In December 2007, FASB adopted two new business combination standards: Statement no. 141(R), Business Combinations, and Statement no. 160, Noncontrolling Interests in Consolidated Financial Statements. Both culminated years of work directed at improving reporting for consolidated entities. This article summarizes the most important changes created by Statement no. 160, which is effective for fiscal years beginning after
Dec. 15, 2008.

The Big Picture

Although developed in tandem with Statement no. 141(R), Statement no. 160 was issued as a separate standard because the original Statement no. 141 did not formally address how to account for what used to be called “minority interests.” Statement no. 160 provides improved terminology and conceptually consistent resolution to several reporting and measurement issues. The result will be more informative financial statements that reflect how the existence of and changes in noncontrolling interests (NCI) can affect cash flow potential for the consolidated entity and its shareholders.

A Need for Updated Terminology

The most visible innovation in Statement no. 160 is the name change from “minority interest” to “noncontrolling interest.” The problem with the old terminology was that it did not encompass the full range of combination scenarios. Some majority ownership positions don’t lead to consolidation, such as when a subsidiary is in bankruptcy. Conversely, under Interpretation no. 46(R), Consolidation of Variable Interest Entities, a parent with a minority holding in another entity may have sufficient control to require consolidation if it is deemed to be the primary beneficiary of the subsidiary’s activities. On Sept. 15, FASB issued an exposure draft proposing revisions to Interpretation no. 46(R). Among other things, the proposal requires performing new qualitative analysis when determining if a financial interest in a VIE is to be consolidated.

The shift to the term “noncontrolling interest” will emphasize a parent’s substantive control over a subsidiary rather than a simple ownership percentage and will more usefully reflect the underlying economic and accounting concepts.

This article has been excerpted from the Journal of Accountancy.
Read the full article here.