Financial Modeling and Valuation by Paul Pignataro

Author:Paul Pignataro
Language: eng
Format: epub, pdf
ISBN: 9781118558690
Publisher: Wiley
Published: 2013-06-16T16:00:00+00:00

Redeemable Non-Controlling Interest

To explain redeemable non-controlling interest, it is first important to explain exactly what non-controlling interest is. From page 57 of Price Waterhouse Coopers’ “A Global Guide to Accounting for Business Combinations and Non-Controlling Interests”:

The noncontrolling interest is the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent [ASC 810-10-45-15; IAS 27R.4]. Only financial instruments issued by a subsidiary that are classified as equity in the subsidiary’s financial statements for financial reporting purposes can be noncontrolling interest in the consolidated financial statements [ASC 810-10-45-17].

A financial instrument that a subsidiary classifies as a liability is not a noncontrolling interest in the consolidated financial statements. However, not all financial instruments that are issued by a subsidiary and classified as equity will be recognized as a noncontrolling interest within equity in consolidation. For example, certain preferred stock, warrants, puts, calls, and options may not form part of noncontrolling interest within equity in consolidation by the parent company. For more information on the guidance to determine whether such instruments are considered noncontrolling interests in consolidation, see BCG 6.2.

In other words, this is a portion of the company’s subsidiary that is not owned by the company itself. For example, if a Company A acquires 75 percent of Company B, Company A must consolidate all of Company B’s financials into Company A (because Company A had acquired greater than 50 percent of Company B). But the 25 percent of Company B that Company A does not own is recorded separately on Company A’s balance sheet as non-controlling interest. According to GAAP rules this is recorded in the equity section of the balance sheet. Further, 25 percent of Company B’s net income is reported as non-controlling interest on the income statement for distribution to the owner of the 25 percent stake of Company B. Let’s look at the following example.

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