presentation of noncontrolling interest on the balance sheet

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Noncontrolling Interests: The Full Consolidation Accounting Tutorial

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Noncontrolling Interests, formerly known as Minority Interests, seem to be one of the most confusing topics in accounting – and I’m not quite sure why.

But my top theory is that it’s because the “Noncontrolling Interests” (NCI) name describes what they’re not .

It’s similar to labeling an organization a “non-profit” – it tells you nothing about what the group does .

Unfortunately, there’s no way to eliminate this confusion because the more useful name – Consolidation Accounting – is also less common.

People are used to repeating the NCI name and assuming that everyone else knows what it means.

But the good news is that the main points are not that difficult.

Let’s start with the main idea and then move into the step-by-step walkthrough:

Noncontrolling Interest Accounting: The Main Concept

You can get this entire tutorial in video format below, along with the Excel file used in the explanations below:

Files & Resources:

• Noncontrolling Interests – Excel File (XL)
• Noncontrolling Interests – Slide (PDF)

Table of Contents:

• 1:10: The Short Version
• 4:37: How Noncontrolling Interests Get Created
• 13:00: Full Consolidation on the Financial Statements
• 15:47: Cash Flow Statement Combination and Projections
• 19:36: Balance Sheet Combination and Projections
• 24:26: Noncontrolling Interests in Valuation
• 25:55: Recap and Summary

We also cover this topic in more depth in our Advanced Financial Modeling course (see the “More Advanced Accounting” module):

Advanced Financial Modeling

Learn more complex "on the job" investment banking models and complete private equity, hedge fund, and credit case studies to win buy-side job offers.

When a Parent Company (“Parent Co.”) owns at least 50% of another company (“Sub Co.”), the Noncontrolling Interest represents the portion the Parent does not own :

So, if Parent Co. owns 70% of Sub Co., the Noncontrolling Interest on its Balance Sheet represents the 30% it does not own .

If Parent Co. owns 80%, the NCI represents the 20% it does not own.

The tricky part is that when a Parent owns at least 50%, it must consolidate Sub Co.’s financial statements with its own 100% regardless of the percentage it owns.

Let’s say that Parent Co. has Revenue of $100 by itself and Sub Co. has $50 of Revenue by itself.

If Parent Co. now owns 70% of Sub Co., the “Combined Revenue” is $100 + $50 = $150.

And if Parent Co. owns 50.01%, 70%, 80%, 99.9999%, or 100%, the “Combined Revenue” is still $150.

It changes only if Parent Co.’s ownership falls below 50%, in which case the equity method of accounting applies.

At the bottom of the Income Statement, you adjust for the portion of Sub Co.’s Net Income that is not attributable to the Parent.

For example, if Parent Co. owns 70% of Sub Co., Parent Co.’s standalone Net Income is $45, and Sub Co.’s standalone Net Income is $15, the Combined Income Statement will look like this:

Consolidation Accounting: But Wait, There’s More!

The points above represent what many bankers understand about Noncontrolling Interests.

But it’s also important to note the treatment of Dividends .

On the Cash Flow Statement, you still combine Parent Co. and Sub Co.’s financials 100% as long as Parent Co. owns >= 50%.

But there are two required adjustments:

• You reverse the deduction for the Net Income Attributable to Noncontrolling Interests on the Income Statement because if Parent Co. controls Sub Co., this deduction is non-cash. Parent Co. controls Sub Co., so it can claim its Net Income.
• And you add back Sub Co.’s Dividends * Ownership Percentage because this portion of Sub Co.’s Dividends goes to the Parent ! Therefore, only a smaller portion of Sub Co.’s Dividends should be a cash outflow.

For example, let’s say that Parent Co. issues $20 in Dividends, and Sub Co. issues $10 in Dividends.

You combine those and show the $30 in total Dividends as a negative on the Cash Flow Statement.

But since Parent Co. owns a percentage of Sub Co., you also add back the Dividends that go to Parent Co.

So, if Parent Co. owns 70% of Sub Co., you’ll show $10 * 70% = $7 as a positive adjustment on the Cash Flow Statement, often within Cash Flow from Operations.

How Noncontrolling Interests Get Created: The Full Process

To start, we’ll assume that Parent Co. already owns 30% of Sub Co., so it has an Equity Investment representing 30% of Sub Co. on its Balance Sheet:

Parent Co. now wants to increase its ownership stake to 70%.

Since this deal will result in ownership >= 50%, Goodwill will be created , and the other line items related to purchase price allocation (asset write-ups, deferred taxes, etc.) could be created as well.

To simplify, we will ignore those and focus on the Goodwill and the write-down of Sub Co.’s Common Shareholders’ Equity (which we can also get from the Statement of Owner’s Equity ).

As an added complication, we’ll also assume that Parent Co. acquired its 30% stake when Sub Co. was worth $50, but it will buy the additional 40% when Sub Co. is worth $100.

The Goodwill is based on the Equity Purchase Price for 100% of Sub Co., or $100 here (for more, see our coverage of the Enterprise Value vs. purchase price ):

It doesn’t matter whether Parent Co. owns 50.01%, 65%, 90%, 99.999%, or 100% afterward – as long as it “flips” from < 50% ownership to >= 50% ownership, Goodwill is created.

Sub Co.’s Common Shareholders’ Equity (CSE) is always written down because it no longer exists as an independent entity after the deal closes.

On the Balance Sheet, you add all of Sub Co.’s Assets and Liabilities to Parent Co.’s, but you exclude Sub Co.’s CSE since it’s written down.

If Sub Co. has line items within Equity but outside of Common Shareholders’ Equity, such as Preferred Stock, those will also be combined with Parent Co.’s.

On the Assets side, you add the new Goodwill created in the deal, remove the Equity Investments, and subtract any Cash used to fund the deal:

On the L&E side, you add any Debt or Stock used to fund the deal and create the Noncontrolling Interest based on (1 – New Ownership Percentage) * Equity Purchase Price for 100% of Sub Co.

That comes out to (1 – 70%) * $100 = $30 here:

There’s one other adjustment that often gets overlooked as well.

Since Parent Co. purchased the 30% stake in Sub Co. at a different valuation, the Balance Sheet will go out of balance when you remove the Equity Investment and replace it with the new Goodwill, the Noncontrolling Interests, and all the other line items.

To address this problem, you calculate the Premium or Discount to the existing Equity Investment before the deal took place and record it under CSE:

It’s based on Equity Purchase Price for 100% of Sub Co. * Old Ownership % – Old Equity Investment on Balance Sheet, so it’s $100 * 30% – $16 = $14 here.

Full Consolidation Accounting on the Financial Statements

After this initial step, you can model the combined financial statements by assuming that Parent Co. continues to own 70% of Sub Co.

The Income Statement follows the treatment outlined above: combine both companies’ line items and subtract (1 – Ownership Percentage) * Sub Co.’s Net Income at the bottom:

The Cash Flow Statement is more complicated, but it still follows the short treatment above: add together most of the items, reverse the Net Income Attributable to NCI deduction, and add back Sub Co.’s Dividends * Ownership Percentage:

In real life, most companies show a single line item for the Dividends, but we prefer to show Parent Co.’s Dividends separately from Sub Co.’s Dividends for clarity and ease of modeling.

You also need to make sure the first “Beginning Cash” number at the bottom of the CFS links to the post-transaction Cash number.

The Balance Sheet is the most complex part of this linking process, but once again, most of the items are simple additions of Parent Co. and Sub Co. numbers:

Equity Investments is now $0 all the way across, but we maintain the formula by linking it to Equity Investment Net Income and Equity Investment Dividends.

Common Shareholders’ Equity equals Old CSE + Net Income to Parent + Parent Co. Dividends + Stock Issuances + Stock Repurchases.

Parent Co. Dividends and Stock Repurchases already have negative signs on the Cash Flow Statement, so that formula subtracts them.

Finally, the formula for the Noncontrolling Interests looks a bit complicated at first:

Noncontrolling Interests = Old NCI + Net Income to NCI + Dividends Received from Partially Owned Companies If Parent Co. Owns >= 50% + 100% of Sub Co. Dividends

Again, note the signs: the Sub Co. Dividends is negative on the CFS, so this formula subtracts them.

The Noncontrolling Interests act like a mini-Shareholders’ Equity for the minority shareholders in Sub Co.

In other words, the NCI tracks what happens to the 30% of Sub Co.’s Net Income and Dividends that do not belong to Parent Co.

You can use this simple example to understand:

• Sub Co. Net Income = $20
• Sub Co. Dividends = $10
• Parent Co. Ownership = 70%

We take the old Noncontrolling Interests and add $20 * (1 – 70%), subtract all $10 of Sub Co.’s Dividends, and add $10 * 70% for the Dividends that go to Parent Co.

As a result, the $6 in Net Income Attributable to Noncontrolling Interests increases the NCI, and the $3 in Net Dividends reduces the NCI.

It’s the same as Net Income and Dividends in the normal Common Shareholders’ Equity line item, but it’s only for the 30% that do not go to Parent Co.

Noncontrolling Interests in Valuation: Equity Value and Enterprise Value

In the context of valuation, you always add Noncontrolling Interests in the Equity Value to Enterprise Value bridge :

In part, this is because Noncontrolling Interests represent another “investor group” (the minority shareholders of Sub Co.), but it’s also to construct proper valuation multiples.

Since Enterprise Value-based metrics like Revenue, EBIT, and EBITDA all include 100% of Sub Co.’s numbers, Enterprise Value must also reflect 100% of Sub Co.’s value.

If you do not add the Noncontrolling Interests, Enterprise Value will reflect only the value of the stake owned by Parent Co., such as the 60%, 70%, or 80% here.

It’s best to use the market value when adding the Noncontrolling Interests, but if you cannot find it, the book value is fine – especially if the NCIs are small.

In projection models, you tend to make simple assumptions for the NCI line items, such as fixed-percentage growth rates for their Net Income and Dividends.

These items rarely make a big difference unless the partially owned companies represent a substantial portion of the Parent Company’s financial results, such as 20%+.

Other, More Advanced Points About Noncontrolling Interests

The last step of the process shown above is deconsolidation : the steps Parent Co. takes to move from a majority stake in Sub Co. to a minority stake or no stake at all.

At a high level, you remove all of Sub Co.’s Assets and Liabilities, remove the Goodwill created in the original deal, recreate the Equity Investment (if applicable), and record a Gain or Loss on the entire transaction.

Determining the Gain or Loss is tricky and outside the scope of this free tutorial; it also has a 0.00001% chance of coming up in interviews.

Noncontrolling Interests rarely matter in merger models and LBO models because they rarely change when these deals take place.

So, unlike Excess Cash or Refinanced Debt, they do not affect the net deal funding, and are therefore unlikely to show up in the Sources & Uses schedule.

If the acquirer does want to modify a target’s stakes in other companies, it might do so after the deal closes and it can evaluate the target’s performance in more detail.

The bottom line, though, is that if you understand the main points outlined here, you should be in good shape for anything related to Noncontrolling Interests in interviews – even if you feel you’re not in complete control the whole time.

If you liked this article, you might be interested in reading Enterprise Value vs Equity Value: The Complete Guide .

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street . In his spare time, he enjoys lifting weights, running, traveling, obsessively watching TV shows, and defeating Sauron.

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What is a Non-Controlling Interest (NCI)?

Accounting treatment of non-controlling interest, criteria for a non-controlling interest, valuation of non-controlling interest, constant growth, historical growth, modeling subsidiaries individually, non-controlling interest in the computation of enterprise value, additional resources, non-controlling interest (nci).

Occurs when a company owns greater than 50% of another company, but not 100%

A non-controlling interest (NCI) typically occurs when a company owns more than 50% of another company but less than 100%. Since the first company (parent company) effectively controls the second company ( subsidiary company), the parent will fully consolidate the subsidiary’s financials with its own.

As an example, assume Company A owns 75% of Company B: This creates a 25% non-controlling interest in Company B. Company A will fully consolidate its financials with Company B. In other words, Company A will claim 100% of Company B’s revenues and expenses and assets and liabilities. However, Company A will allocate 25% of Company B’s net income to the 25% non-controlling interest in Company B. There will also be a non-controlling interest in Shareholder’s Equity on the balance sheet.

Below, you can see an example of how non-controlling interest is reported on both Walmart’s income statement and balance sheet. Non-controlling interest was formerly known as minority interest.

Non-controlling interest typically occurs when one company owns greater than 50% of another company but not 100%. Since the first company has greater voting power, it effectively controls the second company. However, this ownership level is just a rule of thumb. A company may still consolidate another company’s financials even if it owns less than 50%. This may occur if the consolidating company controls the subsidiary’s board of directors and is, therefore, able to direct the subsidiary’s business decisions.

Valuing a company requires financial statements to better forecast future trends around profits and cash flows. Unfortunately, companies with a non-controlling interest prepare consolidated financials and rarely disclose enough information to properly value the NCI. However, analysts can still attempt to value NCI using some of the methods discussed below.

The constant growth method is seldom used because the assumption is that there is hardly any decline or growth in the performance of the subsidiary company.

In the historical growth method, previous financials are analyzed to ascertain existing trends. The model predicts the growth of a subsidiary at a rate based on past trends. However, this method is not applicable to companies experiencing dynamic growth or severe decline.

This analysis method evaluates each subsidiary on its own and then adds up the individual interests of each subsidiary to achieve a consolidated value. This method is much more flexible, and the results may be theoretically more accurate.

Unfortunately, it is quite difficult to perform due to lack of disclosures by the parent company. In addition, if a company has many subsidiaries, then it may not be worth the time and effort to try and value each one.

Assuming markets are efficient and a stock is fairly priced, a company’s market cap reflects the parent’s partial ownership of a consolidated subsidiary. Therefore, when calculating enterprise value , an analyst needs to add the non-controlling interest to the market cap. This is because enterprise value is often used in valuation multiples like EV/EBITDA. Since EBITDA includes 100% of the non-controlling interest’s EBITDA, then adding NCI to the market cap when calculating enterprise value makes the numerator and denominator consistent (both now reflect 100% of the subsidiary). The bottom line is to include non-controlling interest when calculating enterprise value.

It is important to investors that companies provide transparency regarding non-controlling interest because it will give them a better understanding of the effect of the NCI on a group’s financial position, financial results, and cash flows , as well as the risks faced by the group. Investors will then be better positioned to form their own opinion regarding the impact of NCI on the parent company.

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Recognising and measuring non-controlling interests

This article sets out the requirements for recognising and measuring any non-controlling interest (NCI).

Definition of NCI

NCI is the term used in IFRS 3 and IFRS 10 ‘Consolidated Financial Statements’ to describe equity instruments of a subsidiary not held directly or indirectly by a parent. In a business combination, a NCI arises when an entity acquires less than 100% of the equity of the acquiree.

IFRS 3 defines NCI as ‘the equity in a subsidiary not attributable, directly or indirectly, to a parent’

The simplest and most common form of NCI is shares in the acquiree held by non-selling shareholders. However, all instruments issued by the acquiree that meet the definition of equity set out in IAS 32 ‘Financial Instruments: Presentation’ – such as some share options, preferred shares, equity component of convertible bonds, etc – are also NCI if they are not owned or acquired by the acquirer. It is therefore important to identify and distinguish the acquiree’s equity instruments from its financial liabilities based on the definitions in IAS 32. This is because NCI is presented as a separate component of equity in the acquirer’s post-combination consolidated financial statements and is subsequently accounted for in accordance with IFRS 10.

Category of NCI and measurement option

Depending on the nature and the rights those equity instruments entitle their holders, NCI can be grouped into two broad categories, which in turn determine the available measurement options at initial recognition. Determining whether a NCI measurement option is available is key when accounting for a business combination, since the measurement of NCI can affect the amount of goodwill and subsequent accounting.

These measurement options are only available on initial recognition of a NCI, as part of a business combination transaction, in order to determine the amount of goodwill. Once initially recognised in accordance with IFRS 3, IFRS 10 guidance on subsequent accounting should be applied.

Present ownership instruments – NCI measurement options impact

The basis on which NCI of which are present ownership instruments is initially measured, affects goodwill at the acquisition date but could also have a financial impact on subsequent impairment and transactions with those NCI. When the fair value model is used, 100% of the goodwill in the acquiree is recognised (both the acquirer’s and the NCI’s share). This is sometimes described as the full goodwill model. Under the proportionate interest model only the acquirer’s interest in the goodwill is recognised (a lesser amount).

The following example shows the basic effect of the two models:

Example – Measuring NCI Entity A pays CU800 for an 80% interest in Entity B. Entity A does not have any previously held equity interest in Entity B. The fair value of Entity B’s identifiable net assets is estimated to be CU750. Using a valuation technique, the fair value of the remaining 20% in Entity B (the NCI) on the acquisition date is determined to be CU180. The NCI gives right to a present ownership interest in the acquiree’s equity.

Analysis The amount of NCI and goodwill recognised under the alternative methods is as follows:

Apart from the effect on goodwill, other factors may influence the measurement model choice, download ' Recognising and measuring non-controlling interests'  for more.

Determining the fair value of NCI

Fair value of NCI should be measured in accordance with IFRS 13 ‘Fair Value Measurement’. Refer to our article Insights into  IFRS 3 – How are the identifiable assets and liabilities measured? which provides some guidance on how to determine fair value in accordance with IFRS 13.

IFRS 3 provides however some guidance on how the fair value of NCI is determined when applicable:

Fair value of NCI

• The fair value of NCI is based on the quoted price in an active market for the equity shares not held by the acquirer, if available. Otherwise, the acquirer would measure the fair value of NCI using other valuation techniques.
• The fair value of the acquirer’s interest and NCI in the acquiree on a per-share basis might differ and as such it might not be relevant to etain the acquirer fair value per share to determine the fair value of NCI as the fair value per share of the acquirer’s interest in the acquiree is likely to include a control premium or conversely, the fair value of the NCI might include a discount for lack of control (also referred to as a NCI discount).

Call and put options on NCI

The acquirer may arrange with non-selling shareholders during the period of negotiation for the acquisition to acquire NCI shares after the acquisition date – eg by entering into put or call options or a forward contract over the remaining shares held by the non-selling shareholders of the acquiree. An analysis is then required to determine whether, in substance, the underlying shares still legally owned by the NCI are economically attributable to non-selling shareholders or to the acquirer. This analysis and its consequences on the acquisition accounting is discussed further in our article Insights into IFRS 3 – Determining what is part of a business combination transaction .

How we can help

We hope you find the information in this article helpful in giving you some insight into IFRS 3. If you would like to discuss any of the points raised, please speak to your usual Grant Thornton contact or your local member firm .

• Technical update

Non-Controlling Interest (NCI)

Non-controlling interest example, full goodwill.

                          = $ 112,500 – $ 100,000 = $ 12,500

Please refer to the consolidate statement of financial position below:

Partial Goodwill

                 = 20% * 100,000 = $ 20,000

Non-Controlling Interest after Acquisition

One year after the acquisition, the subsidiary has made a profit of $ 60,000 and there is no dividend paid yet.

Valuation of Non-Controlling Interest

Related posts:.

Noncontrolling (Minority) Interest

Noncontrolling interest (NCI) is the portion of equity ownership in a subsidiary not attributable to the parent company, who has a controlling interest (greater than 50% but less than 100%) and consolidates the subsidiary’s financial results with its own.

For example, suppose company Alpha acquires 80% of the outstanding stock of company Sierra. Because Alpha owns more than 50% of Sierra, Alpha consolidates Sierra’s financial results with its own. The 20% of Sierra’s equity that Alpha does not own is recorded on Alpha’s balance sheet as NCI. Consolidated net income is allocated to the parent and noncontrolling interests (minority shareholders) in proportion to their percentages ownership; 80% to Alpha and 20% to the noncontrolling interests, in this case.

The FASB’s FAS 160 and FAS 141r significantly alter the way a parent company accounts for NCI in a subsidiary. Below is a summary of these changes.

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Recording Noncontrolling Interest

The amounts of consolidated net income attributable to the parent and to the noncontrolling interest must be clearly identified and presented on the consolidated income statement. Previously, net income attributable to the noncontrolling interest was generally recorded as an expense or other deduction in calculating consolidated net income. The exhibit below shows AstraZeneca’s 2007 income statement in the prescribed format:

Exhibit – AstraZeneca’s 2007 Consolidated Income Statement

Valuing Acquired Net Assets

Recall from our lesson on important accounting changes that even when less than a 100% controlling interest is acquired, 100% of the acquired net assets are recorded at fair value (FV). Previously, only the controlling interest was recorded at FV while the remaining noncontrolling interest was recorded at its carrying value. The new rules result in goodwill attributable to both the acquirer and the noncontrolling interest.

Example A – Purchase Price Allocation

Suppose that Alpha acquires 30 million shares, or 80% of the outstanding shares, of Sierra for $22.00 per share in cash. The average market price of Sierra’s stock three days prior to and including the acquisition date is $20.00. Transaction costs were $15 and Alpha’s corporate tax rate is 30%. Sierra’s pre-transaction book and tax balance sheets are identical and as shown in the spreadsheet below.

What is goodwill under both the old and new accounting rules?

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Note in the new rules example that the noncontrolling interest is valued at $20.00 per share rather than the $22.00 per share paid by Alpha. This might be because Alpha pays a control premium of $2.00 per share to acquire a controlling interest in Sierra. If Sierra’s seller is a company, the seller will record its 20% noncontrolling interest in Sierra using the equity method of accounting.

Changes in Controlling Interest

Since NCI is now considered equity, changes in a parent’s controlling interest in its subsidiary that do not result in change of control are accounted for as equity transactions, or transactions between shareholders. Previously, decreases in ownership interest were treated as either equity transactions or accounted for with gain/loss recognition on the income statement.

Acquisitions of additional noncontrolling interests (when the parent already has control) in a step acquisition , for example, are no longer required to be accounted for using the purchase method (now called the acquisition method ). Previously, such acquisitions were accounted for under the purchase method. Eliminating the requirement to apply purchase accounting to these transactions reduces the parent’s costs by eliminating the need to value the assets and liabilities of the subsidiary on the dates that additional equity interests are acquired.

Losses Attributable to the Parent and Noncontrolling Interest

Losses attributable to the parent and the noncontrolling interest in a subsidiary are attributed to those respective interests, even if doing so results in a deficit noncontrolling interest balance (negative equity). Previously, ARB 51 required that losses attributable to the noncontrolling interest in a subsidiary that exceeded the noncontrolling interest’s equity be instead attributed to the parent. Therefore, under the new rules, parents may report higher net income because noncontrolling interests are now allocated their proportionate shares of any losses.

Example B – Losses Attributable to Noncontrolling Interest

Suppose that in 2008 Alpha acquired 80% of the equity interest in subsidiary Sierra from Tango, which owns the 20% noncontrolling interest. On Jan 1, 2009, Alpha’s total equity balance is $1,000 and Tango’s noncontrolling interest is $100. During 2009, Sierra generates a net loss of $600. What losses are attributed to Alpha’s and Tango’s noncontrolling interests under the old and new accounting rules?

Note that under the old rules, Alpha records a disproportionate share of Sierra’s losses.

Deconsolidation

A parent must recognize a gain/loss upon deconsolidation of a subsidiary. If the parent retains a noncontrolling interest in the former subsidiary, the investment is measured at FV and any gain/loss is measured using the FV of the noncontrolling equity investment. Previously, the carrying amount, rather than FV, of any retained investment was used in determining any gain/loss upon deconsolidation.

Terminology

The FASB replaces the term minority interest with noncontrolling interest .

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• FINANCIAL REPORTING

Noncontrolling Interest: Much More Than a Name Change

New consolidation rules for partially owned affiliates: fasb 160.

• Accounting & Reporting
• FASB Financial Accounting & Reporting

An article in the June 2008 issue of the JofA (“ A New Day for Business Combinations ,” page 34) described nine major changes created by Statement no. 141(R). This article summarizes the most important changes created by Statement no. 160, which is effective for fiscal years beginning after Dec. 15, 2008.

THE BIG PICTURE Although developed in tandem with Statement no. 141(R), Statement no. 160 was issued as a separate standard because the original Statement no. 141 did not formally address how to account for what used to be called “minority interests.” Statement no. 160 provides improved terminology and conceptually consistent resolution to several reporting and measurement issues. The result will be more informative financial statements that reflect how the existence of and changes in noncontrolling interests (NCI) can affect cash flow potential for the consolidated entity and its shareholders.

A NEED FOR UPDATED TERMINOLOGY The most visible innovation in Statement no. 160 is the name change from “minority interest” to “noncontrolling interest.” The problem with the old terminology was that it did not encompass the full range of combination scenarios. Some majority ownership positions don’t lead to consolidation, such as when a subsidiary is in bankruptcy. Conversely, under Interpretation no. 46(R), Consolidation of Variable Interest Entities , a parent with a minority holding in another entity may have sufficient control to require consolidation if it is deemed to be the primary beneficiary of the subsidiary’s activities. On Sept. 15, FASB issued an exposure draft proposing revisions to Interpretation no. 46(R). Among other things, the proposal requires performing new qualitative analysis when determining if a financial interest in a VIE is to be consolidated.

The shift to the term “noncontrolling interest” will emphasize a parent’s substantive control over a subsidiary rather than a simple ownership percentage and will more usefully reflect the underlying economic and accounting concepts.

There is much more to the standard than just this name change. Years of experience under the old purchase accounting standard showed the need for profound improvements in accounting for the NCI. Specifically, its treatment has varied considerably because of the haphazard processes that created previous consolidation standards.

The result, in FASB’s own words, was that “GAAP had no clear accounting and reporting guidance for the noncontrolling interest in a subsidiary” (Statement no. 160, paragraph B6). This lack of guidance led to an unclear and inconsistent concept of NCI that, in turn, created diverse and unproductive reporting. The following sections describe some of these problems and the related provisions in the new standard that are intended to overcome them.

NCI DISPLAY Balance sheet. Minority interest has been presented on some balance sheets as a liability, as equity or, most commonly, as a fuzzy mezzanine item somewhere in between. The new statement will eliminate these options by specifically requiring the NCI to be displayed as a separate line item within the equity section of the consolidated balance sheet. (A set of illustrative financial statements is provided in Exhibit 1 .)

Income and comprehensive income. Consolidated income statements will present net income for the entire enterprise as well as the allocations to the parent and NCI. Reported earnings per share will be based only on the income attributable to the parent. The consolidated total of accumulated other comprehensive income (AOCI), whether due to available-for-sale securities, pension adjustments, derivatives or other sources, will also be allocated between the controlling and noncontrolling interests.

A major change affecting income reporting concerns the treatment of the earnings related to midyear acquisitions. Currently, consolidated revenue and expenses are often reported under the hypothetical assumption that the parent controlled the subsidiary from the beginning of the year, which is acceptable as long as a subsidiary’s pre-acquisition earnings are backed out at the bottom of the income statement. Since the current treatment allows nondescript measures of top-line performance, the new standard will eliminate this option. Under Statement no. 160, subsidiary revenues and expenses arising only after the date of combination will be reported on the consolidated income statement.

Cash flow statement and statement of changes in equity . The cash flow and equity statements will report the outcome of the period’s events for the entire consolidated enterprise. This display will allow users to see cash flows and other equity changes flowing from all assets and liabilities under the parent management’s control. In addition, equity statements will now include a new column explaining the changes between the beginning and ending NCI balances.

NCI MEASUREMENT In addition to the inconsistent placement of the NCI on consolidated balance sheets, existing GAAP permits diverse measurement practices, diminishing comparability. Specifically, the NCI’s portions of a subsidiary’s assets and liabilities often are included on the consolidated balance sheet at their book values as of the acquisition date. Because the parent’s portions of those same assets and liabilities are reported at fair value, the consolidated assets and liabilities are presented in the statements as an indecipherable mixture of old book and new fair values. This outcome is likely to confound users’ efforts to comprehend the situation.

To overcome this defect, Statement no. 141(R) will require a subsidiary’s assets (including goodwill) and liabilities to be recorded at fair value as of the acquisition date. When a subsidiary is partially owned, Statement no. 160 will require the NCI’s proportional claim to the difference between the fair values of the subsidiary’s assets and liabilities to be reported within consolidated equity. The result of applying both new standards will be a larger amount of total recorded goodwill and a correspondingly larger NCI equity item. Exhibit 2 illustrates NCI accounting for a basic combination scenario.

Going forward from the acquisition date, the NCI balance will increase or decrease based on its proportionate share of the subsidiary’s profits and losses. It will be reduced by its share of dividends paid by the subsidiary. Currently, the NCI’s share of losses is constrained to avoid showing a debit NCI balance. Under Statement no. 160, the sharing of income or losses will not be constrained, even if it means reporting a deficit balance for the NCI.

These modifications reflect an application of the entity accounting theory that will cause financial statements to reflect all shareholder interests, including those of the parent and subsidiary’s noncontrolling shareholders. Existing accounting for the NCI is a slapdash mix of practices that is not aligned with any particular concept and certainly does not produce information useful for rational decisions. This explicit adoption of the entity theory also is consistent with FASB’s Concepts Statement no. 6 classification of the NCI as a residual equity interest.

POST-ACQUISITION CHANGES IN THE PARENT’S OWNERSHIP Statement no. 160 will stipulate new requirements for transactions and other events that change a parent’s ownership percentage in a subsidiary. Depending on the particular facts, the percentage may change because the parent buys or sells subsidiary shares or because the subsidiary engages in its own stock transactions without involving the parent. Some of these events leave the parent in control while others may cause the parent to lose control. The most common of these transactions are described in Exhibit 3 .

WHEN CONTROL IS RETAINED Statement no. 160 will not allow recognition of gains or losses on the consolidated income statement when the parent retains control after changes in its ownership percentage. The rationale is that these transactions are capital in nature. By making this requirement explicit, the new statement will bring uniformity to an area of practice where diversity reigned because of the compromised guidance provided in Staff Accounting Bulletin no. 51, Accounting for Sales of Stock by a Subsidiary . This SAB inconsistently allowed gains and losses to be recognized in some but not all situations, with arbitrary distinctions between them.

When transactions alter the parent’s ownership percentage, Statement no. 160 will require the parent to proportionally adjust its investment account (in its accounting system, not in the consolidated statements). Any difference between the adjustment and the consideration given up or received will be added to or subtracted from the parent’s unconsolidated additional paid in capital, and will not be reported as a gain or loss on the income statement. In turn, no adjustments will be made to the carrying values in the subsidiary’s accounting records for its assets (including goodwill) and liabilities, apart from recognizing any consideration given up or received by the subsidiary from its stock transactions. In the consolidation process, the decrease or increase in the parent’s investment account will pass through to the NCI as an increase or decrease, respectively. These illustrations provide examples of the effects of changes in ownership.

These procedures will also be applied to situations when a subsidiary’s equity includes AOCI. The change in the parent’s ownership percentage will affect the allocation of the subsidiary’s total AOCI between the parent’s and the NCI’s portions. Specifically, the consolidated AOCI must be reallocated with an increase or decrease in the NCI and a corresponding decrease or increase in the parent’s additional paid in capital account.

WHEN CONTROL IS LOST—DECONSOLIDATION When a parent loses control of a subsidiary because of its own transactions or those affecting only the noncontrolling shareholders, the underlying economics are more faithfully represented if the previously consolidated assets and liabilities are “deconsolidated.” Upon losing control, the parent’s own accounting system must accommodate its new status as the holder of an investment that has become a noncontrolling interest in the subsidiary that it used to control. How that adjustment is accomplished depends on the circumstances. If the parent still has influence, it will apply the equity method; if not, it will account for the investment as trading or available-for-sale.

Under existing GAAP, the parent’s records after deconsolidation include a new noncontrolling investment account with a balance equal to the carrying value of the retained shares in the former subsidiary, measured as of the date control was lost. This practice is deficient because that GAAP-based book value doesn’t reliably describe the future cash flow potential inherent in those shares.

Deconsolidation under Statement no. 160 will establish the parent’s new noncontrolling investment account with an initial balance equal to the fair value of the parent’s retained shares in the former subsidiary as of the date control is lost. The difference between the book and fair values for this investment will be reported as a gain or loss on the income statement and will be combined with the realized gain or loss on any shares sold as part of the deconsolidation transaction. The parent’s income statement will also be affected in two ways. Going forward, investment income will replace the previously consolidated operating revenues and expenses, and the earnings per share calculation will no longer allocate earnings between the parent and the NCI.

To summarize the underlying concept, a change in the ownership percentage resulting in a loss of control has a real economic impact on the financial interests of both the parent and the noncontrolling shareholders. This impact is not fully revealed under existing GAAP.

When a noncontrolling interest is retained in a formerly controlled entity, the new investment currently rolls forward at the basis of the kept shares. Statement no. 160 will more usefully describe how the former parent-subsidiary relationship transforms to a new investor-investee relationship by requiring fair value measurement at the time of deconsolidation.

SUPPLEMENTAL DISCLOSURES Statement no. 160 will require new supplemental disclosures about the controlling and noncontrolling interests to help users understand how they affect the overall reporting entity and the future cash flow potential for the parent’s shareholders. Previously, no disclosures about NCI were required. Going forward, Statement no. 160 specifies that a footnote must reconcile the beginning and ending balances of both the parent and NCI equity amounts, including net income and owner contributions attributable to each of them. Additional disclosures will describe changes in the parent’s percentage ownership of its subsidiaries, including any circumstances leading to loss of control and deconsolidation of a previously consolidated subsidiary. The new disclosures will shine a light into areas where users have not had much illumination in the past.

AICPA RESOURCES

CPE What You Need to Know About Accounting for Business Combinations , a CPE self-study course (#182000)

Publication Current Accounting Issues and Risks 2008—Strengthening Financial Management and Reporting (#029208)

For more information or to place an order or register, go to www.cpa2biz.com or call the Institute at 888-777-7077.

OTHER RESOURCE

Web site FASB Web site, www.fasb.org/pdf/fas160.pdf

EXECUTIVE SUMMARY

Paul R. Bahnson , CPA, Ph.D., is an accounting professor at Boise State University. Brian P. McAllister , CPA, Ph.D., and Paul B.W. Miller , CPA, Ph.D., are accounting professors at the University of Colorado at Colorado Springs. Their e-mail addresses, respectively, are [email protected] , [email protected] , and [email protected] .

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What Is Non-Controlling Interest?

Understanding non-controlling interest.

• Financial Statements

The Bottom Line

• Corporate Finance
• Corporate Finance Basics

Non-Controlling Interest: Definition, How It Works, and Example

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Pete Rathburn is a copy editor and fact-checker with expertise in economics and personal finance and over twenty years of experience in the classroom.

Investopedia / Michela Buttignol

A non-controlling interest is an ownership position in which a shareholder owns less than 50% of outstanding shares and has no control over decisions. It's also known as a minority interest. Non-controlling interests are measured at the net asset value of entities. They don't account for potential voting rights .

Most shareholders of public companies would be classified as holding non-controlling interests even with a 5% to 10% equity stake that would be considered to be a large holding in a single company. A non-controlling interest may be contrasted with a controlling or majority interest in a company where the investor does have voting rights and can often affect the course of the company.

Key Takeaways

• A non-controlling interest, also known as a minority interest, is an ownership position in which the shareholder owns less than 50% of outstanding shares.
• Minority interest shareholders have no individual control over corporate decisions or votes.
• A direct non-controlling interest receives a proportionate allocation of all recorded equity of a subsidiary, both pre- and post-acquisition amounts.
• An indirect non-controlling interest receives a proportionate allocation of a subsidiary's post-acquisition amounts only.
• The opposite of a non-controlling interest is a controlling interest where a shareholder has voting rights to determine corporate decisions.

Most shareholders are granted a set of rights when they purchase common stock, including the right to a cash dividend if the company has sufficient earnings and declares a dividend. Shareholders may also have the right to vote on major corporate decisions, such as a merger or company sale. A corporation can issue different classes of stock, each with different shareholder rights.

There are generally two types of non-controlling interests: a direct non-controlling interest and an indirect non-controlling interest. A direct non-controlling interest receives a proportionate allocation of all pre- and post-acquisition amounts of recorded equity of a subsidiary. An indirect non-controlling interest receives a proportionate allocation of a subsidiary's post-acquisition amounts only. 

An investor generally can't communicate specific proposals to the board and management unless they control 5% to 10% of the shares. They can't propose changes to the board of directors, propose changes at shareholder meetings, or team with other investors to make their actions more likely to succeed until they control this number of shares. Such investors are termed activist investors.

Activist investors range widely in style of action and objectives that can range from seeking operational improvements to restructuring to natural environment and social policy.

Financial Statements and Non-Controlling Interest

Consolidation is a set of financial statements that combines the accounting records of several entities into one set of financials. These typically include a parent company as the majority owner, a subsidiary or a purchased firm, and a non-controlling interest company. The consolidated financials allow investors, creditors, and company managers to view the three separate entities as if all three firms are one company.

A consolidation also assumes that a parent and a non-controlling interest company jointly purchased the equity of a subsidiary company. Any transactions between the parent and the subsidiary company or between the parent and the non-controlling interest firm are eliminated before the consolidated financial statements are created.

Example of Non-Controlling Interest

Assume that a parent company buys 80% of XYZ firm and that a non-controlling interest company buys the remaining 20% of this subsidiary. The subsidiary’s assets and liabilities on the balance sheet are adjusted to fair market value and those values are used on the consolidated financial statements. The excess is posted to a goodwill account in the consolidated financial statements if the parent and a non-controlling interest pay more than the fair value of the net assets.

Goodwill is an additional expense incurred to buy a company for more than the fair market value. Goodwill is amortized into an expense account over time after an impairment test. This is done under the purchase acquisition accounting method approved by the Financial Accounting Standards Board (FASB).

What Is Net Asset Value?

Net asset value (NAV) is the value that remains after all liabilities have been expensed. It's typically just one factor considered in the performance of an asset.

How Many Shares Are Necessary to Become an Activist Investor?

An activist investor acquires an average of 6% of a company's outstanding shares, according to the Harvard Law School Forum on Corporate Governance. Less than 5% of outstanding shares awards a minor ownership position but even 5% might be a large holding in a small, single company.

What Is Goodwill in Accounting?

Goodwill is considered to be an intangible asset. The term is commonly used to describe a situation in which Company A is willing to pay more than the fair market value of Company B's net assets in a bid to acquire Company B.

A non-controlling interest is a minority interest. The shareholder owns less than half the number of outstanding shares. This type of shareholding typically awards no control over corporate decisions or votes. Shareholders with controlling interests have voting rights.

Always consult with a professional if you’re unsure about the status of shares of a company in which you’re thinking of investing.

CFI Education. " Goodwill ."

Morningstar. " Net Asset Value ."

Harvard Law School Forum on Corporate Governance. " Activist Investors and Target Identification ."

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How Accounting for Non-controlling Interests Works Under U.S. GAAP and IFRS: A Comparative Analysis

Understanding noncontrolling interests.

Noncontrolling interests (NCIs) play a vital role in the financial consolidation process of a parent company and its subsidiaries, impacting both the balance sheet and the income statement.

Definition and Concepts

Noncontrolling Interest (NCI) , also known as a minority interest, represents the share of equity in a subsidiary not owned by the parent company. If a parent company owns more than 50% but less than 100% of a subsidiary, the remaining share is the NCI. It reflects the portion of the subsidiary’s net assets and results that are not attributable to the parent. This concept is crucial in understanding the financial health and true ownership structure of a business.

Classifying Noncontrolling Interests

Under U.S. GAAP, NCIs are classified within equity, separate from the parent company’s equity. The classification underscores the recognition of NCIs as distinct from the interests of the parent company’s shareholders. The distinction is vital for users of financial statements when evaluating the ownership structure and equity proportion attributable to non-majority shareholders.

Initial Measurement

The initial measurement of an NCI involves valuing the non-majority stake at the date of acquisition, either at fair value or at the proportionate share of the acquiree’s identifiable net assets. Both U.S. GAAP and IFRS require the complete reporting of all assets and liabilities at acquisition, including goodwill, which reflects the measurement of NCIs at their full fair value at acquisition if that option is chosen.

Accounting Standards Overview

In the realm of accounting, non-controlling interests (NCI) present a unique challenge. Two primary frameworks govern the reporting of NCI: US GAAP and IFRS, each with their own set of principles and requirements.

US GAAP Framework

Under the US GAAP, specifically within ASC 810-10-20, and further interpreted by ASC 480-10-S99-3A, a non-controlling interest is defined as the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to the parent company. These interests should be reported in the consolidated financial statements as a separate component of equity, distinct from the parent company’s equity. The accounting for non-controlling interests requires entities to disclose the interests of minority shareholders in the consolidated entities that are not wholly owned by the parent.

IFRS Framework

The IFRS treats non-controlling interests under IFRS 3 with guidance that aligns with the principles of the framework. Similar to US GAAP, non-controlling interest is seen as the portion of equity in a subsidiary not held by the parent entity. However, in 2008, IFRS transitioned from using the term ‘minority interest’ to ‘non-controlling interest’ to better reflect the understanding that owners of minority interests might have control. The recognition and measurement of these interests require careful consideration and accurate representation within the financial statements.

Recognition and Measurement

In accounting for non-controlling interests (NCIs), both U.S. GAAP and IFRS dictate specific criteria for recognition and measurement of NCIs in consolidated financial statements. These standards ensure transparency in depicting the interests in a subsidiary not held by the parent company.

Consolidation Procedures

Under both U.S. GAAP (ASC 810-10-20) and IFRS (IFRS 10 “Consolidated Financial Statements”), a reporting entity is required to consolidate all subsidiaries, or lower-level legal entities it controls, which includes recognizing NCIs. Consolidation involves combining the financial information of a parent and its subsidiaries to present as if the group is a single economic entity. During consolidation, the balance sheet and comprehensive income of the subsidiary are reported in full and the NCIs’ share is presented as a separate component of equity in the parent’s financial statements.

Initial Recognition

At the point of initial recognition, when a controlling interest is acquired in an entity that is not wholly owned, a NCI arises. The NCI is initially measured either at fair value , or at the NCI’s proportionate share of the carrying value of the subsidiary ‘s identifiable net assets. This initial measurement choice under IFRS provides an option that is not available under U.S. GAAP, where NCI must be measured at fair value at initial recognition.

Subsequent Measurement

After the initial recognition, both U.S. GAAP and IFRS require that NCIs be reported within equity, separate from the parent’s equity, and not as a liability. The subsequent measurement involves updating the carrying amount of the NCI to reflect its share of changes in the subsidiary’s net assets. The NCI’s share of the subsidiary’s net income or loss is recognized in the consolidated income statement and directly affects the carrying amount of NCI in the equity section of the consolidated balance sheet . Both U.S. GAAP and IFRS requires reporting entities to apply the equity method of accounting when they possess significant influence, but do not control a subsidiary.

Disclosure and Presentation

The Disclosure and Presentation section of non-controlling interests under U.S. GAAP and IFRS emphasizes the importance of accurate representation of the financial state of a reporting entity. The focus is on clarity regarding the equity and net income attributable to non-controlling shareholders, and the specific requirements for financial statements and disclosure of interests.

Financial Statement Requirements

Under U.S. GAAP, a reporting entity is required to present non-controlling interests (NCI) in the consolidated balance sheet within equity, separate from the parent’s equity. The income statement should report the amount of net income attributable to the non-controlling interests. Under IFRS, similar presentation standards are applied for non-controlling interests. Both require that NCI be presented clearly to show the interests in subsidiary net assets and comprehensive income that are not owned by the parent.

• Balance Sheet : Non-controlling interests should be displayed in the equity section , distinctly separated from the parent’s equity.
• Income Statement : Net income should include a line that specifies the portion attributable to non-controlling interests.

Disclosure of Interests

Disclosure requirements for non-controlling interests involve providing sufficient information to users of the financial statements so they can understand the nature and extent of the interests that the parent does not hold.

Key disclosures under U.S. GAAP and IFRS include:

• The interests of non-controlling shareholders in the consolidated net income .
• Changes in a reporting entity’s interest in a subsidiary that do not result in a loss of control.
• Summary of significant accounting policies regarding non-controlling interests.

In addition to these, the equity instruments and transactions with non-controlling interests, such as equity transactions and purchases or sales of equity interests, require clear disclosure.

Special Considerations

When accounting for non- controlling interest s under U.S. GAAP and IFRS, special considerations need to be taken into account during certain events, such as changes in the level of ownership, loss of control, and during the execution of business combinations.

Changes in Ownership

When there is a change in ownership that does not result in a loss of control, the parent company adjusts the carrying amount of the controlling interest to reflect the change. The difference is recognized directly in equity and attributed to the owners of the parent. Under U.S. GAAP, changes in a parent’s ownership interest while maintaining control are accounted for as equity transactions. If the subsidiary issues new shares to third parties and the parent’s ownership decreases, goodwill is not adjusted. Instead, the reduction in the parent’s controlling interest is accounted for in the equity section.

Loss of Control Events

When a parent company loses control of a subsidiary, it derecognizes the assets and liabilities of the subsidiary, including any non-controlling interests , and recognizes any investment retained at fair value. Any resulting gain or loss is reported in profit or loss. Under U.S. GAAP, loss of control events can significantly impact the financial statements, often involving the recognition of previously unreported gains or losses for the former controlling entity.

Business Combinations

During business combinations , both U.S. GAAP and IFRS require recognition of non-controlling interests. They can be measured either at fair value or at the non-controlling interests’ proportionate share of the acquiree’s identifiable net assets, excluding goodwill (full goodwill method or the proportionate share method). Goodwill is calculated differently depending on the method used:

• Full Goodwill: Goodwill reflects the total value of the business, including the portion attributable to non-controlling interests.
• Proportionate Share: Goodwill is limited to the controlling interest’s portion.

Net identifiable assets are also a point of concern, where all assets and liabilities of the acquiree are recognized at fair value and form part of the consideration transferred in the combination. Under IFRS, entities have an option on a transaction-by-transaction basis to measure non-controlling interests. This flexibility allows for diverse strategies and results in reporting.

Guidance and Interpretations

The realm of accounting for noncontrolling interests is shaped by elaborate guidance from authoritative bodies and interpreted by experts to ensure clarity in financial reporting. Both U.S. GAAP and IFRS have their respective frameworks that direct the accounting treatments for these interests.

Professional Insights

Deloitte and PwC, as leading accounting firms, often provide their interpretation and insights regarding the accounting for noncontrolling interests. Deloitte, through its publications such as “Accounting for Noncontrolling Interests” and various Roadmaps , offers detailed interpretations of the relevant standards. These Roadmaps are essential tools that include a myriad of scenarios, clearly depicting the accounting treatments with the help of decision trees and analyses by professionals like Andrew Winters .

PwC, another esteemed member firm in the financial domain, brings forth its vast expertise in the form of reports and guidance materials. They dissect complex standards into more understandable concepts, frequently using practical examples to illustrate key points. PwC’s guidance is valued for its emphasis on judgment and the nuanced application it often requires.

Practical Examples

Illustrations and examples are pivotal in understanding the application of accounting standards on noncontrolling interests. Jamie Davis , a renowned figure in the accounting sphere, may provide actionable insight through the use of practical examples . These examples show how the abstract elements of the accounting standards are transformed into concrete financial statements entries.

For instance, an accounting scenario may describe how a parent company reports its subsidiary’s net income and comprehensively includes the noncontrolling interest’s share. A clear depiction of these transactions is provided in Deloitte’s or PwC’s publications, allowing other entities to model their reporting on these pivotal illustrations.

Both U.S. GAAP and IFRS require the recognition and measurement of noncontrolling interests, which is displayed in financial reports. The guidance and case studies from these firms ensure that entities can properly reflect the reality of their financial situations in a way that is consistent and transparent for users of the reports.

Valuation and Impairment

Valuation and impairment testing are crucial for accurately reflecting non-controlling interests under U.S. GAAP and IFRS, ensuring that fair value and impairment losses are properly recognized for long-lived assets and property, plant, and equipment .

Testing for Impairment

Under both U.S. GAAP and IFRS, entities must regularly test long-lived assets, including those related to non-controlling interests, for impairment. An impairment test is required when there are indicators that the asset’s carrying amount may not be recoverable. If the carrying amount exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset, an impairment loss is recognized under U.S. GAAP. IFRS, on the other hand, compares the carrying amount to the asset’s recoverable amount, defined as the higher of an asset’s fair value less costs to sell and its value in use.

Fair Value Considerations

For the non-controlling interest valuation, fair value serves as the cornerstone under both accounting frameworks. Entities must measure fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Both U.S. GAAP and IFRS permit the fair value option , allowing entities to elect to measure eligible financial assets and liabilities at fair value. The choice to use the fair value option can significantly impact the financial statements, particularly regarding the volatility of reported earnings, as changes in fair value directly affect profit or loss.

Legal and Structural Matters

Accounting for non-controlling interests varies depending on the legal form of the entity and the structure of the capital in place. It is influenced by whether interests are equity-classified or redeemable, and whether they align with common stock ownership or legal-form liability.

Legal-Form Liability and Capital Structures

Non-controlling interests arise when a parent company does not own 100% of a subsidiary, creating a minority interest that is owned by other shareholders. The structure of these interests is dependent on the legal form of the entity, which affects the liability of the non-controlling interests. In some cases, the capital structures may include both common and preferred shares, with the legal-form liability dictating the degree to which non-controlling interests are responsible for the entity’s obligations.

Equity-Classified Noncontrolling Interests

When non-controlling interests are classified as equity, the accounting reflects their proportionate share in the equity-classified common stock of the subsidiary. Under both U.S. GAAP and IFRS, equity-classified non-controlling interests are recorded in the equity section of the parent company’s consolidated balance sheet, separate from the parent’s equity.

Redeemable Noncontrolling Interests

In scenarios where non-controlling interests are structured with redemption features—labelled as redeemable noncontrolling interests —they may require complex accounting treatment. Under U.S. GAAP, if these interests are not solely controlled by the parent and are likely to be redeemed, they could be considered temporary equity or even be classified as liabilities, depending on the terms of the redemption feature.

Industry Insights

The accounting for non-controlling interests is a nuanced process, influenced by sector-specific practices and the diverse impacts on different markets. Recognizing the complexity and implications is crucial for entities navigating this area of financial reporting.

Sector-Specific Practices

In certain sectors, such as manufacturing, it is common to see joint ventures or strategic alliances, which often result in non-controlling interests being reported. The U.S. GAAP stipulates that non-controlling interests should be presented within equity, separate from the parent’s equity, while IFRS may have similar reporting requirements but with subtle differences in presentation or measurement.

Reporting entities must pay close attention to industry norms as these can dictate how non-controlling interests are treated—from initial recognition to subsequent measurement. For instance, a legal entity within the technology sector may encounter significant fluctuations in non-controlling interest measurements due to rapid valuation changes, requiring diligent attention to the preferred practices within their specific market niche.

Impact on Different Markets

The impact of accounting for non-controlling interests varies across different markets. In the business environment, the portrayal of non-controlling interests can affect stakeholders’ perception of a company’s financial health which, in turn, can influence investment decisions and market value.

For printing and publishing companies that frequently engage in partnerships, clear representation of non-controlling interests in consolidated statements is vital for transparency. As these entities often operate within tight margins, the precise allocation and reporting of non-controlling interests can paint a more detailed picture of a reporting entity’s financial status for investors, especially in markets sensitive to ownership structure and earnings attribution.

Auditing Perspectives

In the realm of financial auditing, addressing the accurate reporting of noncontrolling interests is a vital aspect for both U.S. GAAP and IFRS frameworks. Auditors meticulously scrutinize the consolidation process and the disclosures involved to ensure compliance and transparency.

Audit Processes

Auditors undertake several key processes when assessing the accounting for noncontrolling interests. Initially, they examine the identification of noncontrolling interests within the consolidated financial statements, ensuring that all such interests are accurately reflected. This includes a review of equity allocations and profit or loss attributions. Auditors cross-reference the reported figures with underlying financial data, looking for congruency in the allocation of net assets and net income to the noncontrolling interests.

The procedures typically involve:

• Verification of the calculation methodology for noncontrolling interests.
• Confirmation that transactions with noncontrolling interests are recorded at fair value.
• Assessment of disclosures related to the noncontrolling interests, which detail the effects on the financial position and performance of the reporting entity.

Ensuring Compliance

Ensuring compliance with U.S. GAAP and IFRS requires auditors to be familiar with the nuances of each set of standards. Under U.S. GAAP, ASC 810-10-20 provides explicit guidance on the reporting of noncontrolling interests, which must be presented distinctly within equity in the consolidated financial statements. Compliance ensures that there is a clear depiction of the economic interests that are not attributable to the parent entity.

Under IFRS, IFRS 3 outlines the:

• Recognition criteria,
• Measurement practices,
• Disclosure requirements for noncontrolling interests during business combinations and in consolidated financial statements.

Auditors assess whether the reporting entity adheres to these principles, paying special attention to fair value measurements and the consideration of any potential goodwill allocated to the noncontrolling interests. The emphasis is also put on the adequacy and clarity of the financial statement disclosures that allow users to understand the impact of noncontrolling interests on the entity’s financials.

Emerging Trends and Future Developments

In the dynamic landscape of accounting, regulatory shifts and market evolutions significantly impact how non-controlling interests are accounted for under both U.S. GAAP and IFRS.

Regulatory Changes

U.S. GAAP and IFRS are continually subject to changes steered by regulatory bodies such as the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). Recent adaptations have primed accountants to expect amendments that provide greater clarity in the recognition and measurement of non-controlling interests. These changes often aim to align the practices more closely between U.S. GAAP and IFRS, enhancing comparability for global investors.

• Recognition Adjustments : With evolving interpretations and clarifications, entities may need to adjust the ways in which non-controlling interests are recognized within consolidated financial statements.
• Measurement Guidance : Both U.S. GAAP and IFRS may introduce refined guidance for measuring non-controlling interests, particularly regarding fair value calculations and considerations during transactions such as business combinations.

Market Evolution

The accounting industry is not just shaped by regulations, but also by how the market itself evolves. Technology advancements are rapidly transforming how traditional accounting tasks are performed.

• Technology Integration : With increased automation and the use of sophisticated accounting software, professionals are able to efficiently handle the complexities of accounting for non-controlling interests, thereby reducing the scope for manual errors and enhancing the timeliness of financial reporting.
• Stakeholder Expectations : As the market’s expectation for transparency and detailed financial information grows, accountants are pressured to provide more comprehensive disclosures regarding non-controlling interests. This includes in-depth analysis of the effects of such interests on an entity’s financial health and performance.

Market evolution also emphasizes the need for accountants to adapt and upgrade their skills, especially in interpreting and applying complex financial reporting standards related to non-controlling interests under both accountancy frameworks.

Educational Resources and Tools

In the complex field of accounting for non-controlling interests, professionals can enhance their expertise through various educational resources and tools. These include structured workshops, comprehensive publications, and online learning platforms, each offering distinct advantages for mastering U.S. GAAP and IFRS standards.

Workshops and Seminars

Member firms often host workshops and seminars that provide intensive, in-person training. Attendees can benefit from:

• Live demonstrations of how to record non-controlling interests in financial statements.
• Case studies that explore complex transactions involving non-controlling interests.

Publications and Studies

Publications and studies offer detailed insights into the accounting standards. Key resources include:

• Roadmaps : Publications that serve as comprehensive guides, breaking down the nuances of ASC 810 and IFR S3 in a structured manner.
• Research studies from accounting bodies that analyze the impacts of non-controlling interest accounting on financial reporting.

Online Learning Platforms

Professionals seeking flexibility can turn to online learning platforms , which feature:

• Self-paced courses : Modules that cover accounting standards, including the treatment of non-controlling interests under different scenarios.
• Interactive tools : Quizzes and simulations that help reinforce the concepts learned in a virtual environment.

Frequently Asked Questions

This section addresses common inquiries regarding the treatment and presentation of non-controlling interests in financial accounting under both U.S. GAAP and IFRS.

What is the method for accounting for non-controlling interests in consolidated financial statements under U.S. GAAP?

Under U.S. GAAP, non-controlling interests are treated as a separate component of equity in the consolidated financial statements. They are not attributed to the parent but are recognized in the equity section, reflecting the portion of net assets owned by non-controlling shareholders.

How are non-controlling interests presented on the balance sheet according to IFRS?

In accordance with IFRS, non-controlling interests are presented within equity, separate from the parent company’s equity, on the consolidated balance sheet. This classification underscores their role in the overall group equity.

What is the process for recording accounting entries related to non-controlling interests?

Accounting entries regarding non-controlling interests involve the allocation of profits or losses to non-controlling interests proportionate to their ownership. These entries ensure that the financial statements reflect the accurate equity interest of both the parent and non-controlling shareholders.

Are non-controlling interests considered part of shareholders’ equity under IFRS?

Yes, under IFRS, non-controlling interests are classified as part of shareholders’ equity. They represent equity ownership in subsidiaries not held by the parent company and are treated as equity participants in the consolidated entity.

What are the guidelines for accounting for put options on non-controlling interests under IFRS?

IFRS stipulates that put options on non-controlling interests should be recognized as financial liabilities. Changes to the liability are recorded directly in equity, affecting the measurement of non-controlling interests and potentially the parent’s equity.

How is non-controlling interest treated in the event of a subsidiary redemption under U.S. GAAP?

When a subsidiary redemption occurs under U.S. GAAP, the parent’s share in the subsidiary’s equity changes. Accounting for this involves adjusting the carrying amount of the non-controlling interest to reflect its fair value at the redemption date, with the difference recorded in equity.

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Non-Controlling Interest in Financial Statements

• Equity Accounting , Financial Statements
• Cameron Smith
• May 2, 2023

On a consolidated balance sheet of a major company, you will likely see non-controlling interest come up so it is important for investors to understand this common item and ensure to back it out for valuation purposes. This article will teach investors all about non-controlling interest as we walk through Coca-Cola’s 2022 financial statements and our own simplified example with journal entries to really make it clear.

What is Non-Controlling Interest?

Non-controlling interest occurs when a company is owned by more than one entity/person and certain owners do not have enough individual voting power to influence decisions. Typically, the threshold for control is 50% ownership but corporations can have different classes of shares with different voting power so “control” does not necessarily follow the percentage split of net income in more complex situations. It is about control of the board of directors through voting rights and the ability to make unilateral decisions.

For example, imagine a company is going to start a new joint venture with an external third party. The parent company will own 75% of the new entity and the external party will own the remaining 25%. For consolidation purposes in accounting, the parent company will include 100% of the assets and income of this entity, but then also break out the 25% portion that does not belong to them through “non-controlling interest” accounts in the financial statements so that investors can see it.  

Non-Controlling Interest on the Balance Sheet

On the balance sheet , non-controlling interest is shown as part of the shareholder’s equity section on the liability side of the balance sheet. As the parent company has control of the new entity through their 75% ownership, 100% of the assets and liabilities are consolidated on the balance sheet.

The assets and liabilities of the subsidiary are held at fair value (or other relevant accounting method) and the remainder is equity. As the parent company only owns 75% of this equity, the remaining 25% equity owned by the external third party is shown separately and labeled “non-controlling interest” in the equity section of the balance sheet. We can see this below with $1,721 million of non-controlling interest being backed out of equity attributable to Coca-Cola’s shareholders.

For our simplified example, let’s say that the business has $100 million in assets, $50 million in debt, and $50 million in equity. Under the consolidation method, 100% of assets and liabilities will be recorded on the parent company’s balance sheet who effectively controls the business. This means that all $100 million of assets and $50 million of debt will be reported at the parent company level even though they only own $$37.5 million of the business’s equity (75% ownership x $50 million equity).

The balance sheet will remain in balance because the 3 rd party’s non-controlling interest of $12.5 million (25% ownership x $50 million equity) will also be included on the parent company’s balance sheet as a separate line item. Below are the journal entries that would establish this initial setup.

Non-Controlling Interest on the Income Statement

On the income statement , the parent company is consolidating activity of all joint ventures they are in control of (i.e. +50% ownership). This means that 100% of the revenue and expenses for consolidated subsidiaries will see their financial figures reported directly in the appropriate categories on the income statement. The non-controlling interest share of profits is then backed out at the bottom of the income statement before net income available to common shareholders is arrived at. This can be seen below in the 2022 income statement for Coca-Cola where they had to back out $29 million of income attributable to non-controlling interests before arriving at the income available to shareholders of Coca-Cola.

In our example, let’s assume this business with $100 million of assets mentioned earlier, earns $10 million of net income per year. 75% of this is attributable to the parent company and 25% is attributable to the other external 3 rd party. In their consolidated financials, the parent company would record all the revenue and expenses it took to achieve the $10 million in profit before backing out the $2.5 million attributable to this “non-controlling interest” to arrive at the net profits available to owners of the parent company.  

Let’s look at a summary of the annual journal entries below to see how the subsidiary affected the parent company’s consolidated income statement. As the subsidiary earns revenue and/or pays expenses, they could have paid cash or have an associate accounts receivable and/or payable. The end result is that the net income arrived at from the yearly transactions will be rolled into retained earnings at the company which are the last line items in our journal entry summary below.

How do Non-Controlling Interests Perform?

Partnerships and investments with 3 rd parties can make up a substantial part of some businesses. It is important to get a general understanding of the profits being shared with non-controlling interests to understand what the parent company is giving up or getting in return by making these partnerships.

You can get a quick idea of the return on equity (ROE) the parent company is getting on their joint ventures and subsidiaries by looking at the ROE of the non-controlling interest. High quality financial reporting will also see the non-controlling interest described in further detail in the notes to the financial statements or within the management discussion and analysis write up.

In our example, the non-controlling interest is earnings $2.5 million on the equity of $12.5 million. This would mean the non-controlling interest is getting a 20% ROE ($2.5 million earnings ÷ $12.5 million equity).

Looking at the non-controlling interests at Coke, we see they earned $29 million and $33 million in 2022 and 2021, respectively. At year-end, the equity of these non-controlling interests were $1,721 and $1,861, respectively for 2022 and 2021. This would imply the non-controlling interests in business relationships with Coke are earning ROE of 1.7% and 1.8% respectively for 2022 and 2021. Given the low ROE from Coca-Cola’s subsidiaries, its might signify that these are early stage new ventures that are not in the mature and profitable part of their business lifecycle yet.

Takeaway for Investors

Understanding non-controlling interests allows investors to understand how reliant the business is on third party relationships (even if the parent company is in control) and how profitable these relationships are. Non-controlling interests should be backed out of any valuation analysis whether done by cash flows or book value as these profits do not belong to the parent company.

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Non-Controlling Interest on Balance Sheet: Definition, Example, and Calculation

What is non-controlling interest, how to calculate non-controlling interest, example of non-controlling interest.

Non-Controlling Interest – Income Statement Non-Controlling Interest – Pop Co. 20% Net Income for the year = $200,000 Non-Controlling Interest share = $40,000 Non-Controlling Interest – Balance Sheet Non-Controlling Interest – Pop Co. 20% Net Income for the year = $3,000,000 Non-Controlling Interest share = $600,000

Treatment of Non-Controlling Interest in Balance Sheet

Non-controlling interest and retained earnings, related posts, what are the recognition criteria for assets in the balance sheet, what are recognition criteria of liabilities in balance sheet, 3 element of balance sheet – what are they, what are the advantages of the balance sheet explained.

Press Releases

Intel reports second-quarter 2024 financial results; announces $10 billion cost reduction plan to increase efficiency and market competitiveness, related documents.

NEWS SUMMARY

• Second-quarter revenue of $12.8 billion, down 1% year over year (YoY).
• Second-quarter GAAP earnings (loss) per share (EPS) attributable to Intel was $(0.38); non-GAAP EPS attributable to Intel was $0.02.
• Forecasting third-quarter 2024 revenue of $12.5 billion to $13.5 billion; expecting third-quarter GAAP EPS attributable to Intel of $(0.24); non-GAAP EPS attributable to Intel of $(0.03).
• Implementing comprehensive reduction in spending, including a more than 15% headcount reduction, to resize and refocus.
• Suspending dividend starting in the fourth quarter of 2024. The company reiterates its long-term commitment to a competitive dividend as cash flows improve to sustainably higher levels.
• Achieved key milestones on Intel 18A with the 1.0 Process Design Kit (PDK) released and key power-on of first client and server products on Intel 18A, Panther Lake and Clearwater Forest.

SANTA CLARA, Calif.--(BUSINESS WIRE)-- Intel Corporation today reported second-quarter 2024 financial results.

“Our Q2 financial performance was disappointing, even as we hit key product and process technology milestones. Second-half trends are more challenging than we previously expected, and we are leveraging our new operating model to take decisive actions that will improve operating and capital efficiencies while accelerating our IDM 2.0 transformation,” said Pat Gelsinger, Intel CEO. “These actions, combined with the launch of Intel 18A next year to regain process technology leadership, will strengthen our position in the market, improve our profitability and create shareholder value.”

“Second-quarter results were impacted by gross margin headwinds from the accelerated ramp of our AI PC product, higher than typical charges related to non-core businesses and the impact from unused capacity,” said David Zinsner, Intel CFO. “By implementing our spending reductions, we are taking proactive steps to improve our profits and strengthen our balance sheet. We expect these actions to meaningfully improve liquidity and reduce our debt balance while enabling us to make the right investments to drive long-term value for shareholders.”

Cost-Reduction Plan

As Intel nears the completion of rebuilding a sustainable engine of process technology leadership, it announced a series of initiatives to create a sustainable financial engine that accelerates profitable growth, enables further operational efficiency and agility, and creates capacity for ongoing strategic investment in technology and manufacturing leadership. These initiatives follow the establishment of separate financial reporting for Intel Products and Intel Foundry, which provides a "clean sheet" view of the business and has uncovered significant opportunities to drive meaningful operational and cost efficiencies. The actions include structural and operating realignment across the company, headcount reductions, and operating expense and capital expenditure reductions of more than $10 billion in 2025 compared to previous estimates. As a result of these actions, Intel aims to achieve clear line of sight toward a sustainable business model with the ongoing financial resources and liquidity needed to support the company’s long-term strategy.

The plan will enable the next phase of the company’s multiyear transformation strategy, and is focused on four key priorities:

• Reducing Operating Expenses: The company will streamline its operations and meaningfully cut spending and headcount, reducing non-GAAP R&D and marketing, general and administrative (MG&A) to approximately $20 billion in 2024 and approximately $17.5 billion in 2025, with further reductions expected in 2026. Intel expects to reduce headcount by greater than 15% with the majority completed by the end of 2024.
• Reducing Capital Expenditures: With the end of its historic five-nodes-in-four-years journey firmly in sight, Intel is now shifting its focus toward capital efficiency and investment levels aligned to market requirements. This will reduce gross capital expenditures* in 2024 by more than 20% from prior projections, bringing gross capital expenditures in 2024 to between $25 billion and $27 billion. Intel expects net capital spending* in 2024 of between $11 billion and $13 billion. In 2025, the company is targeting gross capital expenditures between $20 billion and $23 billion and net capital spending between $12 billion and $14 billion.
• Reducing Cost of Sales: The company expects to generate $1 billion in savings in non-variable cost of sales in 2025. Product mix will continue to be a headwind next year, contributing to modest YoY improvements to 2025's gross margin.
• Maintaining Core Investments to Execute Strategy: The company continues to advance its long-term innovation and path to leadership across process technology and products, and the increased efficiency from its actions is expected to further support its execution. In addition, Intel continues to sustain investments to build a resilient and sustainable semiconductor supply chain in the United States and around the world.

Intel is taking the added step of suspending the dividend starting in the fourth quarter, recognizing the importance of prioritizing liquidity to support the investments needed to execute its strategy. The company reiterates its long-term commitment to a competitive dividend as cash flows improve to sustainably higher levels.

Q2 2024 Financial Highlights

In the second quarter, the company generated $2.3 billion in cash from operations and paid dividends of $0.5 billion.

Business Unit Summary

Intel previously announced the implementation of an internal foundry operating model, which took effect in the first quarter of 2024 and created a foundry relationship between its Intel Products business (collectively CCG, DCAI and NEX) and its Intel Foundry business (including Foundry Technology Development, Foundry Manufacturing and Supply Chain, and Foundry Services (formerly IFS)). The foundry operating model is a key component of the company's strategy and is designed to reshape operational dynamics and drive greater transparency, accountability, and focus on costs and efficiency. The company also previously announced its intent to operate Altera ® as a standalone business beginning in the first quarter of 2024. Altera was previously included in DCAI's segment results. As a result of these changes, the company modified its segment reporting in the first quarter of 2024 to align to this new operating model. All prior-period segment data has been retrospectively adjusted to reflect the way the company internally receives information and manages and monitors its operating segment performance starting in fiscal year 2024. There are no changes to Intel’s consolidated financial statements for any prior periods.

Intel Products Highlights

• CCG: Intel continues to define and drive the AI PC category, shipping more than 15 million AI PCs since December 2023, far more than all of Intel's competitors combined, and on track to ship more than 40 million AI PCs by year-end. Lunar Lake, the company’s next-generation AI CPU, achieved production release in July 2024, ahead of schedule, with shipments starting in the third quarter. Lunar Lake will power over 80 new Copilot+ PCs across more than 20 OEMs.
• DCAI: More than 130 million Intel ® Xeon ® processors power data centers around the world today, and at Computex Intel introduced its next-generation Intel ® Xeon ® 6 processor with Efficient-cores (E-cores), code-named Sierra Forest, marking the company’s first Intel 3 server product architected for high-density, scale-out workloads. Intel expects Intel ® Xeon ® 6 processors with Performance-cores (P-cores), code-named Granite Rapids, to begin shipping in the third quarter of 2024. The Intel ® Gaudi ® 3 AI accelerator is also on track to launch in the third quarter and is expected to deliver roughly two-times the performance per dollar on both inference and training versus the leading competitor.
• NEX: Intel announced an array of AI-optimized scale-out Ethernet solutions, including the Intel AI network interface card and foundry chiplets that will launch next year. New infrastructure processing unit (IPU) adaptors for the enterprise are now broadly available and supported by Dell Technologies, Red Hat and others. IPUs will play an increasingly important role in Intel’s accelerator portfolio, which the company expects will help drive AI data center growth and profitability in 2025 and beyond. Additionally, Intel and others announced the creation of the Ultra Accelerator Link, a new industry standard dedicated to advancing high-speed, low-latency communication for scale-up AI systems communication in data centers.

Intel Foundry Highlights

• Intel is nearing the completion of its promised five-nodes-in-four-years strategy, with Intel 18A on track to be manufacturing-ready by the end of this year and production wafer start volumes in the first half of 2025. In July 2024, Intel released to foundry customers the 1.0 PDK for Intel 18A. The company’s first two Intel 18A products, Panther Lake for client — the first microprocessor to use RibbonFet, PowerVia and advanced packaging — and Clearwater Forest for servers, are on track to launch in 2025.
• Ansys, Cadence, Siemens, and Synopsys announced the availability of reference flows for Intel’s embedded multi-die interconnect bridge (EMIB) advanced packaging technology, which simplifies the design process and offers design flexibility. The companies also declared readiness for Intel 18A designs.
• During the quarter, Intel named industry veteran Kevin O'Buckley to lead Foundry Services. The company also recently appointed Dr. Naga Chandrasekaran to lead Intel Foundry Manufacturing and Supply Chain. Their leadership will support Intel’s continued development of the first systems foundry for the AI era.

Other Highlights

Intel announced its second Semiconductor Co-Investment Program (SCIP) agreement, the formation of a joint venture with Apollo related to Intel’s Fab 34 in Ireland. SCIP is an element of Intel’s Smart Capital strategy, a funding approach designed to create financial flexibility to accelerate the company’s strategy, including investing in its global manufacturing operations, while maintaining a strong balance sheet.

Q3 2024 Dividend

The company announced that its board of directors has declared a quarterly dividend of $0.125 per share on the company’s common stock, which will be payable Sept. 1, 2024, to shareholders of record as of Aug. 7, 2024.

As noted earlier, Intel is suspending the dividend starting in the fourth quarter.

Business Outlook

Intel's guidance for the third quarter of 2024 includes both GAAP and non-GAAP estimates as follows:

Reconciliations between GAAP and non-GAAP financial measures are included below. Actual results may differ materially from Intel’s business outlook as a result of, among other things, the factors described under “Forward-Looking Statements” below. The gross margin and EPS outlook are based on the mid-point of the revenue range.

Earnings Webcast

Intel will hold a public webcast at 2 p.m. PDT today to discuss the results for its second quarter of 2024. The live public webcast can be accessed on Intel's Investor Relations website at www.intc.com . The corresponding earnings presentation and webcast replay will also be available on the site.

Forward-Looking Statements

This release contains forward-looking statements that involve a number of risks and uncertainties. Words such as "accelerate", "achieve", "aim", "ambitions", "anticipate", "believe", "committed", "continue", "could", "designed", "estimate", "expect", "forecast", "future", "goals", "grow", "guidance", "intend", "likely", "may", "might", "milestones", "next generation", "objective", "on track", "opportunity", "outlook", "pending", "plan", "position", "possible", "potential", "predict", "progress", "ramp", "roadmap", "seek", "should", "strive", "targets", "to be", "upcoming", "will", "would", and variations of such words and similar expressions are intended to identify such forward-looking statements, which may include statements regarding:

• our business plans and strategy and anticipated benefits therefrom, including with respect to our IDM 2.0 strategy, Smart Capital strategy, partnerships with Apollo and Brookfield, internal foundry model, updated reporting structure, and AI strategy;
• projections of our future financial performance, including future revenue, gross margins, capital expenditures, and cash flows;
• projected costs and yield trends;
• future cash requirements, the availability, uses, sufficiency, and cost of capital resources, and sources of funding, including for future capital and R&D investments and for returns to stockholders, such as stock repurchases and dividends, and credit ratings expectations;
• future products, services, and technologies, and the expected goals, timeline, ramps, progress, availability, production, regulation, and benefits of such products, services, and technologies, including future process nodes and packaging technology, product roadmaps, schedules, future product architectures, expectations regarding process performance, per-watt parity, and metrics, and expectations regarding product and process leadership;
• investment plans and impacts of investment plans, including in the US and abroad;
• internal and external manufacturing plans, including future internal manufacturing volumes, manufacturing expansion plans and the financing therefor, and external foundry usage;
• future production capacity and product supply;
• supply expectations, including regarding constraints, limitations, pricing, and industry shortages;
• plans and goals related to Intel's foundry business, including with respect to anticipated customers, future manufacturing capacity and service, technology, and IP offerings;
• expected timing and impact of acquisitions, divestitures, and other significant transactions, including the sale of our NAND memory business;
• expected completion and impacts of restructuring activities and cost-saving or efficiency initiatives;
• future social and environmental performance goals, measures, strategies, and results;
• our anticipated growth, future market share, and trends in our businesses and operations;
• projected growth and trends in markets relevant to our businesses;
• anticipated trends and impacts related to industry component, substrate, and foundry capacity utilization, shortages, and constraints;
• expectations regarding government incentives;
• future technology trends and developments, such as AI;
• future macro environmental and economic conditions;
• geopolitical tensions and conflicts and their potential impact on our business;
• tax- and accounting-related expectations;
• expectations regarding our relationships with certain sanctioned parties; and
• other characterizations of future events or circumstances.

Such statements involve many risks and uncertainties that could cause our actual results to differ materially from those expressed or implied, including those associated with:

• the high level of competition and rapid technological change in our industry;
• the significant long-term and inherently risky investments we are making in R&D and manufacturing facilities that may not realize a favorable return;
• the complexities and uncertainties in developing and implementing new semiconductor products and manufacturing process technologies;
• our ability to time and scale our capital investments appropriately and successfully secure favorable alternative financing arrangements and government grants;
• implementing new business strategies and investing in new businesses and technologies;
• changes in demand for our products;
• macroeconomic conditions and geopolitical tensions and conflicts, including geopolitical and trade tensions between the US and China, the impacts of Russia's war on Ukraine, tensions and conflict affecting Israel and the Middle East, and rising tensions between mainland China and Taiwan;
• the evolving market for products with AI capabilities;
• our complex global supply chain, including from disruptions, delays, trade tensions and conflicts, or shortages;
• product defects, errata and other product issues, particularly as we develop next-generation products and implement next-generation manufacturing process technologies;
• potential security vulnerabilities in our products;
• increasing and evolving cybersecurity threats and privacy risks;
• IP risks including related litigation and regulatory proceedings;
• the need to attract, retain, and motivate key talent;
• strategic transactions and investments;
• sales-related risks, including customer concentration and the use of distributors and other third parties;
• our significantly reduced return of capital in recent years;
• our debt obligations and our ability to access sources of capital;
• complex and evolving laws and regulations across many jurisdictions;
• fluctuations in currency exchange rates;
• changes in our effective tax rate;
• catastrophic events;
• environmental, health, safety, and product regulations;
• our initiatives and new legal requirements with respect to corporate responsibility matters; and
• other risks and uncertainties described in this release, our 2023 Form 10-K, and our other filings with the SEC.

Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made in this release and in other documents we file from time to time with the SEC that disclose risks and uncertainties that may affect our business.

Unless specifically indicated otherwise, the forward-looking statements in this release do not reflect the potential impact of any divestitures, mergers, acquisitions, or other business combinations that have not been completed as of the date of this filing. In addition, the forward-looking statements in this release are based on management's expectations as of the date of this release, unless an earlier date is specified, including expectations based on third-party information and projections that management believes to be reputable. We do not undertake, and expressly disclaim any duty, to update such statements, whether as a result of new information, new developments, or otherwise, except to the extent that disclosure may be required by law.

About Intel

Intel (Nasdaq: INTC) is an industry leader, creating world-changing technology that enables global progress and enriches lives. Inspired by Moore’s Law, we continuously work to advance the design and manufacturing of semiconductors to help address our customers’ greatest challenges. By embedding intelligence in the cloud, network, edge and every kind of computing device, we unleash the potential of data to transform business and society for the better. To learn more about Intel’s innovations, go to newsroom.intel.com and intel.com.

© Intel Corporation. Intel, the Intel logo, and other Intel marks are trademarks of Intel Corporation or its subsidiaries. Other names and brands may be claimed as the property of others.

For information about our operating segments, including the nature of segment revenues and expenses, and a reconciliation of our operating segment revenue and operating income (loss) to our consolidated results, refer to our Form 10-K filed on January 26, 2024, Form 8-K furnished on April 2, 2024 and 10-Q filed on August 1, 2024.

Intel Corporation Explanation of Non-GAAP Measures

In addition to disclosing financial results in accordance with US GAAP, this document contains references to the non-GAAP financial measures below. We believe these non-GAAP financial measures provide investors with useful supplemental information about our operating performance, enable comparison of financial trends and results between periods where certain items may vary independent of business performance, and allow for greater transparency with respect to key metrics used by management in operating our business and measuring our performance. Some of these non-GAAP financial measures are used in our performance-based RSUs and our cash bonus plans.

Our non-GAAP financial measures reflect adjustments based on one or more of the following items, as well as the related income tax effects. Income tax effects are calculated using a fixed long-term projected tax rate of 13% across all adjustments. We project this long-term non-GAAP tax rate on at least an annual basis using a five-year non-GAAP financial projection that excludes the income tax effects of each adjustment. The projected non-GAAP tax rate also considers factors such as our tax structure, our tax positions in various jurisdictions, and key legislation in significant jurisdictions where we operate. This long-term non-GAAP tax rate may be subject to change for a variety of reasons, including the rapidly evolving global tax environment, significant changes in our geographic earnings mix, or changes to our strategy or business operations. Management uses this non-GAAP tax rate in managing internal short- and long-term operating plans and in evaluating our performance; we believe this approach facilitates comparison of our operating results and provides useful evaluation of our current operating performance.

Our non-GAAP financial measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with US GAAP, and the financial results calculated in accordance with US GAAP and reconciliations from these results should be carefully evaluated.

Intel Corporation Supplemental Reconciliations of GAAP Actuals to Non-GAAP Actuals

Set forth below are reconciliations of the non-GAAP financial measure to the most directly comparable US GAAP financial measure. These non-GAAP financial measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with US GAAP, and the reconciliations from US GAAP to Non-GAAP actuals should be carefully evaluated. Please refer to "Explanation of Non-GAAP Measures" in this document for a detailed explanation of the adjustments made to the comparable US GAAP measures, the ways management uses the non-GAAP measures, and the reasons why management believes the non-GAAP measures provide useful information for investors.

Intel Corporation Supplemental Reconciliations of GAAP Outlook to Non-GAAP Outlook

Set forth below are reconciliations of the non-GAAP financial measure to the most directly comparable US GAAP financial measure. These non-GAAP financial measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with US GAAP, and the financial outlook prepared in accordance with US GAAP and the reconciliations from this Business Outlook should be carefully evaluated. Please refer to "Explanation of Non-GAAP Measures" in this document for a detailed explanation of the adjustments made to the comparable US GAAP measures, the ways management uses the non-GAAP measures, and the reasons why management believes the non-GAAP measures provide useful information for investors.

Intel Corporation Supplemental Reconciliations of Other GAAP to Non-GAAP Forward-Looking Estimates

Set forth below are reconciliations of the non-GAAP financial measure to the most directly comparable US GAAP financial measure. These non-GAAP financial measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with US GAAP, and the reconciliations should be carefully evaluated. Please refer to "Explanation of Non-GAAP Measures" in this document for a detailed explanation of the adjustments made to the comparable US GAAP measures, the ways management uses the non-GAAP measures, and the reasons why management believes the non-GAAP measures provide useful information for investors.

View source version on businesswire.com: https://www.businesswire.com/news/home/20240801042170/en/

Kylie Altman Investor Relations 1-916-356-0320 [email protected] Penny Bruce Media Relations 1-408-893-0601 [email protected]

Source: Intel Corporation

Released Aug 1, 2024 • 4:01 PM EDT

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Sunrun Reports Second Quarter 2024 Financial Results

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Cash Generation of $217 million in Q2, including working capital recovery

Introducing Cash Generation guidance of $350 million to $600 million in 2025; reiterating Cash Generation guidance of $50 million to $125 million in Q4 ($200 million to $500 million annualized)

Storage Capacity Installed of 265 Megawatt hours in Q2, exceeding high-end of guidance range and representing 152% year-over-year growth, as storage attachment rates reach 54%

Solar Energy Capacity Installed of 192 Megawatts in Q2, within the prior guidance range, reaching 7.1 Gigawatts of Networked Solar Energy Capacity

Net Earning Assets increases to $5.7 billion, including over $1 billion in Total Cash

SAN FRANCISCO, Aug. 06, 2024 (GLOBE NEWSWIRE) -- Sunrun (Nasdaq: RUN), the nation’s leading provider of clean energy as a subscription service, today announced financial results for the quarter ended June 30, 2024.

“In the second quarter we again set new records for both storage installation and attachment rates, further differentiating Sunrun in the industry, beating the high-end of our storage installation guidance and delivering solid quarter-over-quarter growth for solar installation, Cash Generation and Net Subscriber Value,” said Mary Powell, Sunrun’s Chief Executive Officer. “Our primary focus is on expanding our differentiation, launching additional products and services to expand customer lifetime values, and remaining a disciplined, margin-focused leader in the sector to drive meaningful Cash Generation.”

“The team is executing on our margin-focused and disciplined-growth strategy, which is producing strong results. We expect positive Cash Generation in Q3, are on track for our annualized run-rate target of $200 to $500 million in Q4, and are excited to introduce our 2025 Cash Generation guidance of $350 to $600 million,” said Danny Abajian, Sunrun’s Chief Financial Officer. “We continue to execute well in the capital markets and believe our sponsor quality and record of strong asset performance continue to differentiate us in the market.”

Second Quarter Updates

• Storage Attachment Rates Reach 54% : Storage attachment rates on installations reached 54% in Q2, up from 18% in the same period a year ago, with 264.5 Megawatt hours installed during the quarter. Sunrun has now installed more than 116,000 solar and storage systems, representing nearly 1.8 Gigawatt hours of stored energy capacity.
• Accelerating Momentum in New Homes Business: Sunrun is pleased to welcome industry leaders Matt Brost and Ellen Struck to its new homes division. Brost and Struck most recently worked at SunPower, where they led the largest new home solar business in the country, and together bring more than four decades of experience in the energy and solar industries. With this strategic investment, Sunrun plans to accelerate the growth of solar and storage installations on new construction and capitalize on our strong, market-leading platform across multiple segments.
• Sunrun and Tesla Electric Partner to Support Texas Power Grid: The program, which has enrolled more than 150 Sunrun customers, will dispatch stored solar energy from at-home batteries to rapidly increase available electricity reserves on the Texas power grid during times of high consumption. Customers will be compensated for their participation while also retaining a portion of the stored energy in their batteries to provide back-up power to their homes in the event of a power outage. Sunrun will also earn incremental recurring revenue for the program.
• Sunrun Customers Power Through Outages Caused By Hurricane Beryl: During prolonged power outages in the aftermath of Hurricane Beryl, more than 1,600 Sunrun customers in the greater Houston area were able to keep their homes energized with more than 70,000 hours of backup energy provided by their solar-plus-storage systems.
• First Vehicle-To-Home Grid Support Launched in Maryland: In partnership with Maryland’s largest utility, Baltimore Gas and Electric Company (BGE), the program utilizes all-electric Ford F-150 Lightning trucks to deliver power to owners’ homes during peak demand times to support Maryland’s power grid. This program is the first operational bidirectional electric vehicle power plant in the United States that uses a cohort of customer vehicles and is a significant proof of concept, with the goal to expand these programs all around the country.
• Continued Strong Capital Markets Execution: In June, as previously noted, Sunrun closed an $886 million securitization of residential solar and battery systems. The two classes of non-recourse Class A senior notes were rated A+ by Kroll with the $443.15 million public Class A-1 note priced at a credit spread of 205 basis points. The Class A notes represented an advance rate of approximately 72.6%. Similar to prior transactions, Sunrun raised additional subordinated non-recourse financing which increased the cumulative advance rate to 83%. In July 2024, Sunrun also expanded its non-recourse warehouse lending facility by $280 to $2,630 million in commitments, matching the growing scale of Sunrun’s business.
• Science Based Targets Initiative (SBTi) Approves Sunrun’s Net-Zero and Emissions Reductions Targets: Sunrun’s near and long-term greenhouse gas emissions reductions targets have been assessed and approved by the SBTi. In addition, SBTi has verified Sunrun’s net-zero science-based target by 2050. The SBTi is a corporate climate action organization that enables companies and financial institutions worldwide to play their part in combating the climate crisis.

Key Operating Metrics

In the second quarter of 2024, Customer Additions were 26,687 including 24,984 Subscriber Additions. As of June 30, 2024, Sunrun had 984,000 Customers, including 828,129 Subscribers. Customers grew 13% in the second quarter of 2024 compared to the second quarter of 2023.

Annual Recurring Revenue from Subscribers was approximately $1.5 billion as of June 30, 2024. The Average Contract Life Remaining of Subscribers was 17.8 years as of June 30, 2024.

Subscriber Value was $49,610 in the second quarter of 2024, an 11% increase compared to the second quarter of 2023. Creation Cost was $37,216 in the second quarter of 2024.

Net Subscriber Value was $12,394 in the second quarter of 2024. Total Value Generated was $310 million in the second quarter of 2024. On a pro-forma basis assuming a 7.5% discount rate, consistent with capital costs observed in Q2, Subscriber Value was $44,291 and Net Subscriber Value was $7,075 in the second quarter of 2024.

Gross Earning Assets as of June 30, 2024, were $15.7 billion. Net Earning Assets were $5.7 billion, which included $1,042 million in Total Cash, as of June 30, 2024.

Cash Generation was $217 million in the second quarter. The strong Cash Generation achievement was inclusive of a recoupment of the ITC-related working capital investments made in Q1.

Storage Capacity Installed was 264.5 Megawatt hours in the second quarter of 2024. This represents a 152% year over year increase from the 104.8 Megawatt hours of Storage Capacity Installed in the second quarter of 2023.

Solar Energy Capacity Installed was 192.3 Megawatts in the second quarter of 2024. Solar Energy Capacity Installed for Subscribers was 182.1 Megawatts in the second quarter of 2024.

Networked Solar Energy Capacity was 7,058 Megawatts as of June 30, 2024. Networked Solar Energy Capacity for Subscribers was 5,984 Megawatts as of June 30, 2024. Networked Storage Capacity was 1.8 Gigawatt hours as of June 30, 2024.

The solar energy systems we deployed in Q2 are expected to offset the emission of 3.8 million metric tons of CO2 over the next thirty years. Over the last twelve months ended June 30, 2024, Sunrun’s systems are estimated to have offset 3.9 million metric tons of CO2.

Management is reiterating guidance for Cash Generation of $50 million to $125 million in Q4 ($200 million to $500 million annualized). Cash Generation is expected to be positive in Q3.

Management is introducing Cash Generation guidance of $350 million to $600 million for the full-year 2025.

Storage Capacity Installed is expected to be in a range of 1,030 to 1,100 Megawatt hours for the full-year 2024, and increase from the prior range of 800 to 1,000 Megawatt hours. This range represents approximately 80% to 93% growth year over year.

Storage Capacity Installed is expected to be in a range of 275 to 300 Megawatt hours in the third quarter of 2024. This range represents approximately 64% growth year over year.

Solar Energy Capacity Installed is expected to decline approximately 15% for the full-year 2024, in-line with the low-end of the prior guidance range. Year-over-year growth is expected to be positive in Q4.

Solar Energy Capacity Installed is expected to be in a range of 220 to 230 Megawatts in the third quarter of 2024. This range represents approximately 14% to 20% sequential growth from Q2.

Second Quarter 2024 GAAP Results

Total revenue was $523.9 million in the second quarter of 2024, down $66.3 million, or 11%, from the second quarter of 2023. Customer agreements and incentives revenue was $387.8 million, an increase of $85.7 million, or 28%, compared to the second quarter of 2023. Solar energy systems and product sales revenue was $136.0 million, a decrease of $152.0 million, or 53%, compared to the second quarter of 2023. The increasing mix of Subscribers results in less upfront revenue recognition, as revenue is recognized over the life of the Customer Agreement which is typically 20 or 25 years.

Total cost of revenue was $428.8 million, a decrease of 20% year-over-year. Total operating expenses were $651.9 million, a decrease of 18% year-over-year.

Net income attributable to common stockholders was $139.1 million, or $0.63 per basic share and $0.55 per diluted share, in the second quarter of 2024.

Financing Activities

As of August 6, 2024, closed transactions and executed term sheets provide us with expected tax equity to fund approximately 313 Megawatts of Solar Energy Capacity Installed for Subscribers beyond what was deployed through June 30, 2024. Sunrun also had $1,089 million available in its non-recourse senior revolving warehouse facility at the end of Q2, pro-forma to reflect a recent upsize, to fund over 373 Megawatts of Solar Energy Capacity Installed for Subscribers.

Conference Call Information

Sunrun is hosting a conference call for analysts and investors to discuss its second quarter 2024 results and business outlook at 1:30 p.m. Pacific Time today, August 6, 2024. A live audio webcast of the conference call along with supplemental financial information will be accessible via the “Investor Relations” section of Sunrun’s website at https://investors.sunrun.com . The conference call can also be accessed live over the phone by dialing (877) 407-5989 (toll free) or (201) 689-8434 (toll). An audio replay will be available following the call on the Sunrun Investor Relations website for approximately one month.

About Sunrun

Sunrun Inc. (Nasdaq: RUN) revolutionized the solar industry in 2007 by removing financial barriers and democratizing access to locally-generated, renewable energy. Today, Sunrun is the nation’s leading provider of clean energy as a subscription service, offering residential solar and storage with no upfront costs. Sunrun’s innovative products and solutions can connect homes to the cleanest energy on earth, providing them with energy security, predictability, and peace of mind. Sunrun also manages energy services that benefit communities, utilities, and the electric grid while enhancing customer value. Discover more at www.sunrun.com

Non-GAAP Information

This press release includes references to certain non-GAAP financial measures, such as non-GAAP net (loss) income and non-GAAP net (loss) income per share. We believe that these non-GAAP financial measures, when reviewed in conjunction with GAAP financial measures, can provide meaningful supplemental information for investors regarding the performance of our business and facilitate a meaningful evaluation of current period performance on a comparable basis with prior periods. Our management uses these non-GAAP financial measures in order to have comparable financial results to analyze changes in our underlying business from quarter to quarter. These non-GAAP financial measures should be considered as a supplement to, and not as a substitute for or superior to the GAAP financial measures presented in this press release and our financial statements and other publicly filed reports. Non-GAAP measures as presented herein may not be comparable to similarly titled measures used by other companies.

Non-GAAP net (loss) income is defined as GAAP net (loss) income adjusted by the non-cash goodwill impairment charge. Management believes the exclusion of this non-cash and non-recurring item provides useful supplemental information to investors and facilitates the analysis of its operating results and comparison of operating results across reporting periods.

Forward Looking Statements

This communication contains forward-looking statements related to Sunrun (the “Company”) within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include, but are not limited to, statements related to: the Company’s financial and operating guidance and expectations; the Company’s business plan, trajectory, expectations, market leadership, competitive advantages, operational and financial results and metrics (and the assumptions related to the calculation of such metrics); the Company’s momentum in its business strategies including its ESG efforts, expectations regarding market share, total addressable market, customer value proposition, market penetration, financing activities, financing capacity, product mix, and ability to manage cash flow and liquidity; the growth of the solar industry; the Company’s financing activities and expectations to refinance, amend, and/or extend any financing facilities; trends or potential trends within the solar industry, our business, customer base, and market; the Company’s ability to derive value from the anticipated benefits of partnerships, new technologies, and pilot programs, including contract renewal and repowering programs; anticipated demand, market acceptance, and market adoption of the Company’s offerings, including new products, services, and technologies; the Company’s strategy to be a storage-first company; the ability to increase margins based on a shift in product focus; expectations regarding the growth of home electrification, electric vehicles, virtual power plants, and distributed energy resources; the Company’s ability to manage suppliers, inventory, and workforce; supply chains and regulatory impacts affecting supply chains; the Company’s leadership team and talent development; the legislative and regulatory environment of the solar industry and the potential impacts of proposed, amended, and newly adopted legislation and regulation on the solar industry and our business; the ongoing expectations regarding the Company’s storage and energy services businesses and anticipated emissions reductions due to utilization of the Company’s solar energy systems; and factors outside of the Company’s control such as macroeconomic trends, bank failures, public health emergencies, natural disasters, acts of war, terrorism, geopolitical conflict, or armed conflict / invasion, and the impacts of climate change. These statements are not guarantees of future performance; they reflect the Company’s current views with respect to future events and are based on assumptions and estimates and are subject to known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from expectations or results projected or implied by forward-looking statements. The risks and uncertainties that could cause the Company’s results to differ materially from those expressed or implied by such forward-looking statements include: the Company’s continued ability to manage costs and compete effectively; the availability of additional financing on acceptable terms; worldwide economic conditions, including slow or negative growth rates and inflation; volatile or rising interest rates; changes in policies and regulations, including net metering, interconnection limits, and fixed fees, or caps and licensing restrictions and the impact of these changes on the solar industry and our business; the Company’s ability to attract and retain the Company’s business partners; supply chain risks and associated costs; realizing the anticipated benefits of past or future investments, partnerships, strategic transactions, or acquisitions, and integrating those acquisitions; the Company’s leadership team and ability to attract and retain key employees; changes in the retail prices of traditional utility generated electricity; the availability of rebates, tax credits and other incentives; the availability of solar panels, batteries, and other components and raw materials; the Company’s business plan and the Company’s ability to effectively manage the Company’s growth and labor constraints; the Company’s ability to meet the covenants in the Company’s investment funds and debt facilities; factors impacting the home electrification and solar industry generally, and such other risks and uncertainties identified in the reports that we file with the U.S. Securities and Exchange Commission from time to time. All forward-looking statements used herein are based on information available to us as of the date hereof, and we assume no obligation to update publicly these forward-looking statements for any reason, except as required by law.

Citations to industry and market statistics used herein may be found in our Investor Presentation, available via the “Investor Relations” section of Sunrun’s website at https://investors.sunrun.com .

Key Operating and Financial Metrics

The following operating metrics are used by management to evaluate the performance of the business. Management believes these metrics, when taken together with other information contained in our filings with the SEC and within this press release, provide investors with helpful information to determine the economic performance of the business activities in a period that would otherwise not be observable from historic GAAP measures. Management believes that it is helpful to investors to evaluate the present value of cash flows expected from subscribers over the full expected relationship with such subscribers (“Subscriber Value”, more fully defined in the definitions appendix below) in comparison to the costs associated with adding these customers, regardless of whether or not the costs are expensed or capitalized in the period (“Creation Cost”, more fully defined in the definitions appendix below). The Company also believes that Subscriber Value, Creation Costs, and Total Value Generated are useful metrics for investors because they present an unlevered view of all of the costs associated with new customers in a period compared to the expected future cash flows from these customers over a 30-year period, based on contracted pricing terms with its customers, which is not observable in any current or historic GAAP-derived metric. Management believes it is useful for investors to also evaluate the future expected cash flows from all customers that have been deployed through the respective measurement date, less estimated costs to maintain such systems and estimated distributions to tax equity partners in consolidated joint venture partnership flip structures, and distributions to project equity investors (“Gross Earning Assets”, more fully defined in the definitions appendix below). The Company also believes Gross Earning Assets is useful for management and investors because it represents the remaining future expected cash flows from existing customers, which is not a current or historic GAAP-derived measure.

Various assumptions are made when calculating these metrics. Both Subscriber Value and Gross Earning Assets utilize a 6% rate to discount future cash flows to the present period. Furthermore, these metrics assume that customers renew after the initial contract period at a rate equal to 90% of the rate in effect at the end of the initial contract term. For Customer Agreements with 25-year initial contract terms, a 5-year renewal period is assumed. For a 20-year initial contract term, a 10-year renewal period is assumed. In all instances, we assume a 30-year customer relationship, although the customer may renew for additional years, or purchase the system. Estimated cost of servicing assets has been deducted and is estimated based on the service agreements underlying each fund.

Note that Sunrun updated the discount rate used to calculate Subscriber Value and Gross Earning Assets to 6% commencing with the first quarter 2023 reporting. Also note that figures presented above may not sum due to rounding. For adjustments related to Subscriber Value and Creation Cost, please see the supplemental Creation Cost Methodology memo for each applicable period, which is available on investors.sunrun.com.

Definitions

Deployments represent solar or storage systems, whether sold directly to customers or subject to executed Customer Agreements (i) for which we have confirmation that the systems are installed, subject to final inspection, or (ii) in the case of certain system installations by our partners, for which we have accrued at least 80% of the expected project cost (inclusive of acquisitions of installed systems).

Customer Agreements refer to, collectively, solar or storage power purchase agreements and leases.

Subscriber Additions represent the number of Deployments in the period that are subject to executed Customer Agreements.

Customer Additions represent the number of Deployments in the period.

Solar Energy Capacity Installed represents the aggregate megawatt production capacity of our solar energy systems that were recognized as Deployments in the period.

Solar Energy Capacity Installed for Subscribers represents the aggregate megawatt production capacity of our solar energy systems that were recognized as Deployments in the period that are subject to executed Customer Agreements.

Storage Capacity Installed represents the aggregate megawatt hour capacity of storage systems that were recognized as Deployments in the period.

Creation Cost represents the sum of certain operating expenses and capital expenditures incurred divided by applicable Customer Additions and Subscriber Additions in the period. Creation Cost is comprised of (i) installation costs, which includes the increase in gross solar energy system assets and the cost of customer agreement revenue, excluding depreciation expense of fixed solar assets, and operating and maintenance expenses associated with existing Subscribers, plus (ii) sales and marketing costs, including increases to the gross capitalized costs to obtain contracts, net of the amortization expense of the costs to obtain contracts, plus (iii) general and administrative costs, and less (iv) the gross profit derived from selling systems to customers under sale agreements and Sunrun’s product distribution and lead generation businesses. Creation Cost excludes stock based compensation, amortization of intangibles, and research and development expenses, along with other items the company deems to be non-recurring or extraordinary in nature. The gross margin derived from solar energy systems and product sales is included as an offset to Creation Cost since these sales are ancillary to the overall business model and lowers our overall cost of business. The sales, marketing, general and administrative costs in Creation Costs is inclusive of sales, marketing, general and administrative activities related to the entire business, including solar energy system and product sales. As such, by including the gross margin on solar energy system and product sales as a contra cost, the value of all activities of the Company’s segment are represented in the Net Subscriber Value.

Subscriber Value represents the per subscriber value of upfront and future cash flows (discounted at 6%) from Subscriber Additions in the period, including expected payments from customers as set forth in Customer Agreements, net proceeds from tax equity finance partners, payments from utility incentive and state rebate programs, contracted net grid service program cash flows, projected future cash flows from solar energy renewable energy credit sales, less estimated operating and maintenance costs to service the systems and replace equipment, consistent with estimates by independent engineers, over the initial term of the Customer Agreements and estimated renewal period. For Customer Agreements with 25 year initial contract terms, a 5 year renewal period is assumed. For a 20 year initial contract term, a 10 year renewal period is assumed. In all instances, we assume a 30-year customer relationship, although the customer may renew for additional years, or purchase the system.

Net Subscriber Value represents Subscriber Value less Creation Cost.

Total Value Generated represents Net Subscriber Value multiplied by Subscriber Additions.

Customers represent the cumulative number of Deployments, from the company’s inception through the measurement date.

Subscribers represent the cumulative number of Customer Agreements for systems that have been recognized as Deployments through the measurement date.

Networked Solar Energy Capacity represents the aggregate megawatt production capacity of our solar energy systems that have been recognized as Deployments, from the company’s inception through the measurement date.

Networked Solar Energy Capacity for Subscribers represents the aggregate megawatt production capacity of our solar energy systems that have been recognized as Deployments, from the company’s inception through the measurement date, that have been subject to executed Customer Agreements.

Networked Storage Capacity represents the aggregate megawatt hour capacity of our storage systems that have been recognized as Deployments, from the company’s inception through the measurement date.

Gross Earning Assets is calculated as Gross Earning Assets Contracted Period plus Gross Earning Assets Renewal Period.

Gross Earning Assets Contracted Period represents the present value of the remaining net cash flows (discounted at 6%) during the initial term of our Customer Agreements as of the measurement date. It is calculated as the present value of cash flows (discounted at 6%) that we would receive from Subscribers in future periods as set forth in Customer Agreements, after deducting expected operating and maintenance costs, equipment replacements costs, distributions to tax equity partners in consolidated joint venture partnership flip structures, and distributions to project equity investors. We include cash flows we expect to receive in future periods from tax equity partners, government incentive and rebate programs, contracted sales of solar renewable energy credits, and awarded net cash flows from grid service programs with utilities or grid operators.

Gross Earning Assets Renewal Period is the forecasted net present value we would receive upon or following the expiration of the initial Customer Agreement term but before the 30th anniversary of the system’s activation (either in the form of cash payments during any applicable renewal period or a system purchase at the end of the initial term), for Subscribers as of the measurement date. We calculate the Gross Earning Assets Renewal Period amount at the expiration of the initial contract term assuming either a system purchase or a renewal, forecasting only a 30-year customer relationship (although the customer may renew for additional years, or purchase the system), at a contract rate equal to 90% of the customer’s contractual rate in effect at the end of the initial contract term. After the initial contract term, our Customer Agreements typically automatically renew on an annual basis and the rate is initially set at up to a 10% discount to then-prevailing utility power prices.

Net Earning Assets represents Gross Earning Assets, plus total cash, less adjusted debt and less pass-through financing obligations, as of the same measurement date. Debt is adjusted to exclude a pro-rata share of non-recourse debt associated with funds with project equity structures along with debt associated with the company’s ITC safe harboring facility. Because estimated cash distributions to our project equity partners are deducted from Gross Earning Assets, a proportional share of the corresponding project level non-recourse debt is deducted from Net Earning Assets, as such debt would be serviced from cash flows already excluded from Gross Earning Assets.

Cash Generation is calculated using the change in our unrestricted cash balance from our consolidated balance sheet, less net proceeds (or plus net repayments) from all recourse debt (inclusive of convertible debt), and less any primary equity issuances or net proceeds derived from employee stock award activity (or plus any stock buybacks or dividends paid to common stockholders) as presented on the Company’s consolidated statement of cash flows. The Company expects to continue to raise tax equity and asset-level non-recourse debt to fund growth, and as such, these sources of cash are included in the definition of Cash Generation. Cash Generation also excludes long-term asset or business divestitures and equity investments in external non-consolidated businesses (or less dividends or distributions received in connection with such equity investments).

Annual Recurring Revenue represents revenue arising from Customer Agreements over the following twelve months for Subscribers that have met initial revenue recognition criteria as of the measurement date.

Average Contract Life Remaining represents the average number of years remaining in the initial term of Customer Agreements for Subscribers that have met revenue recognition criteria as of the measurement date.

Households Served in Low-Income Multifamily Properties represent the number of individual rental units served in low-income multi-family properties from shared solar energy systems deployed by Sunrun. Households are counted when the solar energy system has interconnected with the grid, which may differ from Deployment recognition criteria.

Positive Environmental Impact from Customers represents the estimated reduction in carbon emissions as a result of energy produced from our Networked Solar Energy Capacity over the trailing twelve months. The figure is presented in millions of metric tons of avoided carbon emissions and is calculated using the Environmental Protection Agency’s AVERT tool. The figure is calculated using the most recent published tool from the EPA, using the current-year avoided emission factor for distributed resources on a state by state basis. The environmental impact is estimated based on the system, regardless of whether or not Sunrun continues to own the system or any associated renewable energy credits.

Positive Expected Lifetime Environmental Impact from Customer Additions represents the estimated reduction in carbon emissions over thirty years as a result of energy produced from solar energy systems that were recognized as Deployments in the period. The figure is presented in millions of metric tons of avoided carbon emissions and is calculated using the Environmental Protection Agency’s AVERT tool. The figure is calculated using the most recent published tool from the EPA, using the current-year avoided emission factor for distributed resources on a state by state basis, leveraging our estimated production figures for such systems, which degrade over time, and is extrapolated for 30 years. The environmental impact is estimated based on the system, regardless of whether or not Sunrun continues to own the system or any associated renewable energy credits.

Total Cash represents the total of the restricted cash balance and unrestricted cash balance from our consolidated balance sheet.

Investor & Analyst Contact:

Patrick Jobin SVP, Deputy CFO & Investor Relations Officer [email protected]

Media Contact:

Wyatt Semanek Director, Corporate Communications [email protected]

Released August 6, 2024

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