Issued concurrently with SFAS 141R (now codified in ASC 805) in 2007, SFAS 160 (ASC
810) relates to the accounting for a noncontrolling interest (NCI) and
transactions with noncontrolling interest holders in consolidated financial
statements. ASC 810 was the result of a joint project with the International
Accounting Standards Board (IASB), and aligns with IAS 27, Consolidated and
Separate Financial Statements.
Previously, entities applying US GAAP reported NCIs as liabilities or in the
mezzanine section between liabilities and equity, while entities using
international reporting standards treated NCIs as equity.
An NCI refers to the portion of equity in a subsidiary not attributable,
directly or indirectly, to the parent company. An NCI is often called a minority
interest. In issuing the Statement, FASB’s intent was to improve the
comparability and transparency of financial data as well as to help prevent
manipulation of earnings. ASC 810 is another FASB pronouncement that
incorporates the use of Fair Value measurements. Under ASC 810, the NCI is
initially stated at fair value and may not necessarily be equal to the pro-rata
share of the purchase price. NCIs are generally recorded as a part of equity.
However, in certain situations, most notably when a put/call is present, ASC 810
may require the fair value of the NCI to be disclosed or recognized as a
liability.
REPORTING CHANGES
ASC 810 greatly improves the method for accounting for changes in ownership
percentage. A summary of these methods is provided below:
Status change from no control to control. When a parent’s change in ownership
changes from no control to control, the entity must follow ASC 805 (formerly
SFAS 141R) requirements for acquisitions and remeasure the prior interest at
fair value.
Increases in ownership. Increases are recorded as equity transactions, with no
adjustment of asset or liability carrying amounts.
Decreases in ownership (when the parent retains controlling interest). Recorded
as equity transactions with no gains or losses recorded in consolidated net
income or comprehensive income.
Status change from control to no control. When a parent’s change in ownership
changes its status from control to no control, the entity must deconsolidate,
recognize the gain or loss, and remeasure the remaining interest at fair value
as of the date the control is lost.
CASE STUDIES
Case Study 1
Company X acquired an 85% stake in Company Y for a purchase price of $85
million. For ASC 810 purposes, we were asked to value the NCI (15% stake). In
valuing the NCI we considered the cost, market and income approaches, as well as
a discount for lack of marketability.
Key facts/findings
• The implied value of the NCI, based on a pro-rata share of the purchase price
would be $15 million. ($85m/85% * 15%)
• The unadjusted value of the NCI, based on income and market based approaches
was determined to be $10 million.
• Adjusting for the lack of marketability, the value of the NCI was determined
to be $8 million.
Conclusions
The value of the NCI was determined to be $8 million, which is significantly
lower than the pro-rata share of the purchase price. This difference in value
was related to a couple of items:
1. The company paid a premium to acquire control in the target.
2. The value of the NCI reflected a discount for lack of marketability.
Case Study 2
Company X owns 80% of Company Z. The shareholders of the NCI have a put option
whereby the Company is required to purchase the NCI at fair market value. As per
the requirements of ASC 810, we were asked to value the NCI for financial
statement disclosure purposes.
Key facts/findings
• The value of Company Z was determined to be $100 million.
• The value of the 20% NCI in Company Z was determined to be $20 million.
• The value of the NCI was not adjusted for lack of marketability since the
holders of the NCI have a put option.
Conclusions
Based on the discussion above, the fair value of the NCI was determined to be
$20 million.
VRC frequently performs valuations of noncontrolling interests. For more
information, contact your VRC representative or PJ Patel at 609-243-7030. VR
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