A reporting entity should reverse previous accretion of mezzanine classified instruments to reflect a decline in redemption value of the instrument. However, a reversal should only be recognized to the extent of prior accretions (as detailed in
ASC 480-10-S99-3A(16(e))).
We believe that the carrying amount should also not be lower than the amount that would have otherwise been reported pursuant to
ASC 810. Therefore, each reporting period, a reporting entity should:
- Identify the portion of the NCI carrying amount from the prior period that is attributable to ASC 810, and adjust it for the current period income or loss attributable to the NCI, and
- Calculate the current year’s Mezzanine Adjustment, while ensuring that a reversal, if any, is not larger than the accretion already taken.
To ensure the correct offset for each adjusting entry, a reporting entity should track the components of NCI and follow the order of the operations described above. As illustrated in Example BCG 6-5, if the basis of NCI increases due to the attribution of subsidiary income, a prior year Mezzanine Adjustment may be reversed even though the redemption price did not decrease. Example BCG 6-6 illustrates the full reversal of a prior Mezzanine Adjustment that was made to redeemable NCI.
EXAMPLE BCG 6-5
Partial reversal of a prior Mezzanine Adjustment for redeemable NCI
Parent Company acquires 80% of the common shares of Subsidiary from Company Z. Company Z retains the remaining common shares (20%) in Subsidiary. As part of the acquisition, Parent Company and Company Z enter into an agreement that allows Company Z to put its equity interest in Subsidiary, in its entirety, to Parent Company based on a formula at a future specified date. Parent Company recognizes NCI at its acquisition date fair value of $100 million.
Parent Company concludes that the put option is embedded in the NCI, and the NCI should be presented as mezzanine equity because Parent Company may be required to redeem it at a future date.
At the end of the first year, Subsidiary records income of $50 million. Income attributable to the NCI is $10 million ($50 million × 20%). The formula-based redemption amount is calculated as $117 million. Parent Company first allocates $10 million to the NCI to reflect its proportionate interest in the income of Subsidiary. This results in a carrying amount of $110 million ($100 million + $10 million).
As Parent Company elected to recognize changes in the redemption amount immediately as they occur, it would then adjust the NCI by $7 million ($117 million redemption amount - $110 million carrying amount) with the offset to equity so that the ultimate carrying amount of the NCI is $117 million.
In the subsequent year, Subsidiary has net income of $25 million. Accordingly, net income attributable to the NCI would be $5 million ($25 million x 20%). The formula-based redemption amount is calculated and determined to still be $117 million.
What is the carrying value of the mezzanine equity at the end of Year 2?
Analysis
The carrying amount is $117 million; however, Parent Company will need to reverse $5 million of the prior Mezzanine Adjustment.
At the end of Year 1, the NCI balance resulting from the attribution of Subsidiary’s income was $110 million. After attribution of Year 2’s income, the carrying amount would be $115 million ($110 million + $5 million). Accordingly, there is a $2 million difference between (a) the $115 carrying amount and (b) the $117 redemption amount. While the mezzanine equity ultimately should be reported on the balance sheet at $117 million, Parent Company had a previous Mezzanine Adjustment of $7 million. Therefore, to ensure that the NCI reflects the correct balance, it will need to reverse $5 million ($7 million - $2 million) of the prior Mezzanine Adjustment.
EXAMPLE BCG 6-6
Full reversal of a prior Mezzanine Adjustment made to redeemable NCI
Parent Company acquires 80% of the common shares of Subsidiary from Company Z. Company Z retains the remaining common shares (20%) in Subsidiary. As part of the acquisition, Parent Company and Company Z enter into an agreement that allows Company Z to put its equity interest in Subsidiary, in its entirety, to Parent Company based on a formula at a future specified date. Parent Company recognizes NCI at its acquisition date fair value of $100 million.
Parent Company concludes that the put option is embedded in the NCI, and the NCI should be presented as mezzanine equity because Parent Company may be required to redeem it at a future date.
At the end of the first year, Subsidiary records income of $50 million. Income attributable to the NCI is $10 million ($50 million × 20%). The formula-based redemption amount is calculated as $117 million. Parent Company first allocates $10 million to the NCI to reflect its proportionate interest in the income of Subsidiary. This results in a carrying amount of $110 million ($100 million + $10 million).
As Parent Company elected to recognize changes in the redemption amount immediately as they occur, it would then adjust the NCI by $7 million ($117 million redemption amount - $110 million carrying amount) with the offset to equity so that the ultimate carrying amount of the NCI is $117 million.
In the subsequent year, Subsidiary has a net loss of $30 million. Accordingly, net loss attributable to the NCI would be $6 million ($30 x 20%). The formula-based redemption amount is calculated and determined to be $102 million.
What is the carrying value of the mezzanine equity at the end of Year 2?
Analysis
The carrying amount is $104 million. At the end of Year 1, the NCI balance resulting from the attribution of Subsidiary’s income was $110 million. After attribution of the Year 2 loss, the carrying amount would be $104 million ($110 million - $6 million). As the formula-based redemption amount ($102 million) is less than the carrying amount, the entire prior Mezzanine Adjustment of $7 million should be reversed.