TOPIC A Partially Owned Subsidiaries and Noncontrolling Interests

Transcription

1 Board Meeting Handout Combinations of Not-for-Profit Organizations January 26, 2005 TOPIC A Partially Owned Subsidiaries and Noncontrolling Interests Issue 1 Initial Consolidation of Partially Owned Subsidiaries The staff recommends that not-for-profit organizations be required to conform, with modifications applicable to not-for-profit organizations, to the guidance provided in proposed Statement 141(R) for the initial consolidation of a partially owned subsidiary, as follows: 1. For partially owned subsidiaries that are for-profit businesses or not-for-profit organizations acquired in a reciprocal transaction, the following guidance would apply: a. A partially owned subsidiary would be consolidated initially at the full fair value of the entity acquired, and the parent s previously held noncontrolling equity investment in the subsidiary would be remeasured to acquisition date fair value. b. The amount of acquired goodwill allocated to the controlling ownership interest would be the difference between the fair value of the controlling ownership interest and the controlling interest s share in the fair value of the identifiable net assets acquired. The fair value of the controlling ownership interest would be defined as the acquisition date fair values of (a) the consideration exchanged by the acquirer and (b) the acquiring entity s previous noncontrolling investment in the acquired entity. 2. For partially owned not-for-profit subsidiaries acquired in a nonreciprocal or partially nonreciprocal transaction, the following guidance would apply: a. A partially owned not-for-profit subsidiary acquired in a nonreciprocal or partially nonreciprocal transaction would be initially consolidated at the full fair value of the identifiable net assets acquired plus the amount of goodwill purchased by the acquiring organization. b. All of the purchased goodwill would be allocated to the controlling interest unless the goodwill is recorded as a result of acquiring a net fair value The staff prepares Board meeting handouts to facilitate the audience's understanding of the issues to be addressed at the Board meeting. This material is presented for discussion purposes only; it is not intended to reflect the views of the FASB or its staff. Official positions of the FASB are determined only after extensive due process and deliberations.

2 deficit, measured as the excess of the fair values of the liabilities assumed over the identifiable assets acquired. The goodwill recorded as a result of the acquisition of a net deficit would be allocated between the controlling and the noncontrolling interests based on their ownership percentage. c. In a step acquisition, the previously held ownership interests would be adjusted to equal the interests ownership share of the acquisition date fair value of the net identifiable assets acquired with a gain or loss recognized in the statement of activities. Issue 2 Consolidation Procedures Not-for-profit organizations are currently required to apply Accounting Research Bulletin No. 51, Consolidated Financial Statements, subject to additional guidance in AICPA SOP 94-3, Reporting of Related Entities by Not-for-Profit Organizations, and the AICPA Guide, Health Care Organizations. Because the Board is proposing to replace ARB 51, the staff believes the Board should consider the following alternatives: 1. Replace ARB 51 for all entities except not-for-profit organizations. This could be accomplished by adding a provision to the proposed replacement that directs not-for-profit organizations to continue to apply ARB Include not-for-profit organizations in the scope of the proposed Statement that would replace ARB 51. To avoid delaying the current noncontrolling interest project, the application of the new guidance on noncontrolling interests to not-for-profit organizations could be deferred if the not-for-profit project cannot be finalized concurrently with proposed Statement 141(R) and the ARB 51 replacement standard. The Exposure Draft on not-for-profit combinations could propose any modifications to the noncontrolling interest guidance that the Board may adopt for application to not-for-profit organizations. The staff recommends this alternative. 3. Issue a separate Statement to replace ARB 51 for not-for-profit organizations with new noncontrolling interest guidance applicable to not-for-profit organizations. The staff recommends that not-for-profit organizations conform to the consolidation and disclosure guidance for a partially owned subsidiary in the proposed replacement of ARB 51, with modifications applicable to not-for-profit organizations, as follows: 2

3 1. Consolidated financial statements of a not-for-profit organization should present the donor-imposed restrictions on a partially owned subsidiary s net assets in accordance with FASB Statements No. 117, Financial Statements of Not-for-Profit Organizations, and No. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations. Noncontrolling ownership interests in consolidated subsidiaries should be presented as a separate component of the appropriate class of equity or net assets in the consolidated financial statements (Illustrated in Exhibit 1). 2. Losses that exceed the noncontrolling ownership interests in a subsidiary s unrestricted equity or net assets, as defined by Statement 117, can be attributed to those interests, reducing the carrying amount of those interests below zero. 3. Changes in ownership interests in a subsidiary after consolidation that do not result in deconsolidation would be equity transactions, reported as separate line items in the consolidated statement of activities (Illustrated in Exhibit 2). After a change in ownership interests, goodwill would be reattributed between controlling and noncontrolling interests based on relative carrying amounts. 4. Retained ownership interests should be remeasured to fair value upon deconsolidation of a subsidiary, except as follows: a. If a nonreciprocal transaction or event results in the deconsolidation of a subsidiary that is a not-for-profit organization, any retained ownership interests would be remeasured to an amount that equals the sum of (a) the interests ownership share in the deconsolidation date fair value of the subsidiary s net identifiable assets and (b) the carrying amount of any goodwill allocated to the retained interests in accordance with the guidance for allocating goodwill upon the disposal of a portion of a reporting unit. If the subsidiary was part of a reporting unit, it may not be possible to determine by specific identification what amount, if any, of the retained goodwill is attributable to the retained ownership interest in the deconsolidated subsidiary. In this case, the goodwill should be allocated between the retained interests and the remainder of the reporting unit in a reasonable and supportable manner. 3

4 Disclosures 1. A schedule of changes in consolidated net assets attributable to the controlling interest and noncontrolling ownership interests in subsidiaries should be presented as a separate financial statement or in the notes to the consolidated financial statements, as illustrated in Exhibit 3. The schedule would reconcile beginning and ending balances of the controlling interest and noncontrolling ownership interests in subsidiaries for each class of net assets for which a noncontrolling ownership interest exists at any time during the reporting period. At a minimum, such a schedule would include: a. Performance indicator, if the organization is required to report a performance indicator by GAAP b. Discontinued operations c. Extraordinary items d. Cumulative effect of a change in accounting principle e. Changes in ownership interests in a subsidiary, including investments by and distributions to noncontrolling interests acting in their capacity as owners f. All other changes in unrestricted net assets for the period. Because not-for-profit organizations do not report accumulated other comprehensive income, or other components of owners equity (stock, paid-in capital, or retained earnings), the staff believes this level of detail should not be required in the consolidated disclosures of the not-for-profit parent. 2. If an entity loses control of a subsidiary, the entity shall disclose the amount of any gain or loss recognized in accordance with paragraph XX of (the proposed statement that would replace ARB 51) and the caption in the statement of activities that includes that gain or loss if not separately presented on the face of the statement. If an entity loses control of a subsidiary but retains a noncontrolling equity investment, the entity shall disclose the portion of the gain or loss related to the remeasurement of the retained interest to its fair value separately from the total gain or loss recognized on the loss of control of the subsidiary. 4

5 Illustrative Exhibits The following exhibits illustrate how noncontrolling ownership interests in a consolidated subsidiary and subsequent changes in ownership interests of that subsidiary could be reported by a not-for-profit organization in accordance with the proposed changes to consolidation procedures. Assumptions for the Illustrations of the Presentation and Disclosure Requirements for a Not-for-Profit Organization with One or More Partially Owned Subsidiaries Exhibits 1, 2, and 3 are based on the following assumptions: Not-for-Profit Organization X, the parent, has one for-profit subsidiary, Subsidiary A. 1. As of January 1, 20X6, Subsidiary A is 80 percent owned. There are no donor-imposed restrictions on the net assets of the subsidiary. 2. On January 30, 20X7, Organization X sells a portion of its interest in Subsidiary A to a third party for cash of $17,000, reducing its interest to 70 percent. Organization X continues to control Subsidiary A after the transaction. The carrying value of the interest sold is $16,910, which includes accumulated other comprehensive income of $1,870. This transaction is accounted for as an equity transaction in the statement of activities. (The related accumulated other comprehensive income attributable to the interest sold is reattributed to the noncontrolling interests.) 3. On July 1, 20X7, Organization X purchases a portion of the noncontrolling ownership interests in Subsidiary A from the noncontrolling shareholders for cash of $57,000, increasing its interest to 90 percent. The carrying value of the interest purchased is $54,900, which includes accumulated other comprehensive income of $5,400. This transaction also is accounted for as an equity transaction in the statement of activities. (The related accumulated other comprehensive income attributable to the interest purchased is reattributed to the controlling interest.) 5

6 EXHIBIT 1 Not-for-Profit Organization X Consolidated Statement of Financial Position December 31 20X7 20X6 Assets: Cash $ 159,000 $ 177,500 Accounts receivable 205, ,000 Investments - 112,000 Plant and equipment 1,102, ,250 Total assets $ 1,466,500 $ 1,469,750 Liabilities: Accounts payable $ 125,500 $ 112,500 Accrued liabilities 89,000 79,250 Pension liability 131, ,000 Notes payable 187, ,500 Total liabilities 532, ,250 Net Assets: Unrestricted net assets: Controlling interest 751, ,900 Noncontrolling ownership interest in subsidiary 32,060 48,600 Total unrestricted net assets 783, ,500 Temporarily restricted net assets 50,000 48,000 Permanently restricted net assets 100, ,000 Total net assets 933, ,500 Total liabilities and net assets $ 1,466,500 $ 1,469,750 Note on presentation: Shading highlights certain basic totals that must be reported in financial statements to comply with the provisions of Statement 117. Items in bold represent proposed changes discussed in this memorandum. 6

7 EXHIBIT 2 Not-for-Profit Organization X Consolidated Statement of Activities Year Ended December 31 20X7 20X6 Changes in unrestricted net assets: Revenues and support $ 170,000 $ 155,000 Expenses (31,750) (41,000) Net assets released from restrictions 2,000 Excess of revenues and support over expenses* 140, ,000 Sale of subsidiary stock to noncontrolling interests 17,000 - Purchase of noncontrolling interest subsidiary stock by controlling interest (57,000) - Change in net assets before effects of discontinued operations, extraordinary item, and change in accounting principle, net of tax 100, ,000 Discontinued operations, net of tax - (7,000) Extraordinary item, net of tax - (21,000) Cumulative effect of accounting change, net of tax - (2,500) Change in unrestricted net assets 100,250 83,500 Changes in temporarily restricted net assets: Contributions 4,000 - Net assets released from restrictions (2,000) - Change in temporarily restricted net assets 2,000 - Change in net assets 102,250 83,500 Net assets at beginning of year 831, ,000 Net assets at end of year $ 933,750 $ 831,500 Note on Presentation: Shaded areas depict the constraints imposed by Statement 117 and by GAAP to report appropriately labeled subtotals for changes in classes of net assets before the effects of discontinued operating segments, extraordinary items, or accounting changes, if any. The unshaded areas depict areas within the statement for which there is latitude to sequence and classify items of revenues and expenses. Other formats also may be used. Items in bold illustrate how proposed changes discussed in this memorandum could be presented. There is no specific GAAP guidance on where equity or capital items should be presented in the statement of activities, except as provided for health care organizations in SOP 02-2, which excludes such items from the performance indicator. * This subtotal is not required by Statement

8 EXHIBIT 3 Not-for-Profit Organization X Notes to Consolidated Financial Statements Changes in Consolidated Unrestricted Net Assets Attributable to the Controlling Interest and Noncontrolling Ownership Interests in Subsidiaries Noncontrolling Controlling Interest Ownership Interests Total Balance January 1, 20X6 $ 570,100 $ 29,900 $ 600,000 Changes in net assets before effects of discontinued operations, extraordinary item, and change in accounting principle, net of tax 89,200 24, ,000 Discontinued operations, net of tax (5,600) (1,400) (7,000) Extraordinary item, net of tax (16,800) (4,200) (21,000) Cumulative effect of accounting change, net of tax (2,000) (500) (2,500) Change in net assets 64,800 18,700 83,500 Balance December 31, 20X6 634,900 48, ,500 Excess of revenue and support over expenses* 118,800 21, ,250 Sale of subsidiary stock to noncontrolling interest 90 16,910 17,000 Purchase of noncontrolling interest stock by controlling interest (2,100) (54,900) (57,000) Change in net assets 116,790 (16,540) 100,250 Balance December 31, 20X7 $ 751,690 $ 32,060 $ 783,750 Notes to Exhibit 3: * This subtotal is not defined or required in the statement of activities of any not-for-profit organization. However, health care organizations are required to report a performance indicator analogous to a for-profit entity's income from continuing operations. The amounts presented here are net of the $1,870 transfer of accumulated other comprehensive income resulting from the sale, because not-for-profit organizations do not report accumulated other comprehensive income. An alternate presentation is illustrated below. The amounts presented here are net of the $5,400 transfer of accumulated other comprehensive income resulting from the purchase, because not-for-profit organizations do not report accumulated other comprehensive income. An alternate presentation is illustrated below. Alternate presentation: Sale of subsidiary stock to noncontrolling interest: Carrying amount of stock sold 15,040 15,040 Premium received from sale of stock 1,960 1,960 Transfer between controlling interest and noncontrolling interest resulting from sale (1,870) 1, ,910 17,000 Purchase of noncontrolling interest stock by controlling interest: Carrying amount of stock purchased (49,500) (49,500) Premium paid to acquire stock (7,500) (7,500) Transfer between controlling interest and noncontrolling interest resulting from purchase 5,400 (5,400) - (2,100) (54,900) (57,000) 8

9 TOPIC B Goodwill Accounting Issues Issue 1 Application of Fee-Support Criterion The Board decided to adopt a two-path goodwill impairment testing model for not-for-profit organizations, the application of which is based on whether a reporting unit is supported primarily by fees or other charges to third parties for goods and services. 1. Goodwill assigned to a reporting unit that is supported primarily by fees or other charges to third parties for goods or services should be tested for impairment using the method in Statement Goodwill assigned to a reporting unit that is not supported primarily by fees or other charges to third parties for goods or services should be tested for impairment using the trigger-based write-off method. The staff suggests the Board consider what, if any, additional guidance should be provided on the application of the support criterion. The following alternatives might clarify the application of this criterion: 1. Specify that all investment returns are to be considered fee support. 2. Adopt the trigger-based write-off exception to the Statement 142-type impairment test for all reporting units that are supported primarily by contributions, rather than for those that are not supported primarily by fees or other charges to third parties. 3. Adopt the trigger-based write-off exception to the Statement 142-type impairment test for all reporting units that are supported primarily by contributions and returns on contributions. 4. Consider whether the reporting unit was designed to be supported primarily by fees or contributions. 5. Replace the mandatory fee-support criterion with a principle: The Statement 142-type goodwill impairment test would apply to a reporting unit unless the fair value of the reporting unit cannot be reasonably estimated without incurring undue cost, in which case the trigger-based write-off test would apply. Describe factors that would indicate whether it should be possible to reasonably estimate the fair value of a reporting unit, such as the nature of 9

10 support received, the nature and design of the entity, and the existence of appropriate reference market information. Many not-for-profit organizations receive contributed support, such as some contributed services, that is not recognized in the organizations financial statements prepared in accordance with FASB Statement No. 116, Contributions Received and Contributions Made. For some organizations, the amount of unrecognized support is significant. If the Board decides to retain a goodwill impairment test path criterion based on the nature of a reporting unit s primary support, the staff recommends clarifying that all forms of support, recognized and unrecognized, should be considered in the application of the criterion. Notfor-profit organizations that quantify and disclose the amount of unrecognized contributed support in their financial statements should use the disclosed amounts in their analysis. Although some organizations may determine the fair value of unrecognized support received, not-for-profit organizations should not be required to incur additional costs to do so solely for this analysis. Therefore, the determination of the nature of a reporting unit s primary support should be based on a consideration of all relevant qualitative as well as quantitative factors. Qualitative factors may be determinative, especially when an organization receives significant amounts of unrecognized contributed support that the organization has not quantified. Qualitative factors should be considered even if the reporting unit receives no unrecognized contributed support. Consideration of such factors could have a significant impact on the application of the support criterion when a reporting unit receives nearly equal amounts of fee and contribution 10

11 support or when the nature of the majority of a reporting unit s support changes between fee and contribution support from period to period. Issue 2 Change in the Nature of a Reporting Unit s Support How should goodwill acquired by a not-for-profit organization be accounted for if the nature of the reporting unit to which it has been assigned changes such that it becomes primarily fee supported or is no longer primarily fee supported? That is, how should the organization account for the transition if the nature of the reporting unit changes to the extent that goodwill would be tested for impairment using a different method (trigger-based write-off or Statement 142-type test) than the method previously applied? Should the disclosures required by Statement 142 be modified for not-for-profit organizations to reflect the two-path goodwill testing model? Reporting Unit No Longer Primarily Fee Supported The staff recommends that a not-for-profit organization account for the movement of goodwill from the Statement 142 testing path to the trigger-based write-off path as follows: Based on the facts and circumstances existing at the date of change, consider whether the change indicates that the goodwill has been significantly impaired. If, in the organization s judgment, goodwill has been impaired, write it off. Otherwise, as of the date of the change, identify impairment triggers to be applied prospectively. Reporting Unit Becomes Primarily Fee Supported The staff recommends that a Statement 142-type goodwill impairment test be required as of the date when goodwill that has been subject to the trigger-based write-off path becomes subject to the Statement 142-type goodwill impairment testing path. 11

12 Determining the Date of Change The staff recommends that a not-for-profit organization be required each reporting period to evaluate the nature of its reporting units that include recorded goodwill to determine the appropriateness of the goodwill impairment testing method applied. Goodwill should no longer be tested in accordance with the Statement 142-type test on the date it is no longer assigned to a reporting unit that is primarily fee supported. Similarly, goodwill should begin to be tested under Statement 142 on the date it is assigned to a reporting unit that is primarily fee supported. If, for example, the change is not the result of an identifiable event but has happened gradually over time, then a reporting unit no longer should be tested in accordance with Statement 142 or begin to be tested under Statement 142 when the change is deemed to be other-than-temporary based on an analysis of all relevant facts and circumstances, such as: 1. Duration and amount of decline or increase in percentage of fee support 2. Underlying reasons for the change 3. Management s plans, reactions to the change, and expectations for the future operation of the reporting unit. Disclosures The staff recommends that for each period for which a statement of financial position is presented, not-for-profit organizations disclose separately the changes in carrying amounts of goodwill for goodwill subject to the Statement 142-type fair value impairment test and for goodwill subject to the trigger-based write-off impairment test. The disclosure of changes in the carrying amount of goodwill by the impairment testing method would include disclosure of any amounts that changed from one method to the other as a result of changes in the nature of the reporting units to which the goodwill is assigned. The staff recommends that goodwill impairment loss disclosures required by paragraph 47 of Statement 142 made by a not-for-profit organization also include which method of impairment testing was used to determine the loss. 12

13 Issue 3 Transition for Previously Acquired Goodwill Assigned to Reporting Units That Are Not Primarily Fee Supported On the initial application of the new accounting standard for goodwill impairment testing, what transition guidance should be provided for previously recorded goodwill assigned to reporting units that are not primarily fee supported? How should a not-for-profit organization determine potential impairment events for previously recognized goodwill assigned to reporting units that are not primarily fee supported? For goodwill assigned to a not-for-profit organization s reporting units that are not primarily fee supported, there would be no transitional impairment test as of the beginning of the fiscal year in which the new goodwill accounting standard is initially applied in its entirety. The staff recommends that impairment events that would trigger the write-off of goodwill after the adoption of the new standard be identified based on the facts and circumstances existing at the initial application date, with consideration given to factors that led to the original recognition of the goodwill. Issue 4 Assignment of Assets, Liabilities, and Goodwill to Reporting Units How should a not-for-profit organization with a reporting unit that is not primarily fee supported apply the guidance in Statement 142 relating to the: 1. Assignment of identifiable assets, liabilities, and goodwill to reporting units 2. Reorganization of its reporting structure 3. Disposal of a part of a reporting unit? Assigning Acquired Assets and Assumed Liabilities to Reporting Units One of the criteria in paragraph 32 of Statement 142 for assigning assets and liabilities to reporting units is that the asset or liability will be considered in determining the fair value of the reporting unit. The staff recommends clarifying that the criterion is a basis for assigning assets and liabilities to a reporting unit 13

14 and is not intended to require a not-for-profit organization to determine the fair value of that reporting unit if it is not primarily fee supported. Assigning Goodwill to Reporting Units The staff believes the guidance in paragraph 34 of Statement 142 and the first sentence in paragraph 35 is sufficient for a not-for-profit organization assigning goodwill to reporting units that are not primarily fee supported. The staff recommends that a footnote such as the following be added at the end of the first sentence in paragraph 35 of Statement 142 to clarify that an organization is not required to determine the fair value of a reporting unit that is not primarily fee supported: The remaining guidance in this paragraph may not be applicable for a not-for-profit organization s assignment of goodwill to a reporting unit that is not primarily supported by fees or other charges to third parties for goods and services. Disposal of All or a Portion of a Reporting Unit For the disposal of a part (that is a combined set) of a reporting unit that is not primarily fee supported, the staff recommends the carrying amount of goodwill be allocated based on specific identification of goodwill with the parts disposed of and retained, if possible. If (a) specific identification is not possible and (b) either the disposed of or retained parts of the reporting unit, or both, are not primarily fee supported on the disposal date, then the carrying amount of goodwill should be allocated to the part of the reporting unit disposed of and the part retained based on the relative carrying amounts of the identifiable net assets of each part, instead of using the relative fair value method described in paragraph 39 of Statement 142. The staff believes that if the retained portion of the reporting unit is not primarily fee supported and the partial disposal had been identified as an impairment event when the goodwill was initially acquired, then the remaining goodwill would be written off when the disposal occurs. However, if a previously identified triggering event does not occur upon disposal, the staff recommends that the 14

15 organization review and update, based on current facts and circumstances, the events identified that would indicate significant impairment of the retained goodwill. There would be no other impairment test on the retained goodwill immediately after the disposal for this type of reporting unit. Reorganization of Reporting Structure The staff recommends that when all or part of a reporting unit that is not primarily fee supported is to be integrated into one or more other reporting units, at least one of which is not primarily fee supported, the goodwill should be reassigned based on specific identification, if possible. Otherwise, the goodwill reassignment in the circumstances described should be based on the relative carrying amounts of the identifiable net assets reassigned. 15

16 Board Meeting Handout January 26, 2005 Interpretation of Statement 143 The FASB staff received a comment letter dated September 8, 2004 requesting that the Board reconsider FASB Statement No. 143, Accounting for Asset Retirement Obligations. The comment letter requested that the Board reconsider Statement 143 such that the timing of recognition of an asset retirement obligation would be based on a FASB Statement No. 5, Accounting for Contingencies, approach. In response to the formal request to reconsider Statement 143, the FASB staff is asking the Board the following questions at today s meeting: 1. Should the guidance in Statement 143 be reconsidered? 2. If the answer to the above question is no, should additional guidance for evaluating whether sufficient information is available to make a reasonable estimate of the fair value of an asset retirement obligation be included in the proposed Interpretation? The staff prepares Board meeting handouts to facilitate the audience's understanding of the issues to be addressed at the Board meeting. This material is presented for discussion purposes only; it is not intended to reflect the views of the FASB or its staff. Official positions of the FASB are determined only after extensive due process and deliberations.