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Once a parent controls a subsidiary, changes can occur in the ownership interests in that subsidiary that do not result in a loss of control by the parent. For example, a parent may purchase some of the subsidiary’s shares or sell some of the shares that it holds, a subsidiary may reacquire some of its own shares, or a subsidiary may issue additional shares. These changes should be accounted for as equity transactions.
A noncontrolling interest (NCI) is the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to the parent. In a transaction that results in a change in the parent’s ownership interest but the parent retains its controlling financial interest, the carrying amount of the NCI is adjusted to reflect the change in its ownership interest in the subsidiary’s net assets. Any difference between the fair value of the consideration received or paid and the amount by which the NCI is adjusted is recognized in equity attributable to the parent. See BCG 6 for further information on the accounting for transactions with noncontrolling shareholders.
The direct tax effect of a transaction with noncontrolling shareholders that does not cause a change in control generally is recorded in equity in accordance with ASC 740-20-45-11(c). However, care should be taken to distinguish between direct and indirect tax effects, because the treatment in the financial statements may differ for each, and sometimes the tax effect of a transaction comprises both direct and indirect components. We consider the direct effects to be those resulting from application of the relevant tax law to the transaction. Direct effects do not include those resulting from a change in an accounting assertion, election, or assessment, even though such a change may have been undertaken by the reporting entity in contemplation of the transaction.

10.9.1 Transactions with noncontrolling interest–direct effects

In accordance with ASC 740-20-45-11(c), the direct tax effect of a transaction with noncontrolling shareholders that does not cause a change in control is generally recorded in equity. We believe that any related valuation allowance would also be recorded in equity.
Example TX 10-23 illustrates the recording of a direct tax effect of a transaction with noncontrolling shareholders.
EXAMPLE TX 10-23
Recording the direct tax effect of a transaction with noncontrolling shareholders
Parent owns 100% of Company B, which has net assets of $200 million. Parent’s tax basis in its investment in Company B is $200 million (equal to the book basis). Company B issues additional shares to Company C, an unaffiliated third party, for cash of $80 million. The issuance of the additional shares dilutes Parent’s interest to 80%. After issuance of the additional shares, the ownership interests in the net assets of Company B are as follows (in millions). The tax rate is 25%.
Total net assets
Ownership interest
Net assets attributable
Parent - consolidated
$280
80%
$224
Company C
$280
20%
$56
100%
$280
How should the tax effects of the transaction with the noncontrolling shareholder be recorded?
Analysis
The transaction caused a $24 million increase in the book basis of Parent’s investment in Company B, but no change in the tax basis, thus creating a taxable temporary difference of $6 (($224 book basis - $200 tax basis) x 25%)million.
Unless Parent can establish its intent and ability to indefinitely delay reversal of the difference, Parent would record a deferred tax liability for the taxable temporary difference. Since the transaction is recorded directly in equity, the tax effect of the transaction, assuming a 25% tax rate, is also recorded directly in equity.

Complexities can arise when accounting for the tax effects of a transaction with noncontrolling shareholders that are recorded in both consolidated and separate company financial statements. Example TX 14-8 illustrates the recording of the deferred tax effects of the acquisition of a noncontrolling interest in a consolidated pass-through entity in a consolidated and separate company financial statement.

10.9.2 Transactions with noncontrolling interest–indirect effects

It is important to distinguish between direct and indirect tax effects of a transaction with noncontrolling shareholders because the treatment in the financial statements may differ for each. For example, the purchase by a parent company of an additional interest in a controlled subsidiary may allow the parent for the first time to file a consolidated tax return. The ability to file a consolidated tax return may allow the company to change its assessment regarding its ability to realize existing deferred tax assets, causing the company to release all or a portion of its valuation allowance. Even though a transaction with noncontrolling shareholders may have caused the change in circumstances that allows the parent to realize (or conclude it may not realize) its deferred tax assets in the future, the change in valuation allowance results from management’s decision to file a consolidated return and the related impact of that decision on its assessment regarding the realization of deferred tax assets. Therefore, the change in valuation allowance is an indirect effect of the transaction. The tax effect of a change in judgment about the realization of deferred tax assets in future years generally is reflected in earnings, but it is subject to the intraperiod allocation requirements (see TX 12).
Some transactions may cause a direct and an indirect tax effect. Example TX 10-24 illustrates the recording of the direct and indirect tax effects of a transaction with noncontrolling shareholders.
EXAMPLE TX 10-24
Recording the tax effects of a transaction with noncontrolling shareholders
Parent owns and controls 100% of Company B, which is domiciled in a foreign jurisdiction. Parent’s book basis and tax basis in its investment in Company B is $300 million and $200 million, respectively. The difference between the book basis and tax basis is attributable to the undistributed earnings of Company B. Parent has not historically recorded a deferred tax liability on the taxable temporary difference because of its intent and ability to indefinitely delay reversal of the difference. Parent sells 20% of Company B for $240 million. The sale of Parent’s investment is taxable at a rate of 25%. The noncontrolling interest is $60 million (book basis of $300 million x 20%).
How should the direct and indirect tax effects of the transaction with the noncontrolling shareholder be recorded?
Analysis
Parent’s current tax consequence from the tax gain on the sale of its investment in Company B is $50 million (($240 million selling price – ($200 million tax basis × 20% portion sold)) × 25% tax rate). The total tax consequence of $50 million is comprised of two components:
  1. $5 million, which is the difference between the book basis and the tax basis (i.e., undistributed earnings of Company B) of the portion sold (($300 million book basis – $200 million tax basis) × 20% portion sold × 25% tax rate). This component is an indirect tax effect of the transaction. The tax consequence results from a change in assertion regarding the indefinite delay of the reversal of the outside basis difference, which is triggered by the decision to sell a portion of the investment in Company B. The outside basis difference is attributable to undistributed earnings of Company B and the tax effect of the change in assertion related to the outside basis difference would be recorded in earnings. In fact, the tax liability related to the unremitted earnings of the subsidiary may be required to be recorded in a period preceding the actual sale transaction, because the liability should be recorded when the company’s assertion regarding indefinite reinvestment changes.
  2. $45 million, which is the difference between the selling price and the book basis for the portion sold (($240 million selling price – ($300 million book basis × 20% portion sold)) × 25% tax rate). This component represents the economic gain on the sale and is a direct tax effect of the transaction. Because the difference between fair value and carrying amount of NCI is recorded in equity, the direct tax effect should also be recorded in equity.
The change in assertion related to the indefinite delay of the reversal of the outside basis difference will impact the effective tax rate in the period in which the change occurs.
In light of the disposal of a portion of the Parent’s investment in Company B, Parent should also reassess its intent and ability to indefinitely delay reversal of the remaining outside basis difference in the portion retained and assess whether a deferred tax liability should be recorded on such difference.
1$200 initial net assets + $80 share proceeds
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