FASB Rule Spawns a Second Bottom Line

The new standard kicks minority-interest equity out of the mezzanine, changing what makes up net income.

The practical effect of FAS 160 on the income statement, according to Mulford, is that calculations that use net income will have to be tweaked. “If you have EBITDA and want to add back depreciation, you will have to make it clear that you want to use the parent’s share of net income in the calculation,” Mulford surmised, referring to earnings before interest, taxes, depreciation, and amortization.

Furthermore, most software packages that analyze corporate financials will have to be reworked to calculate the correct net income number. Right now, most software “pretty much punts when it comes to minority interest,” he says, explaining that when it comes to calculating debt-to-equity ratios, “minority interest usually doesn’t turn up as either.”

However, the professor noted, the computer tagging-language known as XBRL (extensible business reporting language), that the Securities and Exchange Commission is pushing, will be unaffected by the FAS 160 changes. XBRL, said Mulford, uses a chart of accounts in its taxonomy, which records line-by-line information. So it will pick up the minority-interest line where ever it appears.

This isn’t the first time FASB has moved to eliminate the mezzanine section of financials. The group issued FAS 150 last year to change the way companies record mandatorily redeemable preferred stock, which has the characteristics of both assets and liabilities. FASB voted to require companies to book the instrument as a liability.

For FASB’s part, FAS 160 is just one more step in its hunt for greater transparency and more simplicity in financial reporting. “This statement improves comparability by eliminating that diversity,” noted FASB’s summary of the rule.

Indeed, it does that by installing a single method of accounting for minority interests, especially when there is a change in a parent’s ownership stake in the subsidiary. According to FASB, whether the parent increases or decreases its investment in the subsidiary, the result is an equity transaction as long as the parent retains a controlling financial interest in the subsidiary.

That’s a departure from current practice. For example, under current practice, decreases in the parent’s ownership stake could be booked as either an equity transaction, or a transaction with gain or loss to income. “Net income will change for everyone,” when FAS 160 goes into effect, posited Mulford. “It will just take time to settle what net income means.”


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