Academic journal article Journal of Accountancy

Noncontrolling Interest: Much More Than a Name Change: New Consolidation Rules for Partially Owned Affiliates: FASB 160

Academic journal article Journal of Accountancy

Noncontrolling Interest: Much More Than a Name Change: New Consolidation Rules for Partially Owned Affiliates: FASB 160

Article excerpt

EXECUTIVE SUMMARY

* The most visible innovation in Statement no. 160 is the name change from "minority interest" to "noncontrolling interest,' The old terminology does not encompass the full range of combination scenarios. For example, some majority ownership positions don't lead to consolidation, such as when a subsidiary is in bankruptcy.

* A major change affecting income statement reporting concerns the treatment of the earnings related to midyear acquisitions. The current treatment at times presents unrealistic measures of top-line performance. Under Statement no. 160, only subsidiary revenues and expenses arising after the date of combination will be reported on the consolidated income statement.

* Statement no. 160 does not allow recognition of gains or losses on the consolidated income statement when the parent retains control after changes in its ownership percentage, The rationale is that these transactions are capital in nature.

* Previously, no NCI disclosures were required. Going forward, Statement no. 160 specifies that a footnote must reconcile the beginning and ending balances of both the parent and NCI equity amounts, including net income and owner contributions attributable to each of them. Additional disclosures will describe percentage changes in parent ownership of its subsidiaries, including any circumstances leading to loss of control and deconsolidation of a previously consolidated subsidiary.

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[ILLUSTRATION OMITTED]

In December 2007, FASB adopted two new business combination standards: Statement no. 141(R), Business Combinations, and Statement no. 160, Noncontrolling Interests in Consolidated Financial Statements. Both culminated years of work directed at improving reporting for consolidated entities.

An article in the June 2008 issue of the JofA ("A New Day for Business Combinations," page 34) described nine major changes created by Statement no. 141(R). This article summarizes the most important changes created by Statement no. 160, which is effective for fiscal years beginning after Dec. 15, 2008.

THE BIG PICTURE

Although developed in tandem with Statement no. 141(R), Statement no. 160 was issued as a separate standard because the original Statement no. 141 did not formally address how to account for what used to be called "minority interests." Statement no. 160 provides improved terminology and conceptually consistent resolution to several reporting and measurement issues. The result will be more informative financial statements that reflect how the existence of and changes in noncontrolling interests (NCI) can affect cash flow potential for the consolidated entity and its shareholders.

A NEED FOR UPDATED TERMINOLOGY

The most visible innovation in Statement no. 160 is the name change from "minority interest" to "noncontrolling interest." The problem with the old terminology was that it did not encompass the full range of combination scenarios. Some majority ownership positions don't lead to consolidation, such as when a subsidiary is in bankruptcy. Conversely, under Interpretation no. 46(R), Consolidation of Variable Interest Entities, a parent with a minority holding in another entity may have sufficient control to require consolidation if it is deemed to be the primary beneficiary of the subsidiary's activities. On Sept. 15, FASB issued an exposure draft proposing revisions to Interpretation no. 46(R). Among other things, the proposal requires performing new qualitative analysis when determining if a financial interest in a VIE is to be consolidated.

The shift to the term "noncontrolling interest" will emphasize a parent's substantive control over a subsidiary rather than a simple ownership percentage and will more usefully reflect the underlying economic and accounting concepts.

There is much more to the standard than just this name change. Years of experience under the old purchase accounting standard showed the need for profound improvements in accounting for the NCI. …

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