Business Combination

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.