Financialreportingdevelopments Bb1577 Noncontrollinginterests 23july2014

Financial reporting developments
A comprehensive guide
Consolidated and other

financial statements
Noncontrolling interests, combined financial statements,

parent company financial statements and consolidating
Revised July 2014
To our clients and other friends

This Financial reporting developments (FRD) publication is primarily designed to help you understand
financial reporting issues related to the accounting for noncontrolling interests. This publication also
includes interpretive guidance on consolidation procedure and on the presentation of combined, parentonly, and consolidating financial statements. The publication reflects our current understanding of the
relevant guidance in these areas, based on our experience with financial statement preparers and related
discussions with the FASB and SEC staffs.
The accounting for noncontrolling interests is based on the economic entity concept of consolidated
financial statements. Under the economic entity concept, all residual economic interest holders in an
entity have an equity interest in the consolidated entity, even if the residual interest is relative to only a
portion of the entity (that is, a residual interest in a subsidiary). Therefore, a noncontrolling interest is
required to be displayed in the consolidated statement of financial position as a separate component of
equity. Likewise, the consolidated net income or loss and comprehensive income or loss attributable to
both controlling and noncontrolling interests is separately presented on the consolidated statement of
comprehensive income.
Consistent with the economic entity concept, after control is obtained, increases or decreases in
ownership interests that do not result in a loss of control should be accounted for as equity transactions.
However, changes in ownership interests that result in a loss of control of a subsidiary or group of assets
generally result in corresponding gain or loss recognition upon deconsolidation. The decrease in
ownership guidance generally does not apply to transactions involving non-businesses, in-substance real
estate or oil and gas mineral rights conveyances.
This edition has been updated to provide additional interpretive guidance in certain areas with frequently
asked questions. Chapter 6 also has been updated to briefly highlight the FASBs new revenue
recognition standard, which will affect the accounting for certain transactions that are currently
accounted for under the deconsolidation and derecognition guidance in ASC 810. These changes are
summarized in Appendix C.
Practice and authoritative guidance continue to evolve and therefore readers should monitor
developments in these areas closely.
July 2014
Contents
1
Consolidated financial statements .............................................................................. 1

1.1 Objectives and scope ............................................................................................................. 1
1.2 Consolidation procedure time of acquisition.......................................................................... 4
1.2.1
Acquisition through a single step.................................................................................... 4
1.2.2
Acquisition through multiple steps ................................................................................. 4
1.3 Proportionate consolidation ................................................................................................... 5
1.4 Differing fiscal year-ends between parent and subsidiary ......................................................... 6
1.5 Using subsidiary financial statements prepared as of an earlier period end for consolidation
procedure in circumstances when the subsidiary has the same fiscal year-end as the parent ...... 8
1.6 Subsidiarys accounting basis is not US GAAP .......................................................................... 8
1.7 Differing accounting policies between parent and subsidiary .................................................... 9
Nature and classification of a noncontrolling interest ................................................. 10

2.1 Noncontrolling interests ....................................................................................................... 10
2.1.1
Noncontrolling interests in consolidated variable interest entities (VIEs)......................... 11
2.2 Equity contracts issued on the stock of a subsidiary ............................................................... 11
Attribution of net income or loss and comprehensive income or loss ........................... 13

3.1 Attribution procedure .......................................................................................................... 13
3.1.1
Substantive profit sharing arrangements ...................................................................... 13
3.1.2
Attribution of losses .................................................................................................... 17
3.1.2.1
Distributions in excess of the noncontrolling interests carrying amount ................ 17
3.1.3
Attribution to noncontrolling interests held by preferred shareholders ........................... 18
3.1.4
Attribution of goodwill impairment ............................................................................... 19
3.1.5
Attributions related to business combinations effected before Statement 160
and Statement 141(R) were adopted ........................................................................... 19
3.1.6
Effect on effective income tax rate............................................................................... 20
3.1.7
Attributions related to dividends of a subsidiary payable in nonmonetary assets............. 21
3.1.8
Attributions related to dividends of a consolidated trust issuing trust
preferred securities..................................................................................................... 22
Changes in a parents ownership interest in a subsidiary while control is retained ........ 23

4.1 Increases and decreases in a parents ownership of a subsidiary ............................................. 23
4.1.1
Increases in a parents ownership interest in a subsidiary .............................................. 24
4.1.1.1
Accounting for contingent consideration ............................................................. 25
4.1.2
Decreases in a parents ownership interest in a subsidiary without loss of control ........... 26
4.1.2.1
Accounting for a stock option of subsidiary stock ................................................. 27
4.1.2.2
Scope exception for in-substance real estate transactions .................................... 28
4.1.2.3
Scope exception for oil and gas conveyances ....................................................... 28
4.1.2.4
Decreases in ownership of a subsidiary that is not a business or
nonprofit activity ................................................................................................ 29
4.1.2.5
Issuance of preferred stock by a subsidiary .......................................................... 29
4.1.2.6
Decreases in ownership through issuance of partnership units that
have varying profit or liquidation preferences ...................................................... 29
4.1.2.7
Issuance of subsidiary shares as consideration in a business combination .............. 31
Financial reporting developments Consolidated and other financial statements | i
Contents
4.1.3
Accumulated other comprehensive income considerations ............................................ 31
4.1.3.1
Accounting for foreign currency translation adjustments...................................... 32
4.1.4
Allocating goodwill upon a change in a parents ownership interest ................................ 32
4.1.5
Accounting for transaction costs incurred in connection with changes in ownership........ 33
4.1.6
Changes in a parents ownership interest in a consolidated VIE ...................................... 33
4.1.7
Chart summarizing the accounting for changes in ownership ......................................... 33
4.1.8
Income tax considerations ........................................................................................... 34
4.1.9
Noncontrolling interests in a common control transaction ............................................. 34
4.2 Comprehensive example ...................................................................................................... 34
4.2.1
Consolidation at the acquisition date ............................................................................ 35
4.2.2
Consolidation in year of combination ............................................................................ 36
4.2.3
Consolidation after purchasing an additional interest .................................................... 38
4.2.4
Consolidation in year 2 ................................................................................................ 40
4.2.5
Consolidation after selling an interest without loss of control ......................................... 43
4.2.6
Consolidation in year 3 ................................................................................................ 44
Intercompany eliminations ....................................................................................... 47

5.1 Procedures for eliminating intercompany balances and transactions ...................................... 47
5.1.1
Effect of noncontrolling interest on elimination of intercompany amounts...................... 48
5.1.2
Subsidiary ownership interest in its parent in the consolidated financial statements........ 49
5.1.2.1
Subsidiary ownership interest in its parent in the subsidiarys
separate financial statements ............................................................................. 50
5.1.3
Intercompany derivative transactions .......................................................................... 50
Loss of control over a subsidiary or a group of assets ................................................ 62

6.1 Deconsolidation of a subsidiary or derecognition of certain groups of assets ........................... 62
6.1.1
Loss of control ............................................................................................................ 65
6.1.2
Nonreciprocal transfers to owners ............................................................................... 65
6.1.3
Gain/loss recognition................................................................................................... 65
6.1.3.1
Assignment of goodwill upon disposal of all or a portion of a reporting unit............ 67
6.1.4
Measuring the fair value of consideration received and any retained
noncontrolling investment ........................................................................................... 67
6.1.4.1
Accounting for contingent consideration in deconsolidation.................................. 67
6.1.4.2
Accounting for a retained creditor interest in deconsolidation............................... 70
6.1.5
Accounting for accumulated other comprehensive income in deconsolidation ................ 70
6.1.5.1
Foreign currency translation adjustments ............................................................ 71
6.1.6
Deconsolidation through multiple arrangements ........................................................... 71
6.1.7
Deconsolidation through a bankruptcy proceeding ........................................................ 72
6.1.8
Gain/loss classification and presentation ...................................................................... 73
6.1.9
Subsequent accounting for retained noncontrolling investment ..................................... 73
6.1.10 Transfer of a subsidiary or a group of assets to an equity method investee
or a joint venture ........................................................................................................ 73
6.1.11 Income tax considerations related to the loss of control over a subsidiary ...................... 74
6.1.12 Transfers between entities under common control........................................................ 74
6.2.1
Deconsolidation by selling entire interest...................................................................... 75
6.2.2
Deconsolidation by selling a partial interest .................................................................. 76
Financial reporting developments Consolidated and other financial statements | ii
Contents
Combined financial statements ................................................................................. 79

7.1 Purpose of and procedures for combined financial statements ............................................... 79
7.1.1
Common management ................................................................................................ 79
7.1.2
Procedures applied in combining entities for financial reporting ..................................... 80
Parent-company financial statements ....................................................................... 81

8.1 Purpose of and procedures for parent-company financial statements ..................................... 81
8.1.1
Investments in subsidiaries .......................................................................................... 81
8.1.2
Investments in non-controlled entities .......................................................................... 82
8.1.3
Disclosure requirements .............................................................................................. 82
Consolidating financial statements............................................................................ 83

9.1 Purpose of consolidating financial statements ....................................................................... 83
9.2 Guarantor financial information prepared under Rule 3-10..................................................... 83
9.2.1
Form and content of guarantor financial information .................................................... 83
9.2.2
Investments in subsidiaries .......................................................................................... 87
9.2.3
Cash flow information ................................................................................................. 89
9.2.4
Disclosure requirements under Rule 3-10 ..................................................................... 90
9.2.5
Example condensed consolidating financial information under Rule 3-10 ....................... 91
10 Presentation and disclosures .................................................................................... 97

10.1 Certain presentation and disclosure requirements related to consolidation ............................. 97
10.1.1 Consolidated statement of comprehensive income presentation .................................... 98
10.1.2 Reconciliation of equity presentation ........................................................................... 98
10.1.2.1 Presentation of redeemable noncontrolling interests in equity reconciliation ......... 99
10.1.2.2 Interim reporting period requirements................................................................. 99
10.1.3 Consolidated statement of financial position presentation ........................................... 100
10.1.4 Consolidated statement of cash flows presentation ..................................................... 101
10.1.4.1 Presentation of transaction costs in statement of cash flow ................................ 101
10.1.5 Disclosure................................................................................................................. 102
10.5.1
Additional AOCI disclosures required subsequent to the adoption of
ASU 2013-02................................................................................................... 102
10.2 Comprehensive example .................................................................................................... 103
A Comprehensive example.......................................................................................... A-1

B Comparison of ASC 810 and IFRS 10 ....................................................................... B-1
C Summary of important changes ............................................................................... C-1
D Abbreviations used in this publication ...................................................................... D-1
E
Index of ASC references in this publication ............................................................... E-1
Financial reporting developments Consolidated and other financial statements | iii
Contents
Notice to readers:
This publication includes excerpts from and references to the FASB Accounting Standards Codification
(the Codification or ASC). The Codification uses a hierarchy that includes Topics, Subtopics, Sections
and Paragraphs. Each Topic includes an Overall Subtopic that generally includes pervasive guidance
for the topic and additional Subtopics, as needed, with incremental or unique guidance. Each Subtopic
includes Sections that in turn include numbered Paragraphs. Thus, a Codification reference includes the
Topic (XXX), Subtopic (YY), Section (ZZ) and Paragraph (PP).
Throughout this publication references to guidance in the Codification are shown using these reference
numbers. References are also made to certain pre-Codification standards (and specific sections or
paragraphs of pre-Codification standards) in situations in which the content being discussed is excluded
from the Codification.
This publication has been carefully prepared but it necessarily contains information in summary form
and is therefore intended for general guidance only; it is not intended to be a substitute for detailed
research or the exercise of professional judgment. The information presented in this publication should
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New York, NY 10036-8775, USA. Copies of complete documents are available from the FASB and the AICPA.
Financial reporting developments Consolidated and other financial statements | iv
Consolidated financial statements
1.1
Objectives and scope

Excerpt from Accounting Standards Codification
Consolidation Overall
Objectives
General
810-10-10-1
The purpose of consolidated financial statements is to present, primarily for the benefit of the owners
and creditors of the parent, the results of operations and the financial position of a parent and all its
subsidiaries as if the consolidated group were a single economic entity. There is a presumption that
consolidated financial statements are more meaningful than separate financial statements and that
they are usually necessary for a fair presentation when one of the entities in the consolidated group
directly or indirectly has a controlling financial interest in the other entities.
Scope and Scope Exceptions
Entities
810-10-15-8
The usual condition for a controlling financial interest is ownership of a majority voting interest, and,
therefore, as a general rule ownership by one reporting entity, directly or indirectly, of more than 50
percent of the outstanding voting shares of another entity is a condition pointing toward consolidation.
The power to control may also exist with a lesser percentage of ownership, for example, by contract,
lease, agreement with other stockholders, or by court decree.
810-10-15-10
A reporting entity shall apply consolidation guidance for entities that are not in the scope of the Variable
Interest Entities Subsections (see the Variable Interest Entities Subsection of this Section) as follows:
a.
All majority-owned subsidiaries all entities in which a parent has a controlling financial interest
shall be consolidated. However, there are exceptions to this general rule.
1.
A majority-owned subsidiary shall not be consolidated if control does not rest with the
majority owner for instance, if any of the following are present:
i.
The subsidiary is in legal reorganization
ii.
The subsidiary is in bankruptcy
iii.
The subsidiary operates under foreign exchange restrictions, controls, or other

governmentally imposed uncertainties so severe that they cast significant doubt on the
parent's ability to control the subsidiary.
iv.
In some instances, the powers of a shareholder with a majority voting interest to control
the operations or assets of the investee are restricted in certain respects by approval or
veto rights granted to noncontrolling shareholder (hereafter referred to as noncontrolling
rights). In paragraphs 810-10-25-2 through 25-14, the term noncontrolling shareholder
refers to one or more noncontrolling shareholders. Those noncontrolling rights may have
Financial reporting developments Consolidated and other financial statements | 1
little or no impact on the ability of a shareholder with a majority voting interest to control
the investee's operations or assets, or, alternatively, those rights may be so restrictive as
to call into question whether control rests with the majority owner.
v.
Control exists through means other than through ownership of a majority voting
interest, for example as described in (b) through (e).
2.
A majority-owned subsidiary in which a parent has a controlling financial interest shall not be
consolidated if the parent is a broker-dealer within the scope of Topic 940 and control is
likely to be temporary.
3.
Except as discussed in paragraph 946-810-45-3, consolidation by an investment company

within the scope of Topic 946 of a non-investment-company investee is not appropriate.
b.
Subtopic 810-20 shall be applied to determine whether the rights of the limited partners in a
limited partnership overcome the presumption that the general partner controls, and therefore
should consolidate, the partnership.
c.
Subtopic 810-30 shall be applied to determine the consolidation status of a research and
development arrangement.
d.
The Consolidation of Entities Controlled by Contract Subsections of this Subtopic shall be applied
to determine whether a contractual management relationship represents a controlling financial
interest.
e.
Paragraph 710-10-45-1 addresses the circumstances in which the accounts of a rabbi trust that
is not a VIE (see the Variable Interest Entities Subsections for guidance on VIEs) shall be
consolidated with the accounts of the employer in the financial statements of the employer.
ASC 810 defines a subsidiary as an entity in which a parent has a controlling financial interest, either
through voting interests or other means (such as variable interests).
While consolidation policy is not the subject of this publication, in general, the first step in determining
whether an entity has a controlling financial interest in a subsidiary is to establish the basis on which the
investee is to be evaluated for control (that is, whether the consolidation determination should be based
on ownership of the investees outstanding voting interests or its variable interests). Accordingly, the
provisions of ASC 810-10s Variable Interest Model1 should first be applied to determine whether the
investee is a VIE. Only if the entity is determined not to be a VIE should the consolidation guidance for
voting interest entities within ASC 810-10 be applied. See our FRD publication, Consolidation and the
Variable Interest Model, for further discussion of ASC 810s consolidation models.
Once a parent has determined that it has a controlling financial interest in an entity, the parent accounts
for the assets, liabilities and any noncontrolling interests of that entity in its consolidated financial
statements in accordance with the consolidation principles in ASC 810-10-45. These principles are
generally the same for entities consolidated under the voting interest and Variable Interest models.
Illustration 1-1 summarizes how ASC 810s control framework should generally be applied to interests in
an entity.
ASC 810-10 includes guidance about the consolidation considerations for both voting interest entities and variable interest
entities. In ASC 810-10, there are General subsections with consolidation guidance that applies to voting interest entities and
that also may apply to variable interest entities in certain circumstances. The Variable Interest Entities subsections in ASC 81010 contain guidance that applies exclusively to variable interest entities. By referring to the Variable Interest Model in ASC 810-10,
we are referring to all of the guidance applicable to variable interest entities in each of ASC 810-10s subsections.
Illustration 1-1:
ASC 810, Consolidation decision tree

Variable Interest Model
Is the entity being evaluated for

consolidation a legal entity?
No
Yes
Does a scope exception to consolidation
guidance (ASC 810) apply?
Employee benefit plans
Governmental organizations
Certain investment companies
Yes
Apply other GAAP
No
Does a scope exception to the Variable Interest Model apply?
Not-for-profit organizations
Separate accounts of life insurance companies
Lack of information
Certain businesses
Consider whether fees paid

to a decision maker or a
service provider represent
a variable interest
No
No
Does the enterprise have a variable

interest in a legal entity?
Consider whether silos exist
or whether the interests or
other contractual arrangements
of the entity (excluding
interests in silos) qualify as
variable interests in the entity
as a whole1
Is the legal entity a variable interest entity?
Does the entity lack sufficient equity to finance its activities?
Do the equity holders, as a group, lack the characteristics of

a controlling financial interest?
Is the legal entity structured with non-substantive voting

rights (i.e., anti-abuse clause)?
No
Variable Interest Model (cont.)
Voting model
Is the enterprise the primary beneficiary

(i.e., does the enterprise individually have both power
and benefits)?
No
Yes
Does a related party or de facto agent

individually have power and benefits?
Consolidate entity
The general partner (GP) is presumed to have

control unless that presumption can be
overcome by one the following conditions:
Related party or de facto

agent consolidates entity
Can a simple majority vote of limited

partners remove a general partner
without cause and there are no barriers
to the exercise that removal right?
Do limited partners have substantive
participating rights?
No
GP consolidates entit
No
Do not
consolidate
Yes
Party most
closely associated
with VIE
consolidates
Consolidation of corporations and

other legal entities
Consolidation of partnerships and

similar entities
Yes
Does the enterprise,

including its related parties
and de facto agents,
collectively have power
and benefits?
Apply other GAAP
Yes
Yes
No
Yes
Does a majority shareholder, directly or

indirectly, have greater than 50% of the
outstanding voting shares?
No
Yes
Do the minority shareholders
hold substantive participating
rights or do certain other
conditions exist (e.g., legal
subsidiary is in bankruptcy)?
Do not consolidate
Yes
GP does not consolidate the
entity. In limited circumstances
a limited partner may
consolidate (e.g., a single
limited partner that has
the ability to liquidate the
limited partnership or kick
out the general partner
without cause).
No
Consolidate entity
Yes
Do not consolidate
See our FRD publication, Consolidation and the Variable Interest Model, for guidance on silos and specified assets.
Note:
The FASB currently has a project on its agenda to make targeted changes to the consolidation
guidance in ASC 810 that would remove the FAS 167 deferral for certain investment companies and
address other concerns. The FASBs tentative decisions in this project may affect consolidation
conclusions for all entities, not just those currently subject to the deferral. The FASB has not indicated
when it might issue a final standard. Readers should monitor developments in this area closely.
1.2
Consolidation procedure time of acquisition

An entity may acquire a controlling financial interest in a subsidiary through a single step or through
multiple steps over time.
1.2.1
Acquisition through a single step

ASC 805 provides guidance when an acquirer obtains control of an acquiree through a single investment,
often referred to as a single-step acquisition. Single-step acquisitions may be the most familiar form of
business combination. ASC 805 requires an acquirer to recognize the assets acquired, the liabilities
assumed and any noncontrolling interest in the acquiree, all generally measured at their fair values as of
the acquisition date. These concepts are discussed further in our FRD publication, Business combinations.
The comprehensive example in Chapter 4 includes an example of the accounting for a single-step
acquisition. See Section 4.2, Illustration 4-10; Section 4.2.1, Illustration 4-11; and Section 4.2.2,
Illustration 4-12.
1.2.2
Acquisition through multiple steps

When an acquirer obtains control of an acquiree through a series of investments, the acquisition is called
a step acquisition or, in ASC 805, a business combination achieved in stages. Under ASC 805, if the
acquirer holds a noncontrolling equity investment in the acquiree immediately before obtaining control,
the acquirer should first remeasure that investment at fair value as of the acquisition date and recognize
any remeasurement gain or loss in earnings. If, before obtaining control, an acquirer recognized changes
in the value of its noncontrolling investment in the target in other comprehensive income (that is, the
investment was classified as available-for-sale in accordance with ASC 320), the amount recognized in
other comprehensive income as of the acquisition date should be reclassified from other comprehensive
income and included in the recognized remeasurement gain or loss as of the acquisition date. The
acquirer then should apply ASC 805s business combination guidance, as discussed in our FRD
publication, Business combinations.
After taking control of a target company, further acquisitions of ownership interests (i.e., acquisitions of
noncontrolling ownership interests with no changes in control) are accounted for as transactions among
shareholders within equity pursuant to ASC 810 (see Chapter 4).
Illustration 1-2 summarizes these concepts.
Illustration 1-2:
1.3
Summary of guidance applied for acquisitions of an interest in an entity
Acquisition of an
interest prior to
obtaining control
Apply other GAAP (e.g., ASC 320, ASC 323 or ASC 815).
Acquisition of an
additional interest that
provides control
First, remeasure the previously held interest (i.e., the interest held before
obtaining control, if any) at fair value, recognizing any gain or loss in
earnings. Next, measure and consolidate (generally at fair value) the net
assets acquired and any noncontrolling interests, in accordance with
ASC 805. (See our FRD publication, Business combinations, for further
interpretive guidance).
Acquisition of an
additional interest,
after control has
already been obtained
Reduce the carrying amount of the noncontrolling interest. Recognize any

difference between the consideration paid and the reduction to the
noncontrolling interest in equity attributable to the controlling interest.
(See Section 4.1.1 for further discussion of this accounting).
Proportionate consolidation
Other Presentation Matters

810-10-45-14
If the investor-venturer owns an undivided interest in each asset and is proportionately liable for its
share of each liability, the provisions of paragraph 323-10-45-1 may not apply in some industries. For
example, in certain industries the investor-venturer may account in its financial statements for its pro
rata share of the assets, liabilities, revenues, and expenses of the venture. Specifically, a proportionate
gross financial statement presentation is not appropriate for an investment in an unincorporated legal
entity accounted for by the equity method of accounting unless the investee is in either the construction
industry (see paragraph 910-810-45-1) or an extractive industry (see paragraphs 930-810-45-1 and
932-810-45-1). An entity is in an extractive industry only if its activities are limited to the extraction of
mineral resources (such as oil and gas exploration and production) and not if its activities involve
related activities such as refining, marketing, or transporting extracted mineral resources.
Real Estate General Investments Equity Method and Joint Ventures
Recognition
970-323-25-12
If real property owned by undivided interests is subject to joint control by the owners, the investorventurers shall not present their investments by accounting for their pro rata share of the assets,
liabilities, revenues, and expenses of the ventures. Most real estate ventures with ownership in the
form of undivided interests are subject to some level of joint control. Accordingly, such investments
shall be presented in the same manner as investments in noncontrolled partnerships.
Using the proportionate gross financial statement presentation method (that is, proportionate
consolidation, as described in ASC 810-10-45-14) is permitted only for the following: (1) investments in
certain unincorporated legal entities in the extractive 2 or construction3 industry that otherwise would be
accounted for under the equity method of accounting (i.e., a controlling interest does not exist), and
(2) ownership of an undivided interest in real property when each owner is entitled only to its pro rata
share of income and expenses and is proportionately (i.e., severally) liable for its share of each liability,
and the real property owned is not subject to joint control by the owners.
An investor applying proportionate consolidation to account for its undivided interest in each asset, its
proportionate share of each liability and its share of the revenues and expenses of an investee would
need to apply typical consolidation procedure. For example, it would need to evaluate intercompany
balances and transactions to ensure they are properly eliminated, in the same manner that it would for
consolidated entities.
1.4
Differing fiscal year-ends between parent and subsidiary


810-10-15-11
A difference in fiscal periods of a parent and a subsidiary does not justify the exclusion of the
subsidiary from consolidation.
Differing Fiscal Year-Ends Between Parent and Subsidiary
810-10-45-12
It ordinarily is feasible for the subsidiary to prepare, for consolidation purposes, financial statements
for a period that corresponds with or closely approaches the fiscal period of the parent. However, if
the difference is not more than about three months, it usually is acceptable to use, for consolidation
810-10-45-14 states: An entity is in an extractive industry only if its activities are limited to the extraction of mineral resources
(such as oil and gas exploration and production) and not if its activities involve related activities such as refining, marketing, or
transporting extracted mineral resources.
To determine which entities are in the construction industry, ASC 910-810-45-1 points to ASC 910-10-15-3, which states that
certain characteristics are common to entities in the industry. The most basic characteristic is that work is performed under
contractual arrangements with customers. A contractor, regardless of the type of construction activity or the type of contractor,
typically enters into an agreement with a customer to build or to make improvements on a tangible property to the customers
specification. The contract with the customer specifies the work to be performed, specifies the basis of determining the amount
and terms of payment of the contract price and generally requires total performance before the contractors obligation is
discharged. Unlike the work of many manufacturers, the construction activities of a contractor are usually performed at job sites
owned by customers rather than at a central place of business, and each contract usually involves the production of a unique
property rather than repetitive production of identical products. Other characteristics common to contractors and significant to
accountants and users of financial statements include the following:
(1) A contractor normally obtains the contracts that generate revenue or sales by bidding or negotiating for specific projects.
(2) A contractor bids for or negotiates the initial contract price based on an estimate of the cost to complete the project and the
desired profit margin, although the initial price may be changed or renegotiated.
(3) A contractor may be exposed to significant risks in the performance of a contract, particularly a fixed-price contract.
(4) Customers (usually referred to as owners) frequently require a contractor to post a performance and a payment bond as
protection against the contractors failure to meet performance and payment requirements.
(5) The costs and revenues of a contractor are typically accumulated and accounted for by individual contracts or contract
commitments extending beyond one accounting period, which complicates the management, accounting, and auditing processes.
(6) The nature of a contractors risk exposure varies with the type of contract. The several types of contracts used in the
construction industry are described in ASC 605-35. The four basic types of contracts used based on their pricing arrangements
are fixed-price or lump-sum contracts, unit-price contracts, cost-type contracts, and time-and-materials contracts.
purposes, the subsidiary's financial statements for its fiscal period; if this is done, recognition should
be given by disclosure or otherwise to the effect of intervening events that materially affect the
financial position or results of operations
810-10-45-13
A parent or an investor should report a change to (or the elimination of) a previously existing difference
between the parent's reporting period and the reporting period of a consolidated entity or between the
reporting period of an investor and the reporting period of an equity method investee in the parent's or
investor's consolidated financial statements as a change in accounting principle in accordance with the
provisions of Topic 250. While that Topic generally requires voluntary changes in accounting principles
to be reported retrospectively, retrospective application is not required if it is impracticable to apply the
effects of the change pursuant to paragraphs 250-10-45-9 through 45-10. The change or elimination
of a lag period represents a change in accounting principle as defined in Topic 250. The scope of this
paragraph applies to all entities that change (or eliminate) a previously existing difference between the
reporting periods of a parent and a consolidated entity or an investor and an equity method investee.
That change may include a change in or the elimination of the previously existing difference (lag period)
due to the parent's or investor's ability to obtain financial results from a reporting period that is more
consistent with, or the same as, that of the parent or investor. This paragraph does not apply in
situations in which a parent entity or an investor changes its fiscal year-end.
Disclosure
810-10-50-2
An entity should make the disclosures required pursuant to Topic 250. This paragraph applies to all
entities that change (or eliminate) a previously existing difference between the reporting periods of a
parent and a consolidated entity or an investor and an equity method investee. This paragraph does
not apply in situations in which a parent entity or an investor changes its fiscal year-end.
A parent must consolidate a controlled subsidiary, even if it has a different fiscal year-end than the
parent. If a subsidiary has a different fiscal year end, the parent can use the subsidiarys financial
statements for consolidation purposes, as long as the difference in fiscal year-ends is not more than
about three months (e.g., 93 days under Rule 3A-02(b) of Regulation S-X). In these circumstances, the
parent should disclose the effect of intervening events that, if recognized, would materially affect the
consolidated financial position or results of operations.
When a parent uses a subsidiarys financial statements that have a different fiscal year end for
consolidation, the parent will need to carefully consider how it applies consolidation procedure. For
example, intercompany transactions should be evaluated to ensure they are properly eliminated and that
any assets (e.g., cash) transferred between the parent and the subsidiary during the intervening period
are not double-counted in consolidation. Separately, the carrying amount of the subsidiarys assets and
liabilities would be reflected in the consolidated financial statements as of the period end of the
subsidiarys fiscal year end and not as of the parents fiscal year end. This includes situations in which
certain subsidiary balances are reported at fair value. When a parent changes a subsidiarys fiscal yearend, the parent would report this as a change in accounting principle in accordance with the provisions of
ASC 250. 4 Under ASC 250s guidance, the parent is required to assess whether a change is preferable
and, if so, report the change in accordance with ASC 250. ASC 250 requires retrospective application to
prior-period financial statements of voluntary changes in accounting principle, unless it is impracticable
to apply the effects of the change retroactively.
This guidance does not apply, however, in situations in which a parent entity changes its own fiscal year-end.
1.5
Using subsidiary financial statements prepared as of an earlier period end

for consolidation procedure in circumstances when the subsidiary has the
same fiscal year-end as the parent
Investments Equity Method and Joint Ventures Overall
Subsequent Measurement
323-10-35-6
If financial statements of an investee are not sufficiently timely for an investor to apply the equity method
currently, the investor ordinarily shall record its share of the earnings or losses of an investee from the
most recent available financial statements. A lag in reporting shall be consistent from period to period.
ASC 810 does not specifically address whether it is acceptable for a parent that has the same fiscal year
end as a subsidiary to use subsidiary financial statements that are prepared on a lag for consolidation
purposes. Depending on the facts and circumstances, we believe it may be acceptable to do so.
For example, both a parent and a subsidiary may have a year-end of 31 December; however, the parent
may not receive the subsidiarys 31 December financial statements until mid-March. As a result, it might
not be practical for the parent to use the subsidiarys 31 December financial statements.
We believe the decision to apply consolidation procedure on a lag is a policy election that should be
applied consistently from period to period and subsidiary by subsidiary. We believe a parent could have
one subsidiary that is on a lag, and another that is not. We believe that a parent should apply the same
maximum difference allowed in Rule 3A-02(b) of SEC Regulation S-X for consolidated subsidiaries with
different fiscal year-ends (i.e., a lag of no more than 93 days). Intervening events that materially affect
the financial position or results of operations should be disclosed.
When a parent uses a subsidiarys financial statements that are on a lag for consolidation, the parent will
need to carefully consider its consolidation procedure. For example, intercompany transactions should
be evaluated to ensure they are properly eliminated and that any assets (e.g., cash) transferred between
the parent and the subsidiary during the intervening period are not double-counted in consolidation.
Separately, the carrying amount of the subsidiarys assets and liabilities would be reflected in the
consolidated financial statements as of the period end of the subsidiarys most recently available
financial statements and not as of the consolidated entitys fiscal year end. This includes situations in
which certain subsidiary balances are reported at fair value.
We believe a parents decision to change or eliminate an existing lag between the parent and the
subsidiary is considered a change in accounting principle, in accordance with ASC 250. Under that
guidance, the parent is required to assess whether the change is preferable and, if so, report the change
in accordance with ASC 250. ASC 250 requires retrospective application to prior-period financial
statements of voluntary changes in accounting principle, unless it is impracticable to apply the effects of
the change retroactively.
1.6
Subsidiarys accounting basis is not US GAAP

A subsidiary may follow accounting principles that differ from US GAAP for separate reporting purposes
(e.g., IFRS). When this is the case, the parent must adjust the subsidiarys financial statements to US GAAP in
consolidation. The consolidated financial statements must be prepared in accordance with the authoritative
principles and standards in the Accounting Standards Codification in order for the parent to assert they
are presented in conformity with GAAP in the United States. SEC registrants also must apply the rules and
interpretive releases of the SEC, which are additional sources of authoritative GAAP for those entities.
1.7
Differing accounting policies between parent and subsidiary

A parent and its subsidiaries may not have the same accounting policies, especially when a subsidiary
was recently acquired, a subsidiary is a public company or a subsidiary has specialized industry
accounting principles.
US GAAP does not require that a parent and its subsidiaries follow the same accounting policies.
Therefore, if the subsidiarys financial statements were prepared in accordance with US GAAP and the
parent follows an acceptable alternative available in US GAAP for similar items in the financial
statements, the financial statements of the subsidiary generally are not adjusted in consolidation.
For example, if a subsidiary applies the first-in, first-out (FIFO) method for inventory accounting but the parent
applies the last-in, last-out (LIFO) method, adjustments to conform the inventory policies are not required.
Nature and classification of a

noncontrolling interest
2.1
Noncontrolling interests
Glossary
810-10-20
Noncontrolling Interest
The portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent.
A noncontrolling interest is sometimes called a minority interest.
Nature and Classification of the Noncontrolling Interest in the Consolidated Statement of Financial
Position
810-10-45-15
The ownership interests in the subsidiary that are held by owners other than the parent is a noncontrolling
interest. The noncontrolling interest in a subsidiary is part of the equity of the consolidated group.
810-10-45-16
The noncontrolling interest shall be reported in the consolidated statement of financial position within
equity, separately from the parents equity. That amount shall be clearly identified and labeled, for
example, as noncontrolling interest in subsidiaries (see paragraph 810-10-55-41). An entity with
noncontrolling interests in more than one subsidiary may present those interests in aggregate in the
consolidated financial statements.
810-10-45-16A
Only either of the following can be a noncontrolling interest in the consolidated financial statements:
a.
A financial instrument (or an embedded feature) issued by a subsidiary that is classified as equity
in the subsidiarys financial statements
b.
A financial instrument (or an embedded feature) issued by a parent or a subsidiary for which the
payoff to the counterparty is based, in whole or in part, on the stock of a consolidated subsidiary,
that is considered indexed to the entitys own stock in the consolidated financial statements of the
parent and that is classified as equity.
810-10-45-17
A financial instrument issued by a subsidiary that is classified as a liability in the subsidiarys financial
statements based on the guidance in other Subtopics is not a noncontrolling interest because it is not
an ownership interest. For example, Topic 480 provides guidance for classifying certain financial
instruments issued by a subsidiary.
Nature and classification of a noncontrolling interest
810-10-45-17A
An equity-classified instrument (including an embedded feature that is separately recorded in equity
under applicable GAAP) within the scope of the guidance in paragraph 815-40-15-5C shall be
presented as a component of noncontrolling interest in the consolidated financial statements whether
the instrument was entered into by the parent or the subsidiary. However, if such an equity-classified
instrument was entered into by the parent and expires unexercised, the carrying amount of the
instrument shall be reclassified from the noncontrolling interest to the controlling interest.
ASC 810-10 states that a noncontrolling interest in an entity is any equity interest in a consolidated
entity that is not attributable to the parent. ASC 810-10 requires that a noncontrolling interest be
classified as a separate component of consolidated equity.
In ASC 810-10, the FASB concluded that a noncontrolling interest in an entity meets the definition of equity
in Concepts Statement 6, which defines equity (or net assets) as, the residual interest in the assets of an
entity that remains after deducting its liabilities. A noncontrolling interest represents a residual interest in
the assets of a subsidiary within a consolidated group and is, therefore, consistent with the definition of
equity in Concepts Statement 6. A noncontrolling interest is presented separately from the equity of the
parent so that users of the consolidated financial statements can distinguish the parents equity from the
equity attributable to the noncontrolling interest (that is, equity of the subsidiary held by owners other than
the parent).
To be classified as equity in the consolidated financial statements, the instrument issued by the
subsidiary should be classified as equity by the subsidiary based on other authoritative literature. If the
instrument is classified as a liability in the subsidiarys financial statements, it cannot be presented as
noncontrolling interest in the consolidated entitys financial statements because that instrument does not
represent an ownership interest in the consolidated entity under US GAAP.
For example, mandatorily redeemable preferred shares issued by a subsidiary would be classified as a
liability in the subsidiarys financial statements according to ASC 480. The preferred shares would not be
classified as a noncontrolling interest in the consolidated financial statements.
2.1.1
Noncontrolling interests in consolidated variable interest entities (VIEs)

ASC 810-10 requires an entity to present assets and liabilities of a consolidated VIE separately on the
balance sheet, when certain conditions exist. ASC 810 does not address the presentation of
noncontrolling interests in a consolidated VIE. We believe an entity is permitted to present noncontrolling
interests of a consolidated VIE separately from other noncontrolling interests in the equity section of the
balance sheet, as long as it makes an accounting policy choice and applies that choice to all consolidated
VIEs. See Chapter 14 of our FRD publication, Consolidation and the Variable Interest Model, for further
discussion of the presentation requirements for consolidated VIEs.
2.2
Equity contracts issued on the stock of a subsidiary

An acquirer (i.e., a new parent) that acquires a controlling financial interest (but less than 100%) in an
acquiree (i.e., a subsidiary) may want the right to obtain the noncontrolling interest at a later date. The
acquirer could execute a call option (a right) or a forward contract (an unconditional obligation) on the
noncontrolling interest with the seller, which in effect would give the acquirer flexibility in the timing and
financing to acquire the noncontrolling interest. When the seller wants to retain an equity interest to
participate in the future performance of the acquiree but have the right to sell its noncontrolling interest
after a period of time, it may execute a put option over the noncontrolling interest with the acquirer.
Nature and classification of a noncontrolling interest
Acquirers and sellers may enter into such arrangements (referred to here as equity contracts) for the
following reasons:
Tax planning A seller may want to defer capital gains that would result from selling 100% of an
entity. The seller may be willing to sell a controlling interest with a put option giving it the right to sell
the remaining interest or a call option giving the acquirer the right to acquire the remaining interest
(or both)
Flexibility for the acquirer Call options and forward contracts provide flexibility for the acquirer in
financing an acquisition
Liquidity to the seller Put options and forward contracts give the seller an exit strategy for its
retained interest
Seller retention Call options, put options or forward contracts with a fair value exercise price create
an incentive for the seller to remain involved with the acquiree and help make it successful
Similar arrangements also may be entered into between a parent and the noncontrolling interest holders
subsequent to an acquisition. Agreements between a parent and the noncontrolling interest holders may:
Grant the noncontrolling interest holders an option to sell their remaining interests in the subsidiary
to the parent (i.e., a written put option from the parents perspective)
Grant the parent an option to acquire the remaining interests held by the noncontrolling interest
holders (i.e., a purchased call option from the parents perspective)
Obligate the parent to acquire and the noncontrolling interest holders to sell their remaining
interests (i.e., a forward contract to purchase shares from the parents perspective)
Grant the parent a purchased call option and grant the noncontrolling interest holders a written put
option (i.e., an arrangement similar to but not exactly the same as a forward contract)
Accounting for these types of arrangements can be difficult, due to the complexity and volume of
authoritative guidance that needs to be considered. The accounting often is affected by whether (1) the
feature (e.g., call option, put option, forward contract) is considered embedded or freestanding and (2) the
strike price is fixed, variable (according to a formula) or at fair value. A parent would need to carefully
evaluate how these arrangements affect the classification and measurement of the noncontrolling interest
and future earnings and earnings per share of the consolidated entity, among other things.
See Section 5.10 of Chapter 5 of our FRD publication, Issuers accounting for debt and equity financings,
and Appendix D to our FRD publication, Business combinations, for further interpretive guidance.
Attribution of net income or loss and

comprehensive income or loss
3.1
Attribution procedure

Attributing Net Income and Comprehensive Income to the Parent and the Noncontrolling Interest
810-10-45-19
Revenues, expenses, gains, losses, net income or loss, and other comprehensive income shall be
reported in the consolidated financial statements at the consolidated amounts, which include the
amounts attributable to the owners of the parent and the noncontrolling interest.
810-10-45-20
Net income or loss and comprehensive income or loss, as described in Topic 220, shall be attributed to
the parent and the noncontrolling interest.
810-10-45-21
Losses attributable to the parent and the noncontrolling interest in a subsidiary may exceed their
interests in the subsidiarys equity. The excess, and any further losses attributable to the parent and
the noncontrolling interest, shall be attributed to those interests. That is, the noncontrolling interest
shall continue to be attributed its share of losses even if that attribution results in a deficit
noncontrolling interest balance.
While ASC 810-10 requires net income or loss and comprehensive income or loss to be attributed to the
controlling and noncontrolling interests, it does not prescribe a method for making these attributions. We
believe that net income or loss and comprehensive income or loss of a partially owned subsidiary should
be attributed between controlling and noncontrolling interests based on the terms of a substantive profit
sharing agreement. If a substantive profit sharing agreement does not exist, we generally believe the
relative ownership interests in the subsidiary should be used. In the latter case, the attribution may be as
simple as multiplying the net income or loss and comprehensive income or loss of the partially owned
subsidiary by the relative ownership interests in the subsidiary.
3.1.1
Substantive profit sharing arrangements

We believe that, if substantive, a contractual arrangement that specifies how net income or loss, including
comprehensive income or loss, is to be attributed among a subsidiarys owners should be used for financial
reporting purposes. To be substantive, the terms of an arrangement should retain their economic
outcome over time, and subsequent events should not have the potential to retroactively affect or
unwind prior attributions. Determining whether a profit sharing arrangement is substantive is a matter
of individual facts and circumstances requiring the use of professional judgment. (If a substantive profit
sharing arrangement does not exist, we generally believe the relative ownership interests in the subsidiary
should be used).
Attribution of net income or loss and comprehensive income or loss
For example, care should be exercised when taxable earnings are allocated using a different formula than
cash distributions and liquidating distributions. In these situations, the tax allocation should be carefully
evaluated to ensure that the basis used for financial reporting purposes reflects the allocations of
earnings agreed to by the parties. ASC 970-323-35-17 provides guidance on this point.
Specified profit and loss allocation ratios should not be used if the allocation of cash distributions
and liquidating distributions are determined on some other basis. For example, if [an] agreement
between two investors purports to allocate all depreciation expense to one investor and to allocate
all other revenues and expenses equally, but further provides that irrespective of such allocations,
distributions to the investors will be made simultaneously and divided equally between them, there is
no substance to the purported allocation of depreciation expense.
We believe a contractual term that could require one investor (e.g., the parent) to pay cash to another
investor (e.g., a noncontrolling interest holder) should be considered carefully when understanding and
evaluating the substance of a profit sharing arrangement. Depending on the facts and circumstances, the
cash payment may be part of a separate arrangement among the investors that is not directly related to
the operations or earnings of the entity (e.g., a payment for services provided by one investor to another
investor outside of the entity). When cash payments of this nature do not clearly and directly link to prior
attributions of earnings or losses among the investors under the agreement, we do not believe they would
affect the attributions made for financial reporting purposes. Alternatively, in certain circumstances
payments from a separate arrangement may be clearly and directly linked to prior attributions and
considered to retroactively affecting or unwinding prior attribution. In these circumstances, the
substance of that arrangement may represent a substantive profit sharing arrangement and would need
to be considered when determining attribution for financial reporting purposes.
The SEC staff has asked public companies to enhance their disclosures by stating how such allocations
among controlling and noncontrolling interests are made. Therefore, we believe that it would be
appropriate to disclose the terms and effects of any material substantive profit sharing arrangement.
To determine how to allocate net income or loss (including other comprehensive income or loss) when a
substantive profit sharing arrangement exists, the parent would need to analyze the agreements and
arrangements to determine how a change in net assets of the less-than-wholly-owned subsidiary
(determined in conformity with US GAAP) would affect cash payments to the parent over the life of the
subsidiary and upon its liquidation. In some circumstances, an arrangement may attribute losses to the
shareholders in a different manner than it attributes profits, and therefore a parent should be careful to
evaluate all elements of the arrangement when making attributions.
Little implementation guidance exists on how to account for substantive profit sharing arrangements.
One approach applied in practice is the hypothetical-liquidation-at-book-value (HLBV) method. As
described in more detail below, the use of such an approach is appropriate when the terms of the
substantive profit-sharing arrangement are consistent with the calculation of HLBV. Under the HLBV
approach, the parents share of the subsidiarys earnings or loss is calculated by:
The parents capital account at the end of the period assuming that the subsidiary was liquidated or
sold at book value, plus
Cash distributions received by the parent during the period, minus
The parents new investments in the subsidiary during the period, minus
The parents capital account at the beginning of the period assuming that the subsidiary were
liquidated or sold at book value
The HLBV method would be applied using the subsidiarys book values in accordance with US GAAP.
The HLBV method was discussed in detail in a proposed Statement of Position (SOP), Accounting for
Investors Interests in Unconsolidated Real Estate Investments. However, the proposed SOP was never
adopted. As a result, there is no authoritative guidance requiring the HLBV method. The HLBV method
therefore should be considered only as an approach for how a parent might allocate net income or loss,
including comprehensive income or loss, when a substantive profit-sharing arrangement exists and when
the application of HLBV is consistent with such terms. Said differently, the parent should ensure that the
application of the HLBV method is consistent with the economic substance of an arrangement and does
not conflict with authoritative guidance. Therefore, using the HLBV method (or any other methodology)
to make such attributions is appropriate only if doing so reflects the terms of an existing substantive
profit-sharing arrangement.
Determining whether the terms of an arrangement are substantive and whether the HLBV method (or
any other allocation methodology) reflects that substance requires the use of professional judgment and
a careful evaluation of the individual facts and circumstances. In evaluating the substance of the terms,
the parent should consider whether the terms retain their economic outcome over time and whether
subsequent events have the potential to retroactively affect or unwind prior allocations.
Again, if a substantive profit sharing arrangement does not exist, we generally believe the relative
ownership interests in the subsidiary should be used. In these circumstances, the attribution may be as
simple as multiplying the net income or loss and comprehensive income or loss by the relative ownership
interests in the subsidiary.
Illustration 3-1:
Application of a substantive profit sharing arrangement
Entity Z was formed as a partnership on 1 January 20X1 by two unrelated investors. Investor A
contributed $200 in exchange for 80% of the common stock of Entity Z. Investor B made a nominal
contribution. Investor B provides certain technical knowledge and background for Entity Z to operate.
For illustrative purposes, assume Entity Z is not a VIE and Investor A (i.e., Parent) controls and
consolidates Entity Z (i.e., Subsidiary) under ASC 810s Voting Model. Upon consolidation, Investor B
is the holder of the noncontrolling interest.
There have not been any changes in investment levels, and there were no additional contributions from
or distributions to the investors from 1 January 20X1 through 31 December 20X3. Under the terms
of the substantive profit-sharing arrangement, Parent is guaranteed its investment of $200, plus an
additional return of $200. After Parent has received these amounts, all remaining profits and losses
are allocated based on ownership percentages (80/20) between it and the noncontrolling interest.
Subsidiary has an operating loss of $(50) in 20X1, income of $170 in 20X2 and income of $240
in 20X3. Subsidiary does not distribute any dividends in any period. Intra-entity transactions and the
effect of income taxes have been ignored to simplify this illustration.
Subsidiarys book value of net assets is as follows:
1/1/X1
Net assets
200
12/31/X1
12/31/X2
150
320
12/31/X3
$
560
Based on the above net assets and the terms of the substantive profit-sharing arrangement, the claim
to net assets at book value would be as follows:
Book value of net assets
Return of capital to Parent (up to
original investment of $200) [1]
Remaining profits to allocate
Guaranteed return to Parent (up to
a maximum of $200) [2]
Remaining profits to allocate
80% pro-rata to Parent [3]
20% pro-rata to the noncontrolling
interest [4]
HLBV capital of Parent [1+2+3]

HLBV capital of the noncontrolling
interest [4]
1/1/X1
$ 200
12/31/X1
$ 150
(200)
12/31/X2
$ 320
(150)
12/31/X3
$ 560
(200)
120
(200)
360
(120)
(200)
160
(128)
(32)
200
150
320
528
32
20X1:
If Subsidiary hypothetically liquidated its assets and liabilities at book value at 31 December 20X1, it
would have $150 available to distribute. Parent would receive $150 as its return of capital according to
the substantive profit-sharing arrangement. Therefore, during 20X1, Parents claim on Subsidiarys
book value decreased by $50 ($150 capital less initial capital of $200), which Parent would recognize
in 20X1 as its share of Subsidiarys losses. Since the entire loss under HLBV has been allocated to
Parent, no income or losses would be attributed to the noncontrolling interest in the consolidated
financial statements during 20X1, and 100% of the $50 loss would be attributed to Parent.
20X2:
would have $320 available to distribute. Parent would receive $200 as its return of capital, plus $120
as part of its guaranteed return, according to the substantive profit-sharing arrangement. Therefore,
during 20X2, Parents capital increased to $320. Parents share of Subsidiary income for the year
would be $170 ($320 in capital at 31 December 20X2 less $150 in hypothetically liquidated capital at
31 December 20X1). Since all income under HLBV was allocated to Parent, no income or losses would
be attributed to the noncontrolling interest in the consolidated financial statements during 20X2, and
100% of the $170 income would be attributed to Parent.
20X3:
would have $560 available to distribute. Parent would receive $200 as its return of capital, plus $200
as its guaranteed return, according to the substantive profit-sharing arrangement. Therefore, during
20X3, Parents HLBV capital increased to $528 (Parents $200 return of capital, $200 in guaranteed
return for the year plus 80% share of the remaining net assets available to distribute [$160 80% =
128]). Parents share of Subsidiary income for the year would be $208 ($528 in capital at 31
December 20X3 less $320 in hypothetically liquidated capital at 31 December 20X3). Parent would
record the following journal entry to attribute $32 of Subsidiarys $240 of income to the
noncontrolling interest:
Dr. Net income attributable to the noncontrolling interest
Cr. Noncontrolling interest
32
32
In summary, under HLBV, $208 of Subsidiary income was allocated to the Parent and $32 was
allocated to the noncontrolling interest in the consolidated financial statements during 20X3.
Question 3.1
How do equity contracts (e.g., call options, put options, forward contracts) on the stock of a
subsidiary affect the attribution of net income or loss and comprehensive income or loss between the
controlling and noncontrolling interests?
See Chapter 5 of our FRD publication, Issuers accounting for debt and equity financings, for detailed
interpretive guidance on the accounting for equity contracts on noncontrolling interests, including their
effect on attributing net income or loss and comprehensive income or loss between the controlling and
noncontrolling interests.
3.1.2
Attribution of losses
Before Statement 160 was adopted, losses that otherwise would have been attributed to the
noncontrolling interest were allocated to the controlling interest after the noncontrolling interest was
reduced to zero. If the subsidiary subsequently became profitable, 100% of the net earnings would have
been allocated to the controlling interest until it recovered the losses that were absorbed.
Importantly, Statement 160 amended previous guidance to say that losses are attributed to the
noncontrolling interest, even when the noncontrolling interests basis in the partially owned subsidiary
has been reduced to zero. Under the economic entity concept, the noncontrolling interest is considered
equity of the consolidated group and participates in the risks and rewards of an investment in the
subsidiary. Therefore, the noncontrolling interest should be attributed its share of losses just like the
parent, even if the noncontrolling interest balance becomes a deficit. Any excess loss attributed to the
noncontrolling interest is reported in consolidated financial statements as a deficit balance in the
noncontrolling interest line in the equity section.
3.1.2.1
Distributions in excess of the noncontrolling interests carrying amount

We generally believe that because the noncontrolling interest balance can be reduced below zero under
ASC 810 (that is, the noncontrolling interest can have a debit balance), the controlling interest is not
required to recognize a loss when distributions exceed the noncontrolling interests carrying value.
Instead, the noncontrolling interest balance is reduced below zero when the transaction is recorded.
Illustration 3-2 demonstrates this concept using an example from the real estate industry, where these
transactions may be more common.
Illustration 3-2:
Distributions in excess of the noncontrolling interests carrying amount
A real estate entity often refinances appreciated property and distributes the proceeds to its owners.
Assume a real estate subsidiary has $100 of equity. The parent and noncontrolling interest own 80%
and 20%, respectively, of the entity. As a result, the balance of noncontrolling interest is $20. The
subsidiarys only asset is a building with a carrying amount of $100, but with a fair value of $1,100.
Assume the subsidiary refinances the building by mortgaging the building for $1,000 and distributes
the proceeds, proportionately, to its owners.
The journal entries to record these transactions in the consolidated financial statements follow:
Cash
Mortgage liability
To record the proceeds from the refinancing transaction
Noncontrolling interest
Cash
To record the distribution to the noncontrolling interest
1,000
1,000
200
200
As a result of this transaction, the noncontrolling interest would have a debit balance of $180.
3.1.3
Attribution to noncontrolling interests held by preferred shareholders

When a consolidated subsidiary is funded with a combination of common and preferred stock, care
should be taken when attributing net income or loss and comprehensive income or loss between the
controlling and noncontrolling interests.
Unlike common stock, preferred stock is typically entitled to a liquidation preference, which generally will
include a par amount and, in some cases, cumulative unpaid dividends. Preferred stock typically is entitled
to a share of the subsidiarys earnings up to the stated dividend, and losses of the subsidiary typically do
not reduce the amount due to the preferred stockholders in liquidation (although economically a portion of
those losses may be funded by the preferred stock). For these reasons, unlike common stock, preferred
stock normally does not represent a residual equity interest in the subsidiary even though preferred stock
is classified as a noncontrolling interest in the consolidated financial statements of the parent.
We believe that a noncontrolling interest in a subsidiary that consists of preferred stock should be
accounted for similar to preferred stock issued by the parent. Accordingly, any net income and
comprehensive income of the subsidiary are allocated to the noncontrolling interest based on the
preferred stocks stated dividend and liquidation rights, and any net losses and comprehensive losses of
the subsidiary normally are not allocated to preferred stock. In other words, the balance of the preferred
stock classified as noncontrolling interest generally should be equal to its liquidation preference.
In some cases, the preferred stock does not have a liquidation preference and truly represents a residual
equity interest in the entity (e.g., the equity interest may be called preferred stock because it participates
disproportionally in returns but otherwise participates in the same preference and proportion as common
stock in losses). In these instances, the interest is tantamount to common stock and we believe it would
be appropriate for the parent to attribute net losses and comprehensive losses to the preferred stock
noncontrolling interest, as the parent would with the common stock.
The guidance above only relates to preferred stock and should not necessarily be analogized to residual
equity interests that provide preferential returns, which are common in partnerships. However, we believe
an analogy may be appropriate for a class of security issued by the subsidiary that has a preference in
distribution or liquidation rights over all other classes of equity security issued by the subsidiary.
Illustration 3-3:
Attribution to noncontrolling interests held by preferred shareholders
Background
Companies A and B form Entity X, which is designed to buy and manage an apartment building.
Company A contributes $70 million and owns 100% of the common equity. Company B contributes
$30 million in exchange for preferred shares that receive a 6% stated dividend per annum. The
preferred stock is entitled to a liquidation preference, which includes the par amount and any
cumulative unpaid dividends. Company A consolidates Entity X.
The results of operations for Entity X in Years 1 through 3 are as follows (in thousands):
Year 1
5,040
Net income (loss)
Year 2
(1,260)
Year 3
3,780
Analysis
Company B is entitled to a 6% stated dividend per annum on its $30 million in preferred shares.
Therefore, Company A would attribute $1.8 million in net income to the noncontrolling interest each
year in its consolidated financial statements, as follows:
Year 1
5,040
Net income (loss)

Net income attributable to the noncontrolling
interest
Net income (loss)attributable to the controlling
interest
3.1.4
Year 2
(1,260)
Year 3
3,780
1,800
1,800
1,800
3,240
(3,060)
1,980
Attribution of goodwill impairment

ASC 350-20-35-57A states that if a reporting unit is less than wholly owned, the fair value of the
reporting unit and the implied fair value of its goodwill is determined in the same manner as it would be in
a business combination under ASC 805. Any goodwill impairment that results from applying step two of
the goodwill impairment model should be attributed to the controlling and noncontrolling interests on a
rational basis.
While allocating net income or loss and comprehensive income or loss to the controlling and
noncontrolling interests may be as straightforward as multiplying earnings by the relative ownership
percentages (when a substantive profit sharing arrangement does not exist), that approach may not be
appropriate for allocating a goodwill impairment. Particular care must be taken in this instance because a
premium may be paid to obtain control of an entity. And, as a result, the controlling and noncontrolling
interests bases in acquired goodwill may not be proportional to their ownership interests because the
premium may not be allocated proportionately to the controlling and noncontrolling interests.
See Section 3.1.6 in Chapter 3 of our FRD publication, Intangibles Goodwill and other, for more
guidance on goodwill impairment testing when a noncontrolling interest exists.
3.1.5
Attributions related to business combinations effected before Statement 160

and Statement 141(R) were adopted
Statement 160 was effective for the first annual reporting period beginning on or after 15 December
2008 (that is, 1 January 2009, for calendar year-end companies) and was required to be adopted
concurrently with Statement 141(R). Statement 141(R) had the same effective date and was required to
be adopted prospectively.
Business combinations achieved in stages before the adoption of Statement 141(R) (e.g., business
combinations accounted for under Statement 141) generally followed step-acquisition accounting
(that is, the noncontrolling interest was not initially measured at fair value). When attributing net income
or loss related to acquisitions that were completed before the adoption of Statement 141(R), it is
inappropriate to use the calculation of the parents relative ownership in the subsidiary to determine the
noncontrolling interests basis in the assets and liabilities. Because of the prohibition against retroactively
applying Statement 141(R), the controlling and noncontrolling interests bases in assets and liabilities
recognized before the adoption of Statement 141(R) should continue to be used.
Illustration 3-4:
Attributions related to an acquisition prior to Statement 141(R)
Assume that Acquirer acquired a 60%-controlling interest in Target on 1 January 2005, and the
business combination was accounted for under Statement 141. Target had, on the acquisition date,
a definite-lived intangible asset with a $100 fair value, but no book value. Under Statement 141,
Acquirer would have measured the intangible asset in its financial statements at $60 (60% acquired
plus carryover basis for the noncontrolling interests ownership in the intangible asset, that is, zero).
Assume at the acquisition date the intangible asset had a 10-year remaining useful life. Accordingly,
Acquirer would have recognized annual amortization expense of $6 in its consolidated financial
statements. Because the noncontrolling interest has no basis in the intangible asset, no amortization
expense is allocated to the noncontrolling interest.
This concept extends to attributing impairment charges to the controlling and noncontrolling interests.
Because the noncontrolling interest does not have a basis in the intangible asset, if the intangible asset
becomes impaired after the acquisition date, the entire impairment charge would be allocated to the
controlling interest. Also, as described in ASC 350-20-35-57A, if a reporting unit includes goodwill that is
attributable only to a parents basis in a partially owned subsidiary for which acquisition accounting was
completed according to Statement 141, any goodwill impairment charge (whether recognized before or
after the effective date of Statement 160) would be attributed entirely to the parent.
3.1.6
Effect on effective income tax rate

In certain instances, an entitys reported effective tax rate may be affected by the attribution of net
income and losses and comprehensive income and losses to noncontrolling interests. This is particularly
true for entities that consolidate subsidiaries that pay no income tax but instead distribute any taxable
income to their respective investors, such as limited liability companies and limited partnerships. In
certain cases, the effective tax rate computed from the amounts included on the income statement may
be significantly affected, requiring additional disclosure in the notes to the financial statements.
Illustration 3-5 demonstrates the potential effect of attributions on an entitys effective tax rate.
Illustration 3-5:
Effect of attributions on an entitys effective tax rate
Assume that Entity A (a corporation) owns 60% of LP (a limited partnership) and consolidates LP. Also
assume that Entity As statutory income tax rate and standalone effective tax rate are both 35%, while
LP pays no income tax because it distributes its taxable earnings to its investors. Each entity has the
following standalone financial information.
Income before income taxes
Income taxes
Net income
Entity A
$ 1,000
350
$
650
$
$
LP
900
900
Entity A is required to pay income taxes on its portion of LPs earnings. Therefore, the income tax
expense related to LP in Entity As consolidated financial statements would be $189 ($900 x 60%
interest x 35% tax rate).
The consolidated financial information for Entity A would be presented as follows.
Income before income taxes ($1,000+$900)

Income taxes ($350+$189)
Net income
Net income attributable to noncontrolling interest ($900 x 40%)
Net income attributable to controlling interest
Entity A Consolidated
$ 1,900
539
1,361
360
$ 1,001
Based on the amounts from the consolidated financial information, Entity As consolidated effective
tax rate would be 28.4% ($539 / $1,900). This difference from 35% occurs because income before
income taxes includes earnings allocable to the noncontrolling interest for which there is no tax
expense provided.
We believe that this is required to be explained in the effective income tax rate reconciliation disclosed
in the footnotes to the consolidated financial statements under ASC 740. An effective income tax rate
reconciliation for Entity A follows:
Effective income tax rate reconciliation
Statutory income tax rate
Book income of consolidated partnership attributable to noncontrolling interest
Effective tax rate for controlling interest
35.0%
(6.6)
28.4%
See Chapter 12 of our FRD publication, Income taxes, for discussion of additional income tax
considerations related to attributing consolidated income taxes between the controlling and
noncontrolling interests.
3.1.7
Attributions related to dividends of a subsidiary payable in nonmonetary assets

In some circumstances, a subsidiary may issue dividends payable in assets other than cash or monetary
assets, which may include merchandise, real estate, investments in unrelated entities or other assets.
Pursuant to ASC 845-10-30-1 through 30-3 and ASC 845-10-30-10, nonmonetary dividends paid to
noncontrolling interests should generally be recorded at the fair value of the property to be distributed,
provided fair value is objectively measurable and would be clearly realizable to the distributing entity in
an outright sale at or near the time of the distribution. Otherwise, carrying amounts should be used in
recording the dividend. When recognized at fair value, differences between the fair value and carrying
amount of the nonmonetary assets distributed should be recognized as a gain or loss only to the extent
of dividends paid to noncontrolling interests (if any) and any gain or loss recognized should be allocated
entirely to the noncontrolling interests. Special guidance applies to the dividend (that is, distribution or
spinoff) of a consolidated subsidiary or an equity method investment that is a business; see ASC 505-60
and ASC 845 for additional guidance.
Nonmonetary dividends received by a parent or other companies under common control should be
recorded at the subsidiarys carrying amount pursuant to ASC 805-50. See Appendix C of our FRD
publication, Business combinations.
Also see Section 3.4.5.2 of Chapter 3 of our FRD publication, Issuers accounting for debt and equity
financings, for more information on the accounting for dividends.
3.1.8
Attributions related to dividends of a consolidated trust issuing trust

preferred securities
In the rare circumstances in which a trust issuing trust preferred securities is consolidated by the
sponsoring entity and classified as a redeemable noncontrolling interest in temporary equity, dividends
should be reported as an allocation of income to the noncontrolling interest holders in the income
statement. See Section 5.6 of Chapter 5 of our FRD publication, Issuers accounting for debt and equity
financings, for more information on accounting for trusts issuing trust preferred securities.
Changes in a parents ownership interest

in a subsidiary while control is retained
4.1
Increases and decreases in a parents ownership of a subsidiary


Changes in a Parents Ownership Interest in a Subsidiary
810-10-45-21A
The guidance in paragraphs 810-10-45-22 through 45-24 applies to the following:
a.
Transactions that result in an increase in ownership of a subsidiary
b.
Transactions that result in a decrease in ownership of either of the following while the parent
retains a controlling financial interest in the subsidiary:
1.
2.
A subsidiary that is a business or a nonprofit activity, except for either of the following:
i.
A sale of in substance real estate (for guidance on a sale of in substance real estate, see
Subtopic 360-20 or 976-605)
ii.
A conveyance of oil and gas mineral rights (for guidance on conveyances of oil and gas
mineral rights and related transactions, see Subtopic 932-360).
A subsidiary that is not a business or a nonprofit activity if the substance of the transaction
is not addressed directly by guidance in other Topics that include, but are not limited to, all
of the following:
i.
Topic 605 on revenue recognition
ii.
Topic 845 on exchanges of nonmonetary assets
iii.
Topic 860 on transferring and servicing financial assets
iv.
Topic 932 on conveyances of mineral rights and related transactions
v.
Topic 360 or 976 on sales of in substance real estate.
810-10-45-22
A parents ownership interest in a subsidiary might change while the parent retains its controlling
financial interest in the subsidiary. For example, a parents ownership interest in a subsidiary might
change if any of the following occur:
a.
The parent purchases additional ownership interests in its subsidiary.
b.
The parent sells some of its ownership interests in its subsidiary.
c.
The subsidiary reacquires some of its ownership interests.
d.
The subsidiary issues additional ownership interests.
Changes in a parents ownership interest in a subsidiary while control is retained
810-10-45-23
Changes in a parents ownership interest while the parent retains its controlling financial interest in its
subsidiary shall be accounted for as equity transactions (investments by owners and distributions to
owners acting in their capacity as owners). Therefore, no gain or loss shall be recognized in
consolidated net income or comprehensive income. The carrying amount of the noncontrolling interest
shall be adjusted to reflect the change in its ownership interest in the subsidiary. Any difference
between the fair value of the consideration received or paid and the amount by which the
noncontrolling interest is adjusted shall be recognized in equity attributable to the parent. Example 1
(paragraph 810-10-55-4B) illustrates the application of this guidance.
810-10-45-24
A change in a parents ownership interest might occur in a subsidiary that has accumulated other
comprehensive income. If that is the case, the carrying amount of accumulated other comprehensive
income shall be adjusted to reflect the change in the ownership interest in the subsidiary through a
corresponding charge or credit to equity attributable to the parent. Example 1, Case C (paragraph
810-10-55-4F) illustrates the application of this guidance.
ASC 810 requires that transactions that result in an increase in ownership of a subsidiary be accounted
for as equity transactions. That is, no purchase accounting adjustments are made. ASC 810 further
requires transactions that result in a decrease in ownership interest while the parent retains its
controlling financial interest to be accounted for as equity transactions. ASC 810-10-45-21A(b) clarifies
that the guidance related to decreases in a parents ownership interest applies to interests in:
A subsidiary that is a business or a nonprofit activity5, except for either a sale of in-substance real
estate or a conveyance of oil and gas mineral rights
A subsidiary that is not a business or a nonprofit activity but the substance of the transaction is not
addressed directly by guidance in other ASC Topics
Neither gains nor losses on these transactions are recognized in net income, and the carrying values of
the subsidiarys assets (including goodwill) and liabilities should not be changed.
The remainder of this chapter focuses on the accounting for increases in a parents ownership interest in
a subsidiary and decreases in ownership that do not result in a loss of control. For a discussion of the
accounting for decreases in ownership that result in a loss of control of a subsidiary or a group of assets
that constitute a business or a nonprofit activity, see Chapter 6, Loss of control over a subsidiary or a
group of assets.
4.1.1
Increases in a parents ownership interest in a subsidiary

A parent may increase its ownership interest in a subsidiary by:
Directly purchasing additional outstanding shares of the subsidiary
Causing the subsidiary to reacquire a portion of its outstanding shares (a treasury stock buy-back)
Causing the subsidiary to issue additional shares to the parent
ASC 810-10-20 defines a nonprofit activity as (a)n integrated set of activities and assets that is capable of being conducted and
managed for the purpose of providing benefits, other than goods or services at a profit or profit equivalent, as a fulfillment of an
entitys purpose or mission (for example, goods or services to beneficiaries, customers, or members). As with a not-for-profit
entity, a nonprofit activity possesses characteristics that distinguish it from a business or a for-profit business entity.
Under ASC 810, accounting for an increase in ownership of a subsidiary is generally similar to accounting
for a decrease in ownership interest without a loss of control. That is, the carrying amount of the
noncontrolling interest is adjusted (decreased, in this case) to reflect the controlling interests increased
ownership interest in the subsidiarys net assets. Any difference between the consideration paid by the
parent to a noncontrolling interest holder (or contributed by the parent to the net assets of the
subsidiary) and the adjustment to the carrying amount of the noncontrolling interest in the subsidiary is
recognized directly in equity attributable to the controlling interest (that is, additional paid-in capital).
Illustration 4-1:
Increase in a parents ownership interest in a subsidiary
To illustrate this concept, assume Parent owns an 80% interest in Subsidiary, which has net assets of
$4,000. The carrying amount of the noncontrolling interests 20% interest in Subsidiary is $800.
Parent acquires an additional 10% interest in Subsidiary from the noncontrolling interest for $500,
increasing its controlling interest to 90%. Under ASC 810, Parent would account for its increased
ownership interest in Subsidiary as a capital transaction as follows:
Stockholders equity noncontrolling interest
Additional paid-in capital
400
100
Cash
4.1.1.1
500
Accounting for contingent consideration

An increase in a parents ownership interest in a subsidiary may involve contingent consideration. For
example, when acquiring an additional interest in a subsidiary, the parent may promise to deliver cash,
additional equity interests or other assets to the seller after the acquisition date if certain specified
events occur or conditions are met in the future. These contingencies may be based on future earnings
or changes in the market price of the subsidiarys stock over specified periods after the date of the sale.
However, they might be based on other factors (e.g., components of earnings, product development
milestones, cash flow levels, the successful completion of third-party contract negotiations).
The basis for recognition and measurement of contingent consideration is not addressed in ASC 810, so
it is necessary to look to other guidance. If contingent consideration meets the definition of a derivative,
it should be accounted for under ASC 815. If the arrangement is not a derivative, the parent should
evaluate the arrangement to determine if it represents payments to employees or selling shareholders
that are compensatory. If the parent determines that the arrangement is compensatory, the parent
would not recognize a liability at the transaction date. Instead, the parent would recognize compensation
expense for the arrangement based on other applicable GAAP (e.g., ASC 710-10-25-9). See Chapter 6 of
our FRD publication, Business combinations, for further guidance on evaluating whether contingent
payments to employees or selling shareholders are compensatory.
When contingent consideration does not meet the definition of a derivative and is not compensatory, the
Codification does not provide detailed guidance. In this circumstance, we believe the basis for recognition
and measurement of contingent consideration payable by the buyer is an accounting policy choice that
should be applied on a consistent basis. Illustration 4-2 illustrates one possible policy alternative that is
applied in practice. Other alternatives also may be acceptable.
Illustration 4-2:
Contingent consideration over the acquisition of noncontrolling interests
Parent currently owns 80% of Subsidiary A. Parent acquires the remaining 20% in Subsidiary A for an
up-front cash payment, plus a contingent cash payment based on cumulative EBITDA of Subsidiary A
at the end of 3 years. The contingent consideration arrangement is not a derivative and is not
compensatory in nature.
ASC 805 Approach
Because Parent controls Subsidiary A, the acquisition of the noncontrolling interest is accounted for as
a transaction among shareholders within equity. ASC 810-10-45-23 states that "[a]ny difference
between the fair value of the consideration received or paid and the amount by which the noncontrolling
interest is adjusted shall be recognized in equity attributable to the parent." However, ASC 810 does
not specifically address the accounting for contingent consideration in connection with the acquisition
of noncontrolling interests.
Under the ASC 805 approach, Parent would analogize to the contingent consideration guidance in
ASC 805. Therefore, Parent would record the contingent consideration liability at fair value at the
acquisition date. Any subsequent changes in the fair value of the contingent consideration liability
would be recognized in earnings. Other alternatives also may be acceptable.
4.1.2
Decreases in a parents ownership interest in a subsidiary without loss

of control
A parent may decrease its ownership interest in a subsidiary by (1) selling a portion of the subsidiarys
shares it holds or (2) causing the subsidiary to issue shares. In accounting for such transactions under
ASC 810, assuming they meet the scope of ASC 810-10-45-21A(b), the carrying amount of the
noncontrolling interest should be increased to reflect the change in the noncontrolling interests
ownership in the subsidiarys net assets (that is, the amount attributed to the additional noncontrolling
interests should reflect its proportionate ownership percentage in the subsidiarys net assets acquired).
Any difference between the consideration received (whether by the parent or the subsidiary) and the
adjustment made to the carrying amount of the noncontrolling interest should be recognized directly in
equity attributable to the controlling interest (that is, as an adjustment to additional paid-in capital).
Illustration 4-3:
Decrease in a parents ownership through parent selling shares
Assume Subsidiary A, a widget manufacturer, has 10,000 shares of common stock outstanding, all of
which are owned by its parent, ABC Co. The carrying amount of Subsidiary As equity is $200,000.
ABC Co. sells 2,000 of its shares in Subsidiary A to an unrelated entity for $50,000 cash, reducing its
ownership interest to 80% from 100%.
Under ASC 810, a noncontrolling interest of $40,000 is recognized ($200,000 x 20%). The excess
$10,000 of the cash received ($50,000) over the adjustment to the carrying amount of the
noncontrolling interest ($40,000) is recognized as an increase in additional paid-in capital attributable
to ABC Co. as follows:
Cash
$ 50,000
$
10,000
40,000
Illustration 4-4:
Decrease in a parents ownership through a subsidiary issuing new shares
Assume Subsidiary A, a widget manufacturer, has 10,000 shares of common stock outstanding. The
parent, ABC Co., owns 9,000 of the outstanding shares and other shareholders own the remaining
1,000 shares. The carrying amount of Subsidiary As equity is $300,000, with $270,000 attributable
to ABC Co. and $30,000 attributable to the noncontrolling interest holders.
Assume Subsidiary A sells 2,000 previously unissued shares to an unrelated entity for $120,000 cash,
increasing the carrying amount of Subsidiary As equity to $420,000 ($300,000 + $120,000).
The transaction would reduce ABC Co.s ownership interest to 75% from 90% (i.e., to 9,000/12,000
from 9,000/10,000). However, the transaction would increase ABC Co.s Investment in Subsidiary A
to $315,000 (75% of $420,000), an increase of $45,000 ($315,000 - $270,000). Therefore, the
entry recorded by ABC Co. would be:
Investment in Subsidiary A
$ 45,000
$
45,000
In addition, the carrying amount of the noncontrolling interest would increase to $105,000 (25% of
$420,000). This increase of $75,000 ($105,000 - $30,000) would be recorded by Subsidiary A as:
Cash
$ 120,000
$
45,000
75,000
In consolidation, the increase to Investment in Subsidiary A recorded on ABC Co.s balance sheet
would be eliminated against the increase in additional paid-in capital recorded on Subsidiary As
balance sheet. See Chapter 5, Intercompany eliminations, for further discussion of elimination entries.
Question 4.1
How should a company account for changes in ownership of a subsidiary that it acquired before
adopting Statement 160 and Statement 141(R) and that it still controls?
We believe that all subsequent acquisitions or dispositions of ownership interests in subsidiaries meeting
the scope of ASC 810-10-45-21A while the parent maintains control including those related to business
combinations before the adoption of Statement 160 should be accounted for under Statement 160.
According to ASC 805, as amended by Statement No. 141(R), assets and liabilities that arose from business
combinations whose acquisition dates preceded Statement 141(R)s effective date are not to be adjusted
upon application of Statement 141(R). Accordingly, acquisitions of the noncontrolling interest by the parent
while it maintains its controlling financial interest should not be accounted for as step acquisitions. Similarly,
a parents sales of its ownership interests in a subsidiary meeting the scope of ASC 810-10-45-21A over
which it continues to maintain control should be accounted for as equity transactions.
4.1.2.1
Accounting for a stock option of subsidiary stock

A subsidiary may grant a share-based payment award of its own stock to its employees that would result
in a decrease in ownership and a noncontrolling interest when exercised. Questions arise as to whether
these awards should be classified in the consolidated financial statements as a noncontrolling interest or
as additional paid-in capital before exercise.
Awards of this nature may arise in a business combination when the acquirer is not obligated to replace
the acquirees awards and the awards continue to exist after the transaction. The accounting for these
awards is addressed in Section 6.3 of our FRD publication, Business combinations. We believe this
accounting would also apply to awards of subsidiary stock that do not arise in a business combination.
4.1.2.2
Scope exception for in-substance real estate transactions

The decrease in ownership guidance in ASC 810-10 does not apply if a transaction is a sale of insubstance real estate, even if that real estate is considered a business. Entities should apply the sale of
real estate guidance in ASC 360-20 and ASC 976-605 to such transactions. However, guidance on
noncontrolling interests in consolidated financial statements within ASC 810-10 will continue to apply to
increases in ownership of an entity that is in-substance real estate.
4.1.2.3
Scope exception for oil and gas conveyances

Any conveyance of an oil and gas mineral right that is accounted for under ASC 932-360-40 is outside
the scope of ASC 810s derecognition provisions as well as ASC 810s provisions regarding decrease
in ownership in circumstances in which a controlling interest is retained. Therefore, if a company is
conveying a mineral interest, the transaction would be accounted for under ASC 932. However, in a
transaction in which a company sells all or a portion of a subsidiary or a group of assets that include oil
and gas mineral rights (or contributes it to another entity), the transaction may be more appropriately
accounted for under ASC 810. Consideration of the illustrations and guidance in ASC 932 is required to
determine whether a transaction represents a conveyance of a mineral property. If a transaction does
not fall within the guidance of ASC 932, it should be accounted for under ASC 810.
The following illustrates a transaction that is not in the scope of ASC 810:
Illustration 4-5:
Applying ASC 810s scope exception for oil and gas conveyances
Facts
O&G Co. owns a 100% gas mineral interest in a property in Colorado. O&G Co. assigns an operating
interest to Drilling Co. and retains a non-operating interest in the property. The transaction requires
Drilling Co. to drill, develop and operate the property. O&G Co. will participate in the production profits
after Drilling Co. recoups its costs.
Analysis
The accounting for this transaction (a pooling of assets in a joint undertaking) is addressed in
ASC 932-360-55-3. Therefore, the transaction should be accounted for in accordance with ASC 932,
not ASC 810.
The following illustrates a transaction that is in the scope of ASC 810:
Illustration 4-6:
Oil and gas transaction is in the scope of ASC 810
Facts
O&G Co. owns an operating subsidiary, Foreign Sub. Foreign Sub has oil and gas mineral properties as
well as other energy-related operations. O&G Co. sells a 55% interest in those operations to Purchase
Co. and loses control.
Analysis
In this fact pattern, O&G Co. is selling 55% of its equity in Foreign Sub, which results in the loss of
control.6 Because this transaction does not represent an oil or gas mineral property conveyance as
contemplated in the guidance of ASC 932 or any of ASC 932s implementation guidance illustrations,
it should be accounted for under the derecognition guidance in ASC 810.
A transaction with the same fact pattern, but in which there is a decrease in ownership without loss of control (for example, a sale
of 20% of the equity), would result in the same conclusion (that is, the transaction is in the scope of ASC 810).
We believe, in this circumstance, ASC 810 is the most appropriate guidance because this transaction
represents the sale of a business that happens to include oil and gas mineral properties. This type of
transaction is not addressed in the mineral property conveyance guidance in ASC 932.
4.1.2.4
Decreases in ownership of a subsidiary that is not a business or nonprofit activity

If a decrease in ownership occurs in a subsidiary that is not a business or nonprofit activity, an entity first
needs to evaluate the substance of the transaction and identify whether other literature (e.g., transfers of
financial assets as discussed in ASC 860, revenue recognition as discussed in ASC 605) may provide
relevant guidance. If no such guidance exists, an entity should apply the guidance in ASC 810-10. For
example, if an enterprise sells the equity securities of a subsidiary that is not a business and all of the assets
in the subsidiary are financial assets, the substance of the transaction should be evaluated under ASC 860.
However, guidance on noncontrolling interests in consolidated financial statements within ASC 810-10
will continue to apply to increases in ownership of an entity that is not a business or nonprofit activity.
4.1.2.5
Issuance of preferred stock by a subsidiary

Under ASC 810-10-45-23, changes in a parents ownership interest while the parent retains control of a
subsidiary should be accounted for as equity transactions. We generally believe that the preferred stock
issuance by a subsidiary to noncontrolling interest holders should be reflected as a noncontrolling
interest in the financial statements of the parent at the amount of the cash proceeds received (e.g., the
par amount).
Unlike common stock, preferred stock of a subsidiary often does not represent a residual equity interest.
The holders of preferred stock often are entitled to a liquidation preference, which generally includes a par
amount and, in some cases, cumulative unpaid dividends. Preferred stock holders of a subsidiary also are
typically entitled to a share of the subsidiarys earnings up to the stated dividend. Unlike an issuance of
common stock by a subsidiary (which generally results in a change in the parents ownership interest), the
issuance of preferred stock by a subsidiary does not change the parents ownership interest. When
recording the issuance of preferred stock by a subsidiary that is not a residual interest, we would not
expect to see an adjustment to the parents equity accounts. (See Section 3.1.3 for interpretive guidance
on attributions to noncontrolling interests held by preferred shareholders).
4.1.2.6
Decreases in ownership through issuance of partnership units that have varying profit or
liquidation preferences
Under ASC 810-10-45-23, changes in a parents ownership interest while the parent retains control of a
subsidiary (e.g., partnership) should be accounted for as equity transactions.
Partnerships can take various forms. Frequently, there is a substantive profit sharing arrangement
through which the profits of the partnership are allocated to the partners based on a predetermined
formula. In some cases, the profit sharing arrangement may provide certain partners with preferences in
profits from operations or in liquidation. In other cases, the substantive profit sharing arrangement may
not provide for preferences in profits or in liquidation.
If an entity determines that issuing partnership units represents the issuance of preferential units
(e.g., such units have preference in operating or liquidating cash flows), we believe that the guidance on
the issuance of preferred stock by a subsidiary should be followed (see Section 4.1.2.5). That is, when
recording the issuance of preferential units by a partnership subsidiary, there is generally no adjustment
to the parents equity accounts. Alternatively, if partnership units are issued without preferences, we
believe that a parent of a partnership would follow the guidance in ASC 810-10-45-23. See Question 4.2
for discussion of the accounting on expiration of a preference period.
We would expect a parent of a partnership to develop a reasonable policy with respect to this accounting
and apply that policy consistently.
Question 4.2
How should the provisions of ASC 810-10 be applied to a consolidated Master Limited Partnerships
issuance of preferential limited partnership units?
A Master Limited Partnership (MLP) is a limited partnership whose units are available to investors and
traded on public exchanges, just like corporate stock. MLPs usually involve (1) a general partner (GP),
who typically holds a small percentage (commonly 2%) of the outstanding partnership units and manages
the operations of the partnership, and (2) limited partners (LPs), who provide capital and hold most of
the ownership but have limited influence over the operations. Enterprises that form MLPs typically do so
to take advantage of the special tax treatment of the partnership structure (although MLPs may also
provide an attractive exit strategy for owners of private equity assets). To qualify for the tax benefits,
90% of an MLPs income must be derived from activities in natural resources, real estate or commodities.
As a result, the energy industry has experienced a dramatic rise in the use of the MLP structure.
The GP frequently consolidates the MLP. For the issuance of LP interests, all sales first should be
evaluated to determine whether they represent in-substance sales or partial sales of real estate under
ASC 360-20-15-2 through 15-10 (see our FRD publication, Real estate sales, for further guidance).
Assuming the sale is not in substance a sale or partial sale of real estate, a consolidated subsidiary that
issues shares while the parent maintains control of the subsidiary should be accounted for as a capital
transaction pursuant to the decrease-in-ownership guidance.
However, the decrease-in-ownership guidance may not apply when an MLP issues limited partnership units
that have a preference in distributions or liquidation rights (referred to as the common LP units). It is
common for an MLP partnership agreement to provide that, during a subordination period, the common LP
units will have the right to receive distributions of available cash each quarter based on a minimum
quarterly distribution, plus any arrearages, before any distributions of available cash may be made on the
subordinated LP units. Furthermore, no arrearages will be paid on the subordinated units.
The practical effect of the subordinated LP units is to increase the likelihood that during the subordination
period there will be available cash to be distributed on the common LP units. When subordinated LP units
are held by the parent/GP of an MLP, common LP units do not possess the characteristics of a residual
equity interest given the common LP units preference over the subordinated LP units. We believe that the
accounting guidance related to changes in a parents ownership interest in a subsidiary would not apply.
Therefore, if the parent/GP owns subordinated LP units in the MLP, the parent/GP should reflect the
proceeds from issuance of common LP units as noncontrolling interest in its financial statements with no
adjustment to additional paid-in capital. We believe that if the class of security issued by the subsidiary has
a preference in distribution or liquidation rights over any other class of equity security, it is analogous to
preferred stock. As such, we do not believe the guidance above would apply to such transactions. See
4.1.2.6 above for additional discussion.
MLP partnership agreements include provisions for the subordination period to expire after a specific
period of time if the minimum quarterly distributions have been made to the holders of the common LP
units. Upon the expiration of the subordination period, all subordinated LP units held by the parent/GP
have the same distribution and liquidation rights as the other common LP units. Although the common
LP units previously issued by the MLP to the holders of the noncontrolling interest no longer have a
preference in distributions due to the expiration of the subordination period, we believe this loss of
preference has no immediate accounting consequences. The accounting for changes in noncontrolling
interests applies only to changes in a parents ownership interest in a subsidiary, which includes
circumstances in which, (a) the parent purchases additional ownership interests in its subsidiary, (b) the
parent sells some of its ownership interests in its subsidiary, (c) the subsidiary reacquires some of its
ownership interests, or (d) the subsidiary issues additional ownership interests (ASC 810-10-45-22).
We believe the expiration of the subordination period is not a change in the parents ownership interest in
a subsidiary because the expiration does not result in a change in ownership interest in the MLP. As such,
there is no adjustment to be recognized to the equity accounts of the parent (that is, no adjustment to
additional paid-in capital) or noncontrolling interest as a result of the expiration of the preferences.
4.1.2.7
Issuance of subsidiary shares as consideration in a business combination

See Chapter 6 of our FRD publication, Business combinations, for discussion of the accounting when an
acquirer issues subsidiary shares as consideration for a controlling interest in another entity.
4.1.3
Accumulated other comprehensive income considerations


Changes in a Parents Ownership Interest in a Subsidiary
810-10-45-24
A change in a parents ownership interest might occur in a subsidiary that has accumulated other
comprehensive income. If that is the case, the carrying amount of accumulated other comprehensive
income shall be adjusted to reflect the change in the ownership interest in the subsidiary through a
corresponding charge or credit to equity attributable to the parent. Example 1, Case C (paragraph
810-10-55-4F) illustrates the application of this guidance.
When a change in a parents ownership interest that does not result in the loss of control occurs in a
subsidiary meeting the scope of ASC 810-10-45-21A that has a balance of accumulated other
comprehensive income (AOCI), the AOCI balance is adjusted to reflect a change in the parents
proportionate interest in that AOCI balance by an adjustment to the parents consolidated additional
paid-in-capital.
Illustration 4-7:
Accounting for AOCI when a parents ownership interest increases
Assume Parent owns an 80% interest in Subsidiary, a retailer of childrens toys, which has net assets
of $4,000. The carrying amount of the noncontrolling shareholders 20% interest in Subsidiary is
$800, which includes $200 that represents the noncontrolling interests share of $1,000 of AOCI
credits. Parent acquires an additional 10% interest from a third party in Subsidiary for $500,
increasing its controlling ownership interest to 90%.
As a result of this purchase, Parents interest in Subsidiarys AOCI balance increases by $100 ($1,000 x
10%). Under ASC 810, Parent will account for its increased ownership interest in Subsidiary as follows:
400
200
Cash
$ 500
AOCI
100
If a decrease in a parents controlling ownership interest that does not result in a loss of control occurs
in a subsidiary meeting the scope of ASC 810-10-45-21A(b) and that has AOCI, the accounting under
ASC 810 is similar to that described in the example above. That is, a proportionate share of AOCI is
attributed to the noncontrolling interest.
Illustration 4-8:
Accounting for AOCI when a parents ownership interest decreases
Assume Parent owns 100% of Subsidiary, which has net assets of $4,000, including $1,000 of AOCI.
Assume Subsidiary is a business and is in the scope of ASC 810-10-45-21A(b). Parent sells a 10%
interest in Subsidiary for $500, decreasing its interest to 90%. As a result of the sale, Parents interest
in Subsidiarys AOCI balance decreases by $100 ($1,000 x 10%). Under ASC 810, Parent will account
for the change in its ownership interest in Subsidiary as follows:
Cash
AOCI
500
100
$ 400
4.1.3.1
200
Accounting for foreign currency translation adjustments
Foreign Currency Matters Translation of Financial Statements

Derecognition
Partial Sale of Ownership Interest
830-30-40-2
For guidance if an entity sells a noncontrolling interest in a consolidated foreign entity, but still retains
a controlling financial interest in the foreign entity, see paragraph 810-10-45-23 through 45-24.
When a change in a parents ownership interest that does not result in the loss of control occurs in a
foreign entity meeting the scope of ASC 810-10-45-21A, the accounting for the currency translation
adjustment balance is the same as the accounting for other items of AOCI described in Section 4.1.3.
That is, the balance should be reallocated between the parent and the noncontrolling interest to reflect a
change in the parents proportionate interest in that balance. A foreign entity may include a subsidiary,
division, branch, joint venture that contains an equity method investment or equity method investment
by itself. That is, a foreign entity as defined by ASC 830 may differ from a legal entity. See Section 1.2.2
of our FRD publication, Foreign currency matters, for additional discussion on the definition of a foreign
entity under ASC 830, and Section 4.4.4 of that FRD publication for additional guidance on how to treat
any cumulative translation adjustment in this scenario.
4.1.4
Allocating goodwill upon a change in a parents ownership interest

Although the total goodwill balance is not adjusted upon a change in parents ownership interest, for the
purposes of testing for impairment, goodwill should be reallocated between the controlling and
noncontrolling interests based on the changes in ownership interests.
Illustration 4-9:
Allocating goodwill upon a change in a parents ownership interest
Assume Parent initially acquires 80% of Subsidiary. The business combination is accounted for under
ASC 805 and $100 of goodwill is recognized ($80 attributable to Parent and $20 attributable to the
noncontrolling interest, assuming no control premium). If Parent acquires an additional 10% interest in
Subsidiary, the consolidated amount of goodwill does not change, but the goodwill balance is reallocated
between Parent and the noncontrolling interest based on the revised percentage ownership interest (that
is, $90 would be attributable to Parent and $10 would be attributable to the noncontrolling interest).
4.1.5
Accounting for transaction costs incurred in connection with changes in

ownership
ASC 810 provides that gains or losses should not be recognized upon changes in a parents ownership of
a subsidiary meeting the scope of ASC 810-10-45-21A if it retains control because the entities are
considered one economic entity. We believe these transactions are analogous to treasury stock
transactions.
Based on this, we believe that specific, direct and incremental costs (but not management salaries or
other general and administrative expenses) related to changes in a parents ownership percentage when
control is maintained may be accounted for as part of the equity transaction. However, the provisions of
ASC 810-10-40-6, which address multiple arrangements that are to be considered as a single
transaction, should be considered.
We note that some observers believe that transaction costs incurred in connection with changes in
ownership of consolidated subsidiaries meeting the scope of ASC 810-10-45-21A while control is retained
are not analogous to treasury stock transactions and, therefore, should be expensed as incurred.
We believe that until further guidance is issued, a reporting enterprise should adopt and consistently
apply an accounting policy for these costs.
4.1.6
Changes in a parents ownership interest in a consolidated VIE

A primary beneficiary may subsequently acquire or dispose of a noncontrolling interest in an existing
consolidated VIE. A primary beneficiarys acquisition or disposal of additional ownership interests is a
reconsideration event that requires a reassessment of whether the entity is a VIE and whether the party
designated as the primary beneficiary has changed. See our FRD, Consolidation and the Variable Interest
Model, for further discussion of this guidance.
If after making these reassessments, the primary beneficiary remains the same (i.e., a controlling
financial interest is maintained), we believe the acquisition or disposal of a noncontrolling interest should
be treated as an equity transaction, consistent with the principles of ASC 810-10-45-23. Any difference
between the price paid and the carrying amount of the noncontrolling interest should not be reflected in
net income, but instead reflected directly in equity. See Sections 4.1.1 and 4.1.2 for further discussion
of this accounting.
4.1.7
Chart summarizing the accounting for changes in ownership

The following chart summarizes ASC 810-10s accounting in the consolidated financial statements
for changes in a parents ownership interest in a subsidiary (within the scope of ASC 810-10-45-21A)
while maintaining a controlling financial interest:
Parent acquires additional ownership interest
Parent sells a portion of its ownership interest
Reduce noncontrolling interest based on proportion

acquired
Increase noncontrolling interest for proportion of parents

ownership interest it sold
APIC adjusted for difference between the amount by

which noncontrolling interest is reduced and the
amount of consideration paid
Adjust APIC for difference between the amount by which

noncontrolling interest is increased and the amount of
consideration received
Adjust AOCI with corresponding adjustment to APIC,

as appropriate

as appropriate
Subsidiary acquires noncontrolling interest
4.1.8
Subsidiary issues shares to noncontrolling interest
Calculate shares effectively acquired by parent and

decrease noncontrolling interest for proportion of
parents ownership interest acquired
Calculate shares effectively sold by parent and increase

noncontrolling interest for proportion of parents ownership
interest sold
Adjust APIC for difference between the amount by

which noncontrolling interest is reduced and the
amount of consideration paid
Adjust APIC for difference between the amount by which

noncontrolling interest is reduced and the amount of
consideration paid

as appropriate.
Adjust AOCI with corresponding adjustment to APIC, as

appropriate
Income tax considerations

See Chapter 12 of our FRD publication, Income taxes, for discussion of income tax considerations related
changes in ownership interest in a subsidiary that do not result in a loss of control.
4.1.9
Noncontrolling interests in a common control transaction

See Appendix C of our FRD publication, Business combinations, for discussion of the accounting for any
changes in noncontrolling interests from a combination of entities under common control that does not
result in a loss of control.
4.2
Comprehensive example
The following example illustrates the accounting in consolidation for changes in a parents ownership interest
when the parent maintains control of the subsidiary meeting the scope of ASC 810-10-45-21A. Work paper
adjusting entries are numbered sequentially.
Illustration 4-10:
Accounting for initial acquisition
Assume that on 1 January 20X1, Company P, which is newly formed, raises $45,000 of capital.
Company P issues 1,500 shares of $1 par stock for $36,000 and raises $9,000 by issuing debt.
Company P acquires 70% (7,000 shares) of the $1 par common stock of Company S for $45,000.
Company S is a distributor of video games that qualifies as a business under ASC 805 and its fair value
is $64,286. Company Ss acquisition-date balance sheet is presented in Figure 4-1. Income taxes have
been ignored.
This example includes certain assumptions for simplicity that are not common in practice. For
example, it would be unusual for no identifiable intangible assets to be recognized as part of the
business combination (and for all the excess purchase price to be allocated to goodwill).
Additionally, this example assumes there is no control premium.
Figure 4-1: Acquisition-date balance sheet for Company S at 1 January 20X1 (all amounts in dollars)
Cash
Marketable securities (available-for-sale)
Inventory
Buildings and equipment, net
Accounts payable
Common stock
Accumulated other comprehensive income
Book value
Fair Value
3,000
12,000
30,000
60,000
105,000
75,000
25,000
5,000
105,000
3,000
12,000
34,500
85,500
135,000
75,000
For illustrative purposes, Company Ss income statement has been made constant for each year of this
example and is presented in Figure 4-2.
Figure 4-2: Income statement for Company S for each year (all amounts in dollars)
Revenues
Cost of revenues
Gross profit
Selling and administrative (including 6,000 of depreciation)
Net income
4.2.1
96,000
42,000
54,000
24,000
30,000
Consolidation at the acquisition date

ASC 805 generally requires the acquirer to measure the identifiable assets acquired, the liabilities
assumed and noncontrolling interest in the acquiree at their acquisition-date fair values if the acquiree
meets ASC 805s business definition. Except for the requirement to recognize goodwill, ASC 805s
provisions are also generally followed for initially recognizing consolidated variable interest entities
under ASC 810-10s Variable Interest Model.
Illustration 4-11:
The consolidation procedures illustrated in this example reflect the revaluation of the subsidiarys
assets and liabilities on the subsidiarys financial statements. That is, this example assumes push down
accounting is required pursuant to other literature.
Figure 4-3: Acquisition-date consolidating work paper to arrive at consolidated balance sheet, 1
January 20X1 (all amounts in dollars)
Adjustments
Company P
Cash
Marketable securities
Inventory
Investment in Company S
Goodwill
Total assets
Company S
45,000
45,000
3,000
12,000
(1) 34,500
(2) 85,500
(4)
4,286
139,286
9,000
9,000
75,000
75,000
Common stock
Retained earnings
Total parent shareholders
equity
Total equity
1,500
34,500
7,000
38,000
Total liabilities and equity
45,000
Accounts payable
Debt
Total liabilities
36,000
36,000
(6)
Debit
Credit
(3)
45,000
Consolidated
3,000
12,000
34,500
85,500
4,286
139,286
75,000
9,000
84,000
(5)
(5)
7,000
38,000
1,500
34,500
45,000
19,286
64,286
36,000
19,286
55,286
139,286
139,286
Figure 4-3 illustrates the elimination of Company Ps investment in Company S and allocation of the
purchase price ($45,000) to the acquired assets, liabilities and noncontrolling interest, as follows:
4.2.2
(1)
Inventory is measured at fair value.
(2)
Buildings and equipment are measured at fair value.
(3)
Company Ps investment in Company S is eliminated.
(4)
Goodwill is determined by subtracting the fair value of Company Ss net identifiable assets from
the fair value of Company S. As stated above, the fair value of Company S is $64,286. Because
the fair value of Company Ss net identifiable assets is $60,000, goodwill is calculated to be
$4,286. Although this comprehensive example does not illustrate goodwill impairment testing,
if the goodwill was tested for impairment, 70% and 30% of the goodwill would be allocable to
Company P and Company S, respectively, because no control premium is assumed in this
example for simplicity (that is, the goodwill would be allocated to the controlling and
noncontrolling interests proportionately). See also Section 4.1.4 for further discussion on
allocating goodwill upon a change in a parents ownership interest.
(5)
Company Ss equity accounts are eliminated.
(6)
Noncontrolling interest is calculated by subtracting the fair value of Company Ss net assets
acquired by Company P ($64,286 x 70% = $45,000) from Company Ss total net assets
($64,286). As indicated in note (4), no control premium has been assumed.
Consolidation in year of combination

Illustration 4-12:
Consolidation in year of combination
Assume that on 31 December 20X1, Company S pays cash dividends of $36,000 and Company Ps
share is $25,200. The fair value of Company Ss marketable securities at that date is $17,000.
Company Ss income statement for the year ended 31 December 20X1 is based on the amounts in
Figure 4-2 (which exclude the effects of push down adjustments).
Figure 4-4:
Consolidating work paper to arrive at consolidated income statement, year of

combination, 31 December 20X1 (all amounts in dollars)
Adjustments
Company P
Revenues
Cost of revenues
Gross profit
Income from Investment in
Company S
Selling and administrative
16,065
Net income
16,065
Net income attributable to


controlling interest
16,065
Company S
(7)
(9)
(10)
Debit
Credit
Consolidated
96,000
46,500
96,000
46,500
49,500
49,500
26,550
(8)
16,065
26,550
22,950
22,950
6,885
6,885
16,065
16,065
Importantly, consolidated net income includes the portion attributable to the noncontrolling interest.
Figure 4-4 presents a consolidating work paper, which includes the following adjustments to arrive at
the consolidated income statement in the year of combination:
(7)
As noted in Figure 4-2, prior to push down accounting, Company S recognized 42,000 in cost of
revenues. This example assumes that all acquisition-date inventory was sold. Therefore, to
reflect push down accounting, cost of revenues has been adjusted to include the effects of the
entry to measure inventory at fair value at the acquisition date (increase of $4,500).
(8)
Income from Investment in Company S recognized by Company P ($22,950 x 70%) is eliminated.
(9)
To reflect push down accounting, selling and administrative expenses includes additional
depreciation because buildings and equipment were recognized at fair value at the acquisition
date. As noted in Figure 4-2, prior to push down accounting, Company S recognized depreciation
expense of $6,000 (on a beginning balance in buildings and equipment of $60,000).
Accordingly, for purposes of this example, the equipment has a 10-year estimated useful life
($60,000 / $6,000). Applying this useful life to the excess fair value of buildings and equipment
of $25,500 ($85,500 - $60,000) creates additional depreciation expense of $2,550 ($25,500 /
10), and total depreciation expense of $8,550.
(10) Because net income is attributed based on outstanding voting interests in this example, net
income attributable to the controlling and noncontrolling interests is $16,065 ($22,950 x 70%)
and $6,885 ($22,950 x 30%), respectively.
Figure 4-5:
Consolidating work paper to arrive at consolidated balance sheet, year of combination,

31 December 20X1 (all amounts in dollars)
Adjustments
Company P
Cash
Inventory
Goodwill
(11)
(12)
25,200
39,365
Company S
(13)
(15)
Debit
3,000
17,000
30,000
76,950
4,286
Credit
(14)
39,365
Consolidated
28,200
17,000
30,000
76,950
4,286
64,565
131,236
156,436
Accounts payable
Debt
9,000
75,000
75,000
9,000
Total liabilities
9,000
75,000
84,000
1,500
34,500
7,000
38,000
(19)
(19)
7,000
38,000
(20)
3,500
Total assets
Common stock
Accumulated other
comprehensive income
Retained earnings (deficit)
(16)
(17)
1,500
34,500
3,500
16,065
(18)
3,500
(9,135)

equity
55,565
(22)
39,365
16,871
55,565
16,871
Total equity
55,565
56,236
72,436
64,565
131,236
156,436
(21)
9,135
3,500
16,065
Figure 4-5 presents a consolidating work paper, which includes the following adjustments to arrive at
the 31 December 20X1 consolidated balance sheet:
(11) Cash is increased by $25,200 for the cash dividend received from Company S ($36,000 x 70%).
(12) The balance of the investment in Company S is adjusted for the earnings and dividends of the
investee as follows:
Beginning balance
Attributed earnings
Attributed other comprehensive income
Attributed dividends
Ending balance
$ 45,000
16,065
3,500
(25,200)
$ 39,365
(13)
Buildings and equipment are recorded at fair value (Item 2 in Figure 4-3), and reduced by the
current year depreciation (Item 9 in Figure 4-4) ($85,500 $8,550).
(16)
Company Ps proportion of other comprehensive income from the increase in value of Company
Ss marketable securities ($5,000 x 70%).
(17)
Company Ps retained earnings reflects the attributed earnings from Company S (see
calculation in Item 10 in Figure 4-4).
(18)
Company Ss retained deficit reflects net income attributable to the controlling interest of
$16,065 (Item 17), less cash dividends attributable to the controlling interest of $25,200 (Item 11).
(20)
Elimination of Company Ss AOCI.
(21)
Elimination of Company Ss retained deficit.
(22)
Noncontrolling interest is rolled forward from 1 January 20X1 (see Figure 4-3), as follows:
Beginning balance
Attributed earnings
Ending balance
19,286
6,885
1,500
(10,800)
$ 16,871
Items (14), (15) and (19) are consistent with Items (3), (4) and (5), respectively, in the acquisitiondate consolidating balance sheet work paper in Figure 4-3 of Illustration 4-11.
4.2.3
Consolidation after purchasing an additional interest

Illustration 4-13:
Consolidation after purchasing an additional interest
Assume that on 1 January 20X2, Company P borrows $18,000 and uses that cash, plus $21,000 of
the cash from the cash dividend received from Company S, to purchase for $39,000 an additional 20%
interest (2,000 shares) in Company S, bringing its total interest to 90% (9,000 shares). The fair value
of Company Ss net assets at the date of the additional investment by Company P is $75,000 (20% of
which is $15,000).
Figure 4-6:
Consolidating work paper to arrive at consolidated balance sheet, 1 January 20X2 (all
amounts in dollars)
Adjustments
Cash
Inventory
Goodwill
(23)
(24)
Total assets
Accounts payable
Debt
(28)
Total liabilities
Common stock
Accumulated other
Company P
Company S
4,200
50,612
3,000
17,000
30,000
76,950
4,286
(25)
(27)
Debit
Credit
(26)
50,612
Consolidated
7,200
17,000
30,000
76,950
4,286
54,812
131,236
135,436
27,000
75,000
75,000
27,000
27,000
75,000
102,000
(35)
1,500
5,747
(35)
(35)
9,000
46,247
(32)
(32)
9,000
46,247
(29)
(30)
4,500
16,065
(35)
(31)
4,500
(9,135)
(33)
4,500
27,812
(35)
50,612
5,624
27,812
5,624

equity
1,500
5,747
(34)
9,135
4,500
16,065
Total equity
27,812
56,236
33,436
54,812
131,236
135,436
Once a company obtains control, subsequent purchases and sales of noncontrolling interests when the
company maintains control are accounted for as equity transactions in consolidation. Therefore, the 1
January 20X2 consolidated balance sheet work paper in Figure 4-6 reflects the following adjustments:
(23) The cash balance is calculated as follows:
Beginning balance
Cash received from loan
25,200
18,000
Cash paid for additional interest
(39,000)
Ending balance
4,200
(24) The investment in Company S is increased for the purchase of an additional interest in Company S:
Beginning balance
Additional proportionate interest in net assets purchased

Ending balance
39,365
11,247
50,612
(28) Company P incurred additional debt of $18,000 to partially fund the purchase of the additional
interest in Company S, resulting in a balance of $27,000 ($9,000 +$18,000). (See also Item 35
below).
(29) AOCI of Company P is increased from $3,500 to $4,500 to reflect the portion of the AOCI that was
purchased from the noncontrolling interest and is now attributable to Company P ($5,000 x 20%).
(35) APIC of Company P is reduced by $28,753, resulting in a balance of $5,747 ($34,500 $28,753).
In summary, the adjustment recorded by Company P for this transaction is as follows:

Investment in Company S (Item 24)
APIC
11,247
28,753
Cash (Item 23)
Debt (Items 23 and 28)
21,000
18,000
AOCI (Item 29)
1,000
Common stock of Company S increases from $7,000 to $9,000, to reflect the acquisition of
2,000 shares of $1 par stock. Further, APIC of Company S increases by $8,247, resulting in a
balance of $46,247 ($38,000 + $8,247).
In addition, AOCI of Company S is increased from $3,500 to $4,500 to reflect the portion of the
AOCI that was purchased from the noncontrolling interest and is now attributable to Company P
($5,000 x 20%).
The 31 December 20X1 balance for noncontrolling interest of Company S was $16,871 (see
Figure 4-5). This amount represented a 30% interest in Company S. Company P purchased an
additional 20% interest in Company S from the noncontrolling interest holders, which was
equivalent to two-thirds of this balance ($16,871 x 2/3 = $11,247). Accordingly, the
noncontrolling interest balance is reduced by $11,247, resulting in a balance of $5,624
($16,871 $11,247). 7
In summary, the adjustment recorded by Company S for this transaction is as follows:
11,247
AOCI
1,000
Common stock
2,000
APIC
8,247
Items (25) through (27) and (30) through (34) are consistent with Items (13) through (15) and (17)
through (21) in Figure 4-5 of Illustration 4-12.
4.2.4
Consolidation in year 2
Illustration 4-14:
Assume that on 31 December 20X2, Company S pays cash dividends of $36,000, including $32,400 to
Company P. The current market value of Company Ss marketable securities has decreased to $15,500.
Figure 4-7:
Consolidating work paper to arrive at consolidated income statement for year ended
Company P
Company S
Adjustments
Consolidated
In this example, the adjustment to the carrying amount of noncontrolling interest is determined by comparing the percentage
change in the parents ownership interest to the percentage owned by the noncontrolling interest holders on the date of the
transaction. An alternative method to calculate this adjustment would be to apply the percentage change in the parents
ownership interest to the total carrying amount of the subsidiarys net assets as of the date of the transaction. However,
determining the carrying amount of a subsidiarys net assets for this calculation may be difficult. For example, the entity may not
apply push down accounting or may not allocate certain intercompany eliminations to the subsidiary in its accounting records. In
these circumstances, deriving the adjustment using the method reflected in this example may be more practical.
Debit
Revenues
Cost of revenues
Gross profit
Income from investment in
Company S
Net income
Credit
96,000
42,000
54,000
96,000
42,000
54,000
24,705
24,705
(37)
26,550
27,450
(36)
24,705
26,550
27,450
(38)
2,745
2,745
24,705
(38)
24,705
24,705
Figure 4-7 presents the consolidating work paper, which includes the following adjustments to arrive
at the 31 December 20X2 income statement:
(38) Net income is attributed to the controlling and noncontrolling interests based on ownership. The
controlling and noncontrolling interests own 90% and 10% of the outstanding stock,
respectively. Thus, net income attributable to the controlling and noncontrolling interests is
$24,705 ($27,450 x 90%) and $2,745 ($27,450 x 10%), respectively.
See Figure 4-4 of Illustration 4-12, Items (8) and (9), for descriptions of Items (36) and (37), respectively.
Figure 4-8:
Consolidating work paper to arrive at consolidated balance sheet, 31 December 20X2

(all amounts in dollars)
Adjustments
Cash
Inventory
Goodwill
Total assets
(39)
(40)
Accounts payable
Debt
Total liabilities
Common stock
Accumulated other
equity
Total equity
(44)
(45)
Company P
Company S
36,600
41,567
78,167
3,000
15,500
30,000
68,400
4,286
121,186
(41)
(43)
Debit
Credit
(42)
27,000
27,000
75,000
75,000
1,500
5,747
9,000
46,247
(47)
(48)
9,000
46,247
(49)
3,150
41,567
Consolidated
39,600
15,500
30,000
68,400
4,286
157,786
75,000
27,000
102,000
1,500
5,747
3,150
40,770
(48)
(46)
3,150
(16,830)
51,167
51,167
(51)
41,567
4,619
46,186
51,167
4,619
55,786
121,186
157,786
78,167
(50)
16,830
3,150
40,770
Figure 4-8 presents the consolidating work paper to arrive at the year-end consolidated balance sheet
in the year in which the additional interest was purchased, and includes the following adjustments:
(39) The parent received $32,400 as a cash dividend from Company S ($36,000 x 90%). The cash
balance is as follows:
Beginning balance
Dividends received
Ending balance
$
$
4,200
32,400
36,600
(40) The investment in Company S was adjusted for the earnings and dividends of the investee:
Beginning balance (after purchase of additional interest)
Attributed earnings
Attributed other comprehensive loss
Ending balance
50,612
24,705
(1,350)
(32,400)
$ 41,567
(44) Company P recognized its proportion of other comprehensive loss for the year (from the
decrease in value of Company Ss marketable securities) ($1,500 x 90%). This amount was
subtracted from last years balance ($4,500 $1,350) to arrive at Company Ps AOCI. For this
example, Company P has no comprehensive income other than its proportionate share of
Company Ss comprehensive income.
(45) Retained earnings for Company P reflect the attributed earnings from Company S. Although a
statement of shareholders equity would generally be presented, for illustrative purposes, the
statement has been excluded. A rollforward of retained earnings follows:
Beginning balance
Earnings recognized on investment in Company S
Ending balance
$ 16,065
24,705
$ 40,770
(46) Retained deficit for Company S is rolled forward as follows:

Beginning balance
Net income
Dividends declared
Ending balance
$ (9,135)
24,705
(32,400)
$ (16,830)
(51) Noncontrolling interest is calculated by rolling forward the balance from 1 January 20X2 (see
Figure 4-6), as follows:
Beginning balance
Attributed earnings
Attributed other comprehensive loss
Ending balance
5,624
2,745
(150)
(3,600)
$ 4,619
Items (41) through (43) and (47) through (50) are consistent with Items (25) through (27) and (32)
through (35) in the prior year in Figure 4-6 of Illustration 4-13.
4.2.5
Consolidation after selling an interest without loss of control

Illustration 4-15:
Consolidation after selling an interest without loss of control
Assume that on 1 January 20X3, Company P sells a 30% interest (3,000 shares) in Company S for
$22,500 cash, decreasing its total interest to 60% (6,000 shares).
Figure 4-9:
Consolidating work paper to arrive at consolidated balance sheet, 1 January 20X3

Adjustments
Cash
Inventory
Goodwill
Total assets
(52)
(53)
Accounts payable
Debt
Total liabilities
Common stock
Accumulated other
equity
Total equity
Company P
Company S
59,100
27,710
86,810
3,000
15,500
30,000
68,400
4,286
121,186
(54)
(56)
27,000
27,000
Debit
Credit
(55)
Consolidated
62,100
15,500
30,000
68,400
4,286
180,286
27,710
75,000
75,000
75,000
27,000
102,000
(64)
1,500
15,440
(64)
(64)
6,000
36,440
(60)
(60)
6,000
36,440
(57)
(58)
2,100
40,770
(62)
(59)
2,100
(16,830)
(63)
2,100
59,810
59,810
(62)
27,710
18,476
46,186
59,810
18,476
78,286
121,186
180,286
86,810
1,500
15,440
(61)
2,100
40,770
16,830
Once a company obtains control, purchases and sales of noncontrolling interests are accounted for as
equity transactions. Therefore, the 1 January 20X3 consolidated balance sheet work paper in Figure 4-9
reflects the following adjustments:
(52) The cash balance rollforward is as follows:
Beginning balance
Cash received from sale (see also Item 64 below)
Ending balance
$
$
36,600
22,500
59,100
(53) The investment in Company S adjusted for the sale of a partial interest in Company S is as follows:
Beginning balance
Proportionate interest in net assets sold (see also Item 64 below)
Ending balance
41,567
(13,857)
$ 27,710
(62) The 31 December 20X2 balance for noncontrolling interest was $4,619. This amount
represented a 10% interest in Company S. Company P sold a 30% interest in Company S, which
was equivalent to three times this balance. Accordingly, the noncontrolling interest balance is
adjusted to $18,476 ($4,619 + $13,857). 8
Refer also to footnote 6 in Illustration 4-13.
In addition, AOCI is adjusted to reflect the portion of the AOCI that was sold ($1,050) and is no
longer attributable to Company P ($3,500 x 30%).
(63) This eliminates the accumulated other comprehensive income of Company S.
(64) The APIC of Company P increases by $9,693, resulting in a balance of $15,440 ($5,747 + $9,693).
In summary, the adjustment recorded by Company P for the change in ownership transaction is
as follows:
Cash (Item 52)
AOCI (Item 62)
22,500
1,050
Investment in Company S (Item 53)
APIC
13,857
9,693
Common stock of Company S decreases from $9,000 to $6,000, to reflect the sale of 3,000
shares of $1 par stock. Further, APIC of Company S decreases by $9,807, resulting in a balance
of $36,440 ($46,247 - $9,807).
In summary, the adjustment recorded by Company S for the change in ownership transaction is
as follows:
Common stock
3,000
AOCI (Item 62)
1,050
APIC
9,807
Noncontrolling interest (Item 62)
13,857
Items (54) through (62) are consistent with (41) through (48), and (50) in the prior year in Figure 4-8
of Illustration 4-14.
4.2.6
Illustration 4-16:
On 31 December 20X3, Company S pays cash dividends of $36,000, including $21,600 to

Company P. The fair value of Company Ss marketable securities has increased to $17,500.
Figure 4-10:
Consolidating work paper to arrive at consolidated income statement, for year ended
Adjustments
Company P
Company S
Debit
Credit
Consolidated
Revenues
Cost of revenues
96,000
42,000
96,000
42,000
Gross profit
Company S
54,000
54,000
16,470
Net income
16,470


16,470
(66)
(67)
26,550
(65)
16,470
26,550
27,450
27,450
10,980
10,980
16,470
16,470
Figure 4-10 presents the consolidating work paper to arrive at the 31 December 20X3 income
statement, and includes the following adjustments:
(67) Net income is attributed to the controlling and noncontrolling interest based on ownership
interests. The controlling and noncontrolling interests own 60% and 40% of the outstanding
stock, respectively. Net income attributable to the controlling and noncontrolling interests is
$16,470 ($27,450 x 60%) and $10,980 ($27,450 x 40%), respectively.
See Figure 4-4 of Illustration 4-13, Items (8) and (9), for explanations of Items (65) and (66), respectively.
Figure 4-11:
Consolidating work paper to arrive at consolidated balance sheet, 31 December

20X3 (all amounts in dollars)
Adjustments
Cash
Inventory
Goodwill
Total assets
(68)
(69)
Accounts payable
Debt
Total liabilities
Common stock
Accumulated other
equity
Total equity
Company P
Company S
80,700
23,780
104,480
3,000
17,500
30,000
59,850
4,286
114,636
(70)
(72)
27,000
27,000
Debit
(71)
23,780
75,000
75,000
1,500
15,440
(79)
6,000
36,440
(76)
(77)
6,000
36,440
(73)
(74)
3,300
57,240
3,300
(21,960)
(78)
3,300
(75)
(81)
104,480
Consolidated
83,700
17,500
30,000
59,850
4,286
195,336
75,000
27,000
102,000
(77)
77,480
77,480
Credit
1,500
15,440
(80)
21,960
3,300
57,240
23,780
15,856
39,636
77,480
15,856
93,336
114,636
195,336
Figure 4-11 presents the consolidating work paper to arrive at the balance sheet as of 31 December
20X3, and includes the following adjustments:
(68) Company P received $21,600 as a cash dividend from Company S ($36,000 x 60%). The cash
balance rollforward is as follows:
Beginning balance
Dividend received
Ending balance
$ 59,100
21,600
$ 80,700
(69) The rollforward of the investment in Company S, adjusted for earnings and dividends is as follows:
Beginning balance
Attributed earnings
Ending balance
$ 27,710
16,470
1,200
(21,600)
$ 23,780
(73) Company P recognized its proportion of other comprehensive income for the year (from the
increase in value of Company Ss marketable securities) ($2,000 x 60%), which was added to
last years balance of $2,100.
(74) Retained earnings for Company P reflect the attributed earnings from Company S. Although a
statement of shareholders equity would generally be presented, for illustrative purposes the
statement has been excluded. A rollforward of retained earnings is as follows:
Beginning balance
Earnings recognized of Company S
Ending balance
$ 40,770
16,470
$ 57,240
(75) Retained deficit for Company S is rolled forward as follows:

Beginning balance
Net income
Dividends declared
Ending balance
$ (16,830)
16,470
(21,600)
$ (21,960)
(78) To eliminate the AOCI of Company S ($5,500), as well as last years adjustment related to the
sale of a partial interest in Company S ($1,050).
(81) The rollforward of the noncontrolling interest balance from 1 January 20X3 (see Figure 4-9), as
follows:
Beginning balance
Attributed earnings
Ending balance
$ 18,476
10,980
800
(14,400)
$ 15,856
Items (70) through (72), (76), (77), (79) and (80) are consistent with Items (54) through (56), (60)
through (62), and (64) in Figure 4-9 of Illustration 4-15.
Intercompany eliminations
5.1
Procedures for eliminating intercompany balances and transactions


Procedures
810-10-45-1
In the preparation of consolidated financial statements, intra-entity balances and transactions shall be
eliminated. This includes intra-entity open account balances, security holdings, sales and purchases,
interest, dividends, and so forth. As consolidated financial statements are based on the assumption
that they represent the financial position and operating results of a single economic entity, such
statements shall not include gain or loss on transactions among the entities in the consolidated group.
Accordingly, any intra-entity profit or loss on assets remaining within the consolidated group shall be
eliminated; the concept usually applied for this purpose is gross profit or loss (see also paragraph
810-10-45-8).
810-10-45-2
The retained earnings or deficit of a subsidiary at the date of acquisition by the parent shall not be
included in consolidated retained earnings.
810-10-45-4
When a subsidiary is initially consolidated during the year, the consolidated financial statements shall
include the subsidiary's revenues, expenses, gains, and losses only from the date the subsidiary is
initially consolidated.
810-10-45-8
If income taxes have been paid on intra-entity profits on assets remaining within the consolidated
group, those taxes shall be deferred or the intra-entity profits to be eliminated in consolidation shall be
appropriately reduced.
An entity required to consolidate another entity must apply consolidation procedures to present the
results of operations and financial position of the group (that is, the parent and the entities required to
be consolidated) as a single consolidated entity. Only transactions and ownership interests with parties
outside the consolidated group are presented. Therefore, the separate financial statements of each
entity are combined and adjusted to eliminate intercompany transactions and ownership interests. This
is consistent with the economic entity concept.
Consolidated financial statements should not include any intercompany receivables, payables, investments,
capital, revenues, costs of sales or profits or losses between the entities within the consolidated group.
Any intercompany profit or loss on assets or liabilities remaining within the consolidated entity should be
eliminated, resulting in the carrying value of the assets and liabilities being adjusted to the historical
carrying value that existed before the intercompany transaction.
The elimination of intercompany receivables and payables is not complex if balance sheet date cut-offs
for intercompany transactions are consistent among entities within the consolidated group. If inventories
or other assets of a consolidated group are transferred between members of the consolidated group,
intercompany revenues, cost of sales and profit or loss recorded by the transferor should be eliminated
in consolidation.
The goal of intercompany income elimination is to remove the income (or loss) arising from transactions
between companies within the consolidated entity and to adjust the carrying amount of the assets to
their historical cost basis (as compared with the intercompany asset transfer price basis) of the
transferred asset in the consolidated financial statements. This practice is continued until the income is
realized through a sale to outside parties or, in the case of depreciable assets, the asset is depreciated
over its estimated useful life.
The elimination of intercompany losses should be consistent with the elimination of intercompany profits.
If losses have been recognized on inventory acquired in an intercompany transaction, those losses must
be eliminated to state the inventory in the consolidated statement of financial position at its cost to the
consolidated entity. Careful consideration should be given to the lower-of-cost-or-market test of inventory
for the purchasing company. The market value of the inventory must not be less than the selling companys
cost. If the market value is exceeded by the consolidated inventory cost, the loss that would have otherwise
been eliminated in consolidation should be adjusted downward. That is, intercompany losses should not be
eliminated if they represent a lower-of-cost-or-market adjustment.
US GAAP provides a limited exception to these general principles on intercompany eliminations. Under
ASC 980-810-45-1 and -2, if an inventory sale is from a non-regulated subsidiary to a regulated
subsidiary (as defined in ASC 980), profits on these sales should not be eliminated in consolidation, if
certain conditions are met.
5.1.1
Effect of noncontrolling interest on elimination of intercompany amounts


Procedures
810-10-45-18
The amount of intra-entity income or loss to be eliminated is not affected by the existence of a
noncontrolling interest. The complete elimination of the intra-entity income or loss is consistent with
the underlying assumption that consolidated financial statements represent the financial position and
operating results of a single economic entity. The elimination of the intra-entity income or loss may be
allocated between the parent and noncontrolling interests.
When eliminating intercompany profits, the existence of a noncontrolling interest in the consolidated
group creates complexities. ASC 810-10-45-18 provides guidance for preparing consolidated financial
statements, including the treatment of noncontrolling interest.
ASC 810 provides for no distinction between wholly owned and partially owned entities with respect to
the need for the elimination of intercompany transactions. In both cases, all transactions with members
of the consolidated group are considered internal transactions that must be eliminated fully, regardless
of the percentage ownership.
Because individual companies in a consolidated group generally record transactions with members of the
consolidated group in a manner similar to transactions with entities outside of the group, sales, cost of
goods sold and profit may be recognized by the selling entity even though there has not been a transaction
outside of the consolidated group. Because income cannot be recognized by the consolidated group until
it has been realized in a transaction with a third party, there may be unrealized intercompany profit or
loss requiring elimination.
Because noncontrolling interest is a component of equity, transfers of assets between entities in the
consolidated group are accounted for as internal transfers for which no earnings are recognized until
they are realized through an exchange transaction with a party outside of the consolidated group.
Unrealized intercompany income and losses are always eliminated fully in preparing consolidated
financial statements. While the entire amount must be eliminated, the entity must sometimes determine
how that elimination should be allocated between the controlling and noncontrolling interests.
When a sale is from a parent to a subsidiary (downstream transaction), profit or loss is recognized by the
parent. We believe the full amount of the elimination of the intercompany profit or loss should be against
the controlling interest. Otherwise, the parent would continue to recognize a portion of the unrealized
income or loss in income even though ASC 810-10-45-1 requires intercompany transactions to be
eliminated fully.
When a subsidiary sells to the parent (upstream transaction) and intercompany profit or loss arises, the
profit or loss may be eliminated against the controlling and noncontrolling interest proportionately.
In either case, the amount of profit eliminated from the consolidated carrying amount of the asset is not
affected by the existence of noncontrolling interest in the subsidiary.
Variable interest entities

Question 5.1
How should intercompany eliminations be attributed to the noncontrolling interests for consolidated
variable interest entities?
The principles described above (see Section 5.1.1) and reflected in the illustrations apply to all
consolidated entities, including variable interest entities. It is common for variable interest entities to have
substantive profit sharing arrangements and therefore the use of relative ownership percentages may
not always be appropriate. Our FRD publication, Consolidation and the Variable Interest Model, provides
more guidance and examples on attributing intercompany eliminations to noncontrolling interests.
5.1.2
Subsidiary ownership interest in its parent in the consolidated financial

statements

Procedures
810-10-45-5
Shares of the parent held by a subsidiary shall not be treated as outstanding shares in the consolidated
statement of financial position and, therefore, shall be eliminated in the consolidated financial
statements and reflected as treasury shares.
Shares of the parent held by a subsidiary should not be reflected as outstanding shares in consolidated
financial statements of the parent. Instead, they should be reflected as treasury shares in the
consolidated financial statements. When there are noncontrolling interests in the subsidiary that holds
the treasury shares, the noncontrolling interest holders have an interest in the earnings or losses of the
parent. Thus, the subsidiary's equity in the earnings or losses of the parent company should be included
in determining the noncontrolling interest in the subsidiary.
Illustration 5-1:
Presentation of a subsidiary ownership interest in its parent in consolidated

Assume that P owns 80% of S, and S owns 10% of P. Net income of P and S is $200,000 and
$100,000, respectively. In the consolidated financial statements of P, income attributable to the
noncontrolling interest (and increase to the noncontrolling interest account on the balance sheet)
would be calculated as follows:
Net income of P
S ownership percentage in P
S interest in net income of P
Noncontrolling ownership percentage in S
Net income of S
Noncontrolling ownership percentage in S
Total income attributable to the noncontrolling interest
5.1.2.1
$ 200,000
10%
20,000
20%
100,000
20%
4,000
20,000
24,000
Subsidiary ownership interest in its parent in the subsidiarys separate financial statements
While ASC 810-10 addresses the accounting for a subsidiary investment in the parent in the consolidated
financial statements, it does not address the accounting for such an investment in the separate financial
statements of the subsidiary. Although a consensus was not reached, EITF 98-2 stated that a subsidiary
should disclose its policy with regard to the accounting for investments in the stock of its parent or
investor. Generally, we believe an investment of a subsidiary in the stock of its parent should be treated
in a manner similar to treasury stock. That is, we believe the subsidiary should present the investment as
a contra-equity account in its separate financial statements, which is consistent with the tentative
conclusion reached in EITF 98-2.
5.1.3
Intercompany derivative transactions

ASC 815 allows intercompany transactions to be used in hedging relationships, if certain conditions are
met. See Chapter 7 of our FRD publication, Derivatives and hedging, for more information.
5.2
The following example illustrates certain procedures for eliminating intercompany balances and
transactions. Work paper adjusting entries are numbered sequentially.
Illustration 5-2:
Parent sells to a majority-owned subsidiary (downstream transaction)
In a transaction in which a parent sells inventory to a majority-owned subsidiary, and some or all of the
inventory remains on hand at a period-end, ASC 810 requires that the full amount of the profit arising
from the intercompany transaction related to the inventory remaining on hand be eliminated against
the parents interest and eliminated from the carrying amount of the asset. That is, because only the
parent has recognized the revenues, costs of sale, and resultant profit and loss in its financial
statements, no portion of these items may be allocated to noncontrolling interests.
Assume that Company P owns an 80% interest in Company S.

The 1 January 20X6, beginning-of-year balance sheets for Company P and Company S are as follows
(all amounts in dollars):
Company P
200,000
400,000
600,000
100,000
200,000
300,000
600,000
Cash
Inventory
Total assets
Current liabilities
Common stock
Retained earnings
Company S
300,000
50,000
150,000
500,000
400,000
100,000
500,000
Now assume that, during the year, Company P sells inventory to Company S. A summary of the effect
of the transaction on Company Ps income statement is as follows:
Revenues
Cost of sales
Gross profit
$
$
100,000
70,000
30,000
Also assume that the inventory sale is the only transaction between Company P and Company S during
20X6. Further, the inventory remains on hand at Company S at year-end. Before consolidation,
Company P accounts for its investment in Company S by recognizing its proportionate share of the
carrying amount of the net assets of Company S, including its proportionate share of comprehensive
income and losses and dividends.
Figure 5-1:
Adjustments
Company P
Company S
Revenues
Cost of revenues
500,000
200,000
270,000
100,000
Gross profit
Company S
300,000
100,000
120,000
170,000
20,000
Net income
320,000
150,000
320,000
30,000
30,000
120,000
290,000

320,000
Debit
(1)
(1)
(2)
(3)
Credit
Consolidated
70,000
670,000
230,000
100,000
120,000
440,000
120,000
Figure 5-1 illustrates the elimination of intercompany transactions between Company P and Company
S for the consolidated income statement, as follows:
(1) Intercompany revenue and intercompany cost of revenue from the downstream sale are eliminated.
(2) Intercompany income from investment recognized by Company P ($150,000 x 80%) is eliminated.
(3) Net income of Company S is attributed to the noncontrolling interest ($150,000 x 20%).
Figure 5-2:

Adjustments
Cash
Intercompany receivable
Inventory
Total assets
Current liabilities
Intercompany payable
Total liabilities
Common stock
Retained earnings
equity
Total equity
(9)
Company P
Company S
200,000
100,000
200,000
520,000
450,000
150,000
150,000
1,020,000
750,000
200,000
100,000
200,000
100,000
200,000
620,000
400,000
120,000
820,000
Debit
Credit
(4)
(5)
100,000
30,000
(6)
520,000
Consolidated
650,000
320,000
150,000
1,120,000
(4)
100,000
200,000
200,000
(7)
(8)
400,000
150,000
200,000
590,000
520,000
130,000
790,000
130,000
820,000
650,000
920,000
1,020,000
750,000
1,120,000
(10)
S for the consolidated balance sheet, as follows:
(4)
Intercompany receivable and payable from the downstream sale are eliminated.
(5)
Intercompany profit remaining in inventory at year-end from the downstream sale is eliminated.
(6)
Company Ps investment in Company S is eliminated.
(7)
Company Ss common stock is eliminated.
(8)
Company Ss retained earnings balance is eliminated ($120,000) and the intercompany profit
on the downstream sale recognized by Company P is eliminated ($30,000).
(9)
A rollforward of retained earnings is as follows:

Beginning balance
Current year earnings of Company P
Ending balance
$ 300,000
320,000
$ 620,000
(10) Noncontrolling interest is recognized at its initial balance of $100,000 ($500,000 x 20%) plus
its proportionate share of income from Company S ($30,000).
Under the economic unit concept, 100% of intercompany sales, receivables, payables, purchases, cost of
sales and unrealized intercompany profits and losses are eliminated. Profits and losses on downstream
transactions are eliminated completely against the controlling interest.
No profit accrues to the stockholders of the selling entity under the economic unit concept because both
the controlling and noncontrolling interests are owners of a single economic unit (albeit with different
claims on the entitys assets). After incorporating elimination entries, transfers of inventory are to be
accounted for on the same basis as internal transfers between departments of a single entity at cost.
Illustration 5-3:
Majority-owned subsidiary sells to parent (upstream transaction)
Assume the same facts as in Illustration 5-2, except that instead of the downstream transaction, S
sells to P inventory that remains in Ps inventory at year-end. A summary of the result of the
transaction on Ss income statement is as follows:
Revenues
$ 100,000
Cost of sales
70,000
Gross profit
30,000
Under the economic unit concept, the transfer of inventory between a subsidiary and its parent is
viewed as a transfer between departments or divisions/components of a single entity. When a
subsidiary sells inventory to its parent, under ASC 810 the unrealized profit may be proportionately
eliminated against the parents interest and the noncontrolling interest.
Figure 5-3:
Adjustments
Company P
Company S
Revenues
Cost of revenues
500,000
200,000
270,000
100,000
Gross profit
Company S
300,000
100,000
170,000
20,000
Net income
320,000
150,000
30,000
320,000
120,000

120,000
Debit
(11)
Credit
100,000
(11)
70,000
Consolidated
670,000
230,000
440,000
120,000
(12)
120,000
320,000
(13)
6,000
24,000
296,000
Figure 5-3 illustrates the elimination of intercompany transactions between Company P and Company S
for the consolidated income statement, as follows:
(13) The noncontrolling interests proportionate share of the elimination of the intercompany
transaction ($30,000 x 20%) is attributed to the noncontrolling interest.
For explanations of Items (11) and (12), see Items (1) and (2), respectively, in Figure 5-1.
Figure 5-4:

Adjustments
Company P
Company S
300,000
200,000
520,000
350,000
100,000
150,000
150,000
1,020,000
750,000
100,000
100,000
100,000
Total liabilities
200,000
100,000
Common stock
Retained earnings
200,000
620,000
400,000
120,000
(17)
(18)
400,000
150,000

equity
820,000
520,000
130,000
(20)
6,000
820,000
650,000
920,000
1,020,000
750,000
1,120,000
Cash
Inventory
Building, net
Total assets
Current liabilities
Total equity
Debit
Credit
(14)
(15)
100,000
30,000
(16)
520,000
Consolidated
650,000
320,000
150,000
1,120,000
(14)
200,000
100,000
200,000
(19)
6,000
200,000
596,000
796,000
124,000
(19) This entry represents a reclassification adjustment to the noncontrolling interest for its
proportionate share of the intercompany profit elimination (30,000 x 20%). Since the entire
effect of eliminating the intercompany profit on the upstream sale ($30,000) has been
attributed to the controlling interest via Item (18), the noncontrolling interests proportionate
share must be reclassified via this entry. See Item (20) below for the other side of the
reclassification.
(20) The noncontrolling interests proportionate share of the elimination of the intercompany
transaction ($30,000 x 20%) is attributed to the noncontrolling interest.
For explanations of Items (14) (18), see Items (4) (8) in Figure 5-2.
The net income attributable to the controlling interest in Illustration 5-3 exceeds the net income
attributable to the controlling interest in Illustration 5-2 by $6,000 because a portion of the elimination
of the unrealized income, which is reflected in the subsidiary with the noncontrolling interest, has been
allocated to the noncontrolling interest ($30,000 x 20% = $6,000). Net income of the consolidated entity is
the same in both examples because of the requirement to fully eliminate the intercompany income or loss.
As described in Illustration 5-2, under the economic entity concept, 100% of intercompany sales,
receivables, payables, purchases, cost of sales and unrealized intercompany profits and losses are
eliminated. Profits and losses are eliminated in proportion to the interests in the selling entity.
No profit accrues to the stockholders of the selling entity under the economic entity concept because both
the controlling and noncontrolling interests are owners of a single economic entity (albeit with different
claims on the entitys net assets). After incorporating elimination entries, transfers of inventory are to be
accounted for on the same basis as internal transfers between departments of a single entity at cost.
Illustration 5-4:
Parent makes an intercompany loan to a majority-owned subsidiary and

the interest is expensed
Assume the same facts as in Illustration 5-2, except:
On 1 January 2006, P makes an intercompany loan to S for $1,000,000 with an annual interest
rate of 10%.
S expenses the current-year interest on the intercompany loan and remits cash to P for the annual
interest incurred on the intercompany loan.
The loan is the only transaction between P and S during 20X6 (that is, the intercompany sales
described in Illustration 5-2 did not occur).
Figure 5-5:
Adjustments
Company P
Company S
Debit
Credit
Consolidated
Revenues
Cost of revenues
500,000
200,000
270,000
100,000
770,000
300,000
Gross profit
Interest income
Interest expense
Company S
300,000
100,000
100,000
170,000
20,000
100,000
470,000
120,000
Net income
340,000

40,000
340,000
(21)
(21)
(21)
(22)
100,000
40,000
100,000
50,000
350,000
10,000
10,000
40,000
340,000
S for the consolidated income statement, as follows:
(21) Intercompany interest income, intercompany interest expense, and income from investment in
Company S are eliminated.
(22) Net income of Company S is attributed to the noncontrolling interest.
Figure 5-6:

Adjustments
Company P
Company S
300,000
200,000
1,000,000
440,000
1,350,000
150,000
150,000
1,940,000
1,650,000
Current liabilities
Intercompany loan
1,100,000
100,000
1,000,000
Total liabilities
1,100,000
1,100,000
200,000
640,000
400,000
40,000
Cash
Inventory
Intercompany loan
Total assets
Common stock
Retained earnings
equity
Total equity
(27)
840,000
Debit
Credit
(23)
(24)
Consolidated
1,000,000
440,000
1,650,000
350,000
150,000
2,150,000
(23)
1,000,000
1,200,000
1,200,000
(25)
(26)
400,000
40,000
200,000
640,000
440,000
110,000
840,000
110,000
840,000
550,000
950,000
1,940,000
1,650,000
2,150,000
(28)
(23) Intercompany loan is eliminated.
(27) A rollforward of retained earnings is as follows:
Beginning balance
$ 300,000
Current year earnings of Company P
340,000
Ending balance
$ 640,000
(28) Noncontrolling interest is recognized at its initial balance of $100,000 plus its proportionate
share of income from Company S ($10,000).
For explanations of Items (24) through (26), see Items (6) through (8) in Figure 5-2.
Before taking into consideration the noncontrolling interest in S, the elimination of the intercompany
interest income and expense has no effect on the combined net income of P and S. However, because
S has absorbed an expense of $100,000, P receives the benefit of the interest to the extent of the
noncontrolling interest. This benefit is realized immediately because S recorded the full amount of the
interest as a current period expense.
Illustration 5-5:
Parent makes an intercompany loan to a majority-owned subsidiary and

the interest is capitalized
During the year, P makes an intercompany loan to S with a principal amount of $1,000,000 and
an annual interest rate of 10%. The proceeds of the loan are used to construct a building.
S capitalizes the current-year interest on the intercompany loan as part of the cost of the building
and remits cash to P for the annual interest incurred on the intercompany loan.
The loan is the only transaction between P and S during 20X6 (that is, the intercompany sales
described in Illustration 5-2 did not occur).
Figure 5-7:
Adjustments
Company P
500,000
200,000
300,000
100,000
100,000
Revenues
Cost of revenues
Gross profit
Interest income
Interest expense
Company S
Net income
Company S
270,000
100,000
170,000
20,000
(29)
120,000
420,000
150,000
(30)
420,000
(29)
Debit
Credit
100,000
Consolidated
770,000
300,000
470,000
120,000
120,000
350,000
30,000
30,000
120,000
320,000
for the consolidated income statement, as follows:
(29)
Interest income on the intercompany loan recognized by Company P and income from
investment in Company S are eliminated.
(30)
Net income of Company S is attributed to the noncontrolling interest ($150,000 x 20%).
Figure 5-8:

Adjustments
Cash
Inventory
Intercompany loan
Total assets
Current liabilities
Intercompany loan
Total liabilities
Common stock
Retained earnings
equity
Total equity
(36)
Company P
300,000
200,000
1,000,000
520,000
2,020,000
Company S
350,000
150,000
1,250,000
1,750,000
1,100,000
1,100,000
200,000
720,000
100,000
1,000,000
1,100,000
400,000
120,000
920,000
(37)
920,000
2,020,000
Debit
Credit
(31)
(32)
(33)
(32)
1,000,000
(34)
(35)
400,000
220,000
100,000
1,000,000
520,000
Consolidated
650,000
350,000
1,150,000
2,150,000
1,200,000
1,200,000
200,000
620,000
520,000
130,000
650,000
820,000
130,000
950,000
1,750,000
2,150,000
for the consolidated balance sheet, as follows:
(31) Capitalized interest from outstanding intercompany loan is eliminated.
(32) The intercompany loan is eliminated.
(35) The retained earnings attributable to the controlling interest of Company S are eliminated
($150,000 x 80%), and the interest income recognized by Company P on the intercompany loan
is eliminated ($100,000).
(36) Company P recognizes its proportionate share (80%) of income from Company S ($150,000 x
80%). A roll forward of this account is as follows:
Beginning balance
Attributable share of Company S net income
600,000
120,000
Ending balance
720,000
For explanations of Items (33) and (34), see Items (6) and (7), respectively, in Figure 5-2.
Because S has capitalized the intercompany interest expense it paid as part of the cost of the building,
the interest has not been expensed in the income statement of S. P does not receive any benefit of the
interest income until the expense is recognized, which will occur as the building is depreciated by S.
Year 2
In Year 2, assume S depreciates the newly constructed building over 10 years, which results in annual
depreciation expense of $125,000 ($1,250,000 / 10 years = $125,000) that is included in Ss cost of
revenues. This amount includes $10,000 of excess depreciation, resulting from the capitalization of
intercompany interest in Year 1 ($100,000/10 years). Also, to simplify the example, assume that
(1) P had no other transactions during Year 2 and (2) S does not incur any additional interest expense
in Year 2.
Figure 5-9:
Consolidating work paper to arrive at consolidated income statement, for year

ended 31 December 20X7 (all amounts in dollars)
Adjustments
Company P
Company S
Revenues
Cost of revenues
400,000
250,000
Gross profit
Company S
150,000
Net income
Debit
Credit
(38)
10,000
Consolidated
400,000
240,000
160,000
120,000
120,000
150,000
160,000
30,000
30,000
120,000
130,000
120,000
(39)
(38)
120,000
for the Year 2 consolidated income statement, as follows:
(38) The excess depreciation from the capitalized interest on the intercompany loan ($10,000) and
income from investment in Company S ($120,000) are eliminated.
(39) Net income of Company S is attributed to the noncontrolling interest ($150,000 x 20%).
Figure 5-10:

Adjustments
Company P
Company S
300,000
200,000
1,000,000
640,000
625,000
150,000
1,125,000
2,140,000
1,900,000
Current liabilities
Intercompany loan
1,100,000
100,000
1,000,000
Total Liabilities
1,100,000
1,100,000
200,000
840,000
400,000
240,000
Cash
Inventory
Intercompany loan
Total assets
Common stock
Retained earnings
equity
(46)
1,040,000
(48)
Debit
Credit
Consolidated
925,000
350,000
1,035,000
(40)
90,000
(41) 1,000,000
(42)
640,000
2,310,000
1,200,000
(41) 1,000,000
1,200,000
(43)
(44)
(45)
400,000
240,000
100,000
200,000
750,000
(47)
10,000
640,000
160,000
950,000
160,000
Total equity
1,040,000
800,000
1,110,000
2,140,000
1,900,000
2,310,000
Figure 5-10 illustrates the elimination of intercompany transactions between Company P and
Company S for the consolidated balance sheet in Year 2, as follows:
(40) Capitalized interest expense from the prior year ($100,000) less current-year depreciation
($10,000) is eliminated.
(45) Retained earnings are eliminated for the prior years recognition of interest income ($100,000)
by Company P.
(46) Current-year attributable share of income from Company S ($150,000 x 80%) is added to
retained earnings. A roll forward of this account is as follows:
Beginning balance
Attributable share of Company S net income

Ending balance
720,000
120,000
840,000
(47) Excess depreciation from the capitalized interest on the intercompany loan is eliminated (see
item (39) on Figure 5-9).
share of income from Company S of $30,000 for both Years 1 and 2.
For explanations of Items (41) and (44), see Items (32) and (35) in Figure 5-8, respectively. For
explanations of Items (42) and (43), see Items (6) and (7) in Figure 5-2.
Illustration 5-6:
Parent charges subsidiary a management fee
During the year, Company P charges Company S a management fee of $1,500 for its accounting
and finance services.
The management fee is the result of a contractual arrangement negotiated between P and S.
The management fee is the only transaction between P and S during 20X6 (that is, the
intercompany sales described in Illustration 5-2 did not occur).
Figure 5-11:
Consolidating work paper to arrive at consolidated income statement, for year

ended 31 December 20X6 (all amounts in dollars)
Adjustments
Revenues
Cost of revenues
Gross profit
Intercompany expense
Intercompany revenue
Company S
Net income
Company P
500,000
200,000
300,000
100,000
1,500
Company S
270,000
100,000
170,000
20,000
1,500
(49)
118,800
320,300
148,500
(50)
320,300
(49)
Debit
Credit
(49)
1,500
1,500
Consolidated
770,000
300,000
470,000
120,000
118,800
350,000
29,700
29,700
118,800
320,300
Company S for the consolidated income statement, as follows:
(49) Intercompany revenue and expense resulting from the management fee of $1,500 paid to
Company P and income from investment in Company S are eliminated.
(50) Net income of Company S is attributed to the noncontrolling interest, including its attributable
share of the management fee (($150,000 $1,500) x 20%).
Figure 5-12:

Adjustments
Company P
200,000
200,000
518,800
918,800
Company S
450,000
150,000
150,000
750,000
Current liabilities
Total liabilities
98,500
98,500
101,500
101,500
Common stock
Retained earnings
200,000
620,300
400,000
118,800

equity
Total equity
820,300
820,300
918,800
Cash
Inventory
Total assets
(56)
Debit
Credit
(51)
518,800
Consolidated
650,000
350,000
150,000
1,150,000
200,000
200,000
(52)
(53)
(54)
400,000
118,800
1,500
(55)
1,500
200,000
620,300
518,800
129,700
648,500
820,300
129,700
950,000
750,000
1,150,000
Company S for the consolidated balance sheet, as follows:
(54) The income recognized by Company P from the management fee is eliminated from retained
earnings.
(55) The expense recognized by Company S from the management fee is eliminated from retained
earnings.
For explanations of Items (51) through (53), see Items (6) through (8) in Figure 5-2.
Loss of control over a subsidiary or a

group of assets
6.1
Deconsolidation of a subsidiary or derecognition of certain groups of assets

Derecognition
Deconsolidation of a Subsidiary or Derecognition of a Group of Assets
810-10-40-3A
The deconsolidation and derecognition guidance in this Section applies to the following:
a.
b.
c.
A subsidiary that is a nonprofit activity or a business, except for either of the following:
1.
Subtopic 360-20 or Subtopic 976-605)
2.
A group of assets that is a nonprofit activity or a business, except for either of the following:
1.
Subtopic 360-20 or Subtopic 976-605)
2.
A subsidiary that is not a nonprofit activity or a business if the substance of the transaction is
not addressed directly by guidance in other Topics that include, but are not limited to, all of
the following:
1.
Topic 605 on revenue recognition
2.
Topic 845 on exchanges of nonmonetary assets
3.
Topic 860 on transferring and servicing financial assets
4.
Topic 932 on conveyances of mineral rights and related transactions
5.
Topic 360 or 976 on sales of in substance real estate.
810-10-40-4
A parent shall deconsolidate a subsidiary or derecognize a group of assets specified in the preceding
paragraph as of the date the parent ceases to have a controlling financial interest in that subsidiary or
group of assets. See paragraph 810-10-55-4A for related implementation guidance.
Loss of control over a subsidiary or a group of assets
Implementation Guidance and Illustrations

Deconsolidation of a Subsidiary
810-10-55-4A
All of the following are circumstances that result in deconsolidation of a subsidiary under paragraph
810-10-40-4:
a.
A parent sells all or part of its ownership interest in its subsidiary, and as a result, the parent no
longer has a controlling financial interest in the subsidiary.
b.
The expiration of a contractual agreement that gave control of the subsidiary to the parent.
c.
The subsidiary issues shares, which reduces the parents ownership interest in the subsidiary so
that the parent no longer has a controlling financial interest in the subsidiary.
d.
The subsidiary becomes subject to the control of a government, court, administrator, or regulator.
Derecognition
810-10-40-5
If a parent deconsolidates a subsidiary or derecognizes a group of assets through a nonreciprocal
transfer to owners, such as a spinoff, the accounting guidance in Subtopic 845-10 applies. Otherwise,
a parent shall account for the deconsolidation of a subsidiary or derecognition of a group of assets
specified in paragraph 810-10-40-3A by recognizing a gain or loss in net income attributable to the
parent, measured as the difference between:
a.
b.
The aggregate of all of the following:

1.
The fair value of any consideration received
2.
The fair value of any retained noncontrolling investment in the former subsidiary or group of
assets at the date the subsidiary is deconsolidated or the group of assets is derecognized
3.
The carrying amount of any noncontrolling interest in the former subsidiary (including any
accumulated other comprehensive income attributable to the noncontrolling interest) at the
date the subsidiary is deconsolidated.
The carrying amount of the former subsidiarys assets and liabilities or the carrying amount of the
group of assets.
810-10-40-6
A parent may cease to have a controlling financial interest in a subsidiary through two or more
arrangements (transactions). Circumstances sometimes indicate that the multiple arrangements
should be accounted for as a single transaction. In determining whether to account for the
arrangements as a single transaction, a parent shall consider all of the terms and conditions of the
arrangements and their economic effects. Any of the following may indicate that the parent should
account for the multiple arrangements as a single transaction:
a.
They are entered into at the same time or in contemplation of one another.
b.
They form a single transaction designed to achieve an overall commercial effect.
c.
The occurrence of one arrangement is dependent on the occurrence of at least one other arrangement.
d.
One arrangement considered on its own is not economically justified, but they are economically
justified when considered together. An example is when one disposal is priced below market,
compensated for by a subsequent disposal priced above market.
Note:
The FASB and the International Accounting Standards Board (IASB) (collectively, the Boards) issued a
joint revenue recognition standard that replaces most existing revenue recognition guidance and
interpretations. The FASBs new standard includes consequential amendments to ASC 810 that may
result in certain transactions that previously were accounted for under the deconsolidation and
derecognition guidance in ASC 810 now being accounted for following the principles in the new
revenue recognition guidance. These transactions include any sale to a customer (e.g., a sale of a
business) and any sale of an in-substance non-financial asset (whether it is a business or not). Readers
should carefully review this new guidance.
Effective date and transition
The new standard is effective for public entities for fiscal years beginning after 15 December 2016,
and for interim periods therein. Early adoption is not permitted for public entities. Nonpublic entities
are required to adopt the new guidance for fiscal years beginning after 15 December 2017, and
interim periods within fiscal years beginning after 15 December 2018, and may adopt it as early as the
public entity effective date.
An entity can elect to apply either a full retrospective adoption in which the standard is applied to all
of the periods presented (e.g., beginning as of January 1 2015 for a calendar year-end public entity)
or a modified retrospective adoption.
A parent company deconsolidates a subsidiary or derecognizes a group of assets when that parent
company no longer controls the subsidiary or group of assets specified in ASC 810-10-40-3A. Certain
scope exceptions in ASC 810-10-40-3A are identical to those provided in ASC 810-10-45-21A for
decreases in ownership that do not result in a loss of control. See Sections 4.1.2.2 and 4.1.2.3 of
Chapter 4 for further discussion of the scope exceptions for in-substance real estate and oil and gas
conveyances, respectively.
When control is lost, the parent-subsidiary relationship no longer exists and the parent derecognizes the
assets and liabilities of the qualifying subsidiary or group of assets.
The FASB concluded that the loss of control and the related deconsolidation of a subsidiary or
derecognition of a group of assets specified in ASC 810-10-40-3A is a significant economic event that
changes the nature of the investment held in the subsidiary or group of assets.
Based on this consideration, a gain or loss is recognized upon the deconsolidation of a subsidiary or
derecognition of a group of assets specified in ASC 810-10-40-3A. Any remaining ownership interest in
the subsidiary or entity acquiring the group of assets specified in ASC 810-10-40-3A (which would be
classified as a noncontrolling interest by the acquirer) is measured at its fair value. That ownership
interest is subsequently accounted for in accordance with ASC 320, ASC 323 or other applicable GAAP.
If the retained noncontrolling interest is accounted for as an equity method investment, the former
parent would be required to identify and determine the acquisition date fair value of the underlying
assets and liabilities of the investee (with certain exceptions), under ASC 323. While the former parent
would not recognize those identified assets and liabilities, it would be required to track its bases in them
to account for the effect of any differences between its bases and the bases recognized by the investee.
This process is often called memo accounting. See our FRD publication, Equity method investments, for
more guidance on this accounting.
6.1.1
Loss of control
We believe the guidance in ASC 810 applies to the loss of control and deconsolidation of any subsidiary
or group of assets specified in ASC 810-10-40-3A, regardless of how control was lost (except for
nonreciprocal transfers to owners). Several events may lead to a loss of control of a subsidiary specified in
ASC 810-10-40-3A, and not all events are the direct result of actions taken by the parent company. The
simplest example of the loss of control of a subsidiary is when a parent company decides to sell all of its
interest in a subsidiary. A loss of control also can result from actions of the subsidiary. When a subsidiary
issues shares to third parties, the parents interest is diluted, potentially to the point when the parent no
longer controls the subsidiary. A loss of control can also result if a government, court, administrator or
regulator takes legal control of a subsidiary or a group of assets as specified in ASC 810-10-40-3A.
6.1.2
Nonreciprocal transfers to owners

ASC 810s provisions do not apply to spinoffs or other nonreciprocal transactions with owners. A spinoff
occurs when a parent company transfers the subsidiarys stock or a group of assets that it owns to its
own shareholders. Spinoffs should be accounted for in accordance with ASC 845.
6.1.3
Gain/loss recognition
When a subsidiary or a group of assets specified in ASC 810-10-40-3A is deconsolidated or
derecognized, the carrying amounts of the previously consolidated subsidiarys assets and liabilities or
group of assets are removed from the consolidated statement of financial position. Generally, a gain or
loss is recognized as the difference between the following two amounts:
The sum of the fair value of any consideration received, the fair value of any retained noncontrolling
investment in the former subsidiary or group of assets at the date the subsidiary is deconsolidated or
the group of assets is derecognized, and the carrying amount of any noncontrolling interest in the
former subsidiary (including any AOCI attributable to the noncontrolling interest) at the date the
subsidiary is deconsolidated
The carrying amount of the former subsidiarys assets and liabilities or the carrying amount of the
group of assets
Importantly, because the loss of control is deemed to be a significant economic event, when an entity
loses control of a subsidiary or a group of assets specified in ASC 810-10-40-3A but retains a
noncontrolling interest in the former subsidiary or entity that acquired the group of assets, that retained
interest is measured at fair value and is included in the calculation of the gain/loss on deconsolidation of
the subsidiary or the derecognition of a group of assets.
When an entity recognizes a gain, SAB Topic 5-E (codified in ASC 810-10-S99-5) states that the entity
should identify all of the elements of the divesture arrangement and allocate the consideration
exchanged to each of those elements. For example, if the divesture arrangement included elements of
guarantees and promissory notes, the entity would recognize the guarantees at fair value in accordance
with ASC 460 and recognize the promissory notes in accordance with ASC 835, ASC 470 and ASC 310.
As indicated in ASC 810-10-40-5, the gain/loss calculation is affected by the carrying amount of any
noncontrolling interest in the former subsidiary specified in ASC 810-10-40-3A. However, adjustments to
the carrying amount of a redeemable noncontrolling interest from the application of ASC 480-10-S99-3A
do not initially enter into the determination of net income (Section 5.10 of Chapter 5 of our FRD publication,
Issuers accounting for debt and equity financings, for more discussion of the application of ASC 480-10S99-3A). For this reason, the SEC staff believes 9 that the carrying amount of the noncontrolling interest
The views of the SEC staff described here are codified in ASC 480-10-S99-3A, paragraph 19, Deconsolidation of a Subsidiary.
used in the gain/loss calculation should not include any adjustments made to that noncontrolling interest
from the application of ASC 480-10-S99-3A. Previously recorded adjustments to the carrying amount of
a noncontrolling interest from the application of ASC 480-10-S99-3A should be eliminated in the same
manner in which they were initially recorded (that is, by recording a credit to equity of the parent).
Illustration 6-1:
Calculating a gain or loss upon loss of control
Assume that Company A has a 90% controlling interest in Company B, a public retailer of athletic wear.
On 31 December 20X6, the carrying amount of Company Bs net assets is $100 million, and the
carrying amount attributable to the noncontrolling interest in Company B (including the noncontrolling
interests share of AOCI) is $10 million. On 1 January 20X7, Company A sells 70% of Company B to a
third party for cash proceeds of $108 million. As a result of the sale, Company A loses control of
Company B but retains a 20% noncontrolling interest in Company B. The fair value of the retained
interest on that date is $24 million. 10
The gain on sale of the 70% interest in Company B is calculated as follows (in millions):
Cash proceeds
Fair value of retained interest
Carrying amount of the nonredeemable noncontrolling interest
Less:
Carrying amount of Company Bs net assets
Gain
108
24
10
142
100
42
The journal entry to record Company Bs deconsolidation follows:

Cash
108
Investment in Company B
24
10
Net assets of Company B
Gain on sale
100
42
Company A subsequently may account for its retained interest as an available-for-sale or

trading security under ASC 320 (with a cost basis of $24).
If Company As retained 20% noncontrolling interest gave it significant influence over Company B and
was to be accounted for as an equity method investment, Company A would be required to identify
and determine the acquisition date fair value of the underlying assets and liabilities of the investee
(with certain exceptions), in accordance with ASC 323. While Company A would not recognize those
identified assets and liabilities, it must track its bases in them (often through memo accounting) to
account for the effect of any differences between its bases and the bases recognized by the investee.
See our FRD publication, Equity method investments, for more guidance on this accounting.
10
This number is assumed (and cannot be determined based on the acquisition of the 70% interest because that price may include a
control premium).
6.1.3.1
Assignment of goodwill upon disposal of all or a portion of a reporting unit

See Chapter 3 of our FRD publication, Intangibles Goodwill and other, for guidance on the assignment
of goodwill upon the disposal of all or a portion of a reporting unit.
6.1.4
Measuring the fair value of consideration received and any retained

noncontrolling investment
To determine a gain or loss upon deconsolidation, an entity must first determine the fair value of any
consideration received and the fair value of any retained noncontrolling investment in the former
subsidiary or groups of assets. When the consideration received is cash or when the retained
noncontrolling investment in the former subsidiary or group of assets is a publicly traded equity interest,
this determination may be relatively straightforward. However, in other circumstances, the determination
may prove more challenging. The facts and circumstances of a deconsolidating event should be evaluated
carefully before recording a gain or loss. Consistent with the disclosure provisions included within
ASC 810-10-50-1B and discussed further in Chapter 9, we believe it is appropriate to disclose the details
of the computation of any material gain or loss.
Consideration received may take many forms, including cash, tangible and intangible assets, financial
instruments and contingent consideration. Because ASC 810-10-40-5 indicates that the consideration
received is to be measured at fair value, we generally believe that it is appropriate to measure
consideration received at its fair value regardless of its form (see Section 6.1.4.1 below for further
discussion of contingent consideration). In evaluating the nature and amount of consideration received,
it may be helpful to consider ASC 805 regarding consideration transferred. See our FRD publication,
Business combinations, for more discussion of this guidance.
We believe the determination of the fair value of any consideration received should contemplate any offmarket executory contracts (e.g., leases). To illustrate: If upon deconsolidation, a favorable lease
contract (from the reporting entitys perspective) exists between the reporting entity and its former
subsidiary, we believe that an intangible asset should be recorded by the reporting entity for the offmarket component of the lease contract. The effect of this accounting is to increase the gain (or reduce
the loss) recorded upon deconsolidation because presumably the consideration received was reduced by
the favorable lease contract.
A retained noncontrolling investment may take many forms, including common stock investments,
preferred stock investments and debt interests (see Section 6.1.4.2). We also generally believe it is
appropriate to measure any noncontrolling investment at its fair value, regardless of its form.
6.1.4.1
Accounting for contingent consideration in deconsolidation

In certain instances, a transfer of a controlling interest in a subsidiary involves contingent consideration.
For example, when an entity sells a controlling interest in a subsidiary, the acquirer may promise to deliver
cash, additional equity interests or other assets to the seller after the sale date if certain specified events
occur or conditions are met in the future. These contingencies frequently are based on future earnings or
changes in the market price of the subsidiarys stock over specified periods after the date of the sale.
However, they might be based on other factors (e.g., components of earnings, product development
milestones, cash flow levels, the successful completion of third-party contract negotiations).
The basis for recognition and measurement of contingent consideration in deconsolidation is not
addressed in ASC 810, so it is necessary to look to other guidance. If contingent consideration meets the
definition of a derivative, it should be accounted for under ASC 815. When contingent consideration does
not meet the definition of a derivative, the Codification does not provide detailed guidance. In this
circumstance, we believe the basis for recognition and measurement of contingent consideration
receivable by the seller is an accounting policy choice that should be applied on a consistent basis. The
EITF considered this matter and did not arrive at a consensus and therefore we believe that significant
diversity exists in practice. Companies should carefully consider the accounting for these transactions
and consider preclearing the accounting with the Office of the Chief Accountant. Discussed below are
two policy alternatives that are applied in practice.
Alternative 1: fair value approach
ASC 810-10-40-5 requires that the measurement of any gain or loss on deconsolidation of a subsidiary
include the fair value of any consideration received. We believe that this could be interpreted to include
contingent consideration. Thus, we believe the seller may initially recognize an asset from the buyer equal
to the fair value of any contingent consideration received upon deconsolidation. We note that this view is
consistent with ASC 805s requirement that an acquirer recognize contingent consideration obligations as
of the acquisition date as part of consideration transferred in exchange for an acquired business.
If a seller follows an accounting policy to initially recognize an asset equal to the fair value of the
contingent consideration, we believe it also must elect an accounting policy to subsequently measure the
contingent consideration under either of the following approaches:
Remeasure at fair value by electing the fair value option provided in ASC 825-10-25 (assuming the
gain contingency is a financial instrument eligible for the fair value option)
Recognize increases in the carrying value of the asset using the gain contingency guidance in
ASC 450-30 and recognize impairments based on the guidance in ASC 450-20-25-2
Alternative 2: loss recovery approach

We also believe it is reasonable to conclude that contingent consideration is not required to be measured
at fair value. In that circumstance, we believe it is acceptable to apply a loss recovery approach by
analogizing to the accounting for insurance recoveries on property and casualty losses.
Property and casualty losses are accounted for in accordance with ASC 605-40. Under that guidance,
when a nonmonetary asset (e.g., property, equipment) is involuntarily converted to a monetary asset
(e.g., receipt of insurance proceeds upon the occurrence of an insured event), the loss on the
derecognition of the nonmonetary asset must be recognized, even when an entity reinvests or is
obligated to reinvest the monetary assets in a replacement asset.
Anticipated insurance proceeds up to the amount of the loss recognized are called insurance recoveries
and may be recognized when it is probable11 that they will be received. Some or all of the anticipated
insurance recoveries therefore may be recognized. Specifically, anticipated insurance recoveries may be
recognized at the lesser of the amount of (1) the proceeds for which the likelihood of receipt is probable
or (2) the total loss recognized. Insurance proceeds in excess of the amount of the loss recognized are
subject to the gain contingency guidance in ASC 450-30, and are not recognized until all contingencies
related to the insurance claim are resolved.
When analogizing insurance recovery accounting to the initial recognition of contingent consideration in
deconsolidation, an entity would compare the fair value of the consideration received, excluding the
contingent consideration, to the carrying amount of the assets that are deconsolidated under ASC 810.
If the fair value of the consideration received, excluding the contingent consideration, is less than the
carrying amount of the deconsolidated assets, the initial measurement of the contingent consideration
asset would be limited to the difference between those amounts. That is, if it is probable that contingent
consideration will be received, an asset would be recognized and measured initially at the lesser of (1) the
amount of probable future proceeds or (2) the difference between the fair value of the consideration
received, excluding the contingent consideration, and the carrying amount of the deconsolidated assets.
11
The ASC master glossary defines probable as: the future event or events are likely to occur.
Subsequent recognition and measurement would be based on the gain contingency guidance in ASC 45030-25-1 (i.e., a contingency that might result in a gain usually should not be reflected in the financial
statements because doing so might recognize revenue before it is realized). Any subsequent impairments
would be recognized based on ASC 450-20-25-2.
If the fair value of the consideration received, excluding the contingent consideration, is greater than the
carrying amount of the deconsolidated assets, no contingent consideration asset would be recognized
initially. Subsequent recognition and measurement of the contingent consideration would be based on
the gain contingency model under ASC 450-30 and any subsequent impairment would be recognized
based on ASC 450-20-25-2.
Illustration 6-2 demonstrates these two alternatives.
Illustration 6-2:
Assume that Company A has a 100% controlling interest in Company B, a public retailer of athletic
wear. On 31 December 20X6, the carrying amount of Company Bs net assets is $150 million. On
1 January 20X7, Company A sells 100% of Company B to a third party for cash proceeds of $75 million
and a promise by the third party to deliver additional cash annually over the next five years, based on a
percentage of Company Bs annual earnings above an agreed upon target. The fair value of the contingent
consideration is determined to be $175 million on 1 January 20x7. Company A determines it is probable
that it will receive $225 million 12 in total contingent consideration over the life of the arrangement.
Fair value approach
The gain on sale of the 100% interest in Company B is calculated as follows (in millions):
Cash proceeds
Fair value of the contingent consideration
Less:
Gain
75
175
250
150
100
The journal entry to record Company Bs deconsolidation follows:

Cash
Contingent consideration receivable
Gain on sale
75
175
$
150
100
If Company A applies the fair value accounting policy, we believe Company A also must elect an
accounting policy to subsequently measure the contingent consideration under either of the following
approaches:
Subsequent remeasurement at fair value by electing the fair value option provided in ASC 825-10-25
Recognizing increases in the carrying amount of the asset using the gain contingency guidance in
ASC 450-30 and recognizing impairments based on ASC 450-20-25-2
12
This amount reflects the total cash that is probable of receipt under the terms of the arrangement, as determined using a
reasonable estimate of the earnings of Company B over the next five years. No discount factor or other fair value adjustments
are applied in determining this amount.
Loss recovery approach

Company A would compare the fair value of the consideration received, excluding the contingent
consideration, to the carrying amount of the assets that are deconsolidated under ASC 810.
Cash proceeds
Less:
Difference
75
150
(75)
Because the fair value of the consideration received, excluding the contingent consideration, is less than
the carrying amount of the deconsolidated assets, an asset would be recognized and measured initially
at the lesser of the amount of probable future proceeds or the difference between those amounts.
In this example, the difference of $75 million calculated above is less than the probable future
proceeds of $225 million. Therefore, the contingent consideration asset would be recognized and
measured initially at $75 million. No gain would be recognized when initially recording this transaction.
The journal entry to record Company Bs deconsolidation would be as follows:
Cash
Contingent consideration receivable
75
75
$
150
If Company A elects to apply this alternative, subsequent increases in the carrying amount of the asset
would be recognized using the gain contingency guidance in ASC 450-30-25-1 and any subsequent
impairments would be recognized based on ASC 450-20-25-2.
6.1.4.2
Accounting for a retained creditor interest in deconsolidation

The FASB concluded that the loss of control and the related deconsolidation of a subsidiary or
derecognition of a group of assets specified in ASC 810-10-40-3A is a significant economic event that
changes the nature of the investment held in the subsidiary or group of assets. Upon deconsolidation,
an entity therefore is required to record any remaining noncontrolling investment in the subsidiary or a
group of assets specified in ASC 810-10-40-3A at fair value. Consistent with this approach, we believe
that a loan to the former subsidiary also should be measured at fair value at the deconsolidation date.
Thus, any difference between the carrying amount of the loan to the subsidiary and the fair value should
be included in the gain/loss calculation upon deconsolidation of the subsidiary.
6.1.5
Accounting for accumulated other comprehensive income in deconsolidation

AOCI of a subsidiary or group of assets specified in ASC 810-10-40-3A is attributed to both the
controlling and noncontrolling interests. As part of deconsolidation, the parent should derecognize any
portion of AOCI attributable to the noncontrolling interest because the underlying asset or liability of the
subsidiary or group of assets specified in ASC 810-10-40-3A that generated the AOCI is no longer
recorded on the books of the parent.
While ASC 810 does not specify the treatment of the AOCI attributable to the parent, we believe that the
reversal of any AOCI attributable to the parent should be included in the gain or loss recognized on
deconsolidation. The basis for this conclusion is that the assets or liabilities of the former subsidiary or
group of assets specified in ASC 810-10-40-3A that generated the amounts in AOCI have been
derecognized upon the loss of control.
Other amounts recognized in equity outside of AOCI related to changes in ownership interests that did not
result in a loss of control would not be included in determining the gain or loss. These amounts resulted
from transactions among shareholders and are not directly attributable to the noncontrolling interest.
The fair value of any retained interest is its new carrying amount and if that investment is accounted for
as an equity method investment, the former parent would be required to identify and determine the
acquisition date fair value of the underlying assets and liabilities of the investee (with certain exceptions),
under ASC 323. While the former parent would not recognize those identified assets and liabilities, it
must track its bases in them (often through memo accounting) to account for the effect of any
differences between its bases and the bases recognized by the investee. (See our FRD publication,
Equity method investments, for more guidance on this accounting). Because the investment, as well as
the underlying assets and liabilities of an equity method investment, is recognized with a new basis, no
AOCI is recognized upon deconsolidation. However, subsequent accounting for the investment (for
example, under ASC 320) or the underlying assets and liabilities (under ASC 323) may generate AOCI
after deconsolidation.
6.1.5.1
Foreign currency translation adjustments

If the former subsidiary is a foreign entity or is within a foreign entity (as defined by ASC 830) special
considerations apply. A foreign entity may include a subsidiary, division, branch, joint venture that
contains an equity method investment or equity method investment by itself. That is, a foreign entity as
defined by ASC 830 may differ from a legal entity. See Section 1.2.2 of our FRD publication, Foreign
currency matters, for additional discussion on the definition of a foreign entity under ASC 830, and
Section 4.4.3 of that FRD publication for guidance on how to treat any cumulative translation adjustment
in this scenario.
6.1.6
Deconsolidation through multiple arrangements

Changes in ownership interests while maintaining control generally are accounted for as equity
transactions, while a loss of control generally gives rise to the recognition of a gain or loss. The FASB
recognized that because of these accounting differences, transactions might be structured to achieve a
specific accounting result. Consequently, ASC 810-10-40-6 provides the following considerations when
determining whether multiple arrangements or transactions should be considered a single transaction:
They are entered into at the same time or in contemplation of one another.
They form a single transaction designed to achieve an overall commercial result.
The occurrence of one arrangement depends on the occurrence of at least one other arrangement.
One arrangement, on its own is not economically justified, but it is economically justified when
considered together with another arrangement. An example would be a disposal priced below
market, compensated for by a subsequent disposal priced above market.
Determining whether multiple transactions should be considered as a single transaction is a matter of

facts and circumstances that requires the use of professional judgment. Such a determination should be
clearly and contemporaneously documented.
6.1.7
Deconsolidation through a bankruptcy proceeding

Objectives
810-10-15-10a
1.
A majority-owned entity shall not be consolidated if control does not rest with the majority
owner for instance, if any of the following are present:
i.
The subsidiary is in legal reorganization
ii.
The subsidiary is in bankruptcy
iii.
The subsidiary operates under foreign exchange restrictions, controls or other

governmentally imposed uncertainties so severe that they cast significant doubt on the
parent's ability to control the subsidiary.
The bankruptcy of an entity within a consolidated group may affect whether the entity continues to be
consolidated. Consolidation considerations include the status of the bankruptcy proceedings as well as
the facts and circumstances of the parents relationship with the subsidiary (that is, majority shareholder,
priority debt holder or single largest creditor). See Chapter 2 of our FRD publication, Bankruptcies,
liquidations and quasi-reorganizations, for more information on the consolidation implications related to
entities in or entering bankruptcy.
Question 6.1
ASC 810-10-40-3A is clear that a parent entity must consider ASC 360-20 for sales of in-substance
real estate. However, does ASC 360-20 also apply when a reporting entity loses control of an insubstance real estate subsidiary through means other than a sale?
In ASU 2011-10, the FASB clarified that ASC 360-20 applies when a reporting entity loses control of
an in-substance real estate subsidiary as a result of a default by the subsidiary on its nonrecourse debt.
ASU 2011-10 is effective for public companies for fiscal years beginning on or after 15 June 2012
and interim periods within those fiscal years. For nonpublic companies, the guidance is effective for fiscal
years ending after 15 December 2013 and interim and annual periods thereafter. The standard is to be
applied prospectively and early adoption is permitted. The accounting in ASU 2011-10 is not required for
lenders.
However, when considering the issue, the EITF did not address other scenarios in which a reporting entity
loses a controlling financial interest in an in-substance real estate subsidiary. For those transactions, we
believe a reporting entity generally should consider the real estate sales guidance or other real estate
literature (e.g., ASC 970-323) before removing the real estate from its statement of financial position.
We believe that the real estate literature provides relevant considerations for evaluating whether it is
appropriate to derecognize real estate in the statement of financial position.
See our FRD publication, Real estate sales, for more interpretive guidance.
6.1.8
Gain/loss classification and presentation

ASC 810-10-40-5 does not provide guidance on the classification of the gain/loss on deconsolidation in
the income statement.
We believe a gain/loss on deconsolidation of a subsidiary would in many cases be most appropriately
presented as part of non-operating income because, in most cases, the deconsolidation will not be a
part of an entitys primary revenue- and expense-generating activities. Before Statement 160, the SEC
staffs view, articulated in SAB Topic 5-H, was that gains (or losses) arising from issuances by a
subsidiary of its own stock, if recorded in income by the parent, should be presented as a separate line
item in the consolidated income statement without regard to materiality and clearly be designated as
non-operating income.
The SEC staff rescinded SAB Topic 5-H after Statement 160 was issued. Nonetheless, we believe SAB
Topic 5-H provides a useful basis for classifying deconsolidation gains or losses as part of non-operating
income. SAB Topic 5-H focused on a situation in which a gain or loss may have been recognized while
control was maintained and the decrease in the parents ownership percentage resulted from the direct
issuance of unissued shares by a consolidated subsidiary. We believe its guidance on classifying resulting
gains or losses as non-operating income was consistent with the notion that these transactions are
generally not an entitys primary revenue- and expense-generating activity.
An entity should clearly disclose the income statement classification of significant gains or losses
resulting from deconsolidation of a subsidiary. Entities should carefully evaluate the nature of the
deconsolidation to appropriately determine the proper classification and presentation of related gain/loss
and should consistently apply that evaluation. For example, it would not be appropriate to classify gains
in operating income and losses in non-operating income for similar transactions.
Note that if a gain or loss is recognized from a deconsolidation that relates to a discontinued operation, that
gain or loss should be included and presented as part of the income (loss) from discontinued operations.
6.1.9
Subsequent accounting for retained noncontrolling investment

After the subsidiary or group of assets specified in ASC 810-10-40-3A is deconsolidated or
derecognized, any retained ownership interest is initially recognized at fair value (see Section 6.1 for
further discussion of this accounting). After initial recognition, the retained ownership interest is subject
to other existing accounting literature, as appropriate.
If the former parent exercises significant influence over the investee, as defined in ASC 323-10-15-6
through 15-8, the investment should be accounted for under the equity method. The former parent would
be required to identify and determine the acquisition date fair value of the underlying assets and liabilities
of the investee (with certain exceptions) under ASC 323. While the former parent would not recognize
those identified assets and liabilities, it would be required to track its bases in them (often through memo
accounting) to account for the effect of any differences between its bases and the bases recognized by the
investee. See our FRD, Equity method investments, for more guidance on applying the equity method.
If it is determined that the investor is not able to exercise significant influence over the investee, the
investment is accounted for as an equity security, generally in accordance with ASC 320 or at cost,
as appropriate.
6.1.10
Transfer of a subsidiary or a group of assets to an equity method investee or

a joint venture
ASC 810s principles on the accounting for a loss of control over certain subsidiaries or groups of assets apply
to transactions in which an investor transfers a subsidiary or a group of assets to an equity method investee
or a joint venture in exchange for an equity interest. See our FRD publications Equity method investments and
Joint ventures for further discussion of the accounting applied by the investor in these transactions.
6.1.11
Income tax considerations related to the loss of control over a subsidiary

See Chapter 12 of our FRD publication, Income taxes, for discussion of income tax considerations related
to the accounting for a loss of control over a subsidiary.
6.1.12
Transfers between entities under common control

See Appendix C of our FRD publication, Business combinations, for a discussion of the accounting and
reporting by the transferring entity for the transfer of certain subsidiaries or certain groups of assets
between entities under common control.
6.2
Illustration 6-3:
Beginning balance sheet
Assume that Company P acquired a controlling financial interest in Company S, a distributor of video
games qualifying as a business under ASC 805, as of 1 January 20X1. As of 31 December 20X3,
Company P owned 60% of Company S.
Figure 6-1 presents the consolidating work paper to arrive at the consolidated balance sheet of
Company P as of 31 December 20X3. This consolidating work paper is taken from Figure 4-11 in
Illustration 4-16 of Chapter 4.
Figure 6-1:
Consolidating work paper to arrive at consolidated balance sheet, 31 December

20X3 (all amounts in dollars)
Adjustments
Company P
Company S
80,700
23,780
3,000
17,500
30,000
59,850
4,286
Total assets
104,480
114,636
195,336
Accounts payable
Debt
27,000
75,000
75,000
27,000
Total liabilities
27,000
75,000
102,000
1,500
15,440
6,000
36,440
3,300
57,240
3,300
(21,960)
77,480
23,780
15,856
77,480
15,856
77,480
39,636
93,336
104,480
114,636
195,336
Cash
Inventory
Goodwill
Common stock
Accumulated other
equity
Total equity
Debit (1)
Credit (1)
23,780
6,000
36,440
Consolidated
83,700
17,500
30,000
59,850
4,286
1,500
15,440
3,300
21,960
3,300
57,240
(1) The items reflected here are described in Figure 4-11 of Chapter 4.
6.2.1
Deconsolidation by selling entire interest

Illustration 6-4:
Deconsolidation by selling entire interest
Assume that on 1 January 20X4, Company P sells its remaining 60% interest in Company S for
$60,000 and repays its outstanding debt.
Company P no longer has a controlling financial interest in the subsidiary. So Company P derecognizes
Company S and calculates its gain as follows:
Cash proceeds
Carrying amount of the noncontrolling interest
$ 60,000
15,856
AOCI attributable to Company P
3,300
79,156
(39,636)
$ 39,520
Carrying amount of Company Ss net assets

Gain
On a consolidated basis, Company Ss assets, liabilities and noncontrolling interest should be

derecognized, and the cash proceeds and gain should be recognized through the following journal entry:
Cash
$ 60,000
15,856
Accounts payable
75,000
AOCI
3,300
Cash (of Company S)
3,000
17,500
Inventory
30,000
59,850
Goodwill
4,286
Gain on sale of investment
39,520
Alternatively, on a parent-only basis, the investment in Company S and AOCI should be derecognized,
and the gain and cash proceeds should be recognized.
Cash
AOCI
60,000
3,300
$
23,780
39,520
The entry to record the repayment of the outstanding debt is recorded separately and is not shown
above.
Figure 6-2 presents Company Ps balance sheet at 1 January 20X4, after the sale of Company S.
Figure 6-2:
Company P balance sheet, 1 January 20X4, entire interest sold (all amounts in
dollars)
Company P
Cash
(1)
113,700
(2)
Total assets
113,700
Debt
(2)
Total liabilities
Common stock
1,500
15,440
(2)
Retained earnings
(3)
96,760
Total parent shareholders equity
113,700
113,700
(1) Cash is rolled forward as follows:

Beginning balance
$ 80,700
Proceeds from sale
60,000
Repayment of debt
(27,000)
Ending balance
$ 113,700
(2) The investment, debt and AOCI are zero after the sale of Company S and the repayment of
Company Ps debt.
(3) The rollforward of the retained earnings balance is as follows:
Beginning balance
$ 57,240
Gain from sale of investment
39,520
Ending balance
6.2.2
$ 96,760
Deconsolidation by selling a partial interest

Illustration 6-5: Deconsolidation by selling a partial interest
Assume that instead of selling its entire interest in Company S on 1 January 20X4, Company P sells a
30% interest in Company S (leaving Company P with a remaining 30% interest) for $24,000. The fair
value of the remaining 30% interest is also $24,000. Company P uses the proceeds to extinguish its
outstanding debt.
In this example, Company Ps investment in Company S is recognized at fair value and is reflected as
part of the sales proceeds.
Company Ps gain is calculated as follows:

Proceeds
24,000
Fair value of retained noncontrolling interest
24,000
Carrying value of noncontrolling interest
15,856
AOCI attributable to Company P
3,300
67,156
Carrying amount of Company Ss net assets
(39,636)
Gain
27,520
On a consolidated basis, Company Ss assets, liabilities and noncontrolling interest should be

derecognized, and the cash proceeds, gain and retained interest in Company S should be recognized
through the following journal entry:
Cash
24,000
15,856
Accounts payable
75,000
AOCI
3,300
24,000
Cash (of Company S)
3,000
17,500
Inventory
30,000
59,850
Goodwill
4,286
27,520
Alternatively, on a parent-only basis, the investment in Company S is adjusted to its fair value of
$24,000, the AOCI balance is derecognized, and the gain and cash proceeds are recognized.
Cash
AOCI
24,000
220
3,300
$
27,520
Figure 6-3 presents Company Ps balance sheet at 1 January 20X4, reflecting the sale of Company S.
Figure 6-3
Company P balance sheet, 1 January 20X4, partial interest sold (all amounts in
dollars)
Company P
Cash
(5)
77,700
(6)
24,000
Total assets
101,700
Debt
(7)
Total liabilities
Common stock
1,500
Paid-in capital
15,440
(7)
Retained earnings
(8)
84,760
101,700
Total equity
101,700
101,700
(5) The rollforward of cash is as follows:

Beginning balance
$ 80,700
Proceeds from sale
24,000
Repayment of debt
(27,000)
Ending balance
$ 77,700
(6) The investment in Company S account was adjusted to equal the fair value of the retained interest
in Company S at the date of deconsolidation ($24,000).
(7) The debt and AOCI are zero after the sale of Company S and the repayment of Company Ps debt.
(8) The rollforward of retained earnings is as follows:
Beginning balance
Gain from sale of investment

Ending balance
57,240
27,520
84,760
Combined financial statements
7.1
Purpose of and procedures for combined financial statements

Implementation Guidance and Illustrations

Combined Financial Statements
810-10-55-1B
To justify the preparation of consolidated financial statements, the controlling financial interest shall
rest directly or indirectly in one of the entities included in the consolidation. There are circumstances,
however, in which combined financial statements (as distinguished from consolidated financial
statements) of commonly controlled entities are likely to be more meaningful than their separate
financial statements. For example, combined financial statements would be useful if one individual
owns a controlling financial interest in several entities that are related in their operations. Combined
financial statements might also be used to present the financial position and results of operations of
entities under common management.
810-10-45-10
If combined financial statements are prepared for a group of related entities, such as a group of
commonly controlled entities, intra-entity transactions and profits or losses shall be eliminated, and
noncontrolling interests, foreign operations, different fiscal periods, or income taxes shall be treated in
the same manner as in consolidated financial statements.
Control is the primary basis for presenting consolidated financial statements. However, there are times
when combining the financial statements of related entities is more meaningful than presenting the
financial statements of the entities separately. ASC 810 states that combined financial statements may
be useful for related entities under common control or related entities with common management, though
there are no conditions specified under which combined financial statements would be required. Combined
financial statements are most frequently presented for filings in accordance with various statutory or
regulatory requirements.
The fundamental difference between combined and consolidated financial statements is that there is no
controlling financial interest present between or among the combined entities under either the variable
interest or voting interest models.
7.1.1
Common management
We believe that the determination of whether entities are under common management should be based
on individual facts and circumstances. To justify combined presentation, we would expect evidence to
exist that indicates that the subsidiaries are not operated as if they were autonomous. This evidence
could include:
A common chief executive officer
Common facilities and costs
Commitments, guarantees or contingent liabilities among the entities
Commonly financed activities
Combined financial statements
There could be other factors relevant to determining whether subsidiaries are under common
management.
The following illustration demonstrates these concepts.
Illustration 7-1: Presenting combined versus consolidated financial statements
Facts
Assume that Company S has 2,000 common shares and 1,000 preferred shares outstanding. The
preferred shareholders have the same rights as the common shareholders, except they do not have
the right to vote. Half of the 2,000 common shares outstanding are owned by Company P and the
other half by an individual who also owns all of the outstanding common shares of Company P. The
preferred shares of Company S are owned by a third party.
Analysis
In this situation, Company P does not control Company S directly or indirectly, and, therefore,
consolidation under either the variable interest or voting interest models is not appropriate. Combined
financial statements could be presented as long as combined statements are more meaningful than
presenting Company Ss separate financial statements.
7.1.2
Procedures applied in combining entities for financial reporting

The procedures applied to combining entities are the same as those applied when preparing consolidated
financial statements. All transactions between the entities in the combined presentation and the related
profit and loss must be eliminated. In addition, the accounting in combined financial statements for
noncontrolling interests, foreign operations, different fiscal periods and income taxes is the same as that
used in consolidated financial statements.
The reference to noncontrolling interests in ASC 810-10-45-10 relates to the noncontrolling interests in
each of the combining entities subsidiaries as reflected in the individual combining entities financial
statements. We believe interests held by parties outside of the control group in each of the respective
combining entities themselves would not constitute noncontrolling interests in the combined financial
statements. The fundamental difference between combined and consolidated financial statements is that
there is no direct controlling financial interest present between or among the combined entities.
Therefore, we believe equity holdings in each of the combining entities, regardless of who holds this
equity (that is, whether the equity is held by parties outside of the control group or not) should be
reflected as ownership interests in the combined financial statements.
Illustration 7-2:
Noncontrolling interests in combined financial statements
Assume that Company P consolidates Subsidiaries A, B and C, none of which it wholly owns. If
combined financial statements were to be prepared for Subsidiaries A and B, interests held by parties
other than Company P would not constitute noncontrolling interests in the combined financial
statements. Only the noncontrolling interests that would be reflected in Subsidiaries A and Bs
individual financial statements, if any, would be reflected as such in the combined financial
statements. For example, if Subsidiary A has an 80%-owned subsidiary (Subsidiary A1), the 20%
noncontrolling interest held by a third party in Subsidiary A1 would be reflected as noncontrolling
interest in the combined financial statements.
Parent-company financial statements
8.1
Purpose of and procedures for parent-company financial statements


Parent Entity Financial Statements
810-10-45-11
In some cases parent-entity financial statements may be needed, in addition to consolidated financial
statements, to indicate adequately the position of bondholders and other creditors or preferred
shareholders of the parent. Consolidating financial statements, in which one column is used for the
parent and other columns for particular subsidiaries or groups of subsidiaries, often are an effective
means of presenting the pertinent information. However, consolidated financial statements are the
general-purpose financial statements of a parent having one or more subsidiaries; thus, parent-entity
financial statements are not a valid substitute for consolidated financial statements.
ASC 810 permits the presentation of parent-company financial statements but clarifies that these
financial statements may not be issued as the primary financial statements of the reporting entity and
are not a valid substitute for consolidated financial statements.
Certain SEC registrants must present condensed parent-company financial information under Regulation
S-X, Rule 12-04, Condensed Financial Information of Registrant, in Schedule I of their Form 10-K. This
schedule is required when restricted net assets of consolidated subsidiaries exceed 25% of consolidated
net assets at the end of the fiscal year. Registrants are required to present information required by Rule
12-04 as a separate schedule or in the notes to the financial statements. Our publication, SEC annual
reports, provides more guidance for applying these quantitative tests and summarizes the related
disclosure requirements.
Not-for-profit entities 13 such as health care providers also occasionally prepare parent-company financial
statements. Consolidation with respect to not-for-profit entities is addressed in ASC 958.
8.1.1
Investments in subsidiaries
Parent-company financial statements generally present the parent companys investment in consolidated
subsidiaries under the equity method in accordance with ASC 323. Under ASC 805 and ASC 810, additional
investment activity in consolidated subsidiaries that does not result in a change in control is accounted for as
an equity transaction. Importantly, because ASC 323 uses step-acquisition accounting, basis differences may
exist between the application of the equity method and the parents proportion of the subsidiarys equity.
13
ASC 810-10-20 defines a not-for-profit entity as (a)n entity that possesses the following characteristics, in varying degrees, that
distinguish it from a business entity: (a) contributions of significant amounts of resources from resource providers who do not
expect commensurate or proportionate pecuniary return, (b) operating purposes other than to provide goods or services at a
profit, (c) absence of ownership interests like those of business entities. Entities that clearly fall outside this definition include the
following: (a) all investor-owned entities and (b) entities that provide dividends, lower costs or other economic benefits directly
and proportionately to their owners, members or participants, such as mutual insurance entities, credit unions, farm and rural
electric cooperatives and employee benefit plans.
Parent-company financial statements
This accounting is not specifically addressed by the accounting literature. Therefore, we believe a parent
that does not apply the equity method to their investments in consolidated subsidiaries and instead
determines the value at an amount equal to its proportionate share of the carrying amount of the
subsidiaries net assets should continue this practice. Otherwise, the equity and earnings of the parent
company in the parent-company financial statements may differ from the corresponding amounts in the
8.1.2
Investments in non-controlled entities

Investments accounted for at cost or under the equity method in consolidated financial statements
should follow that same basis in the parent-company financial statements. Also, their carrying amounts
should generally be the same on the parent-company financial statements and the consolidated financial
statements.
8.1.3
Disclosure requirements
When parent-company financial statements are presented but arent the primary financial statements of
the reporting entity, the notes to the financial statements should include a statement to that effect. In
addition, the accounting policy note should describe the policy used to account for investments in
subsidiaries. The following is an example of such a note.
Illustration 8-1:
Noncontrolling interests in combined financial statements
Note A Accounting Policies

Basis of Presentation. In the parent-company financial statements, the Companys investment in
subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries since the date of
acquisition. The Companys share of net income of its unconsolidated subsidiaries is included in
consolidated income using the equity method. Parent-company financial statements should be read in
conjunction with the Companys consolidated financial statements.
Consolidating financial statements
9.1
Purpose of consolidating financial statements

Consolidating financial statements are briefly mentioned in ASC 810-10-45-11s guidance on parententity financial statements, which says Consolidating financial statements, in which one column is used
for the parent and other columns for particular subsidiaries or groups of subsidiaries, often are an
effective means of presenting the pertinent information. Generally, they present the operating results,
financial position and cash flows of a parent and its subsidiaries (individually, or in groups) on a standalone basis in separate columns, and include columns with consolidating adjustments (e.g., elimination
entries) and totals for the consolidated reporting entity.
Reporting entities may present consolidating financial information for many reasons, including:
As a footnote to the entitys consolidated financial statements, following the relief provided for
certain issuers and guarantors of securities under SEC Rule 3-10 of Regulation S-X (Rule 3-10)
As supplementary information to the entitys consolidated financial statements (commonly referred

to as other financial information or, an OFI), for the benefit of certain financial statement users
(e.g., for management; for banks pursuant to loan covenant requirements)
This chapter primarily discusses condensed consolidating financial information prepared under Rule 310. However, many of the concepts discussed in this chapter also could apply to consolidating financial
statements prepared for other purposes.
9.2
Guarantor financial information prepared under Rule 3-10

Rule 3-10 generally requires subsidiaries to file separate financial statements if they are issuers of debt sold in
an SEC registered offering or are guarantors of registered debt issued by a parent. However, if certain
conditions are met, Rule 3-10 provides relief in which modified financial information (i.e., condensed
consolidating financial information or disclosure only information) related to these subsidiaries may be
presented in a footnote to the parent companys financial statements instead. See our publication, SEC annual
reports, and our publication Form 10-K and registration statement checklist supplement to GAAP disclosure
checklist (Ernst & Young Form No. A69) for more information on applying the provisions of Rule 3-10.
The remainder of this chapter focuses on preparing condensed consolidating financial information under
the relief provided in Rule 3-10.
9.2.1
Form and content of guarantor financial information

Excerpts from Accounting Standards Codification
Debt Overall
SEC Materials
470-10-S99-1 (Rule 3-10(h) of Regulation S-X)
(i) Instructions for preparation of the condensed consolidating financial information required by
paragraphs (c), (d), (e) and (f) of this section.
(1) Follow the general guidance in 210.10-01 for the form and content for condensed financial
statements and present the financial information in sufficient detail to allow investors to
determine the assets, results of operations and cash flows of each of the consolidating groups;
(2) The financial information should be audited for the same periods that the parent company
financial statements are required to be audited;
(4) The parent company's basis shall be "pushed down" to the applicable subsidiary columns to the
extent that push down would be required or permitted in separate financial statements of
the subsidiary;
(6) Provide a separate column for each subsidiary issuer or subsidiary guarantor that is not 100%
owned, whose guarantee is not full and unconditional, or whose guarantee is not joint and several
with the guarantees of other subsidiaries. Inclusion of a separate column does not relieve that
issuer or guarantor from the requirement to file separate financial statements under paragraph (a)
of this section. However, paragraphs (b) through (f) of this section will provide this relief if the
particular paragraph is satisfied except that the guarantee is not joint and several;
(7) Provide separate columns for each guarantor by legal jurisdiction if differences in domestic or
foreign laws affect the enforceability of the guarantees;
When companies prepare condensed consolidating financial information, Rule 3-10(i) instructs them to
follow the general guidance on interim financial statements in Article 10 of Regulation S-X regarding the
form and content of the condensed information. Rule 3-10(i) states that the financial information should
be presented in sufficient detail to allow investors to determine the assets, results of operations and cash
flows of the consolidating groups. This means that the level of detail should be consistent with what a
registrant is required to include in its interim financial statements on Form 10-Q (e.g., include all major
captions on the face of the financial statements). Since registrants rarely fully utilize the condensed
financial statements permitted by Article 10, a registrant may be able to present the Rule 3-10
information on an even more condensed level than its Form 10-Q presentation.
The condensed consolidating financial information should be presented for the same periods for which the
parent company presents financial statements (and audited for any periods for which audited financial
statements of the parent company are required). While Rule 3-10 does not address the presentation of
comprehensive income, the SEC staff has stated that the condensed consolidating financial information
should include a total for comprehensive income presented in either a single continuous statement or in two
separate but consecutive statements, following the requirements in ASU 2011-05 (codified in ASC 220). 14
The SEC staff also has emphasized the importance of the form and content of the condensed
consolidating financial information by reminding registrants that the individual columns in the condensed
consolidating financial information need to be in accordance with GAAP. 15
Included below is a list of the separate columns that may be required in preparing consolidating financial
information under Rule 3-10, depending on the facts and circumstances:
Parent
Subsidiary issuer(s)
Combined Subsidiary Guarantor(s)
Column for each Subsidiary Issuer and Subsidiary Guarantor that is not 100% owned, whose
guarantee is not full and unconditional, or whose guarantee is not joint and several 16
14
15
16
See Section 2515 of the SEC staffs Division of Corporation Finance Financial Reporting Manual.
Remarks by Craig Olinger, 4 December 2012, 2012 AICPA National Conference on Current SEC and PCAOB Developments
Under Rule 3-10, presenting this column does not relieve Subsidiary Issuers or Subsidiary Guarantors with these characteristics
from providing separate financial statements.
Column for each Subsidiary Guarantor by Legal Jurisdiction 17
Combined Subsidiary Non-Guarantors (if not minor)18
Consolidating adjustments
Total consolidated amounts
Condensed consolidating financial information is prepared on a legal entity basis. Determining which legal
entities of the consolidated group should be included in the separate columns involves understanding the
terms of the underlying contractual agreements and other documents of the registered debt. These
documents generally identify the issuers and guarantors by their legal entity names.
An entitys legal department may need to be involved to verify that the groupings of legal entities by
column are appropriate and that there have been no changes in entity structure. One of the objectives of
this disclosure is that the columns should be as comparable as possible over time. Therefore, careful
consideration should be given to how changes in an entitys structure should be reflected. For example, a
change in which a legal entity switches from being a guarantor to being a nonguarantor generally would
result in retrospective adjustment of prior period financial statements to reflect the new entity structure.
For internal reporting, entities often group or summarize financial information by region, product line,
brand, or industry (for example), but not by legal entity. Therefore, special adjustments will likely be
required when preparing condensed consolidating financial information on a legal entity basis to ensure
each column properly reflects all appropriate balances. Income taxes should be calculated on a separate
return basis by legal entity, and any related assets and liabilities should be allocated to those legal
entities. Likewise, other assets and liabilities (e.g., intellectual property intangibles) should be allocated
to the subsidiary that has legal title to the underlying item.
Special adjustments also may be required to "push down" the parents basis in the net assets of a
subsidiary to the applicable subsidiary column, in circumstances in which push down accounting would be
required or permitted under relevant SEC rules in the separate financial statements of the subsidiary.
When preparing condensed consolidating financial information, an entity should consider relevant SEC
rules, including those related to:
Regulation S-X Rule 3-10, Financial Statements of Guarantors, and Affiliates Whose securities
Collateralize an Issue Registered or Being Registered (ASC 470-10-S99-1)
Allocating certain charges incurred by a parent on behalf of a subsidiary and the accounting for and
disclosure of the subsidiary's income tax expense, in accordance with SAB Topic 1.B.1 (codified in
ASC 225-10-S99-3)
Pushing down balances from a parent to a subsidiary, in accordance with SAB Topic 5.J (codified in
ASC 805-50-S99-1) 19
Additional adjustments may be required to properly reflect intercompany balances. A common

circumstance in which adjustments are required is when a parent entity performs a treasury function on
behalf of its subsidiaries, and routinely transfers cash to and from the subsidiaries. Many times, there is
17
18
19
Under Rule 3-10, this column is required if domestic or foreign laws affect the enforceability of the guarantee.
Under Rule 3-10, this column is not required if the non-guarantor subsidiaries are minor (i.e., each of the subsidiarys total assets,
stockholders equity, revenues income from continuing operations before income taxes, and cash flows from operating activities
is less than 3% of the parent companys corresponding consolidated amount).
See our FRD publication, Business combinations, which has an appendix on push down accounting and other new basis issues.
no formal policy for recording these transactions for internal reporting purposes. These transactions may
be recorded inconsistently (e.g., as intercompany loans, intercompany payables and receivables, or as
adjustments to the subsidiary equity and the investment in subsidiary accounts).
Making adjustments to properly reflect these transactions in the condensed consolidating financial
information may require a detailed investigation of the nature of the transactions. For example, interestbearing assets would need to be recorded as loans, and the underlying terms of the loans would need to
be investigated to determine whether short-term or long-term classification is appropriate. Related
adjustments to properly reflect intercompany interest income and charges also may be required.
Additionally, intercompany transactions recorded as assets and liabilities that are noninterest bearing
should be investigated to determine if they are capital activities that should be recorded within equity.
Certain intercompany consolidation adjustments also may need to be pushed down to the various
columns. For example, see Section 9.2.2 for more information on how certain elimination entries are
treated when adjusting a parents investment in subsidiary account for its equity in a subsidiarys
earnings or losses.
As mentioned earlier, the SEC staff has emphasized the importance of the form and content of the
condensed consolidating financial information by reminding registrants that the individual columns in the
condensed consolidating financial information need to be in accordance with GAAP. For example,
intercompany receivables or liabilities should be classified as current or long-term assets or liabilities, not
as liabilities with debit balances or assets with credit balances. It is important to remember that the
relief to provide condensed consolidating financial information is allowed in lieu of filing separate, full
audited financial statements with the SEC. Therefore, the SEC staff may be more likely to insist on
amendments to correct errors than it would for errors in other notes to the financial statements.
Illustration 9-1 summarizes these and other common adjustments that may be required when preparing
condensed consolidating financial information.
Illustration 9-1:
Common adjustments that may be required when preparing condensed

consolidating financial information
Adjustments to push down the parents basis in a subsidiarys assets and liabilities, including any
goodwill and noncontrolling interest recognized as a result of the acquisition of such subsidiary (to
the extent permitted or required in ASC 805-50-S99-1)
Adjustments to properly classify intercompany balances, including investments in subsidiary

accounts, intercompany payables and receivables, and intercompany debt
Adjustments to allocate the effects of certain intercompany elimination entries to the controlling
and noncontrolling interest in the parent and subsidiary columns
Adjustments to properly allocate tax accounts and balances by legal entity
Allocations of certain costs incurred by the parent on behalf of its subsidiaries
Once all adjustments are posted, certain amounts that may be reflected separately on the face of the
condensed consolidating financial information often reconcile, based on the nature of their relationship
to one another. Illustration 9-2 includes examples of amounts that may reconcile, when this information
is prepared appropriately in accordance with Rule 3-10. Also, see Section 9.2.5 for example condensed
consolidating financial information, which further illustrates how certain amounts may reconcile.
Illustration 9-2:
9.2.2
Examples of amounts that may reconcile in condensed consolidating financial

information
Intercompany payables and intercompany receivables
Intercompany income and intercompany charges
Equity of the parent and consolidated equity attributable to the controlling interest
Earnings of the parent and consolidated earnings attributable to the controlling interest
Parents equity in the earnings of a subsidiary and earnings of the subsidiary attributable to the
Parents investment in subsidiary balance and equity of the subsidiary attributable to the
Certain cash flow activity relating to intercompany transactions
Debt Overall
SEC Materials
paragraphs (c), (d), (e), and (f) of this section.
(3) The parent company column should present investments in all subsidiaries based upon their
proportionate share of the subsidiary's net assets;
(5) All subsidiary issuer or subsidiary guarantor columns should present the following investments
in subsidiaries under the equity method:
(i) Non-guarantor subsidiaries;
(ii) Subsidiary issuers or subsidiary guarantors that are not 100% owned or whose guarantee
is not full and unconditional;
(iii) Subsidiary guarantors whose guarantee is not joint and several with the guarantees of
the other subsidiaries; and
(iv) Subsidiary guarantors with differences in domestic or foreign laws that affect the
enforceability of the guarantees;
Rule 3-10 requires that the parent company column present the parents investments in all subsidiaries
based upon its proportionate share of each subsidiarys net assets. The subsidiary issuer and subsidiary
guarantor columns also should present their investments in any subsidiaries that are reflected in other
columns in the same manner.
Investments in subsidiaries are initially recognized based on the amount of consideration transferred to
obtain control of the subsidiary. The balance is subsequently adjusted for changes in ownership that do not
result in a loss of control, subsidiary earnings or losses, the effects of elimination entries attributable to the
controlling interest, intercompany dividends, and other items that result in changes to the net assets of the
subsidiary (e.g., a contribution of assets by the parent). The investment in subsidiary balance generally
eliminates against equity of the subsidiary attributable to the controlling interest in consolidation.
Illustration 9-3 provides an example rollforward of an investment in subsidiary account, to highlight the
types of adjustments that are commonly made to an investment in subsidiary balance.
Illustration 9-3:
Rollforward of an investment in subsidiary account
Assume that on 1 January 20x1, Parent acquires a 100% controlling financial interest in Subsidiary A
for $100,000.
On 28 February 20x1, Parent transfers fixed assets with a carrying value of $10,000 to Subsidiary A.
On 31 March 20x1, Parent sells 10% of its interest in Subsidiary A to a third party, but retains control.
On 30 November 20x1, Parent sells inventory to Subsidiary A (downstream transaction) which
Subsidiary A holds at year end. Parent recognizes $10,000 of revenues on the transaction and
$8,000 in cost of revenues, for a net profit of $2,000. At year-end, the $2,000 in net profit is
eliminated in consolidation and the elimination is attributable entirely to the controlling interest.
For fiscal year 20x1, Subsidiary A has net income of $50,000, other comprehensive income of
$10,000, and declares of cash dividends $20,000 to its shareholders.
The carrying amount of the net assets of Subsidiary A at 31 December 20x1 is $150,000, excluding
the effects of any eliminations.
Included below is a rollforward of Parents Investment in Subsidiary A account for fiscal year 20x1:
Beginning balance (31 December 20x0)
Acquire 100% of Subsidiary A (1 January 20x1)

Transfer fixed assets to Subsidiary A (28 February 20x1)
Sell 10% of Subsidiary A stock (31 March 20x1)
Equity in fiscal year 20x1 net income of Subsidiary A (90%)
Equity in fiscal year 20x1 other comprehensive income (90%)
Dividend from Subsidiary A to Parent (90%)
Elimination of intercompany profit (100%)
Ending balance (31 December 20x1)
100,000
10,000
(11,000)
45,000
9,000
(18,000)
(2,000)
$ 133,000
The ending balance of Parents Investment in Subsidiary A account for fiscal year 20x1 equals its
proportionate share of the net assets of Subsidiary A (i.e., $135,000 = $150,000 x 90%), less the
effects of the elimination of intercompany profit attributable to the controlling interest ($2,000).
9.2.3
Cash flow information

To prepare condensed consolidating cash flow information on a separate legal entity basis, registrants
generally begin with the amounts determined for the condensed consolidating balance sheet and income
statement information. General ledger balances often do not include the special adjustments that may be
needed when preparing condensed consolidating financial information (see Illustration 9-1 for examples
of these adjustments).
Following the guidance on condensed cash flow statements in SEC Regulation S-X Article 10.01.4, 20 cash
flows from operating activities can be presented net (i.e., as a single line item).
Registrants may need to make additional special adjustments to classify certain intercompany activity
appropriately in the parent and subsidiary columns within the condensed consolidating cash flow
statements. We believe a common misconception is that all intercompany activity is an operating activity,
when some of it may relate to investing or financing activities or may be a noncash activity. Illustration 94 includes examples of common intercompany cash flow activity that should be evaluated carefully to
determine the appropriate classification. Also, see Section 9.2.5 for example condensed consolidating
statements of cash flows, which further illustrate how certain intercompany cash activity would be
classified. All intercompany cash flow activity would be eliminated in consolidation.
Illustration 9-4:
Examples of common intercompany cash flow activity
Cash flow activity related to intercompany payables/receivables
Cash flow activity related to the parents investment in subsidiary, including intercompany
dividend activity
Intercompany borrowing and repayment activity
Intercompany capital contributions
Purchases, sales and transfers of fixed and other assets among affiliates
Determining whether special adjustments are needed to classify intercompany activity appropriately
requires a careful evaluation of the facts and circumstances. For example, a subsidiary that either
receives or pays back intercompany loans or other advances from the parent or another subsidiary would
classify those transactions as financing activities. The parent or other subsidiary providing the loans or
other advances would classify the transactions as investing activities.
Cash flow activity related to the parents investment in subsidiary also generally requires special
adjustments to present certain activity separately. For example, a parents initial investment in the
subsidiary would be classified as an investing activity by the parent and a financing activity by the
subsidiary. Further, the parent would need to evaluate dividends received from the subsidiary to determine
whether they are a return on the investment (classified as operating activities) or a return of the investment
(classified as investing activities). The subsidiary would classify all dividend payments as financing activities.
The classification of these and other similar items on the statement of cash flows requires judgment. See
our FRD publication, Statements of cash flows, for further interpretive guidance in this area.
20
This guidance states that the condensed statement of cash flows may be abbreviated starting with a single figure of net cash
flows from operating activities.
9.2.4
Disclosure requirements under Rule 3-10

Debt Overall
SEC Materials
paragraphs (c), (d), (e), and (f) of this section.
(8) Include the following disclosure, if true:
(i) Each subsidiary issuer or subsidiary guarantor is 100% owned by the parent company;
(ii) All guarantees are full and unconditional; and
(iii) Where there is more than one guarantor, all guarantees are joint and several;
(9) Disclose any significant restrictions on the ability of the parent company or any guarantor to
obtain funds from its subsidiaries by dividend or loan;
(10) Provide the disclosures prescribed by 210.4-08(e)(3) with respect to the subsidiary issuers
and subsidiary guarantors;
(11) The disclosure:
(i) May not omit any financial and narrative information about each guarantor if the
information would be material for investors to evaluate the sufficiency of the guarantee;
(ii) Shall include sufficient information so as to make the financial information presented not
misleading; and
(iii) Need not repeat information that would substantially duplicate disclosure elsewhere in
the parent company's consolidated financial statements; and
(12) Where the parent company's consolidated financial statements are prepared on a
comprehensive basis other than U.S. Generally Accepted Accounting Principles, reconcile the
information in each column to U.S. Generally Accepted Accounting Principles to the extent
necessary to allow investors to evaluate the sufficiency of the guarantees. The reconciliation may
be limited to the information specified by Item 17 of Form 20-F (249.220f of this chapter). The
reconciling information need not duplicate information included elsewhere in the reconciliation of
the consolidated financial statements.
9.2.5
Example condensed consolidating financial information under Rule 3-10

Illustration 9-5:
Condensed consolidating statements of income

Year ended 31 December 20x1 (all amounts in dollars)
Subsidiary
guarantor
Parent
Nonguarantors
Eliminations
Consolidated
Net sales
Cost of goods sold
2,250
1,250
1,000
500
Gross profit
Selling, distribution, and
administrative expenses
1,000
500
1,500
125
525
375
1,025
475
(1)
15
(2) 125
125
(2)
25
Operating profit
Interest expense
Interest income
Intercompany charges
Intercompany income
Income before income taxes and equity
in net income of subsidiaries
Income taxes
Income before equity in net income of
subsidiaries
Equity in net income of subsidiaries
Net income
Net income attributable to parent
Comprehensive income
Comprehensive income attributable to
parent
(125)
80
(1) (15)
(2) (150)
(40)
14
(26)
(3) 267
241
(100)
(100)
3,150
1,650
(15)
15
(150)
150
475
80
335
(120)
100
(35)
215
65
(267)
254
215
65
(267)
254
(4) 241
(3) 215
297
13
(3)
395
(141)
13
52
(267)
(4) 241
255
85
(323)
314
17
297
255
68
(323)
17
297
The following amounts in the example condensed consolidating statements of income above reconcile
to one another (consistent with the guidance in Illustration 9-2):
(1)
Intercompany interest income of the Parent ($15) equals intercompany interest expense
recognized by the Subsidiary Guarantor ($15).
(2)
Intercompany income of the Parent ($150) equals the intercompany charges recognized by the
subsidiaries ($125 + $25 = $150).
(3)
Parents equity in net income of subsidiaries ($267) equals the total net income attributable to
Parent in the subsidiary columns ($215 + $52 = $267).
(4)
Parents net income ($241) equals the consolidated net income attributable to the Parent
($241).
Illustration 9-6:

Subsidiary
guarantor
Parent
Nonguarantors
Eliminations
Consolidated
Net sales
Cost of goods sold
3,250
1,850
1,525
875
Gross profit
Selling, distribution, and
administrative expenses
1,400
650
2,050
675
375
1,200
725
(5)
25
(6) 145
275
(6)
45
Operating profit
Interest expense
Interest income
Intercompany charges
Intercompany income
Income before income taxes and equity
in net income of subsidiaries
Income taxes
Income before equity in net income of
subsidiaries
Equity in net income of subsidiaries
Net income
Net income attributable to parent
Comprehensive income attributable
to parent
150
(150)
95
(5) (25)
(6) (190)
(30)
12
(18)
(7) 547
529
(200)
(200)
4,575
2,525
(25)
25
(190)
190
850
95
555
(120 )
230
(90 )
755
(198)
435
140
(547)
557
435
140
(547)
557
28
(8) 529
(7) 435
(7) 112
(547)
(8) 529
28
603
485
170
(621)
637
34
603
485
136
(621)
34
603
The following amounts in the example condensed consolidating statements of income above reconcile
to one another (consistent with the guidance in Illustration 9-2):
(5)
Intercompany interest income of the Parent ($25) equals intercompany interest expense
recognized by the Subsidiary Guarantor ($25).
(6)
Intercompany income of the Parent ($190) equals the intercompany charges recognized by the
subsidiaries ($145 + $45 = $190).
(7)
Parents equity in net income of subsidiaries ($547) equals the total net income attributable to
the Parent in the subsidiary columns ($435 + $112 = $547).
(8)
Parents net income ($529) equals consolidated net income attributable to the Parent ($529).
Illustration 9-7:
Condensed consolidating balance sheets

31 December 20x1 (all amounts in dollars)
Parent
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net
Intercompany receivables
Inventories
Other current assets
(9)
Total current assets

Property, plant, and equipment, net
Goodwill
Intangible assets
Total current liabilities

Long-term debt
Deferred income taxes
Stockholders equity:
Total parents stockholders equity
Total stockholders equity
Total stockholders equity and liabilities
Nonguarantors
Eliminations
5
235
50
200
25
45
50
10
90
15
(110)
425
285
290
45
(9)
(9)
Consolidated
430
515
210
(110)
1,045
(10) 466
125
300
95
30
45
5
(466)
155
345
100
896
1,035
290
(576)
1,645
15
25
15
(110)
300
270
(110)
570
Total assets
Liabilities and stockholders equity
Current liabilities:
Accounts payable
Other accrued liabilities
375
50
Subsidiary
guarantor
(9)
10
5
15
(9)
275
80
240
(9)
30
595
55
300
150
15
(11) 566
(10) 290
(10) 176
44
(466)
566
290
220
(466)
610
896
1,035
290
(576)
1,645
300
165
(11) 566
44
The following amounts in the example condensed consolidating balance sheets above reconcile to one
another (consistent with the guidance in Illustration 9-2):
(9)
Total intercompany receivables ($50 + $50 + $10 = $110) equal total intercompany payables
($5 + $80 + $25 = $110).
(10) The Parents investment in subsidiaries ($466) equals total equity of the subsidiaries
attributable to the Parent ($290 + $176 = $466).
(11) The Parents equity ($566) equals consolidated equity attributable to the Parent ($566).
Illustration 9-8:

31 December 20x2 (all amounts in dollars)
Parent
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net
Intercompany receivables
Inventories
Other current assets
(12)
Total current assets

Property, plant, and equipment, net
Goodwill
Intercompany notes receivable
Intangible assets
(13)
(14)
Total assets
Liabilities and stockholders equity
Current liabilities:
Accounts payable
Other accrued liabilities
Total current liabilities
Long-term debt
Intercompany notes payable
Deferred income taxes
Stockholders equity:
Total parents stockholders equity
Total stockholders equity
Total stockholders equity and liabilities
(12)
267
100
Subsidiary
guarantor
Nonguarantors
Eliminations
90
378
60
375
20
40
120
15
200
35
(175)
397
498
575
60
(12)
(12)
Consolidated
372
923
410
(175)
1,530
225
937
120
300
90
29
45
(225)
(937)
149
345
95
1,534
1,433
489
(1,337)
2,119
35
10
25
(175)
258
120
5
60
(12)
218
105
95
(12)
65
418
70
(175)
378
300
225
165
29
(225)
300
194
312
78
(937)
(15) 1,169
78
(15) 1,169
(13)
(14)
625
(14)
1,169
625
390
(937)
1,247
1,534
1,433
489
(1,337)
2,119
The following amounts in the example condensed consolidating balance sheets above reconcile to one
another (consistent with the guidance in Illustration 9-2):
(12) Total intercompany receivables ($100 + $60 + $15 = $175) equal total intercompany payables
($60 + $105 + $10 = $175).
(13) Intercompany notes receivable ($225) equal intercompany notes payable ($225).
(14) The parents investment in subsidiaries account ($937) equals total equity of subsidiaries
attributable to the parent ($625 + $312 = $937). Also, the roll forward of this account is as follows:
Beginning balance (Illustration 9-7)
466
Share of comprehensive income of subsidiary guarantor (Illustration 9-6)
485
Share of comprehensive income of subsidiary non-guarantor (Illustration 9-6)
136
Dividends received from subsidiary guarantor (Illustration 9-10)

Ending balance
(150)
$
937
(15) The Parents equity ($1,169) equals consolidated equity attributable to the Parent ($1,169).
Illustration 9-9:
Condensed consolidating statements of cash flows

Parent
Net Cash Provided by (Used for) Operating

Activities
Cash Provided by (Used for) Investing Activities:
Purchases of property, plant, and equipment
Net Cash Used for Investing Activities
Cash Provided by (Used for) Financing
Activities:
Additions to long-term debt
Proceeds from stock option exercises and
other
Excess tax benefits from share-based
payments
Intercompany dividends
Net Cash (Used for) Provided by Financing
Activities
Net Change in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
Cash and Cash Equivalents at End of Year
Subsidiary
guarantor
Nonguarantors
25
40
15
Eliminations
(17)
Consolidated
(150)
(70)
(5)
(5)
300
300
150
150
310
235
190
425
310
325
50
375
(16)
(150)
(150)
(130)
135
5
40
5
45
(17)
(5)
(5)
The following intercompany amounts have been separately classified in the example condensed
consolidating statements of cash flows above (consistent with the guidance in Illustration 9-4):
(16) Intercompany dividends paid to the Parent are classified as cash used for financing activities by
the Subsidiary Guarantor.
(17) The Parent classifies the intercompany dividends received from the Subsidiary Guarantor as
operating activities, since they are a return on the investment (see Section 9.2.3 for further
discussion). Since cash provided by (or used for) operating activities is presented at a net
amount as a single line item, the intercompany dividends received are not reflected separately
here. They eliminate against the intercompany dividend activity in Item (16) in consolidation.
Illustration 9-10:

Subsidiary
guarantor
Parent
Net Cash Provided by (Used for) Operating
Activities
Cash Provided by (Used for) Investing Activities:
Intercompany notes issued
(18)
Purchases of property, plant, and equipment
Net Cash Used for Investing Activities
Cash Provided by (Used for) Financing Activities:
Proceeds from stock option exercises and
other
Excess tax benefits from share-based
payments
Intercompany notes borrowing
Intercompany dividends
Net Cash (Used for) Provided by Financing
Activities
Net Change in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
Cash and Cash Equivalents at End of Year
107
Nonguarantors
230
(230)
Eliminations
Consolidated
(20)
(150)
(43)
(18)
225
(225)
(225)
225
6
4
10
(108)
375
267
(19)
(150)
(150)
85
5
90
(18)
225
225
(5)
45
40
(18)
(20)
(225)
150
(75)
10
(28)
425
397
The following intercompany amounts have been separately classified in the example condensed
consolidating statements of cash flows above (consistent with the guidance in Illustration 9-4):
(18) As reflected in Illustration 9-8, the Parent issued intercompany notes to the Subsidiary
Guarantor in 20x2. The Parent classifies the issuance of the intercompany notes as cash used
for investing activities. The Subsidiary Guarantor classifies the borrowing as cash provided by
financing activities. (See Section 9.2.3 for further discussion). These amounts are eliminated
in consolidation.
(19) Intercompany dividends paid to the Parent are classified as cash used for financing activities by
the Subsidiary Guarantor.
(20) The Parent classifies the intercompany dividends received from the Subsidiary Guarantor as
operating activities, since they are a return on the investment (see Section 9.2.3 for further
discussion). Since cash provided by (or used for) operating activities is presented at a net
amount as a single line item, the intercompany dividends received are not reflected separately
here. They eliminate against the intercompany dividend activity in Item (16) in consolidation.
10
Presentation and disclosures
10.1
Certain presentation and disclosure requirements related to consolidation

Disclosure
Consolidation Policy
810-10-50-1
Consolidated financial statements shall disclose the consolidation policy that is being followed. In most
cases this can be made apparent by the headings or other information in the financial statements, but
in other cases a footnote is required.
Parent with a Less-than-Wholly-Owned Subsidiary
810-10-50-1A
A parent with one or more less-than-wholly-owned subsidiaries shall disclose all of the following for
each reporting period:
a.
b.
c.
d.
Separately, on the face of the consolidated financial statements, both of the following:
1.
The amounts of consolidated net income and consolidated comprehensive income
2.
The related amounts of each attributable to the parent and the noncontrolling interest.
Either in the notes or on the face of the consolidated income statement, amounts attributable to
the parent for any of the following, if reported in the consolidated financial statements:
1.
Income from continuing operations
2.
Discontinued operations
3.
Extraordinary items.
Either in the consolidated statement of changes in equity, if presented, or in the notes to

consolidated financial statements, a reconciliation at the beginning and the end of the period of
the carrying amount of total equity (net assets), equity (net assets) attributable to the parent, and
equity (net assets) attributable to the noncontrolling interest. That reconciliation shall separately
disclose all of the following:
1.
Net income
2.
Transactions with owners acting in their capacity as owners, showing separately

contributions from and distributions to owners
3.
Each component of other comprehensive income.
In notes to the consolidated financial statements, a separate schedule that shows the effects of any
changes in a parents ownership interest in a subsidiary on the equity attributable to the parent.
10
810-10-50-1B
In the period that either a subsidiary is deconsolidated or a group of assets is derecognized in
accordance with paragraph 810-10-40-3A, the parent shall disclose all of the following:
10.1.1
a.
The amount of any gain or loss recognized in accordance with paragraph 810-10-40-5
b.
The portion of any gain or loss related to the remeasurement of any retained investment in the
former subsidiary or group of assets to its fair value
c.
The caption in the income statement in which the gain or loss is recognized unless separately
presented on the face of the income statement
d.
A description of the valuation technique(s) used to measure the fair value of any direct or indirect
retained investment in the former subsidiary or group of assets
e.
Information that enables users of the parents financial statements to assess the inputs used to
develop the fair value in item (d)
f.
The nature of continuing involvement with the subsidiary or entity acquiring the group of assets
after it has been deconsolidated or derecognized
g.
Whether the transaction that resulted in the deconsolidation or derecognition was with a related
party
h.
Whether the former subsidiary or entity acquiring a group of assets will be a related party after
deconsolidation.
Consolidated statement of comprehensive income presentation

ASC 810 requires that consolidated net income and consolidated comprehensive income of the
consolidated entity include the revenues, expenses, gains and losses from both the parent and the
noncontrolling interest. The FASB believes that consolidated financial statements are more relevant if
the user is able to distinguish between amounts attributable to both the owners of the parent company
and the noncontrolling interest. For the user to make that determination, the amounts of consolidated
net income and consolidated comprehensive income allocable to both the parents owners and the
noncontrolling interest should be presented on the face of the financial statements. In addition, the
amounts attributable to the parent for income from continuing operations, discontinued operations and
extraordinary items should be disclosed either on the face of the income statement or in the notes to the
consolidated financial statements. Earnings per share will continue to be calculated based on
consolidated net income allocable to the parents owners. (See Chapter 7 of our FRD publication,
Earnings per share, for additional discussion of how consolidated net income allocable to the
noncontrolling interest is treated in the calculation of earnings per share).
10.1.2
Reconciliation of equity presentation

ASC 810 also requires a reconciliation of the carrying amount of total equity from the beginning of the
period to the end of the period. This reconciliation includes total equity, equity allocable to the parent
and equity allocable to the noncontrolling interest. It should separately disclose net income, transactions
with owners acting in their capacity as owners (showing separately contributions from and distributions
to owners) and each component of other comprehensive income. For SEC registrants, this requirement is
satisfied by including equity allocable to the noncontrolling interest in the statement of changes in equity.
Entities not registered with the SEC are not required to include a statement of changes in equity. The
10
disclosure requirements related to this reconciliation can be satisfied by including a statement of changes
in equity or including the required information in the notes to the consolidated financial statements. In
addition to the reconciliation of the carrying amount of equity, the effect of any changes in the parents
ownership interest in a subsidiary on equity allocable to the parent should be disclosed in the notes to the
If material, Rule 5-02(31) of Regulation S-X requires registrants to present noncontrolling interest
amounts represented by preferred stock and applicable dividend requirements separately in a note.
10.1.2.1
Presentation of redeemable noncontrolling interests in equity reconciliation

The SEC staff has indicated that registrants with redeemable noncontrolling interests (that is, mezzanine
equity) should not include these items in any caption titled total equity in the reconciliation of equity
required under ASC 810-10-50-1A(c).
ASC 810-10-50-1A(c) and the SECs technical amendments to Regulation S-X Rule 3-04 require
registrants to reconcile total equity at the beginning of the period to total equity at the end of the period.
ASC 480-10-S99-3A specifies that securities that are redeemable at the option of the holder or outside
the control of the issuer are to be presented outside permanent equity (in the mezzanine section of the
statement of financial position) and prohibits such instruments from being included in any caption titled
total equity.
The SEC staff 21 has identified two potentially acceptable means of presentation to satisfy the
requirements of both ASC 480-10-S99-3A and ASC 810-10-50-1A(c):
Provide a column for redeemable noncontrolling interests in the equity reconciliation but exclude the
related amounts from any total column. For example, this column could be presented separately to
the right of the column reconciling total equity. In that case, the reconciliation could include a row for
net income or a supplemental table identifying the allocation of net income among controlling
interests, noncontrolling interests and redeemable noncontrolling interests.
Exclude redeemable noncontrolling interests from the equity reconciliation but provide a supplemental
table, reconciling the beginning and ending balance of redeemable noncontrolling interests. The
supplemental table may be in either the notes to the financial statements or the statement of
changes in equity and noncontrolling interests. In this case, the caption net income in the equity
reconciliation could note parenthetically the amount related to redeemable noncontrolling interests.
Other means of presenting the reconciliation of total equity may be acceptable and the
appropriateness of such presentation would be evaluated by the SEC staff based on the specific facts
and circumstances.
10.1.2.2
Interim reporting period requirements

ASC 810-10-50-1A(c) requires that a parent with one or more less-than-wholly-owned subsidiaries must
disclose equity reconciliations for each reporting period, which includes interim reporting periods. Some
reporting entities may choose to present this reconciliation in the form of a consolidated statement of
changes in equity. If a consolidated statement of changes in equity is not presented on an interim basis,
a reporting entity must provide the disclosure in the notes to the consolidated financial statements.
21
The SEC staffs views described here are included in the publicly available minutes of the Center for Audit Qualitys 23 June 2009
SEC Regulations Committee meeting.
10
We believe that the reconciliation of the carrying amount of total equity (net assets), equity (net assets)
attributable to the parent and equity (net assets) attributable to the noncontrolling interest should be
presented on a year-to-date basis. This approach is consistent with the presentation requirements for the
statement of cash flows, which provides information about the activity of balance sheet amounts (that is,
cash and cash equivalents) between periods.
However, it would also be acceptable for an issuer to provide a reconciliation of the relevant equity
amounts on a quarter-to-date basis in addition to the year-to-date disclosures.
10.1.3
Consolidated statement of financial position presentation

Although ASC 810 does not explicitly require that a subtotal for total parent shareholders equity be
presented on the face of the statement of financial position, we believe that, based on the example in
ASC 810-10-55-41, such presentation should be made. ASC 810-10-50-1A(c) requires that an entity
disclose a reconciliation at the beginning and the end of the period of the carrying amount of equity
attributable to the parent, either in the consolidated statement of changes in equity, if presented, or in
the notes to the consolidated financial statements. The illustrative example in ASC 810-10-55-41
presents a subtotal for the total parent shareholders equity. Therefore, we believe that an entity should
present a subtotal for the total parent shareholders equity on the face of the statement of financial
position separately from noncontrolling interest and before arriving at total equity.
Question 10.1
How should an insurer consolidate a controlled investment fund if a portion of the consolidated
investment fund is owned by the insurers separate accounts?
In accordance with ASC 944-80-25-12, the insurer should consolidate the investment fund in the
following manner:
The portion of the fund assets representing the contract holders interests should be included as
separate account assets and liabilities in accordance with ASC 944-80-25-3.
The remaining portion of the fund assets (including the portion owned by any other investors) should
be included in the general account of the insurer on a line-by-line basis.
Noncontrolling interests should not be included in the separate account liability but rather classified
as a liability or equity based on other applicable guidance.
It should be noted that under ASC 944-80-25-3, 22 when evaluating an entity for consolidation, an insurer
should not consider any separate account interests held for the benefit of policy holders to be the
insurers interests, nor should it combine any separate account interests held for the benefit of policy
holders with the insurers general account interest in the same investment.
See our FRD publication, Consolidation and the Variable Interest Model, for additional consolidation
considerations related to these funds.
22
The guidance applies if the separate account meets the conditions in ASC 944-80-25-2.
10
10.1.4
Consolidated statement of cash flows presentation

ASC 810 does not affect the statement of cash flow and therefore entities with noncontrolling interests
should continue to look to ASC 230 for guidance. ASC 230 requires entities to provide a reconciliation
of net income to net cash flows from operating activities regardless of whether the direct or indirect
method is used for presenting net cash flows from operating activities. Therefore, entities should start
with net income in their statement of cash flow presentation when applying the indirect method rather
than net income attributable to the parent. Illustration 10-1 provides an example of this presentation.
Illustration 10-1:
Starting point for indirect method
For Company A, assume for the years ended 31 December 20x9 and 20x8:
Net income was $1,200 and $1,000, respectively
Net income attributable to the noncontrolling interests was $240 and $200, respectively
Net income attributable to the Parent was $960 and $800, respectively
In preparing the statement of cash flows under the indirect method, Company A would begin with net
income including income attributable to the noncontrolling interests. Therefore, Company A would
begin with net income amounts of $1,200 and $1,000 for the years ended 31 December 20x9 and
20x8, respectively.
While ASC 230 does not provide specific guidance on the statement of cash flow presentation for
transactions with noncontrolling interest holders (e.g., dividends and purchases/sales of noncontrolling
interest while control is maintained), ASC 230-10-45-14 and 45-15 state that proceeds from issuing
equity instruments and payment of dividends and other distributions to owners, including outlays to
reacquire the enterprises equity instruments are financing activities. We believe that transactions with
noncontrolling interest holders, while control is maintained, should generally be reported as financing
activities in the statement of cash flows. This view is consistent with the economic entity concept that all
residual economic interest holders have an equity interest in the consolidated entity, even if the residual
interest is relative to a subsidiary, and with ASC 810s requirement to present noncontrolling interests in
the consolidated statement of financial position as a separate component of equity. This view is also
consistent with ASC 810s requirement that, with certain exceptions, changes in a parents ownership
interest in a subsidiary while the parent retains control must be accounted for as equity transactions.
10.1.4.1
Presentation of transaction costs in statement of cash flow

As discussed in Chapter 4 (See Section 4.1.5), companies will have to make a policy election concerning
whether to reflect transaction costs associated with purchases and sales of noncontrolling interests as an
expense in the consolidated statement of income or as a direct charge to equity. We believe the most
appropriate classification of transaction costs in the consolidated statement of cash flows would be
consistent with that accounting. Accordingly, if transaction costs are reflected as an expense, we believe
the related cash flows would be most appropriately reflected as an operating activity. Alternatively, if the
transaction costs are reflected as a direct charge to equity, we believe the related cash flows would be
most appropriately classified as a financing activity.
10
10.1.5
Disclosure
ASC 810 also requires disclosure of any gain/loss recognized on the deconsolidation of a subsidiary or
derecognition of a group of assets. The amount and classification of the gain/loss in the income statement
(see Section 6.1.8) are disclosed in the notes to the consolidated financial statements along with the
amount of the gain/loss related to the remeasurement of any retained interest in the deconsolidated
subsidiary or group of assets.
ASC 810 requires disclosure of a description of the valuation technique(s) used to measure the fair value
of any direct or indirect retained investment in a deconsolidated subsidiary or group of assets (e.g., a
discounted cash flow approach). Disclosure is also required of the information that enables users of the
parents financial statements to assess the inputs used to develop the fair value measurements for the
retained interest in the former subsidiary or group of assets.
For example, for a discounted cash flow approach, disclosures may include information on discount
rates and the assumed capital structure, capitalization rates for terminal cash flows, assumptions about
expected growth in revenues, expected profit margins, expected capital expenditures, expected
depreciation and amortization, expected working capital requirements and other assumptions that may
have a significant effect on the valuation, such as discounts for lack of marketability or lack of control, as
applicable. For a market approach, disclosures may include information on the valuation multiples used in
the analysis, a description of the population of the guideline companies or similar transactions from
which the multiples were derived, the timeliness of the market data used, the method by which the
multiples were selected (e.g., use of the median, use of an average, the extent to which the financial
performance of the subject company was compared to the relative performance of the guideline
companies), discounts for lack of marketability and lack of control, as applicable. An entity also is
required to disclose the valuation techniques used to measure an equity interest in an acquiree held by
the entity immediately before the acquisition date in a business combination achieved in stages.
An entity also must disclose the nature of its continuing involvement with the deconsolidated subsidiary
or the entity acquiring the group of assets and whether a related-party relationship exists. This disclosure
is intended to highlight circumstances in which a gain or loss is recognized, but the continuing
relationship may affect the ultimate amounts realized from the sale and resulting relationship.
10.1.5.1
Additional AOCI disclosures required subsequent to the adoption of ASU 2013-02

ASU 2013-02 amended ASC 220 to require an entity to report, in one place, information about
reclassifications out of AOCI. Entities also are required to present reclassifications by component when
reporting changes in AOCI balances. Refer to our 27 February 2013 Technical Line, What the new AOCI
disclosures will look like, for further information on these disclosure requirements. The Technical Line
includes examples of how to apply the requirements when an entity has noncontrolling interests.
Public companies must make the disclosures in fiscal years and interim periods within those years
beginning after 15 December 2012. For nonpublic companies, the requirements are effective for fiscal
years beginning after 15 December 2013 and interim and annual periods thereafter. The guidance
should be applied prospectively.
10
10.2
Illustration 10-2:
Presentation and disclosure example
The following financial statements and selected notes for Company P illustrate ASC 810s
presentation and disclosure requirements and are based on the comprehensive example in Chapters 4
and 6. The quantitative disclosures required by ASC 810-10-50-1A(c) reflected in the consolidated
statement of changes in equity in this example may instead be reflected in the notes to the
consolidated financial statements. This example does not include the qualitative disclosure
requirements of ASC 810-10-50-1B(d)-(h).
Company P
Consolidated Statement of Financial Position
31 December,
20X3
20X2
83,700
17,500
30,000
59,850
4,286
39,600
15,500
30,000
68,400
4,286
Total assets
195,336
157,786
Liabilities:
Accounts payable
Debt
75,000
27,000
75,000
27,000
102,000
102,000
1,500
15,440
3,300
57,240
1,500
5,747
3,150
40,770
77,480
15,856
51,167
4,619
93,336
195,336
55,786
157,786
Assets:
Cash
Inventory
Goodwill
Total liabilities
Equity:
Company P shareholders equity:
Common stock
Retained earnings
Total Company P shareholders equity
Total equity
In the consolidated statement of financial position, Company P separately identifies Company Ps

shareholders equity and the noncontrolling interest.
Consolidated net income is attributed to the controlling and noncontrolling interests.
10
Company P
Consolidated Statement of Income
(all amounts in dollars, except share amounts)
20X3
Year Ended 31 December,

20X2
20X1
Revenues
Cost of revenues
96,000
42,000
96,000
42,000
96,000
46,500
Gross profit
54,000
26,550
54,000
26,550
49,500
26,550
Consolidated net income

Less: Net income attributable to noncontrolling interest
27,450
10,980
27,450
2,745
22,950
6,885
Net income attributable to Company P
16,470
24,705
16,065
Earnings per share basic and diluted:

Net income attributable to Company P common shareholders
10.98
16.47
10.71
Weighted-average shares outstanding
1,500
1,500
1,500
Company P
Consolidated Statement of Comprehensive income
(all amounts of dollars)
Year Ended 31 December,
20X3
20X2
Net income
27,450
27,450
Other comprehensive income and reclassification adjustments:

Unrealized holding gain (loss) on available-for-sale securities and
reclassification adjustments
2,000
(1,500)
Total other comprehensive income and reclassification adjustments
2,000
(1,500)
29,450
Less: Comprehensive income attributable to noncontrolling

interest
Comprehensive income attributable to Company P
25,950
20X1
22,950
5,000
5,000
27,950
11,780
2,595
8,385
17,670
23,355
19,565
The consolidated statement of changes in equity includes an additional column representing the
changes in noncontrolling interest.
10
10
10
10
Company P also discloses the effects of changes in Company Ps ownership interest in its subsidiary on
Company Ps equity. This schedule would be presented as a note in the companys financial statements,
as follows.
Company P
Notes to Consolidated Financial Statements
Years Ended 31 December, 20X3, 20X2, 20X1
Net Income Attributable to Company P and Transfers (to) from the Noncontrolling Interest
Net income attributable to Company P

Transfers (to) from the noncontrolling interest
Increase in Company Ps paid-in capital for sale of 9,000 Company S common
shares
Decrease in Company Ps paid-in capital for purchase of 6,000 Company S
common shares
Net transfers (to) from noncontrolling interest
Change from net income attributable to Company P and transfers (to) from
20X3
20X2
20X1
16,470
24,705
16,065
9,693
(28,753)
9,693
(28,753)
26,163
(4,048)
16,065
This appendix provides a comprehensive example of the concepts described in this publication:
Control resulting from an increase in ownership interest
Changes in a parents ownership interest while the parent maintains control of the subsidiary
meeting the scope of ASC 810-10-45-21A
The elimination of intercompany transactions
Deconsolidation of a subsidiary
Work paper consolidating entries are numbered sequentially. While there are different ways to apply
consolidation procedures, this comprehensive example illustrates consolidation based on push down
accounting to the subsidiary (with the exception that certain elimination entries have not been pushed
back to the parent or subsidiary columns, as might otherwise be appropriate for the external reporting of
consolidating financial statements see Chapter 9 for more information). The subsidiary is a retailer of
luxury handbags qualifying as a business under ASC 805.
Illustration A-1:
Year 20X2
Facts:
As of 31 December 20X1, Company P (P) owns 40,000 shares of $1 par stock of Company S (S),
representing a 40% investment in S. S is a retailer of luxury handbags and a voting interest entity,
with net assets of $650,000. The carrying amount of Company Ps 40% investment in Company S
is $260,000.
P purchases an additional 40,000 shares of $1 par stock of S on 1 January 20X2 for $400,000,
increasing its ownership interest to 80% (assume no control premium). The fair value of S is
$1,000,000 and the fair value of the identifiable net assets of S is $800,000.
During the year, S sells inventory to P (upstream transaction) which P holds at year-end.
A summary of the effect of the transaction on Ss income statement is as follows:
Revenues
$ 100,000
Cost of revenues
Gross profit
70,000
$
During the year, P sells inventory to S (downstream transaction) which S holds at year end.
A summary of the effect of the transaction on Ps income statement is as follows:
Revenues
Cost of revenues
Gross profit
30,000
150,000
80,000
70,000
During the year, P makes an intercompany loan to S with principal of $1,000,000 and an annual
interest rate of 10%. S capitalizes the current years interest on the intercompany loan as part of
the cost to construct a building and remits cash to P for the annual interest incurred on the
intercompany loan.
Financial reporting developments Consolidated and other financial statements | A-1
During the year, P charges S a management fee of $1,500 for management services.
Company S has other comprehensive income of $25,000 from unrealized gains on available-forsale securities for the year.
The remaining useful life of the buildings and equipment at 1 January 20X2 is 10 years.
Assume inventory held by S at the beginning of the year and affected by the step up to fair value
on 1 January 20X2 is sold in the current year.
S pays cash dividends of $50,000 during the year, of which Ps share is $40,000.
Figure A-1:
Balance sheet for Company P, 31 December 20X1 (all amounts in dollars)
Cash
Accounts receivable
Inventory
640,000
190,000
184,000
220,000
260,000
1,494,000
Accounts payable
Other liabilities
Common stock
Retained earnings
125,000
250,000
200,000
500,000
419,000
1,494,000
Figure A-2:
Acquisition-date balance sheet for Company S, 1 January 20X2

Book value
Fair value
Cash
250,000
250,000
Available-for-sale securities
100,000
100,000
Accounts receivable
100,000
100,000
Inventory
150,000
200,000
200,000
300,000
800,000
950,000
Accounts payable
150,000
150,000
Common stock
100,000
550,000
800,000
Figure A-3:
Acquisition-date consolidating work paper to arrive at consolidated balance sheet,

1 January 20X2 (all amounts in dollars)
Adjustments
Cash
Accounts receivable
Inventory
Goodwill
(3)
Total assets
Company P
Company S
240,000
190,000
184,000
220,000
800,000
250,000
100,000
100,000
200,000
300,000
200,000
(1)
(2)
(4)
Debit
Credit
(5)
800,000
Consolidated
490,000
100,000
290,000
384,000
520,000
200,000
1,634,000
1,150,000
1,984,000
Accounts payable
Other liabilities
125,000
250,000
150,000
275,000
250,000
Total liabilities
375,000
150,000
525,000
200,000
500,000
559,000
80,000
720,000
Common stock
Retained earnings
equity
(6)
1,259,000
(7)
(8)
(9)
(9)
80,000
720,000
200,000
500,000
559,000
800,000
200,000
1,259,000
200,000
Total equity
1,259,000
1,000,000
1,459,000
1,634,000
1,150,000
1,984,000
Figure A-3 illustrates the consolidating entries between P and S for the 1 January 20X2 business
combination.
(1) Inventory of S is adjusted to fair value.
(2) Buildings and equipment of S are adjusted to fair value.
(3) The $400,000 investment purchased on 1 January 20X2 is added to the book value of the original
investment ($260,000). In addition, a gain is recognized on the original investment to increase it
to fair value. This gain on investment of $140,000 is calculated as the fair value of the original
40% investment ($400,000) less the book value of the original investment.
(4) Goodwill is determined by subtracting the fair value of Ss net identifiable assets acquired
($800,000) from the fair value of Ss net assets ($1,000,000). In push down accounting, the
goodwill is recorded on the books of S.
(5) Ps investment in S is eliminated.
(6) Retained earnings include the original retained earnings of P ($419,000) and the gain on the
investment in S ($140,000).
(7) In push down accounting, the basis of the equity is increased to equal the fair value of S less the
noncontrolling interest.
(8) Noncontrolling interest is calculated by taking the fair value of S ($1,000,000) and subtracting the
fair value of Ps 80% investment in S ($800,000). For illustrative purposes, no control premium is
assumed. In push down accounting, the noncontrolling interest is recorded on the books of S.
(9) Ss common stock and additional paid-in capital are eliminated.
Figure A-4:
Work paper of consolidated income statement, for year ended 31 December 20X2 (all
amounts in dollars)
Adjustments
Revenues
Cost of revenues
Gross profit
Depreciation expense
Management fee expense
Management fee revenue
Interest income
Gain on investment
Income from investment in Company S
Net income
Net income attributable to controlling
interest
Company P
500,000
200,000
300,000
60,000
40,000
1,500
100,000
140,000
72,000
513,500
Company S
300,000 (13)
(10)
145,000
155,000
(11)
60,000
3,500
1,500
(15)
(16)
(16)
90,000
(12)
513,500
18,000
(17)
Debit
250,000
Credit
(14)
150,000
(15)
1,500
1,500
100,000
72,000
6,000
Consolidated
550,000
195,000
355,000
120,000
43,500
140,000
331,500
12,000
72,000
319,500
Adjustments
Company P
Net income
Other comprehensive income:
Unrealized gain on available-for-sale
securities
Company S
Debit
Consolidated
151,500
331,500
513,500
90,000
(18)
423,500
20,000
533,500
25,000
115,000
(19)
20,000
25,000
356,500
23,000
(18)
6,000
17,000
533,500
(20)
(18)
Credit
92,000
339,500
Figure A-4 illustrates the consolidating entries between P and S for the year ended 31 December 20X2.
(10) The cost of revenues includes the fair value adjustment made to inventory at the beginning of
the year because the inventory was sold during the year.
(11) Depreciation expense includes 20X2 depreciation of $10,000 ($100,000 / 10 years) related to
the step up in fair value at 1 January 20X2.
(12) Net income attributable to the noncontrolling interest on a push down basis is based on the
percentage ownership interest of the noncontrolling interest (20%) and calculated as a
percentage of Ss income on a push down basis ($90,000 x 20%).
(13) Intercompany revenues from the upstream ($100,000) and downstream ($150,000) sales are
eliminated.
(14) Intercompany cost of revenues from the upstream ($70,000) and downstream ($80,000) sales
are eliminated.
(15) Intercompany revenue and expense for the management fee charged to S are eliminated.
(16) Company Ps interest income on the outstanding intercompany loan and income from
investment in company S ($72,000) are eliminated.
(17) The intercompany profits from the upstream sale are eliminated in Items (13) and (14). A
proportionate share of the upstream elimination is attributed to the noncontrolling interest
($30,000 x 20%). The elimination of the downstream sale is 100% attributable to the parent.
(18) These reflect the adjustments related to net income from the income statement above. See
explanations of the $423,500 debit to net income in Items (13) and (15) to (17). See
explanations of the $151,000 credit to net income in Items (14) and (15). See the explanation
for the $6,000 attribution to the noncontrolling interest in Item (19).
(19) Company Ps share of the unrealized gain on available-for-sale securities ($25,000 x 80%) is
eliminated.
(20) Comprehensive income attributable to the noncontrolling interest on a push down basis is based
on the percentage ownership interest of the noncontrolling interest (20%) and calculated as a
percentage of Ss comprehensive income on a push down basis ($115,000 x 20%).
Figure A-5:

Adjustments
Cash
Accounts receivable
Inventory
Intercompany loan
Goodwill
Total assets
Accounts payable
Intercompany loan
Other liabilities
Company P
200,000
104,000
(21) 150,000
106,000
340,000
(22) 1,000,000
(27) 852,000
2,752,000
(21)
Total liabilities
Common stock
Retained earnings
Accumulated other
equity
(28)
279,000
100,000
720,500
(21)
(21)
(22)
Company S
125,000
125,000
135,000
100,000
245,000
1,410,000
200,000
2,340,000
125,000
150,000
1,000,000
1,099,500
1,275,000
200,000
500,000
932,500
80,000
720,000
32,000
20,000
(29)
Debit
Credit
(23)
(24)
(25)
(26)
(27)
(23)
(26)
250,000
100,000
100,000
1,000,000
852,000
Consolidated
325,000
125,000
239,000
251,000
1,650,000
200,000
2,790,000
404,000
720,500
250,000
1,000,000
1,124,500
(32)
(32)
(34)
(33)
80,000
720,000
200,000
32,000
200,000
500,000
738,500
(35)
6,000
(30)
20,000
(33)
20,000
20,000
(31)
852,000
213,000
(35)
6,000
1,458,500
207,000
1,652,500
Total equity
1,652,500
1,065,000
1,665,500
2,752,000
2,340,000
2,790,000
The balance sheet is consolidated in Figure A-5, as follows:

(21) Intercompany receivables and payables are recorded from the sales transactions between P and S.
(22) An intercompany loan was made to finance the construction of a new building for S.
(23) Intercompany receivables and payables from the upstream ($100,000) and downstream
($150,000) sales are eliminated.
(24) Intercompany profit remaining in inventory at year end from the upstream ($30,000) and
downstream ($70,000) sales is eliminated.
(25) Interest capitalized from the intercompany loan is eliminated.
(26) Outstanding intercompany loan is eliminated.

(27) Ps investment in S is rolled forward from the prior period as shown below. Ps investment in S is
eliminated in consolidation.
31 December 20X1
Attributed net income
Dividends received
31 December 20X2 balance
$ 800,000
72,000
20,000
(40,000)
$ 852,000
(28) Ps retained earnings balance is rolled forward as follows:

Current year income
$ 419,000
513,500
$ 932,500
(29) Ss retained earnings balance is rolled forward as follows. In push down accounting, only
the earnings and dividends attributable to the controlling interest are recorded in retained
earnings.
Income attributable to controlling interest
Dividends declared
72,000
(40,000)
$ 32,000
(30) In push down accounting, only the other comprehensive income attributable to the controlling
interest is recorded by S ($25,000 x 80%).
(31) Noncontrolling interest, on a push down basis, is rolled forward as follows:
31 December 20X1
Creation of noncontrolling interest
Attributed net income
Dividends received
200,000
18,000
5,000
(10,000)
$ 213,000
(32) The common stock and additional paid-in capital of S are eliminated.
(33) The retained earnings and AOCI of Company S are eliminated.
(34) This adjustment represents the net effects of the intercompany eliminations in Items (13) through
(17) of the income statement work paper in Figure A-4 (except for the effect of the elimination
of income on investment in Company S of $72,000, which is incorporated into Item (33) above).
(35) The intercompany profit from the upstream sale is proportionately eliminated from the
noncontrolling interest (see Item (17) in Figure A-4). Since the entire effect of eliminating the
intercompany profit on the upstream sale ($30,000) has been attributed to the controlling
interest via Item (34), the noncontrolling interests proportionate share ($30,000 x 20%) must
be reclassified from retained earnings to the noncontrolling interest via this entry. For
illustrative purposes, this entry has been made as a consolidation entry; however, it typically
would be made directly to the retained earnings and noncontrolling interest on Ss books and to
retained earnings and investment in Company S on Ps books.
Illustration A-2:
Year 20X3
Facts:
P sells a 20% interest in S on 1 January 20X3 for $300,000.
During the year, S sells inventory to P, which P holds at year end. A summary of the effect of the
transaction on Ss income statement is as follows:
Revenues
Cost of revenues
Gross profit
$ 130,000
50,000
$ 80,000
During the year, P sells inventory to S, which S holds at year end. A summary of the effect of the
transaction on Ps income statement is as follows:
Revenues
Cost of revenues
$ 100,000
60,000
Gross profit
40,000
The intercompany loan of $1,000,000 remains outstanding. Construction on the building is

complete, so S does not capitalize the interest payment for the current year. Depreciation begins
on the completed building (including the depreciation of the previously capitalized interest). The
useful life of the building is 10 years.
During the year, P charges S a management fee of $1,500 for management services.
S has other comprehensive income for the year of $15,000 from unrealized gains on available-forsale securities.
All inventory held by S and P at 31 December 20X2 resulting from upstream and downstream
intercompany sales is sold to a nonaffiliated party.
S pays cash dividends of $50,000 during the year, of which Ps share is $30,000.
Figure A-6:
Work paper of consolidated income statement for year ended 31 December 20X3 (all
amounts in dollars)
Company P
600,000
200,000
Company S
400,000
125,000
Gross profit
Depreciation expense
Management fee expense
Management fee revenue
Interest income
Interest expense
Company S
400,000
70,000
30,000
1,500
100,000
275,000
125,000
3,500
1,500
100,000
27,000
Net income
Net income (loss) attributable to
428,500
45,000
Revenues
Cost of revenues
Net income attributable to controlling

interest
428,500
(36)
18,000
27,000
(37)
(42)
(43)
(44)
Adjustments
Debit
Credit
230,000
(38)
110,000
(39)
100,000
(40)
10,000
(41)
1,500
(43)
100,000
1,500
100,000
27,000
Consolidated
770,000
115,000
655,000
185,000
33,500
436,500
(45)
32,000
(46)
12,000
(2,000)
438,500
Company P
Company S
Debit
Adjustments
Credit
Net income
Other comprehensive income:
Unrealized gain on available-for-sale
securities
428,500
45,000
(47)
358,500
9,000
15,000
(44)
9,000
437,500
60,000

noncontrolling interests

437,500
(48)
24,000
(47)
321,500
Consolidated
436,500
15,000
451,500
(47)
32,000
(47)
12,000
36,000
4,000
447,500
Figure A-6 illustrates the consolidating entries between P and S for the year ended 31 December 20X3.
(36) Net income attributable to the noncontrolling interest on a push down basis is based on the new
percentage ownership interest of the noncontrolling interest (40%) and calculated as a
percentage of Ss income on a push down basis ($45,000 x 40%).
(37) Intercompany revenues from the upstream ($130,000) and downstream ($100,000) sales are
eliminated.
(38) Intercompany cost of revenues from the upstream ($50,000) and downstream ($60,000) sales
is eliminated.
(39) Reversal of elimination of intercompany profit in inventory held by S and P at 31 December
20X2 to cost of revenues as inventory is sold to a nonaffiliated party during the first inventory
turn of the year. (For reference, see Item (24) in Figure A-5).
(40) Excess depreciation of $10,000 ($100,000 / 10 years) due to capitalized interest in the prior
year is eliminated.
(41) Intercompany expense for the management fee charged to S is eliminated.
(42) Intercompany revenue for the management fee charged to S is eliminated.
(43) Interest income and expense from the intercompany loan are eliminated.
(44) Company Ps income from investment in Company S ($27,000) and Company Ps share of the
unrealized gain on available-for-sale securities ($15,000 x 60%) are eliminated.
(45) The intercompany profits from the upstream sale are eliminated in Items (37) and (38). A
proportionate share of the upstream elimination is attributed to the noncontrolling interest
($80,000 x 40%). The elimination of the downstream sale is 100% attributable to the parent,
and therefore no portion of the elimination is attributed to the noncontrolling interest.
(46) The intercompany profit from 20X2 on the upstream sale is realized in the current year because
the inventory was sold to a nonaffiliated party (for reference, see Item (39)). A proportionate
share of the profit is attributable to the noncontrolling interest ($30,000 x 40%).
(47) Adjustments to net income from the income statement. See Items (37) to (44) above for
explanations of adjustments.
(48) Comprehensive income attributable to the noncontrolling interest on a push down basis is based
on the percentage ownership interest of the noncontrolling interest (40%) and calculated as a
percentage of Ss comprehensive income on a push down basis ($60,000 x 40%).
Figure A-7:

Adjustments
Company P
Cash
Accounts receivable
Inventory
Intercompany loan
Goodwill
Total assets
310,000
230,000
100,000
300,000
500,000
1,000,000
(49)
645,000
3,085,000
330,000
140,000
160,000
130,000
260,000
1,285,000
200,000
2,505,000
190,000
130,000
588,000
908,000
330,000
100,000
1,000,000
1,430,000
Accounts payable
Intercompany loan
Other liabilities
Total liabilities
Common stock
Retained earnings
Accumulated other
equity
Total equity
Company S
Debit
640,000
140,000
390,000
440,000
1,695,000
200,000
3,505,000
520,000
588,000
1,108,000
(50)
230,000
(53) 1,000,000
(56)
(56)
(57)
60,000
532,000
29,000
(60)
(60)
(62)
(64)
(66)
(63)
60,000
532,000
200,000
10,000
12,000
29,000
(49)
24,000
(58)
24,000
(63)
24,000
2,177,000
2,177,000
(59)
645,000
430,000
1,075,000
(67)
44,000
3,085,000
Consolidated
(50)
230,000
(51)
120,000
(52)
90,000
(53) 1,000,000
(54)
645,000
200,000
(49)
592,000
(55) 1,361,000
Credit
(61)
(61)
(65)
200,000
598,000
1,177,000
6,000
6,000
32,000
24,000
(66)
1,999,000
398,000
2,397,000
12,000
2,505,000
3,505,000
The balance sheet is consolidated in Figure A-7, as follows:

(49) P sold a 20% interest in S for $300,000 on 1 January 20X3, which represented 25% of Ps
investment in S. The adjustment to record this transaction on Ps balance sheet is as follows:
Cash
AOCI (25% of $20,000)
300,000
5,000
Investment in Company S (25% of $852,000)

Additional paid-in capital (APIC)
213,000
92,000
Ps Investment in Company S is rolled forward as follows:

$ 852,000
25% of Investment in Company S sold on 1 January 20x3

Share of 20x3 earnings of Company S
27,000
Share of 20x3 other comprehensive income of Company S

Share of 20x3 dividends of Company S
(213,000)
9,000
(30,000)
$ 645,000
Ps additional paid-in capital is rolled forward as follows:

Adjustment related to sale of 20% interest in Company S
$ 500,000
92,000
$ 592,000
Ps AOCI is rolled forward as follows:

20% interest in Company S sold 1 January 20x3
Share of 20x3 other comprehensive income of Company S
20,000
(5,000)
9,000
24,000
(50) Intercompany receivables and payables from the upstream ($130,000) and downstream
($100,000) sales are eliminated.
(51) Intercompany profit remaining in inventory at year end from the upstream ($80,000) and
downstream ($40,000) sales is eliminated.
(52) Interest capitalized in 20X2 from the intercompany loan is eliminated ($100,000), less currentyear excess depreciation ($10,000).
(53) Outstanding intercompany loan is eliminated.
(54) Ps investment in S is eliminated.
(55) Ps retained earnings balance is rolled forward as follows:
Current year income
$ 932,500
428,500
$1,361,000
(56) P sold a 20% interest in S for $300,000 on 1 January 20X3 (20,000 shares of $1 par stock).
The carrying amount of the net assets of S as of 1 January 20X3 was $1,065,000 (Figure A-5).
This amount excludes the effects of intercompany profit eliminations see Item (61). The
adjustment to record this transaction on Ss balance sheet is as follows.
Common stock
APIC
20,000
188,000
AOCI (25% of $20,000)
5,000
Noncontrolling interest (20% x $1,065,000)
213,000
Ss common stock is rolled forward as follows (see Items (58) and (59) for rollforwards of AOCI
and noncontrolling interest):
80,000
(20,000)
$ 60,000
Ss APIC is rolled forward as follows (see Items (58) and (59) for rollforwards of AOCI and
noncontrolling interest):
$ 720,000
(188,000)
$ 532,000
(57) Ss retained earnings balance is rolled forward as follows (in push down accounting, only the
earnings and dividends attributable to the controlling interest are recorded in retained earnings).
Income attributable to controlling interest
Dividends paid
32,000
27,000
(30,000)
$ 29,000
(58) AOCI is rolled forward as follows:

20% interest in Company S sold 1 January 20x3
Comprehensive income attributable to controlling interest
20,000
(5,000)
9,000
24,000
(59) Noncontrolling interest, on a push down basis, is rolled forward as follows:

Additional interest sold by P
Current year income
Current year other comprehensive income
Dividends received
$ 213,000
213,000
18,000
6,000
(20,000)
$ 430,000
(60) The common stock and APIC of S are eliminated.

(61) This entry carries forward the effect on Ps equity of reclassifying to the noncontrolling interest
its proportionate share of the prior years (20x2) intercompany profit elimination (see Item (35)
in Figure 4-5). The total amount reclassified ($12,000) is calculated using the noncontrolling
interests revised ownership percentage (30,000 x 40%). The portion of this amount resulting
from the change in ownership transaction (30,000 x 20%) is recorded to Ps APIC balance (see
Section 4.1.2 of Chapter 4). See Item (67) for the other side to this adjustment, which reduces
noncontrolling interest for the effects of this reclassification. For illustrative purposes, this entry
has been made as a consolidation entry; however, the effects of this entry typically would be
made directly to Company Ps and Company Ss books.
(62) This entry carries forward the net effects of the intercompany elimination entries in the prior
years (20x2) income statement work paper (for reference, see Item (34) in Figure A-5).
(63) The retained earnings and AOCI of Company S are eliminated.
(64) This adjustment represents the net effects of the intercompany eliminations in Items (37)
through (43) of the current year (20x3) income statement work paper in Figure A-6. This
adjustment excludes the effect on retained earnings of eliminating intercompany income on
investment in Company S ($27,000), which is incorporated into Item (63) above.
(65) The entire effect of eliminating the intercompany profit on the upstream sale ($80,000) has
been attributed to the controlling interest via Item (64). Therefore the noncontrolling interests
proportionate share of the elimination entry ($80,000 x 40%) must be reclassified from retained
earnings (via this entry) to the noncontrolling interest (via Item (67)). For illustrative purposes,
this entry has been made as a consolidation entry; however, it ordinarily would be made directly
to the retained earnings and noncontrolling interest on Ss books.
(66) The intercompany profit from Year 20X2 on the upstream sale is realized in the current year
because the inventory was sold externally (see Item (39) in Figure A-6 and Item (64) above). A
proportionate share of the profit is attributable to the noncontrolling interest ($30,000 x 40%) and
therefore is reclassified from retained earnings to the noncontrolling interest through this entry.
For illustrative purposes, this entry has been made as a consolidation entry; however, it ordinarily
would be made directly to the retained earnings and noncontrolling interest on Ss books.
(67) This entry represents the noncontrolling interests proportionate share of the elimination of
intercompany profit on upstream sales in the prior year ($12,000 - see Item (61)) and current
year ($32,000 - see Item (65)). (The effect of the prior year elimination ($12,000) is reversed
upon sale of the inventory in the current year see Item (66)). For illustrative purposes, this
entry has been made as a consolidation entry; however, it typically would be made directly to
the retained earnings and noncontrolling interest on Ss books and to retained earnings and
investment in Company S on Ps books.
Illustration A-3:
Year 20X4
As of 31 December 20X3, P owns 60% of S, which has net assets of $945,000 (after pushing down
intercompany profit eliminations). The carrying amount of the noncontrolling interests 40% interest in
Company S is $398,000, which includes $16,000 of AOCI.
Facts:
P sells an additional 15% of its ownership for $300,000, assuming no control premium on
Company S, on 1 January 20X4, resulting in a loss of control and deconsolidation of S on 1
January 20X4. The fair value of the retained 45% interest in S is $900,000.
The fair value of the intercompany loan on 1 January 20X4 is $1,000,000.
Figure A-8:
Consolidating work paper to arrive at consolidated balance sheet, 1 January 20X4

Adjustments
Company P
Cash
Accounts receivable
Inventory
Intercompany loan
Total assets
Accounts payable
Intercompany loan
Other liabilities
Total liabilities
Common stock
Retained earnings
(68)
310,000
230,000
100,000
300,000
500,000
1,000,000
645,000
Debit
(69)
(70)
Credit
300,000
100,000
(70)
(71)
(72)
100,000
80,000
255,000
3,085,000
190,000
130,000
588,000
Consolidated
610,000
330,000
220,000
500,000
1,000,000
900,000
3,560,000
(70)
(70)
130,000
130,000
908,000
320,000
588,000
908,000
200,000
(73)
(75)
6,000
677,000
200,000
598,000
1,854,000
592,000
1,361,000
(74)
184,000
Accumulated other comprehensive

income
24,000
(75)
24,000

2,177,000
2,652,000
Total equity
2,177,000
2,652,000
3,085,000
3,560,000
Figure A-8 illustrates the deconsolidating entries between P and S on Ps balance sheet, as follows:
(68) The creditor interest in S would be adjusted to fair value. For illustrative purposes, the carrying
value of the intercompany loan is equal to the fair value of the intercompany loan at the date of
deconsolidation.
(69) Cash is received on the sale of 15% interest.
(70) Intercompany receivable and payable are reclassified to accounts receivable and accounts payable.
(71) The intercompany profit included in inventory held by P at 1 January 20X4 is eliminated.
(72) The retained 45% interest in S is adjusted to fair value.
(73) This APIC adjustment relates to the sale of a 20% interest in S in 20X3. See Item (61) in Figure
A-7 for further explanation.
(74) Retained earnings is adjusted for all prior intercompany adjustments related to P that were
made in consolidation. See Items (34) through (35) in Figure A-5 and Items (64) through (66) in
Figure A-7.
(75) AOCI, which relates exclusively to Company S, is derecognized.
(76) The gain on sale of Company S is recorded. The gain is calculated as follows:
Proceeds
Fair value of retained interest
Carrying value of noncontrolling interest
AOCI attributable to P
$ 300,000
900,000
398,000
24,000
Carrying amount of Ss net assets

Gain
1,622,000
(945,000)
$ 677,000
On a consolidated basis (i.e., after push down adjustments), Company Ss assets, liabilities and
noncontrolling interest should be derecognized, and the cash proceeds and gain should be
recognized through the following journal entry. The amounts reflected for inventory and for
buildings and equipment, net include the effects of pushing down intercompany eliminations
of $40,000 (Item (51) in Figure A-7) and $90,000 (Item (52) in Figure A-7), respectively:
Cash
Accounts payable
Intercompany loan
AOCI
Cash (of Company S)
Accounts receivable
Inventory
Goodwill
Gain
300,000
398,000
330,000
1,000,000
100,000
24,000
900,000
330,000
140,000
160,000
130,000
220,000
1,195,000
200,000
677,000
Comparison of ASC 810 and IFRS 10

The following table compares certain significant aspects of ASC 810 and IFRS 10, Consolidated Financial
Statements. IFRS 10 replaced portions of IAS 27(R), Consolidated and Separate Financial Statements, and
is effective for years beginning after 1 January 2013, with early adoption permitted. The requirements
described in this table were formerly part of IAS 27(R) and were not changed by IFRS 10.
Valuation of
noncontrolling
interest in a
business
combination
achieved in stages
(commonly called a
step acquisition).
Reporting
noncontrolling
interest in the
consolidated
statement of
financial position
Reporting the
noncontrolling
interest in the
consolidated
income statement
ASC 810
IFRS 10 (formerly IAS 27(R))
Noncontrolling interests share of identifiable

net assets recognized at fair value at date
control is obtained. Step acquisitions/disposals
are accounted for as equity transactions if
control is maintained.
Companies may elect to recognize the

noncontrolling interest at fair value
(consistent with ASC 810) or its
proportionate share of the fair value of
identifiable net assets. If the fair value
method is elected, 100% of the goodwill is
recognized in the parents consolidated
financial statements (consistent with
Statement 160). If the proportionate share
method is elected, only the controlling
interests share of goodwill is recognized.
Redeemable noncontrolling interest is

measured under ASC 480-10-S99-3A for SEC
registrants.
Noncontrolling interest is reported as a

separate component of consolidated
stockholders equity.
IFRS 10 is consistent with ASC 810, except

for redeemable noncontrolling interest.
Redeemable noncontrolling interest is

classified under ASC 480-10-S99-3A for SEC
registrants.
Losses are allocated to the noncontrolling
interests even if the losses exceed the
noncontrolling interests basis in the equity
capital of the subsidiary, thus resulting in a
contra-equity (that is, deficit) balance.
IFRS 10 is consistent with ASC 810.
Amounts that are attributed to the

noncontrolling interest are reported as part of
consolidated net income and not as a separate
component of income or expense. Disclosure
of the amounts attributed between controlling
and noncontrolling interests on the face of the
income statement is required.

Earnings and comprehensive income are
attributed to the controlling and noncontrolling
interests based on a substantive profit sharing
agreement (or relative ownership percentage if
there is no substantive profit sharing
arrangement).
Financial reporting developments Consolidated and other financial statements | B-1
Changes in
ownership interest
in a subsidiary
without loss of
control
ASC 810
IFRS 10 (formerly IAS 27(R))
Transactions that result in decreases in a

parents ownership interest in a subsidiary in
either of the following without a loss of control
are accounted for as equity transactions in the
consolidated entity (that is, no gain or loss is
recognized):
IFRS 10 is consistent with US GAAP, except

that IFRS 10 applies to all subsidiaries,
even those that are not businesses or
nonprofit activities and those that involve
sales of in-substance real estate or a
conveyance of oil and gas mineral rights.
Loss of control of a
subsidiary
A subsidiary that is a business or a

nonprofit activity, except for either of the
following:
A sale of in-substance real estate
A conveyance of oil and gas mineral

rights
A subsidiary that is not a business or a

nonprofit activity if the substance of the
transaction is not addressed directly by
other ASC Topics
In certain transactions that result in a loss of

control of a subsidiary or a group of assets,
any retained noncontrolling investment in the
former subsidiary or group of assets is
remeasured to fair value on the date control is
lost. The gain or loss on remeasurement is
included in income along with the gain or loss
on the ownership interest sold.
IFRS 10 is generally consistent with US

GAAP, except that the guidance in IFRS 10
applies to all subsidiaries, even those that
are not businesses or nonprofit activities or
those that involve sales of in-substance real
estate or conveyance of oil and gas mineral
rights.
Further, unlike US GAAP, IFRS 10 does not

address whether its guidance should be
applied to transactions involving
nonsubsidiaries that are businesses or
Loss of control of a subsidiary that is a
business or a nonprofit activity, except for nonprofit activities. That is, IFRS 10 does
not address the derecognition of assets
either of the following:
outside the loss of control of a subsidiary.
This accounting is limited to the following

transactions:

rights
Loss of control of a subsidiary that is not a

business or a nonprofit activity if the
substance of the transaction is not
addressed directly by other ASC Topics
The derecognition of a group of assets

that is a business or a nonprofit activity,
except for either of the following:

rights
Financial reporting developments Consolidated and other financial statements | B-2
Summary of important changes

The following highlights important changes to this FRD since the November 2013 edition:
Chapter 1:
Chapter 3:
Section 1.4 was updated to provide certain additional interpretive guidance on the effect on
consolidation procedure when a parent and subsidiary have different fiscal year ends.
Section 1.5 was added to provide guidance in circumstances when a parent has the same fiscal year
end as a subsidiary, but uses subsidiary financial statements that are prepared as of an earlier date
(i.e., on a lag) for consolidation purposes.
Chapter 4:
Chapter 6:
Section 3.1.1 and Illustration 3-1 were updated to provide additional interpretive guidance on how
to evaluate the substance of a profit sharing arrangement and attribute net income or loss and
comprehensive income or loss to controlling and noncontrolling interest holders.
Section 4.1.3.1 was updated to provide additional cross references to guidance relating to foreign
currency translation adjustments in our FRD publication, Foreign currency matters.
Section 6.1 was updated to briefly highlight the FASBs new revenue recognition standard, which will
affect the accounting for certain transactions that are currently accounted for under the
deconsolidation and derecognition guidance in ASC 810.
Section 6.1.5.1 was updated and Section 6.1.5.2 was removed. These sections discussed the
accounting for foreign currency translation adjustments upon the loss of control over a foreign
subsidiary or certain groups of assets within a foreign subsidiary before and after the adoption of
ASU 2013-05. The updates to Section 6.1.5.1 provide additional cross references to the guidance on
these transactions in our FRD publication, Foreign currency matters.
Section 6.1.12 was added to provide a cross reference to our FRD publication, Business
combinations, for a discussion of the accounting and reporting by the transferring entity for the
transfer of certain subsidiaries or certain groups of assets between entities under common control.
Financial reporting developments Consolidated and other financial statements | C-1
Abbreviations used in this publication

Abbreviation
FASB Accounting Standards Codification
ASC 220
ASC 225
ASC 230
ASC 250
ASC 310
ASC 320
ASC 323
ASC 350
ASC 360
ASC 450
ASC 460
ASC 470
ASC 480
ASC 605
ASC 710
ASC 740
ASC 805
ASC 810
ASC 815
ASC 825
ASC 830
ASC 835
ASC 845
ASC 860
ASC 932
ASC 944
ASC 958
ASC 970
ASC 976
ASC 980
ASU 2011-05
ASU 2011-10
FASB ASC Topic 220, Comprehensive Income

FASB ASC Topic 225, Income Statement
FASB ASC Topic 230, Statement of Cash Flows
FASB ASC Topic 250, Accounting Changes and Error Corrections
FASB ASC Topic 310, Receivables
FASB ASC Topic 320, Investments Debt and Equity Securities
FASB ASC Topic 323, Investments Equity Method and Joint Ventures
FASB ASC Topic 350, Intangibles Goodwill and Other
FASB ASC Topic 360, Property, Plant, and Equipment
FASB ASC Topic 450, Contingencies
FASB ASC Topic 460, Guarantees
FASB ASC Topic 470, Debt
FASB ASC Topic 480, Distinguishing Liabilities from Equity
FASB ASC Topic 605, Revenue Recognition
FASB ASC Topic 710, Compensation General
FASB ASC Topic 740, Income Taxes
FASB ASC Topic 805, Business Combinations
FASB ASC Topic 810, Consolidation
FASB ASC Topic 815, Derivatives and Hedging
FASB ASC Topic 825, Financial Instruments
FASB ASC Topic 830, Foreign Currency Matters
FASB ASC Topic 835, Interest
FASB ASC Topic 845, Nonmonetary Transactions
FASB ASC Topic 860, Transfers and Servicing
FASB ASC Topic 932, Extractive Activities Oil and Gas
FASB ASC Topic 944, Financial Services Insurance
FASB ASC Topic 958, Not-for-Profit Entities
FASB ASC Topic 970, Real Estate General
FASB ASC Topic 976, Real Estate Retail Land
FASB ASC Topic 980, Regulated Operations
Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income
Accounting Standards Update No. 2011-10, Derecognition of in Substance Real
Estate a Scope Clarification
Accounting Standards Update No. 2013-02, Comprehensive Income Reporting of
Amounts Reclassified Out of Accumulated Other Comprehensive Income
Accounting Standards Update No. 2013-05, Foreign Currency Matters Parents
Accounting for the Cumulative Translation Adjustment Upon Derecognition of
Certain Subsidiaries or Groups of Assets Within a Foreign Entity or of an
Investment in a Foreign Entity
ASU 2013-02
ASU 2013-05
Financial reporting developments Consolidated and other financial statements | D-1
Abbreviation
Abbreviations used in this publication
Other Authoritative Standards
Concepts Statement 6 FASB Statement of Financial Accounting Concepts No. 6, Elements of Financial
Statements
SAB Topic 1.B.1
Codified Staff Accounting Bulletins, Topic 1.B.1, Costs Reflected in Historical

Income Statements
SAB Topic 5-E
Codified Staff Accounting Bulletins, Topic 5-E, Accounting For Divesture Of A

Subsidiary Or Other Business Operation
Codified Staff Accounting Bulletins, Topic 5.J, New Basis of Accounting Required in
Certain Circumstances
SAB Topic 5.J
Abbreviation
Non-Authoritative Standards
EITF 98-2
EITF Issue No. 98-2, Accounting by a Subsidiary or Joint Venture for an

Investment in the Stock of Its Parent Company or Joint Venture Partner
SAB Topic 5-H
Staff Accounting Bulletins, Topic 5-H, Accounting for Sales of Stock by a Subsidiary
Statement 141
FASB Statement No. 141, Business Combinations
Statement 141(R)
Statement 160
FASB Statement No. 141(R), Business Combinations

FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51
FAS 167
FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R)
Financial reporting developments Consolidated and other financial statements | D-2
Index of ASC references in this

publication
ASC Reference
Section
220
9.2.1
220
10.1.5.1
Additional AOCI disclosures required subsequent to the

adoption of ASU 2013-02
225-10-S99-3
9.2.1
230
10.1.4
230-10-45-14
10.1.4
230-10-45-15
10.1.4
250
1.4
250
1.5
Using subsidiary financial statements prepared as of an earlier

period end for consolidation procedure in circumstances when
the subsidiary has the same fiscal year-end as the parent
310
6.1.3
320
1.2.2
320
6.1
Deconsolidation of a subsidiary or derecognition of certain

groups of assets
320
6.1.3
320
6.1.5
Accounting for accumulated other comprehensive income in

deconsolidation
320
6.1.9
323
1.2.2
323
6.1

groups of assets
323
6.1.3
323
6.1.5

deconsolidation
323
6.1.9
323
8.1.1
323-10-15-6
6.1.9
323-10-15-7
6.1.9
323-10-15-8
6.1.9
323-10-35-6
1.5
Using subsidiary financial statements prepared as of an earlier

period end for consolidation procedure in circumstances when
the subsidiary has the same fiscal year-end as the parent
Financial reporting developments Consolidated and other financial statements | E-1
Index of ASC references in this publication
ASC Reference
Section
350-20-35-57A
3.1.4
350-20-35-57A
3.1.5
Attributions related to business combinations effected before

Statement 160 and Statement 141(R) were adopted
360-20
4.1.2.2
360-20
6.1.7
360-20-15-2 through
15-10
4.1.2.6
Decreases in ownership through issuance of partnership units

that have varying profit or liquidation preferences
450-20-25-2
6.1.4.1
450-30
6.1.4.1
450-30-25-1
6.1.4.1
460
6.1.3
470
6.1.3
470-10-S99-1
9.2.1
470-10-S99-1
9.2.2
470-10-S99-1
9.2.4
Disclosure requirements under Rule 3-10
480
2.1
480-10-S99-3A
6.1.3
480-10-S99-3A
10.1.2.1
Presentation of redeemable noncontrolling interests in equity

reconciliation
480-10-S99-3A
505-60
3.1.7
Attributions related to dividends of a subsidiary payable in

nonmonetary assets
605
4.1.2.4

nonprofit activity
605-35
1.3
605-40
6.1.4.1
710-10-25-9
4.1.1.1
740
3.1.6
Effect on effective income tax rate
805
1.2.1
Acquisition through a single step
805
1.2.2
805
3.1.4
805
4.1.1.1
805
4.1.2
Decreases in a parents ownership interest in a subsidiary

without loss of control
805
4.1.4
Allocating goodwill upon a change in a parents ownership

interest
805
4.2.1
805
6.1.4
Measuring the fair value of consideration received and any

retained noncontrolling investment
ASC Reference
Section
805
6.1.4.1
805
6.2
805
8.1.1
805
805-50
3.1.7

nonmonetary assets
805-50-S99-1
9.2.1
810-10-10-1
1.1
810-10-15-8
1.1
810-10-15-10
1.1
810-10-15-10
6.1.7
810-10-15-11
1.4
810-10-20
2.1
810-10-20
4.1
810-10-20
8.1
Purpose of and procedures for parent-company financial

statements
810-10-40-3A
6.1

groups of assets
810-10-40-3A
6.1.1
Loss of control
810-10-40-3A
6.1.3
810-10-40-3A
6.1.4.2
Accounting for a retained creditor interest in deconsolidation
810-10-40-3A
6.1.5

deconsolidation
810-10-40-3A
6.1.7
810-10-40-3A
6.1.9
810-10-40-4
6.1

groups of assets
810-10-40-5
6.1

groups of assets
810-10-40-5
6.1.3
810-10-40-5
6.1.4

810-10-40-5
6.1.4.1
810-10-40-5
6.1.8
Gain/loss classification and presentation
810-10-40-6
4.1.5
Accounting for transaction costs incurred in connection with

changes in ownership
810-10-40-6
6.1

groups of assets
810-10-40-6
6.1.6
Deconsolidation through multiple arrangements
ASC Reference
Section
810-10-45
1.1
810-10-45-1
5.1
Procedures for eliminating intercompany balances and

transactions
810-10-45-1
5.1.1
Effect of noncontrolling interest on elimination of intercompany

amounts
810-10-45-2
5.1

transactions
810-10-45-4
5.1

transactions
810-10-45-5
5.1.2
Subsidiary ownership interest in its parent in the consolidated

810-10-45-8
5.1

transactions
810-10-45-10
7.1
810-10-45-10
7.1.2
Procedures applied in combining entities for financial reporting
810-10-45-11
8.1

statements
810-10-45-11
9.1
Purpose of consolidating financial statements
810-10-45-12
1.4
810-10-45-13
1.4
810-10-45-14
1.3
810-10-45-15
2.1
810-10-45-16
2.1
810-10-45-16A
2.1
810-10-45-17
2.1
810-10-45-17A
2.1
810-10-45-18
5.1.1
Effect of noncontrolling interest on elimination of intercompany

amounts
810-10-45-19
3.1
810-10-45-20
3.1
810-10-45-21
3.1
810-10-45-21A
4.1
810-10-45-21A
4.1.2
Decreases in a parents ownership interest in a subsidiary

without loss of control
810-10-45-21A
4.1.3
810-10-45-21A
4.1.3.1
810-10-45-21A
4.1.5
Accounting for transaction costs incurred in connection with

changes in ownership
810-10-45-21A
4.1.7
Chart summarizing the accounting for changes in ownership
810-10-45-21A
4.2
ASC Reference
Section
810-10-45-21A
6.1

groups of assets
810-10-45-21A
810-10-45-22
4.1
810-10-45-22
4.1.2.6

810-10-45-23
4.1
810-10-45-23
4.1.1.1
810-10-45-23
4.1.2.5
Issuance of preferred stock by a subsidiary
810-10-45-23
4.1.2.6

810-10-45-23
4.1.6
Changes in a parents ownership interest in a consolidated VIE
810-10-45-24
4.1
810-10-45-24
4.1.3
810-10-50-1
10.1
Certain presentation and disclosure requirements related to

consolidation
810-10-50-1A
10.1

consolidation
810-10-50-1A
10.1.2.1
Presentation of redeemable noncontrolling interests in equity

reconciliation
810-10-50-1A
10.1.2.2
Interim reporting period requirements
810-10-50-1A
10.1.3
810-10-50-1A
10.2
810-10-50-1B
6.1.4

810-10-50-1B
10.1

consolidation
810-10-50-1B(d)-(h)
10.2
810-10-50-2
1.4
810-10-55-1B
7.1
810-10-55-4A
6.1

groups of assets
810-10-55-41
10.1.3
810-10-S99-5
6.1.3
815
1.2.2
815
4.1.1.1
815
5.1.3
Intercompany derivative transactions
815
6.1.4.1
825-10-25
6.1.4.1
ASC Reference
Section
830
4.1.3.1
830
6.1.5.1
Foreign currency translation adjustments
830-30-40-2
4.1.3.1
835
6.1.3
845
3.1.7

nonmonetary assets
845
6.1.2
Nonreciprocal transfers to owners
845-10-30-1
3.1.7

nonmonetary assets
845-10-30-2
3.1.7

nonmonetary assets
845-10-30-3
3.1.7

nonmonetary assets
845-10-30-10
3.1.7

nonmonetary assets
860
4.1.2.4

nonprofit activity
910-10-15-3
1.3
910-810-45-1
1.3
932
4.1.2.3
932-360-40
4.1.2.3
932-360-55-3
4.1.2.3
944-80-25-2
10.1.3
944-80-25-3
10.1.3
944-80-25-12
10.1.3
958
8.1

statements
970-323
6.1.7
970-323-25-12
1.3
970-323-35-17
3.1.1
Substantive profit sharing arrangements
976-605
4.1.2.2
980
5.1

transactions
980-810-45-1
5.1

transactions
980-810-45-2
5.1

transactions
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Financial reporting developments

Consolidated and other

Noncontrolling interests, combined financial statements,

To our clients and other friends

Consolidated financial statements .............................................................................. 1

Nature and classification of a noncontrolling interest ................................................. 10

Attribution of net income or loss and comprehensive income or loss ........................... 13

Changes in a parents ownership interest in a subsidiary while control is retained ........ 23

Financial reporting developments Consolidated and other financial statements | i

Intercompany eliminations ....................................................................................... 47

Loss of control over a subsidiary or a group of assets ................................................ 62

Financial reporting developments Consolidated and other financial statements | ii

Combined financial statements ................................................................................. 79

Parent-company financial statements ....................................................................... 81

Consolidating financial statements............................................................................ 83

10 Presentation and disclosures .................................................................................... 97

A Comprehensive example.......................................................................................... A-1

Index of ASC references in this publication ............................................................... E-1

Financial reporting developments Consolidated and other financial statements | iii

Financial reporting developments Consolidated and other financial statements | iv

Consolidated financial statements

Objectives and scope

The subsidiary is in legal reorganization

The subsidiary is in bankruptcy

The subsidiary operates under foreign exchange restrictions, controls, or other

Financial reporting developments Consolidated and other financial statements | 1

Consolidated financial statements

Except as discussed in paragraph 946-810-45-3, consolidation by an investment company

Financial reporting developments Consolidated and other financial statements | 2

Consolidated financial statements

ASC 810, Consolidation decision tree

Is the entity being evaluated for

Employee benefit plans

Certain investment companies

Apply other GAAP

Separate accounts of life insurance companies

Consider whether fees paid

Does the enterprise have a variable

Is the legal entity a variable interest entity?

Does the entity lack sufficient equity to finance its activities?

Do the equity holders, as a group, lack the characteristics of

Is the legal entity structured with non-substantive voting

Variable Interest Model (cont.)

Is the enterprise the primary beneficiary

Does a related party or de facto agent

The general partner (GP) is presumed to have

Related party or de facto

Can a simple majority vote of limited

Consolidation of corporations and

Consolidation of partnerships and

Does the enterprise,

Apply other GAAP

Does a majority shareholder, directly or

Financial reporting developments Consolidated and other financial statements | 3

Consolidated financial statements

Consolidation procedure time of acquisition

Acquisition through a single step

Acquisition through multiple steps

Financial reporting developments Consolidated and other financial statements | 4

Consolidated financial statements

Summary of guidance applied for acquisitions of an interest in an entity

Reduce the carrying amount of the noncontrolling interest. Recognize any

Other Presentation Matters

Financial reporting developments Consolidated and other financial statements | 5