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Accounting for Noncontrolling Interests Requires Fair Value Measurement

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