 155,000 355,000 Depreciation expense 60,000 (11) 60,000 120,000 Selling and administrative 40,000 3,500 43,500 Management fee expense – 1,500 (15) 1,500 – Management fee revenue 1,500 – (15) 1,500 – Interest income 100,000 – (16) 100,000 – Gain on investment 140,000 – 140,000 Income from investment in Company S 72,000 (16) 72,000 – Net income 513,500 90,000 331,500 Net income attributable to

noncontrolling interest – (12) 18,000 (17) 6,000 12,000 Net income attributable to controlling

interest 513,500 72,000 319,500

Company P Company S

Adjustments

Consolidated Debit Credit Net income 513,500 90,000 (18) 423,500 (18) 151,500 331,500 Other comprehensive income: Unrealized gain on available-for-sale

securities 20,000 25,000 (19) 20,000 25,000 Comprehensive income 533,500 115,000 356,500 Comprehensive income attributable to

noncontrolling interest – (20) 23,000 (18) 6,000 17,000 Comprehensive income attributable to


Figure A-4 illustrates the consolidating entries between P and S for the year ended 31 December 20X2.

(10) The cost of revenues includes the fair value adjustment made to inventory at the beginning of the year because the inventory was sold during the year.

(11) Depreciation expense includes 20X2 depreciation of $10,000 ($100,000 / 10 years) related to the step up in fair value at 1 January 20X2.

(12) Net income attributable to the noncontrolling interest on a push down basis is based on the percentage ownership interest of the noncontrolling interest (20%) and calculated as a percentage of S’s income on a push down basis ($90,000 x 20%).

(13) Intercompany revenues from the upstream ($100,000) and downstream ($150,000) sales are eliminated.

(14) Intercompany cost of revenues from the upstream ($70,000) and downstream ($80,000) sales are eliminated.

(15) Intercompany revenue and expense for the management fee charged to S are eliminated.

(16) Company P’s interest income on the outstanding intercompany loan and income from investment in company S ($72,000) are eliminated.

(17) The intercompany profits from the upstream sale are eliminated in Items (13) and (14). A proportionate share of the upstream elimination is attributed to the noncontrolling interest ($30,000 x 20%). The elimination of the downstream sale is 100% attributable to the parent.



(18) These reflect the adjustments related to net income from the income statement above. See explanations of the $423,500 debit to net income in Items (13) and (15) to (17). See explanations of the $151,000 credit to net income in Items (14) and (15). See the explanation for the $6,000 attribution to the noncontrolling interest in Item (19).

(19) Company P’s share of the unrealized gain on available-for-sale securities ($25,000 x 80%) is eliminated.

(20) Comprehensive income attributable to the noncontrolling interest on a push down basis is based on the percentage ownership interest of the noncontrolling interest (20%) and calculated as a percentage of S’s comprehensive income on a push down basis ($115,000 x 20%).

Figure A-5: Consolidating work paper to arrive at consolidated balance sheet, 31 December 20X2 (all amounts in dollars)

Company P


Consolidated Debit Credit Cash 200,000 125,000 325,000 Available-for-sale securities – 125,000 125,000 Accounts receivable 104,000 135,000 239,000 Intercompany receivable (21) 150,000 (21) 100,000 (23) 250,000 – Inventory 106,000 245,000 (24) 100,000 251,000 Buildings and equipment, net 340,000 1,410,000 (25) 100,000 1,650,000 Intercompany loan (22) 1,000,000 – (26) 1,000,000 – Investment in Company S (27) 852,000 – (27) 852,000 – Goodwill – 200,000 200,000

Total assets 2,752,000 2,340,000 2,790,000 Accounts payable 279,000 125,000 404,000 Intercompany payable (21) 100,000 (21) 150,000 (23) 250,000 – Intercompany loan – (22) 1,000,000 (26) 1,000,000 – Other liabilities 720,500 – 720,500

Total liabilities 1,099,500 1,275,000 1,124,500 Common stock 200,000 80,000 (32) 80,000 200,000 Additional paid-in capital 500,000 720,000 (32) 720,000 500,000 Retained earnings (28) 932,500 (29) 32,000 (34) 200,000 738,500 (33) 32,000 (35) 6,000 Accumulated other comprehensive income

20,000 (30) 20,000 (33) 20,000 20,000


1,652,500 852,000 1,458,500

Noncontrolling interest (31) 213,000 (35) 6,000 207,000 Total equity 1,652,500 1,065,000 1,665,500


The balance sheet is consolidated in Figure A-5, as follows:

(21) Intercompany receivables and payables are recorded from the sales transactions between P and S.

(22) An intercompany loan was made to finance the construction of a new building for S.

(23) Intercompany receivables and payables from the upstream ($100,000) and downstream ($150,000) sales are eliminated.

(24) Intercompany profit remaining in inventory at year end from the upstream ($30,000) and downstream ($70,000) sales is eliminated.

(25) Interest capitalized from the intercompany loan is eliminated.



(26) Outstanding intercompany loan is eliminated.

(27) P’s investment in S is rolled forward from the prior period as shown below. P’s investment in S is eliminated in consolidation.

31 December 20X1 $ 800,000 Attributed net income 72,000 Attributed other comprehensive income 20,000 Dividends received (40,000) 31 December 20X2 balance $ 852,000

(28) P’s retained earnings balance is rolled forward as follows:

31 December 20X1 balance $ 419,000 Current year income 513,500 31 December 20X2 balance $ 932,500

(29) S’s retained earnings balance is rolled forward as follows. In push down accounting, only the earnings and dividends attributable to the controlling interest are recorded in retained earnings.

31 December 20X1 balance $ – Income attributable to controlling interest 72,000 Dividends declared (40,000) 31 December 20X2 balance $ 32,000

(30) In push down accounting, only the other comprehensive income attributable to the controlling interest is recorded by S ($25,000 x 80%).

(31) Noncontrolling interest, on a push down basis, is rolled forward as follows:

31 December 20X1 $ – Creation of noncontrolling interest 200,000 Attributed net income 18,000 Attributed other comprehensive income 5,000 Dividends received (10,000) 31 December 20X2 balance $ 213,000

(32) The common stock and additional paid-in capital of S are eliminated.

(33) The retained earnings and AOCI of Company S are eliminated.

(34) This adjustment represents the net effects of the intercompany eliminations in Items (13) through (17) of the income statement work paper in Figure A-4 (except for the effect of the elimination of income on investment in Company S of $72,000, which is incorporated into Item (33) above).

(35) The intercompany profit from the upstream sale is proportionately eliminated from the noncontrolling interest (see Item (17) in Figure A-4). Since the entire effect of eliminating the intercompany profit on the upstream sale ($30,000) has been attributed to the controlling interest via Item (34), the noncontrolling interest’s proportionate share ($30,000 x 20%) must be reclassified from retained earnings to the noncontrolling interest via this entry. For illustrative purposes, this entry has been made as a consolidation entry; however, it typically would be made directly to the retained earnings and noncontrolling interest on S’s books and to retained earnings and investment in Company S on P’s books.




Facts:

• P sells a 20% interest in S on 1 January 20X3 for $300,000.

• During the year, S sells inventory to P, which P holds at year end. A summary of the effect of the transaction on S’s income statement is as follows:

Revenues $ 130,000 Cost of revenues 50,000 Gross profit $ 80,000

• During the year, P sells inventory to S, which S holds at year end. A summary of the effect of the transaction on P’s income statement is as follows:

Revenues $ 100,000 Cost of revenues 60,000 Gross profit $ 40,000

• The intercompany loan of $1,000,000 remains outstanding. Construction on the building is complete, so S does not capitalize the interest payment for the current year. Depreciation begins on the completed building (including the depreciation of the previously capitalized interest). The useful life of the building is 10 years.

• During the year, P charges S a management fee of $1,500 for management services.

• S has other comprehensive income for the year of $15,000 from unrealized gains on available-for-sale securities.

• All inventory held by S and P at 31 December 20X2 resulting from upstream and downstream intercompany sales is sold to a nonaffiliated party.

• S pays cash dividends of $50,000 during the year, of which P’s share is $30,000.

Figure A-6: Work paper of consolidated income statement for year ended 31 December 20X3 (all amounts in dollars)


Consolidated Company P Debit Credit Revenues 600,000 400,000 (37) 230,000 770,000 Cost of revenues 200,000 125,000 (38) 110,000 115,000 (39) 100,000 Gross profit 400,000 275,000 655,000 Depreciation expense 70,000 125,000 (40) 10,000 185,000 Selling and administrative 30,000 3,500 33,500 Management fee expense – 1,500 (41) 1,500 – Management fee revenue 1,500 – (42) 1,500 – Interest income 100,000 – (43) 100,000 – Interest expense – 100,000 (43) 100,000 – Income from investment in

Company S 27,000 – (44) 27,000 – Net income 428,500 45,000 436,500 Net income (loss) attributable to

noncontrolling interest – (36) 18,000 (45) 32,000 (46) 12,000 (2,000) Net income attributable to controlling

interest 428,500 27,000 438,500




Consolidated Company P Debit Credit Net income 428,500 45,000 (47) 358,500 (47) 321,500 436,500 Other comprehensive income: Unrealized gain on available-for-sale

securities 9,000 15,000 (44) 9,000 15,000 Comprehensive income 437,500 60,000 451,500

Comprehensive income attributable to noncontrolling interests

– (48) 24,000 (47) 32,000 (47) 12,000 4,000

Comprehensive income attributable to controlling interest 437,500 36,000 447,500

Figure A-6 illustrates the consolidating entries between P and S for the year ended 31 December 20X3.

(36) Net income attributable to the noncontrolling interest on a push down basis is based on the new percentage ownership interest of the noncontrolling interest (40%) and calculated as a percentage of S’s income on a push down basis ($45,000 x 40%).

(37) Intercompany revenues from the upstream ($130,000) and downstream ($100,000) sales are eliminated.

(38) Intercompany cost of revenues from the upstream ($50,000) and downstream ($60,000) sales is eliminated.

(39) Reversal of elimination of intercompany profit in inventory held by S and P at 31 December 20X2 to cost of revenues as inventory is sold to a nonaffiliated party during the first inventory turn of the year. (For reference, see Item (24) in Figure A-5).

(40) Excess depreciation of $10,000 ($100,000 / 10 years) due to capitalized interest in the prior year is eliminated.

(41) Intercompany expense for the management fee charged to S is eliminated.

(42) Intercompany revenue for the management fee charged to S is eliminated.

(43) Interest income and expense from the intercompany loan are eliminated.

(44) Company P’s income from investment in Company S ($27,000) and Company P’s share of the unrealized gain on available-for-sale securities ($15,000 x 60%) are eliminated.

(45) The intercompany profits from the upstream sale are eliminated in Items (37) and (38). A proportionate share of the upstream elimination is attributed to the noncontrolling interest ($80,000 x 40%). The elimination of the downstream sale is 100% attributable to the parent, and therefore no portion of the elimination is attributed to the noncontrolling interest.

(46) The intercompany profit from 20X2 on the upstream sale is realized in the current year because the inventory was sold to a nonaffiliated party (for reference, see Item (39)). A proportionate share of the profit is attributable to the noncontrolling interest ($30,000 x 40%).

(47) Adjustments to net income from the income statement. See Items (37) to (44) above for explanations of adjustments.

(48) Comprehensive income attributable to the noncontrolling interest on a push down basis is based on the percentage ownership interest of the noncontrolling interest (40%) and calculated as a percentage of S’s comprehensive income on a push down basis ($60,000 x 40%).



Figure A-7: Consolidating work paper to arrive at consolidated balance sheet, 31 December 20X3 (all amounts in dollars)

Company P


Debit Credit Consolidated Cash 310,000 330,000 640,000 Available-for-sale securities – 140,000 140,000 Accounts receivable 230,000 160,000 390,000 Intercompany receivable 100,000 130,000 (50) 230,000 – Inventory 300,000 260,000 (51) 120,000 440,000 Buildings and equipment, net 500,000 1,285,000 (52) 90,000 1,695,000 Intercompany loan 1,000,000 – (53) 1,000,000 – Investment in Company S (49) 645,000 – (54) 645,000 – Goodwill – 200,000 200,000

Total assets 3,085,000 2,505,000 3,505,000

Accounts payable 190,000 330,000 520,000 Intercompany payable 130,000 100,000 (50) 230,000 – Intercompany loan – 1,000,000 (53) 1,000,000 – Other liabilities 588,000 – 588,000

Total liabilities 908,000 1,430,000 1,108,000 Common stock 200,000 (56) 60,000 (60) 60,000 200,000 Additional paid-in capital (49) 592,000 (56) 532,000 (60) 532,000 (61) 6,000 598,000 Retained earnings (55) 1,361,000 (57) 29,000 (62) 200,000 (61) 6,000 1,177,000 (64) 10,000 (65) 32,000

(66)

(63) 12,000 29,000

Accumulated other comprehensive income (49) 24,000 (58) 24,000 (63) 24,000 24,000


2,177,000 645,000 1,999,000

Noncontrolling interest – (59) 430,000 (67) 44,000 (66) 12,000 398,000 Total equity 2,177,000 1,075,000 2,397,000


The balance sheet is consolidated in Figure A-7, as follows:

(49) P sold a 20% interest in S for $300,000 on 1 January 20X3, which represented 25% of P’s investment in S. The adjustment to record this transaction on P’s balance sheet is as follows:

Cash $ 300,000

AOCI (25% of $20,000) 5,000

Investment in Company S (25% of $852,000) $ 213,000

Additional paid-in capital (APIC) 92,000

P’s Investment in Company S is rolled forward as follows:

31 December 20X2 balance $ 852,000 25% of Investment in Company S sold on 1 January 20x3 (213,000) Share of 20x3 earnings of Company S 27,000 Share of 20x3 other comprehensive income of Company S 9,000 Share of 20x3 dividends of Company S (30,000)

31 December 20X3 balance $ 645,000



P’s additional paid-in capital is rolled forward as follows:

31 December 20X2 balance $ 500,000 Adjustment related to sale of 20% interest in Company S 92,000 31 December 20X3 balance $ 592,000

P’s AOCI is rolled forward as follows:

31 December 20X2 balance $ 20,000 20% interest in Company S sold 1 January 20x3 (5,000) Share of 20x3 other comprehensive income of Company S 9,000 31 December 20X3 balance $ 24,000

(50) Intercompany receivables and payables from the upstream ($130,000) and downstream ($100,000) sales are eliminated.

(51) Intercompany profit remaining in inventory at year end from the upstream ($80,000) and downstream ($40,000) sales is eliminated.

(52) Interest capitalized in 20X2 from the intercompany loan is eliminated ($100,000), less current-year excess depreciation ($10,000).

(53) Outstanding intercompany loan is eliminated.

(54) P’s investment in S is eliminated.

(55) P’s retained earnings balance is rolled forward as follows:

31 December 20X2 balance $ 932,500 Current year income 428,500 31 December 20X3 balance $1,361,000

(56) P sold a 20% interest in S for $300,000 on 1 January 20X3 (20,000 shares of $1 par stock). The carrying amount of the net assets of S as of 1 January 20X3 was $1,065,000 (Figure A-5). This amount excludes the effects of intercompany profit eliminations — see Item (61). The adjustment to record this transaction on S’s balance sheet is as follows.

Common stock $ 20,000

APIC 188,000

AOCI (25% of $20,000) 5,000

Noncontrolling interest (20% x $1,065,000) $ 213,000

S’s common stock is rolled forward as follows (see Items (58) and (59) for rollforwards of AOCI and noncontrolling interest):

31 December 20X2 balance $ 80,000 Adjustment related to sale of 20% interest in Company S (20,000) 31 December 20X3 balance $ 60,000

S’s APIC is rolled forward as follows (see Items (58) and (59) for rollforwards of AOCI and noncontrolling interest):

31 December 20X2 balance $ 720,000 Adjustment related to sale of 20% interest in Company S (188,000) 31 December 20X3 balance $ 532,000



(57) S’s retained earnings balance is rolled forward as follows (in push down accounting, only the earnings and dividends attributable to the controlling interest are recorded in retained earnings).

31 December 20X2 balance $ 32,000 Income attributable to controlling interest 27,000 Dividends paid (30,000) 31 December 20X3 balance $ 29,000

(58) AOCI is rolled forward as follows:

31 December 20X2 balance $ 20,000 20% interest in Company S sold 1 January 20x3 (5,000) Comprehensive income attributable to controlling interest 9,000 31 December 20X3 balance $ 24,000

(59) Noncontrolling interest, on a push down basis, is rolled forward as follows:

31 December 20X2 balance $ 213,000 Additional interest sold by P 213,000 Current year income 18,000 Current year other comprehensive income 6,000 Dividends received (20,000) 31 December 20X3 balance $ 430,000

(60) The common stock and APIC of S are eliminated.

(61) This entry carries forward the effect on P’s equity of reclassifying to the noncontrolling interest its proportionate share of the prior year’s (20x2) intercompany profit elimination (see Item (35) in Figure 4-5). The total amount reclassified ($12,000) is calculated using the noncontrolling interest’s revised ownership percentage (30,000 x 40%). The portion of this amount resulting from the change in ownership transaction (30,000 x 20%) is recorded to P’s APIC balance (see Section 4.1.2 of Chapter 4). See Item (67) for the other side to this adjustment, which reduces noncontrolling interest for the effects of this reclassification. For illustrative purposes, this entry has been made as a consolidation entry; however, the effects of this entry typically would be made directly to Company P’s and Company S’s books.

(62) This entry carries forward the net effects of the intercompany elimination entries in the prior year’s (20x2) income statement work paper (for reference, see Item (34) in Figure A-5).

(63) The retained earnings and AOCI of Company S are eliminated.

(64) This adjustment represents the net effects of the intercompany eliminations in Items (37) through (43) of the current year (20x3) income statement work paper in Figure A-6. This adjustment excludes the effect on retained earnings of eliminating intercompany income on investment in Company S ($27,000), which is incorporated into Item (63) above.

(65) The entire effect of eliminating the intercompany profit on the upstream sale ($80,000) has been attributed to the controlling interest via Item (64). Therefore the noncontrolling interest’s proportionate share of the elimination entry ($80,000 x 40%) must be reclassified from retained earnings (via this entry) to the noncontrolling interest (via Item (67)). For illustrative purposes, this entry has been made as a consolidation entry; however, it ordinarily would be made directly to the retained earnings and noncontrolling interest on S’s books.

(66) The intercompany profit from Year 20X2 on the upstream sale is realized in the current year because the inventory was sold externally (see Item (39) in Figure A-6 and Item (64) above). A proportionate share of the profit is attributable to the noncontrolling interest ($30,000 x 40%) and therefore is reclassified from retained earnings to the noncontrolling interest through this entry. For illustrative purposes, this entry has been made as a consolidation entry; however, it ordinarily would be made directly to the retained earnings and noncontrolling interest on S’s books.



(67) This entry represents the noncontrolling interest’s proportionate share of the elimination of intercompany profit on upstream sales in the prior year ($12,000 - see Item (61)) and current year ($32,000 - see Item (65)). (The effect of the prior year elimination ($12,000) is reversed upon sale of the inventory in the current year — see Item (66)). For illustrative purposes, this entry has been made as a consolidation entry; however, it typically would be made directly to the retained earnings and noncontrolling interest on S’s books and to retained earnings and investment in Company S on P’s books.


As of 31 December 20X3, P owns 60% of S, which has net assets of $945,000 (after pushing down intercompany profit eliminations). The carrying amount of the noncontrolling interest’s 40% interest in Company S is $398,000, which includes $16,000 of AOCI.

Facts:

• P sells an additional 15% of its ownership for $300,000, assuming no control premium on Company S, on 1 January 20X4, resulting in a loss of control and deconsolidation of S on 1 January 20X4. The fair value of the retained 45% interest in S is $900,000.

• The fair value of the intercompany loan on 1 January 20X4 is $1,000,000.

Figure A-8: Consolidating work paper to arrive at consolidated balance sheet, 1 January 20X4 (all amounts in dollars)

Company P Adjustments

Consolidated Debit Credit Cash 310,000 (69) 300,000 610,000 Accounts receivable 230,000 (70) 100,000 330,000 Intercompany receivable 100,000 (70) 100,000 – Inventory 300,000 (71) 80,000 220,000 Buildings and equipment, net 500,000 500,000 Intercompany loan (68) 1,000,000 1,000,000 Investment in Company S 645,000 (72) 255,000 900,000

Total assets 3,085,000 3,560,000

Accounts payable 190,000 (70) 130,000 320,000 Intercompany payable 130,000 (70) 130,000 – Intercompany loan – – Other liabilities 588,000 588,000

Total liabilities 908,000 908,000

Common stock 200,000 200,000 Additional paid-in capital 592,000 (73) 6,000 598,000 Retained earnings 1,361,000 (74) 184,000 (75) 677,000 1,854,000 Accumulated other comprehensive income

24,000 (75) 24,000 –

Total parent shareholders’ equity 2,177,000 2,652,000 Noncontrolling interest – –

Total equity 2,177,000 2,652,000

Total liabilities and equity 3,085,000 3,560,000



Figure A-8 illustrates the deconsolidating entries between P and S on P’s balance sheet, as follows:

(68) The creditor interest in S would be adjusted to fair value. For illustrative purposes, the carrying value of the intercompany loan is equal to the fair value of the intercompany loan at the date of deconsolidation.

(69) Cash is received on the sale of 15% interest.

(70) Intercompany receivable and payable are reclassified to accounts receivable and accounts payable.

(71) The intercompany profit included in inventory held by P at 1 January 20X4 is eliminated.

(72) The retained 45% interest in S is adjusted to fair value.

(73) This APIC adjustment relates to the sale of a 20% interest in S in 20X3. See Item (61) in Figure A-7 for further explanation.

(74) Retained earnings is adjusted for all prior intercompany adjustments related to P that were made in consolidation. See Items (34) through (35) in Figure A-5 and Items (64) through (66) in Figure A-7.

(75) AOCI, which relates exclusively to Company S, is derecognized.

(76) The gain on sale of Company S is recorded. The gain is calculated as follows:

Proceeds $ 300,000 Fair value of retained interest 900,000 Carrying value of noncontrolling interest 398,000 AOCI attributable to P 24,000 1,622,000 Carrying amount of S’s net assets (945,000) Gain $ 677,000

On a consolidated basis (i.e., after push down adjustments), Company S’s assets, liabilities and noncontrolling interest should be derecognized, and the cash proceeds and gain should be recognized through the following journal entry. The amounts reflected for “inventory” and for “buildings and equipment, net” include the effects of pushing down intercompany eliminations of $40,000 (Item (51) in Figure A-7) and $90,000 (Item (52) in Figure A-7), respectively:

Cash $ 300,000 Noncontrolling interest 398,000 Accounts payable 330,000 Intercompany loan 1,000,000 Intercompany payable 100,000 AOCI 24,000 Investment in Company S 900,000

Cash (of Company S) $ 330,000 Available-for-sale securities 140,000 Accounts receivable 160,000 Intercompany receivable 130,000 Inventory 220,000 Buildings and equipment, net 1,195,000 Goodwill 200,000 Gain 677,000

Financial reporting developments Consolidated and other financial statements | B-1

B Comparison of ASC 810 and IFRS 10

The following table compares certain significant aspects of ASC 810 and IFRS 10, Consolidated Financial Statements. IFRS 10 replaced portions of IAS 27(R), Consolidated and Separate Financial Statements, and is effective for years beginning after 1 January 2013, with early adoption permitted. The requirements described in this table were formerly part of IAS 27(R) and were not changed by IFRS 10.

ASC 810 IFRS 10 (formerly IAS 27(R))

Valuation of noncontrolling interest in a business combination achieved in stages (commonly called a step acquisition).

Noncontrolling interest’s share of identifiable net assets recognized at fair value at date control is obtained. Step acquisitions/disposals are accounted for as equity transactions if control is maintained.

Redeemable noncontrolling interest is measured under ASC 480-10-S99-3A for SEC registrants.

Companies may elect to recognize the noncontrolling interest at fair value (consistent with ASC 810) or its proportionate share of the fair value of identifiable net assets. If the fair value method is elected, 100% of the goodwill is recognized in the parent’s consolidated financial statements (consistent with Statement 160). If the proportionate share method is elected, only the controlling interest’s share of goodwill is recognized.

Reporting noncontrolling interest in the consolidated statement of financial position

Noncontrolling interest is reported as a separate component of consolidated stockholder’s equity.

Redeemable noncontrolling interest is classified under ASC 480-10-S99-3A for SEC registrants.

IFRS 10 is consistent with ASC 810, except for redeemable noncontrolling interest.

Losses are allocated to the noncontrolling interests even if the losses exceed the noncontrolling interests’ basis in the equity capital of the subsidiary, thus resulting in a contra-equity (that is, deficit) balance.

IFRS 10 is consistent with ASC 810.

Reporting the noncontrolling interest in the consolidated income statement

Amounts that are attributed to the noncontrolling interest are reported as part of consolidated net income and not as a separate component of income or expense. Disclosure of the amounts attributed between controlling and noncontrolling interests on the face of the income statement is required.


Earnings and comprehensive income are attributed to the controlling and noncontrolling interests based on a substantive profit sharing agreement (or relative ownership percentage if there is no substantive profit sharing arrangement).


B Comparison of ASC 810 and IFRS 10

Financial reporting developments Consolidated and other financial statements | B-2

ASC 810 IFRS 10 (formerly IAS 27(R))

Changes in ownership interest in a subsidiary without loss of control

Transactions that result in decreases in a parent’s ownership interest in a subsidiary in either of the following without a loss of control are accounted for as equity transactions in the consolidated entity (that is, no gain or loss is recognized):

• A subsidiary that is a business or a nonprofit activity, except for either of the following:

• A sale of in-substance real estate

• A conveyance of oil and gas mineral rights

• A subsidiary that is not a business or a nonprofit activity if the substance of the transaction is not addressed directly by other ASC Topics

IFRS 10 is consistent with US GAAP, except that IFRS 10 applies to all subsidiaries, even those that are not businesses or nonprofit activities and those that involve sales of in-substance real estate or a conveyance of oil and gas mineral rights.

Loss of control of a subsidiary

In certain transactions that result in a loss of control of a subsidiary or a group of assets, any retained noncontrolling investment in the former subsidiary or group of assets is remeasured to fair value on the date control is lost. The gain or loss on remeasurement is included in income along with the gain or loss on the ownership interest sold.

This accounting is limited to the following transactions:

• Loss of control of a subsidiary that is a business or a nonprofit activity, except for either of the following:



• Loss of control of a subsidiary that is not a business or a nonprofit activity if the substance of the transaction is not addressed directly by other ASC Topics

• The derecognition of a group of assets that is a business or a nonprofit activity, except for either of the following:



IFRS 10 is generally consistent with US GAAP, except that the guidance in IFRS 10 applies to all subsidiaries, even those that are not businesses or nonprofit activities or those that involve sales of in-substance real estate or conveyance of oil and gas mineral rights.

Further, unlike US GAAP, IFRS 10 does not address whether its guidance should be applied to transactions involving nonsubsidiaries that are businesses or nonprofit activities. That is, IFRS 10 does not address the derecognition of assets outside the loss of control of a subsidiary.

Financial reporting developments Consolidated and other financial statements | C-1

C Summary of important changes

The following highlights important changes to this FRD since the November 2013 edition:

Chapter 1: Consolidated financial statements

• Section 1.4 was updated to provide certain additional interpretive guidance on the effect on consolidation procedure when a parent and subsidiary have different fiscal year ends.

• Section 1.5 was added to provide guidance in circumstances when a parent has the same fiscal year end as a subsidiary, but uses subsidiary financial statements that are prepared as of an earlier date (i.e., on a lag) for consolidation purposes.

Chapter 3: Attribution of net income or loss and comprehensive income or loss

• Section 3.1.1 and Illustration 3-1 were updated to provide additional interpretive guidance on how to evaluate the substance of a profit sharing arrangement and attribute net income or loss and comprehensive income or loss to controlling and noncontrolling interest holders.

Chapter 4: Changes in a parent’s ownership interest in a subsidiary while control is retained

• Section 4.1.3.1 was updated to provide additional cross references to guidance relating to foreign currency translation adjustments in our FRD publication, Foreign currency matters.

Chapter 6: Loss of control over a subsidiary or a group of assets

• Section 6.1 was updated to briefly highlight the FASB’s new revenue recognition standard, which will affect the accounting for certain transactions that are currently accounted for under the deconsolidation and derecognition guidance in ASC 810.

• Section 6.1.5.1 was updated and Section 6.1.5.2 was removed. These sections discussed the accounting for foreign currency translation adjustments upon the loss of control over a foreign subsidiary or certain groups of assets within a foreign subsidiary before and after the adoption of ASU 2013-05. The updates to Section 6.1.5.1 provide additional cross references to the guidance on these transactions in our FRD publication, Foreign currency matters.

• Section 6.1.12 was added to provide a cross reference to our FRD publication, Business combinations, for a discussion of the accounting and reporting by the transferring entity for the transfer of certain subsidiaries or certain groups of assets between entities under common control.

Financial reporting developments Consolidated and other financial statements | D-1

D Abbreviations used in this publication

Abbreviation FASB Accounting Standards Codification ASC 220 FASB ASC Topic 220, Comprehensive Income ASC 225 FASB ASC Topic 225, Income Statement ASC 230 FASB ASC Topic 230, Statement of Cash Flows ASC 250 ASC 310

FASB ASC Topic 250, Accounting Changes and Error Corrections FASB ASC Topic 310, Receivables

ASC 320 FASB ASC Topic 320, Investments — Debt and Equity Securities ASC 323 FASB ASC Topic 323, Investments — Equity Method and Joint Ventures ASC 350 FASB ASC Topic 350, Intangibles — Goodwill and Other ASC 360 FASB ASC Topic 360, Property, Plant, and Equipment ASC 450 FASB ASC Topic 450, Contingencies ASC 460 FASB ASC Topic 460, Guarantees ASC 470 FASB ASC Topic 470, Debt ASC 480 FASB ASC Topic 480, Distinguishing Liabilities from Equity ASC 605 FASB ASC Topic 605, Revenue Recognition ASC 710 FASB ASC Topic 710, Compensation — General ASC 740 FASB ASC Topic 740, Income Taxes ASC 805 FASB ASC Topic 805, Business Combinations ASC 810 FASB ASC Topic 810, Consolidation ASC 815 FASB ASC Topic 815, Derivatives and Hedging ASC 825 FASB ASC Topic 825, Financial Instruments ASC 830 FASB ASC Topic 830, Foreign Currency Matters ASC 835 FASB ASC Topic 835, Interest ASC 845 FASB ASC Topic 845, Nonmonetary Transactions ASC 860 FASB ASC Topic 860, Transfers and Servicing ASC 932 FASB ASC Topic 932, Extractive Activities — Oil and Gas ASC 944 FASB ASC Topic 944, Financial Services — Insurance ASC 958 FASB ASC Topic 958, Not-for-Profit Entities ASC 970 FASB ASC Topic 970, Real Estate — General ASC 976 FASB ASC Topic 976, Real Estate — Retail Land ASC 980 FASB ASC Topic 980, Regulated Operations ASU 2011-05 Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income ASU 2011-10 Accounting Standards Update No. 2011-10, Derecognition of in Substance Real

Estate — a Scope Clarification ASU 2013-02 Accounting Standards Update No. 2013-02, Comprehensive Income — Reporting of

Amounts Reclassified Out of Accumulated Other Comprehensive Income ASU 2013-05 Accounting Standards Update No. 2013-05, Foreign Currency Matters — Parent’s

Accounting for the Cumulative Translation Adjustment Upon Derecognition of Certain Subsidiaries or Groups of Assets Within a Foreign Entity or of an Investment in a Foreign Entity

D Abbreviations used in this publication

Financial reporting developments Consolidated and other financial statements | D-2

Abbreviation Other Authoritative Standards Concepts Statement 6 FASB Statement of Financial Accounting Concepts No. 6, Elements of Financial

Statements SAB Topic 1.B.1 Codified Staff Accounting Bulletins, Topic 1.B.1, Costs Reflected in Historical

Income Statements SAB Topic 5-E Codified Staff Accounting Bulletins, Topic 5-E, Accounting For Divesture Of A

Subsidiary Or Other Business Operation SAB Topic 5.J Codified Staff Accounting Bulletins, Topic 5.J, New Basis of Accounting Required in

Certain Circumstances Abbreviation Non-Authoritative Standards EITF 98-2 EITF Issue No. 98-2, “Accounting by a Subsidiary or Joint Venture for an

Investment in the Stock of Its Parent Company or Joint Venture Partner” SAB Topic 5-H Staff Accounting Bulletins, Topic 5-H, Accounting for Sales of Stock by a Subsidiary Statement 141 FASB Statement No. 141, Business Combinations Statement 141(R) FASB Statement No. 141(R), Business Combinations Statement 160 FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial

Statements, an amendment of ARB No. 51 FAS 167 FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R)

Financial reporting developments Consolidated and other financial statements | E-1

E Index of ASC references in this publication

ASC Reference

Section

220 9.2.1 Form and content of guarantor financial information

220 10.1.5.1 Additional AOCI disclosures required subsequent to the adoption of ASU 2013-02

225-10-S99-3 9.2.1 Form and content of guarantor financial information

230 10.1.4 Presentation of transaction costs in statement of cash flow

230-10-45-14 10.1.4 Presentation of transaction costs in statement of cash flow

230-10-45-15 10.1.4 Presentation of transaction costs in statement of cash flow

250 1.4 Differing fiscal year-ends between parent and subsidiary

250 1.5 Using subsidiary financial statements prepared as of an earlier period end for consolidation procedure in circumstances when the subsidiary has the same fiscal year-end as the parent

310 6.1.3 Gain/loss recognition

320 1.2.2 Acquisition through multiple steps

320 6.1 Deconsolidation of a subsidiary or derecognition of certain groups of assets


320 6.1.5 Accounting for accumulated other comprehensive income in deconsolidation

320 6.1.9 Subsequent accounting for retained noncontrolling investment


323 6.1 Deconsolidation of a subsidiary or derecognition of certain groups of assets


323 6.1.5 Accounting for accumulated other comprehensive income in deconsolidation

323 6.1.9 Subsequent accounting for retained noncontrolling investment

323 8.1.1 Investments in subsidiaries

323-10-15-6 6.1.9 Subsequent accounting for retained noncontrolling investment



323-10-35-6 1.5 Using subsidiary financial statements prepared as of an earlier period end for consolidation procedure in circumstances when the subsidiary has the same fiscal year-end as the parent



ASC Reference

Section

350-20-35-57A 3.1.4 Attribution of goodwill impairment

350-20-35-57A 3.1.5 Attributions related to business combinations effected before Statement 160 and Statement 141(R) were adopted

360-20 4.1.2.2 Scope exception for in-substance real estate transactions

360-20 6.1.7 Deconsolidation through a bankruptcy proceeding

360-20-15-2 through 15-10

4.1.2.6 Decreases in ownership through issuance of partnership units that have varying profit or liquidation preferences

450-20-25-2 6.1.4.1 Accounting for contingent consideration in deconsolidation

450-30 6.1.4.1 Accounting for contingent consideration in deconsolidation





470-10-S99-1 9.2.2 Investments in subsidiaries

470-10-S99-1 9.2.4 Disclosure requirements under Rule 3-10

480 2.1 Noncontrolling interests

480-10-S99-3A 6.1.3 Gain/loss recognition

480-10-S99-3A 10.1.2.1 Presentation of redeemable noncontrolling interests in equity reconciliation

480-10-S99-3A B Comparison of ASC 810 and IFRS 10

505-60 3.1.7 Attributions related to dividends of a subsidiary payable in nonmonetary assets

605 4.1.2.4 Decreases in ownership of a subsidiary that is not a business or nonprofit activity

605-35 1.3 Proportionate consolidation

605-40 6.1.4.1 Accounting for contingent consideration in deconsolidation

710-10-25-9 4.1.1.1 Accounting for contingent consideration

740 3.1.6 Effect on effective income tax rate

805 1.2.1 Acquisition through a single step


805 3.1.4 Attribution of goodwill impairment

805 4.1.1.1 Accounting for contingent consideration

805 4.1.2 Decreases in a parent’s ownership interest in a subsidiary without loss of control

805 4.1.4 Allocating goodwill upon a change in a parent’s ownership interest

805 4.2.1 Consolidation at the acquisition date

805 6.1.4 Measuring the fair value of consideration received and any retained noncontrolling investment



ASC Reference

Section

805 6.1.4.1 Accounting for contingent consideration in deconsolidation

805 6.2 Comprehensive example

805 8.1.1 Investments in subsidiaries

805 A Comprehensive example

805-50 3.1.7 Attributions related to dividends of a subsidiary payable in nonmonetary assets


810-10-10-1 1.1 Objectives and scope



810-10-15-10 6.1.7 Deconsolidation through a bankruptcy proceeding

810-10-15-11 1.4 Differing fiscal year-ends between parent and subsidiary

810-10-20 2.1 Noncontrolling interests

810-10-20 4.1 Increases and decreases in a parent’s ownership of a subsidiary

810-10-20 8.1 Purpose of and procedures for parent-company financial statements

810-10-40-3A 6.1 Deconsolidation of a subsidiary or derecognition of certain groups of assets

810-10-40-3A 6.1.1 Loss of control

810-10-40-3A 6.1.3 Gain/loss recognition

810-10-40-3A 6.1.4.2 Accounting for a retained creditor interest in deconsolidation

810-10-40-3A 6.1.5 Accounting for accumulated other comprehensive income in deconsolidation

810-10-40-3A 6.1.7 Deconsolidation through a bankruptcy proceeding

810-10-40-3A 6.1.9 Subsequent accounting for retained noncontrolling investment

810-10-40-4 6.1 Deconsolidation of a subsidiary or derecognition of certain groups of assets


810-10-40-5 6.1.3 Gain/loss recognition

810-10-40-5 6.1.4 Measuring the fair value of consideration received and any retained noncontrolling investment


810-10-40-5 6.1.8 Gain/loss classification and presentation

810-10-40-6 4.1.5 Accounting for transaction costs incurred in connection with changes in ownership


810-10-40-6 6.1.6 Deconsolidation through multiple arrangements



ASC Reference

Section

810-10-45 1.1 Objectives and scope

810-10-45-1 5.1 Procedures for eliminating intercompany balances and transactions

810-10-45-1 5.1.1 Effect of noncontrolling interest on elimination of intercompany amounts



810-10-45-5 5.1.2 Subsidiary ownership interest in its parent in the consolidated financial statements


810-10-45-10 7.1 Purpose of and procedures for combined financial statements

810-10-45-10 7.1.2 Procedures applied in combining entities for financial reporting

810-10-45-11 8.1 Purpose of and procedures for parent-company financial statements

810-10-45-11 9.1 Purpose of consolidating financial statements



810-10-45-14 1.3 Proportionate consolidation

810-10-45-15 2.1 Noncontrolling interests


810-10-45-16A 2.1 Noncontrolling interests


810-10-45-17A 2.1 Noncontrolling interests

810-10-45-18 5.1.1 Effect of noncontrolling interest on elimination of intercompany amounts

810-10-45-19 3.1 Attribution procedure



810-10-45-21A 4.1 Increases and decreases in a parent’s ownership of a subsidiary

810-10-45-21A 4.1.2 Decreases in a parent’s ownership interest in a subsidiary without loss of control

810-10-45-21A 4.1.3 Accumulated other comprehensive income considerations

810-10-45-21A 4.1.3.1 Accounting for foreign currency translation adjustments

810-10-45-21A 4.1.5 Accounting for transaction costs incurred in connection with changes in ownership

810-10-45-21A 4.1.7 Chart summarizing the accounting for changes in ownership

810-10-45-21A 4.2 Comprehensive example



ASC Reference

Section


810-10-45-21A A Comprehensive example

810-10-45-22 4.1 Increases and decreases in a parent’s ownership of a subsidiary

810-10-45-22 4.1.2.6 Decreases in ownership through issuance of partnership units that have varying profit or liquidation preferences


810-10-45-23 4.1.1.1 Accounting for contingent consideration

810-10-45-23 4.1.2.5 Issuance of preferred stock by a subsidiary

810-10-45-23 4.1.2.6 Decreases in ownership through issuance of partnership units that have varying profit or liquidation preferences

810-10-45-23 4.1.6 Changes in a parent’s ownership interest in a consolidated VIE


810-10-45-24 4.1.3 Accumulated other comprehensive income considerations

810-10-50-1 10.1 Certain presentation and disclosure requirements related to consolidation

810-10-50-1A 10.1 Certain presentation and disclosure requirements related to consolidation

810-10-50-1A 10.1.2.1 Presentation of redeemable noncontrolling interests in equity reconciliation

810-10-50-1A 10.1.2.2 Interim reporting period requirements

810-10-50-1A 10.1.3 Consolidated statement of financial position presentation

810-10-50-1A 10.2 Comprehensive example

810-10-50-1B 6.1.4 Measuring the fair value of consideration received and any retained noncontrolling investment

810-10-50-1B 10.1 Certain presentation and disclosure requirements related to consolidation

810-10-50-1B(d)-(h) 10.2 Comprehensive example


810-10-55-1B 7.1 Purpose of and procedures for combined financial statements


810-10-55-41 10.1.3 Consolidated statement of financial position presentation

810-10-S99-5 6.1.3 Gain/loss recognition


815 4.1.1.1 Accounting for contingent consideration

815 5.1.3 Intercompany derivative transactions

815 6.1.4.1 Accounting for contingent consideration in deconsolidation

825-10-25 6.1.4.1 Accounting for contingent consideration in deconsolidation



ASC Reference

Section

830 4.1.3.1 Accounting for foreign currency translation adjustments

830 6.1.5.1 Foreign currency translation adjustments

830-30-40-2 4.1.3.1 Accounting for foreign currency translation adjustments


845 3.1.7 Attributions related to dividends of a subsidiary payable in nonmonetary assets

845 6.1.2 Nonreciprocal transfers to owners

845-10-30-1 3.1.7 Attributions related to dividends of a subsidiary payable in nonmonetary assets




860 4.1.2.4 Decreases in ownership of a subsidiary that is not a business or nonprofit activity



932 4.1.2.3 Scope exception for oil and gas conveyances

932-360-40 4.1.2.3 Scope exception for oil and gas conveyances

932-360-55-3 4.1.2.3 Scope exception for oil and gas conveyances




958 8.1 Purpose of and procedures for parent-company financial statements

970-323 6.1.7 Deconsolidation through a bankruptcy proceeding


970-323-35-17 3.1.1 Substantive profit sharing arrangements

976-605 4.1.2.2 Scope exception for in-substance real estate transactions

980 5.1 Procedures for eliminating intercompany balances and transactions



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