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FASB No. 160: Statement of Financial Accounting Standards No. 160--Noncontrolling Interests in Consolidated Financial Statements (an amendment of ARB No. 51).

SUMMARY

Why is the FASB Issuing This Statement?

A noncontrolling interest, sometimes called a minority interest, is the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. The objective of this Statement is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards that require:

* The ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent's equity

* The amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income.

* Changes in a parent's ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently. A parent's ownership interest in a subsidiary changes if the parent purchases additional ownership interests in its subsidiary or if the parent sells some of its ownership interests in its subsidiary It also changes if the subsidiary reacquires some of its ownership interests or the subsidiary issues additional ownership interests. All of those transactions are economically similar, and this Statement requires that they be accounted for similarly, as equity transactions.

* When a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value. The gain or loss on the deconsolidation of the subsidiary is measured using the fair value of any noncontrolling equity investment rather than the carrying amount of that retained investment.

* Entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners.

What Is the Scope of This Statement?

This Statement applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary Not-for-profit organizations should continue to apply the guidance in Accounting Research Bulletin No. 51, Consolidated Financial Statements, before the amendments made by this Statement, and any other applicable standards, until the Board issues interpretative guidance.

How Will This Statement Improve Current Accounting Practice?

This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Before this Statement was issued, limited guidance existed for reporting noncontrolling interests. As a result, considerable diversity in practice existed. So-called minority interests were reported in the consolidated statement of financial position as liabilities or in the mezzanine section between liabilities and equity. This Statement improves comparability by eliminating that diversity.

This Statement changes the way the consolidated income statement is presented. It requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. Previously, net income attributable to the noncontrolling interest generally was reported as an expense or other deduction in arriving at consolidated net income. It also was often presented in combination with other financial statement amounts. Thus, this Statement results in more transparent reporting of the net income attributable to the noncontrolling interest.

This Statement establishes a single method of accounting for changes in a parent's ownership interest in a subsidiary that do not result in deconsolidation. For example, a parent's ownership interest in its subsidiary changes if the parent purchases additional ownership interests in its subsidiary or the parent sells some of its ownership interests in its subsidiary It also changes if the subsidiary reacquires some of its ownership interests or the subsidiary issues additional ownership interests. This Statement clarifies that all of those transactions are equity transactions if the parent retains its controlling financial interest in the subsidiary. Before this Statement was issued, decreases in a parent's ownership interest in a subsidiary could be accounted for in one of two ways: as equity transactions or as transactions with gain or loss recognition An the income statement, a parent's acquisition of noncontrolling ownership interests in a subsidiary was previously accounted for by the purchase method. This Statement simplifies accounting standards by establishing a single method of accounting for those economically similar transactions. Eliminating the requirement to apply purchase accounting to a parent's acquisition of noncontrolling ownership interests in a subsidiary also reduces the parent's costs because it eliminates the need to value the assets and liabilities of the subsidiary on the date that each additional interest is acquired.

This Statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. A parent deconsolidates a subsidiary as of the date the parent ceases to have a controlling financial interest in the subsidiary. If a parent retains a noncontrolling equity investment in the former subsidiary, that investment As measured at its fair value. The gain or loss on the deconsolidation of the subsidiary is measured using the fair value of the noncontrolling equity investment. Previously, the carrying amount of any retained investment was not remeasured and was used in determining any gain or loss on the deconsolidation of the subsidiary Recognizing a retained investment in a former subsidiary at fair value provides more relevant information about the value of that investment on the date that the subsidiary is deconsolidated. Remeasuring any retained investment to fair value also is consistent with the requirements in FASB Statement No. 141 (revised 2007), Business Combinations, for remeasuring any previously held equity interest in an entity if the acquirer obtains control of that entity in a business combination achieved in stages (a step acquisition).

This Statement requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent's owners and the interests of the noncontrolling owners of a subsidiary Those expanded disclosures include a reconciliation of the beginning and ending balances of the equity attributable to the parent and the noncontrolling owners and a schedule showing the effects of changes in a parent's ownership interest in a subsidiary on the equity attributable to the parent. This Statement therefore improves the completeness, relevance, and transparency of the information provided in the consolidated financial statements.

This Statement does not change ARB 51's provisions related to consolidation purpose or consolidation policy or the requirement that a parent consolidate all entities in which it has a controlling financial interest. This Statement does, however, amend certain of ARB 51's consolidation procedures to make them consistent with the requirements of Statement 141(R). It also amends ARB 51 to provide definitions for certain terms and to clarify some terminology This Statement does not change the requirements in FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities.

In addition to the amendments to ARB 51, this Statement amends FASB Statement No. 128, Earnings per Share, so that earnings-per-share data will continue to be calculated the same way those data were calculated before this Statement was issued. That is, the calculation of earnings-per-share amounts in consolidated financial statements will continue to be based on amounts attributable to the parent.

What Is the Impact of This Statement on Convergence with International Financial Reporting Standards?

This Statement, together with the IASB's Amendments to IAS 27, Consolidated and Separate Financial Statements, concludes a joint effort by the Board and the IASB to improve the accounting for and reporting of noncontrolling interests in consolidated financial statements while promoting the international convergence of accounting standards.

This Statement aligns the reporting of noncontrolling interests in subsidiaries with the requirements in IAS 27. Previously, entities applying international financial reporting standards (IFRSs) reported noncontrolling interests as equity, while entities applying U.S. generally accepted accounting principles (GAAP) reported those interests as liabilities or in the mezzanine section between liabilities and equity. This Statement and IFRSs also provide similar guidance for accounting for changes in a parent's ownership interest and deconsolidation of a subsidiary and similar disclosure requirements. Thus, the issuance of this Statement eliminates a source of noncomparable financial reporting.

What Is the Effective Date of This Statement?

This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 (that is, January 1, 2009, for entities with calendar year-ends). Earlier adoption is prohibited. The effective date of this Statement is the same as that of the related Statement 141(R).

This Statement shall be applied prospectively as of the beginning of the fiscal year in which this Statement is initially applied, except for the presentation and disclosure requirements. The presentation and disclosure requirements shall be applied retrospectively for all periods presented.

CONTENTS
Objective/1
Standards Of Financial Accounting and Reporting:
 Scope/2
 Amendments to ARB 51/3
 Effective Date and Transition/4-6
Appendix A: Amendments to ARB 51/A1
Appendix B: Background Information and Basis for
Conclusions/B1-B82
Appendix C: Amendments to Existing
Pronouncements/C1-C13
Appendix D: Amendments to Other Authoritative
Literature/D1-D14


OBJECTIVE

1. The objective of this Statement is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary

STANDARDS OF FINANCIAL ACCOUNTING AND REPORTING

Scope

2. This Statement applies to all entities that prepare consolidated financial statements, except not-for-profit organizations. Not-for-profit organizations shall continue to apply the guidance in Accounting Research Bulletin No. 51, Consolidated Financial Statements, before the amendments made by this Statement, and any other applicable standards, until the Board issues interpretative guidance.

Amendments to ARB 51

3. This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also amends certain of ARB 51's consolidation procedures for consistency with the requirements of FASB Statement No. 141 (revised 2007), Business Combinations. Appendix A includes the amendments to ARB 51.

Effective Date and Transition

4. This Statement shall be effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited.

5. This Statement shall be applied prospectively as of the beginning of the fiscal year in which this Statement is initially adopted, except for the presentation and disclosure requirements. The presentation and disclosure requirements shall be applied retrospectively for all periods presented, as follows:

a. The noncontrolling interest shall be reclassified to equity in accordance with paragraph 26 of ARB 51, as amended by this Statement.

b. Consolidated net income shall be adjusted to include the net income attributed to the noncontrolling interest.

c. Consolidated comprehensive income shall be adjusted to include the comprehensive income attributed to the noncontrolling interest.

d. The disclosures in paragraphs 38 and 39 of ARB 51, as amended by this Statement, shall be provided.

6. Paragraph 31 of ARB 51, as amended by this Statement, requires that the noncontrolling interest continue to be attributed its share of losses even if that attribution results in a deficit noncontrolling interest balance. In contrast, paragraph 15 of ARB 51, before the amendments made by this Statement, required:
 In the unusual case in which losses applicable to the minority
 interest in a subsidiary exceed the minority interest in the equity
 capital of the subsidiary, such excess and any further losses
 applicable to the minority interest should be charged against the
 majority interest, as there is no obligation of the minority
 interest to make good such losses. However, if future earnings do
 materialize, the majority interest should be credited to the extent
 of such losses previously absorbed.


If, in the year of adoption, an entity's consolidated net income attributable to the parent would have been significantly different had the previous requirement in paragraph 15 of ARB 51 been applied, the entity shall disclose pro forma consolidated net income attributable to the parent and pro forma earnings per share as if the previous requirement in paragraph 15 of ARB 51 had been applied in the year of adoption.

The provisions of this Statement need not be applied to immaterial items.

This Statement was adopted by the affirmative vote of five members of the Financial Accounting Standards Board. Ms. Seidman dissented; Mr. Smith abstained.

Ms. Seidman dissents from the issuance of this Statement because she believes that the accounting for noncontrolling interests in subsidiaries is integrally related to other conceptual issues that are under active discussion by the Board, and she believes it is premature to significantly change the accounting for transactions involving noncontrolling interests before it is relatively clear under those evolving concepts that noncontrolling interests would be considered equity of the consolidated group.

Ms. Seidman agrees that the equity of a consolidated subsidiary does not meet the definition of a liability under the current conceptual framework. However, Ms. Seidman believes that the equity of the subsidiary is different from the parent shareholders' residual interest in the parent. That is, the equity of a subsidiary that is held by the noncontrolling interest is not available to absorb losses or share in gains related to other activities of the parent. Therefore, it is debatable whether transactions involving the noncontrolling interest should be treated in the same manner as transactions involving shares of the parent.

That debate is currently taking place as part of the objectives of financial reporting and reporting entity phases of the Boards' conceptual framework project. Those phases address the related questions of who are the primary users of financial reports and what is a reporting entity Ms. Seidman believes that those concepts should be compatible with the definitions of liabilities and equity, which also are currently being reconsidered. At the standards level, the FASB is about to issue its preliminary views on the distinction between liabilities and equity. The Board's preliminary view is that the most subordinated interests (for example, common stock) would be considered equity; all other interests would be considered liabilities. That approach would entail a change to the conceptual definitions of liabilities and equity and, depending on the concept that is ultimately expressed, it is not clear to Ms. Seidman that noncontrolling interests in a subsidiary would be considered equity of the consolidated entity For example, from the perspective of the consolidated entity, the noncontrolling shareholders of the subsidiary would not absorb losses relating to other activities of the parent and thus would be higher in standing than the residual claim of shareholders of the parent entity. If the concept of equity is based on the most subordinated interest in the entity, noncontrolling interests in the subsidiary would seem to be liabilities from the consolidated perspective.

Ms. Seidman would have been willing to characterize noncontrolling interests as a form of equity that is different from the equity of the parent, but she would have preferred to defer the changes that result from full adoption of the economic unit perspective (rather than the parent company perspective) in the accounting for transactions involving the noncontrolling shareholders until the relevant phases of the conceptual framework projects were closer to conclusion.

Ms. Seidman disagrees with the requirement of this Statement that upon deconsolidation of a subsidiary, any retained investment is remeasured to its fair value and a gain or loss is recognized in earnings, because that investment was not part of the exchange. Ms. Seidman agrees that ceasing to have a controlling financial interest in a subsidiary is a significant economic event. However, the retained investment has not been sold. Under current accounting standards, gains and losses on cost method, available-for-sale, and equity method investments are only recognized in earnings when the investment is sold (other than impairment). Ms. Seidman would have recognized the effect of those remeasurements as a separate component of other comprehensive income instead of current period earnings.

Members of the Financial Accounting Standards Board:

Robert H. Herz, Chairman

George J. Batavick

G. Michael Crooch

Thomas J. Linsmeier

Leslie F. Seidman

Lawrence W. Smith

Donald M. Young

Space Considerations prevent publishing here the appendices to FASB Statement 160. Since the appendices often are important to understanding FASB statements, readers are advised to obtain complete copies. For additional copies of FASB statements and/or information on applicable prices and discount rates, contact the FASB order department, 401 Merritt 7, P.O. Box 5116, Norwalk, CT 06856-5116. Please ask for Product Code No. S160.
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Title Annotation:Official Releases
Publication:Journal of Accountancy
Date:Feb 1, 2008
Words:2785
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