Your browser does not support JavaScript!

Business Combination

18. Jun 2025
3

Hi everyone, I need your insights on purchase accounting under US GAAP for a scenario involving put and call options on the noncontrolling interest (NCI) in a business combination.

Specifically:

Parent acquires a majority stake (e.g., 80%) in a subsidiary.

There's a put option for the minority shareholder (on the remaining 20%), and the parent has a call option as well.

Both options are exercisable in a few years at a achievement of certain performance targets (Revenue & EBITDA),

How is this usually handled in practice when it comes to:

Initial recognition

Subsequent measurement

Impact on equity and earnings

Submitted by Mladek on Wed, 06/18/2025 - 17:31

When a parent acquires a controlling interest in a subsidiary but less than 100%, it recognizes a noncontrolling interest (NCI) in equity. The presence of put and call options on the NCI can complicate the accounting. If a put option gives the minority shareholder an enforceable right to compel the parent to purchase their shares for cash or another financial asset, US GAAP generally requires reclassifying the NCI as a liability, initially measured at fair value. This liability replaces the NCI in equity. The parent’s call option, unless it is in-the-money and meets the definition of a derivative, is typically not recognized at initial acquisition. If the put and call options are contingent on performance conditions (such as revenue or EBITDA targets), liability recognition may be delayed until those conditions are probable and estimable. If the options are not substantive or are freestanding, the NCI remains in equity and only the put option may be recognized separately as a liability.

After initial recognition, changes in the fair value of any put liability are recognized in earnings, which can introduce volatility to the income statement. If the parent later acquires the remaining NCI and retains control, the transaction is accounted for as an equity transaction—no gain or loss is recognized in earnings, only an adjustment to equity. For SEC registrants, redeemable NCIs may be classified as “temporary equity” (outside permanent equity). The specific accounting treatment depends on the enforceability and structure of the options, as well as the presence of any performance conditions, so careful evaluation of the terms is essential to ensure compliance with US GAAP.

Submitted by Johnbabu on Wed, 06/18/2025 - 17:51

The buyer exercise the call option for $1 if the ebitda or revenue target is not met and if it’s met then the the earn amount and sellers exercising the put option if it achieves the target evitda or revenue that’s over two years with a total payout of 8x of avg ebitda for two years minus the initial payment And exercising the put or call option is mandatory

Submitted by Mladek on Thu, 06/19/2025 - 08:58

A mandatory option is not an option. An option is a right not obligation. If it is mandatory, it is a right and an obligation so a forward or firm commitment. In this situation US GAAP requires a liability for the expected payout to be recognized, with ongoing remeasurement through earnings, and removal of the NCI from equity. This reflects the economic substance: the parent is effectively committed to purchase the remaining shares, contingent on performance, with the price determined by the outcome.

Add new comment