If NCI is created as part of a business acquisition, where the reporting entity gained control over an acquiree while the seller retained a portion of the acquiree’s equity, then the NCI would be recognized at fair value, as described in BCG 5.3.1
If non-redeemable NCI is created through the sale of common stock to a third party, ASC 810-10-45-23
specifies that NCI is measured initially based on its proportionate ownership interest in the carrying amount of the subsidiary. Any difference between the fair value of the consideration received and the NCI recognized would be reflected in APIC, as illustrated in Example BCG 5-6. When preferred stock is issued to a third party, the initial carrying amount is the fair value of the consideration received, as described in FG 7.4
Non-redeemable NCI is (1) reported as part of equity of the consolidated group, (2) recorded separate from the parent’s interests, and (3) clearly identified and labelled (e.g., NCI in subsidiaries) to distinguish it from other components of the parent’s equity. The presentation of NCI is further discussed in FSP 2.5
If redeemable NCI is created through the sale of common stock to a third party and will be classified as mezzanine, or temporary, equity as discussed in BCG 188.8.131.52
, questions arise as to whether it should be initially recorded following the guidance in ASC 810
or ASC 480-10-S99
. Specifically, ASC 480-10-S99
states that the initial amount presented in temporary equity should be the initial carrying amount of the noncontrolling interest pursuant to ASC 805-20-30
, which in a business combination is its acquisition-date fair value. We believe that if the fair value of NCI (i.e., the consideration received) exceeds the proportionate interest in the carrying amount of the subsidiary (i.e., the ASC 810
amount), and is less than the calculated redemption amount of the NCI, the NCI should be initially recorded at its fair value.
Example BCG 6-2 illustrates the initial carrying amount of redeemable NCI resulting from a sale.
EXAMPLE BCG 6-2
Sale of redeemable shares in a business
Company A has a wholly-owned subsidiary, Company B. Company A sells a 20% interest in the common shares of Company B to outside investors for $200 million. Company A maintains an 80% controlling interest in the subsidiary. The carrying value of the subsidiary’s net assets is $600 million.
Embedded in the 20% interest is a put option that gives investors the right to put the interest to Company A after 3 years for $250 million. It was determined that the put should not be separately accounted for and that NCI should be classified as mezzanine equity.
What is the initial carrying amount of the redeemable NCI?
$200 million. The fair value of the shares (i.e., the consideration received) is greater than the proportionate interest in the carrying amount of the subsidiary, which is $120 million ($600 million × 20%). Additionally, it is less than the redemption amount of the instrument (i.e., $250 million).
The journal entry recorded on the issuance date for the 20% interest sold would be as follows (in millions):
Cr. NCI - mezzanine equity
If at the issuance date, the calculated redemption amount is less than its fair value (i.e., the amount received), but greater than the proportionate ownership interest in the carrying amount of the subsidiary (i.e., the amount based on ASC 810
), we believe the NCI should be recorded at the calculated redemption amount. Any difference between the redemption amount and the fair value (i.e., consideration received) should be reflected in APIC.
When redeemable NCI is initially recognized at an amount greater than its proportionate ownership interest under ASC 810
, that initial recognition should not be considered a deemed dividend, and therefore should not be viewed as an adjustment impacting the parent’s share of the subsidiary’s net income or its earnings per share.
Redeemable NCI classified as mezzanine equity is presented after liabilities and before stockholders’ equity on the balance sheet. Mezzanine equity should be separate from the stockholders’ equity accounts that are classified as permanent equity.