Industry Insights

Banks, bonding companies and insurers want to do business with construction and real estate companies that have sufficient equity on their balance sheets. Thanks to recent changes, equity portions of balance sheets may be getting a facelift when a company presents consolidated financial statements. The Financial Accounting Standards Board (FASB) issued and subsequently amended Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements, which is now codified in FASB Accounting Standards Codification Topic 810 (ASC 810). This standard changes the presentation and disclosure of noncontrolling interests in subsidiaries, formerly known as minority interest, within the consolidated financial statements. These changes could make the equity portion of construction and real estate companies’ balance sheets more appealing to banks, bonding companies, insurers and others.

Noncontrolling Interest

A noncontrolling interest is the portion of equity in a consolidated subsidiary not attributable, directly or indirectly, to the parent or primary beneficiary. A noncontrolling interest for a construction or real estate company may be a subsidiary, such as joint ventures or other forms of partnerships, limited liability companies, leasing and development companies and variable interest entities.

What Is the Impact to Your Financials?

ASC 810 requires separate presentation of a noncontrolling interest in the equity section of the consolidated balance sheet. Previously, the noncontrolling interest appeared between liabilities and equity in a caption known as the “mezzanine” section on the balance sheet. In addition to the balance sheet, the consolidated statement of stockholder’s equity also will show the noncontrolling interest. While both of these can be positive for your company, the real impact may be within the consolidated income statement.

Prior to ASC 810, losses allocated to the noncontrolling interest could not reduce its carrying amount below zero. The parent company had to recognize the losses that otherwise would have been allocated to the noncontrolling interest. However, under ASC 810, the noncontrolling interest’s share of losses is charged in full to itself.

Previously, losses ceased being allocated to the noncontrolling interest because the minority interest carrying amount was zero. The standard does not allow for an adjustment of those absorbed losses going forward. Also, the parent company cannot recapture losses previously absorbed when the subsidiary begins to generate profit.

Income or losses allocated to noncontrolling interests were added or deducted in arriving at net income or loss before ASC 810. Under ASC 810, net income or loss is determined before any allocation to noncontrolling interests. In addition, the consolidated statement of cash flows accounts for net income or loss attributable to the noncontrolling interest as an operating activity.

Below is an example of the equity section of a consolidated balance sheet:

Below is an example of presentation in a consolidated income statement:

Deconsolidation

ASC 810 changed the rules on deconsolidating subsidiaries. Deconsolidation occurs when the parent company no longer has a controlling interest in a subsidiary. The parent company deconsolidates the subsidiary and recognizes a gain or loss for the difference between the carrying amount of its interest in the former subsidiary and the sum of consideration received on disposal plus the fair value of any interest retained in the former subsidiary. Certain real estate transactions remain guided by other accounting standards. For further details, see the February 2010, BKD Focus article, Accounting Standards Update Will Affect Ownership Change Provisions.

Impairment

Any impairment charges should be appropriately attributed to the controlling or noncontrolling interest. If a transaction is expected to result in the loss of control in a subsidiary, the parent should evaluate any goodwill or long-lived assets for impairment prior to losing control. Impairment losses should be recognized in earnings.

Conclusion

In conclusion, the facelift to equity can cause issues with financial debt covenants and affect the ability to obtain financing, bonding or insurance coverage. The benefits are not including income or loss attributable to noncontrolling interests in determining net income or loss and the increase in equity resulting from inclusion of noncontrolling interests therein. Consult your BKD advisor to help determine the impact ASC 810 will have on your company’s consolidated financial statements.