Negative Minority Interest?

See if this sounds familiar…a parent company has a very large negative balance and the noncontrolling interest is at or close to zero, because the parent has been absorbing all of the excess losses to date.

Several clients have asked whether under FASB Statement 160 (FASB ASC 810), the parent will have the opportunity to record all future net income until the parent’s balance recoups the recorded excess losses to date before sharing the net income pro rata with the NCI. This accounting was appropriate under the “old way” and seems unfair to the parent under the “new way” if the parent doesn’t have the opportunity to recoup excess losses first.

Although the answer may not seem “fair,” FAS 160 was pretty clear about this issue. Specifically, FAS 160 amended ARB 51 to require a parent to allocate losses to the noncontrolling interest even if the noncontrolling interest has a deficit balance. Under the old guidance, a parent would cease allocating losses of a subsidiary to the minority interest if the carrying value of the minority interest was reduced to zero. Here’s the old language from paragraph 15 of ARB 51:

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.

Here’s the new language from paragraph 31 of ARB 51 (as amended by FAS 160; now codified in FASB ASC 810-10-45-21):

Losses attributable to the parent and the noncontrolling interest in a subsidiary may exceed their interests in the subsidiary’s 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.

Bottom line = in the circumstance where a parent has ceased allocating losses to a noncontrolling interest because the noncontrolling interest has been reduced to zero, the parent should begin allocating losses to the noncontrolling interest upon the adoption of FAS 160. There is no adjustment for previous unallocated losses. There is also no future recapture of losses absorbed by the parent when the subsidiary generates profits.