top of page
Search

How Put and Call Options over Non-Controlling Interests Are Recognized under IFRS 10 and ASC 480

ree

In many group structures, a parent company grants a put option to minority shareholders (non-controlling interests, or NCI), giving them the right to sell their shares back to the parent at a future date. Alternatively, the parent may hold a call option allowing it to buy the NCI shares. These contractual rights reshape how ownership interests and equity are presented in consolidated financial statements.

Under IFRS (primarily IFRS 10, IAS 32, and IFRS 9) and US GAAP (ASC 480 and ASC 810), the accounting hinges on whether the obligation is present, probable, or contingent, and whether the strike price is fixed or variable. These differences drive major divergences in equity vs liability classification, recognition timing, and subsequent measurement.

·····

.....

How NCI put and call arrangements arise

Typical cases include:

  • Joint venture agreements where a minority investor can exit after a lock-up period.

  • Deferred buyout clauses in step acquisitions.

  • Private equity exits structured via put/call options.

  • Family-owned groups granting guaranteed redemption rights to minority heirs.

Although these are ownership-related instruments, their legal form may create financial liabilities for the parent when a present obligation to purchase exists, even if the option is exercisable in the future.

Example:Parent holds 80% of Subsidiary A, NCI holds 20%. Parent grants NCI a put option to sell the 20% back to Parent at a fixed price of €2 million any time after three years.

This contract creates a potential future outflow, and its treatment depends on the framework applied.

·····

.....

IFRS treatment — IAS 32 and IFRS 10 interaction

Under IFRS, a written put option over NCI can create a present obligation to purchase the shares if the contract is expected to be settled in cash or another financial asset.

1. Initial recognition (NCI put)

Upon granting the put, the parent recognizes a financial liability for the present value of the redemption amount, with a corresponding debit to equity (usually retained earnings or NCI).

Journal entry:

  • Dr Equity – NCI / Retained Earnings 2,000,000

  • Cr Financial Liability – NCI Put Option 2,000,000

This accounting reflects that the parent has, in substance, acquired the NCI shares even though legal ownership remains with the minority holder. The NCI is derecognized from equity.

2. Subsequent measurement

The liability is remeasured at each reporting date to reflect changes in the expected redemption amount (fair value, indexed price, or discounted contractual amount).

  • Changes recognized in P&L if liability classified under IFRS 9 FVTPL, or

  • Changes recognized in equity if accounted for as an equity transaction (policy choice allowed in practice under IAS 32).

3. Settlement

When the option is exercised:

  • Dr Financial Liability – NCI Put Option 2,000,000

  • Cr Cash 2,000,000

If the NCI option expires unexercised:

  • Dr Financial Liability – NCI Put Option 2,000,000

  • Cr Equity – NCI 2,000,000

4. Impact on consolidation

From inception, consolidated profit is fully attributed to the parent, since the NCI is treated as already acquired.

·····

.....

IFRS treatment — call options

For call options, where the parent has the right (but not the obligation) to acquire NCI shares, no liability is recognized until the option is exercised. The option is instead treated as a derivative asset under IFRS 9, measured at fair value through profit or loss if it meets the derivative definition (zero or small initial net investment, underlying value based on equity, and settlement in cash or shares).

Example:Parent has the right to buy 20% of Subsidiary B for €3 million in 2028.

  • At inception, option’s fair value = €150,000.

  • Dr Derivative Asset – Call Option 150,000

  • Cr Cash 150,000

Subsequent fair value changes flow through P&L.

·····

.....

US GAAP treatment — ASC 480 and ASC 810

Under US GAAP, redeemable NCI (often called temporary equity) receives a distinct classification between liabilities and equity.

1. Initial recognition (put option granted to NCI)

If the redemption is mandatory, probable, or outside the control of the issuer (parent), the NCI is reclassified from equity to temporary equity at the redemption value.

Entry:

  • Dr Non-Controlling Interest (permanent equity) xx

  • Cr Redeemable NCI (temporary equity) xx

If redemption is not probable, disclosure of the terms is required but no reclassification yet.

2. Measurement

Redeemable NCI is measured at the greater of (a) the carrying amount adjusted for its share of income and dividends, or (b) the redemption amount.

Adjustments between carrying and redemption amounts bypass P&L and are recognized directly in retained earnings (consistent with equity treatment).

3. Settlement

When the redemption occurs:

  • Dr Redeemable NCI xx

  • Cr Cash xx

If the option expires unexercised, the balance is reclassified back to permanent equity.

4. Call options

A call option held by the parent is accounted for as a derivative asset under ASC 815, unless it qualifies for a scope exception (e.g., indexed to own equity).

Example:Fair value of parent’s call option on NCI increases by $80,000:

  • Dr Derivative Asset 80,000

  • Cr Gain on Call Option (P&L) 80,000

·····

.....

Comparative framework — IFRS vs US GAAP

Topic

IFRS (IAS 32 / IFRS 10 / IFRS 9)

US GAAP (ASC 480 / ASC 810)

Initial recognition – NCI put

Financial liability for redemption amount; debit to equity

NCI moved to temporary equity at redemption value

Subsequent measurement

Revalue to fair value or amortized cost (depending on structure)

Adjust to greater of carrying or redemption amount

Effect on NCI attribution

NCI derecognized; full profit attributed to parent

NCI remains, but presented in temporary equity

Impact on profit or loss

Fair value changes to P&L or equity depending on policy

Adjustments through equity, not P&L

Call options

Derivative asset (FVPL)

Derivative asset (FVPL) unless indexed to own equity

Expiry of option

Reverse liability and restore NCI

Reclassify from temporary to permanent equity

·····

.....

Worked example — IFRS NCI put option

Facts:Parent owns 80% of Subsidiary C. Minority holds 20%. A put option allows the minority to sell its shares to the parent at a fixed price of €1.5 million after two years. Present value at inception = €1.4 million.

Entries (at inception):

  • Dr Equity – NCI 1,400,000

  • Cr Liability – NCI Put 1,400,000

Year-end fair value rises to €1.55 million:

  • Dr Loss on Revaluation – NCI Put 150,000

  • Cr Liability – NCI Put 150,000

Option exercised at €1.55 million:

  • Dr Liability – NCI Put 1,550,000

  • Cr Cash 1,550,000

Impact:All interim profits of Subsidiary C were attributed entirely to the parent during the period, since NCI was derecognized at inception.

·····

.....

Disclosure requirements

IFRS (IAS 32 / IFRS 7):Entities must disclose:

  • Terms and conditions of NCI put/call arrangements.

  • Carrying amount of the financial liability and related movements.

  • Where changes in fair value are recognized (P&L or equity).

  • Judgments about control and classification of the liability.

US GAAP (ASC 480-10-50 / ASC 810-10-50):Disclosures include:

  • Nature and redemption features of redeemable NCI.

  • Redemption dates, amounts, and valuation methods.

  • Movements between permanent and temporary equity.

  • Fair value inputs for derivative call or put options.

Example (IFRS note):

At December 31, 2025, the Group recognized a liability of €2.1 million for written put options granted to non-controlling shareholders of Subsidiary D. Changes in fair value of €0.3 million during the year were recorded in retained earnings.

·····

.....

Journal entries summary

IFRS

  1. Grant of NCI put:

    • Dr Equity (NCI) xx

    • Cr Liability – NCI Put xx

  2. Revaluation:

    • Dr / Cr P&L or Equity xx

    • Cr / Dr Liability – NCI Put xx

  3. Settlement:

    • Dr Liability – NCI Put xx

    • Cr Cash xx

  4. Expiry:

    • Dr Liability – NCI Put xx

    • Cr Equity (NCI) xx

US GAAP

  1. Grant of NCI put:

    • Dr NCI (Equity) xx

    • Cr Redeemable NCI (Temporary Equity) xx

  2. Measurement update:

    • Dr / Cr Retained Earnings xx

    • Cr / Dr Redeemable NCI xx

  3. Settlement:

    • Dr Redeemable NCI xx

    • Cr Cash xx

  4. Expiry:

    • Dr Redeemable NCI xx

    • Cr NCI (Permanent Equity) xx

·····

.....

Impact on financial performance and ratios

  • Leverage: IFRS liability recognition increases total debt and reduces equity; GAAP temporary equity does not affect debt ratios directly.

  • Net income volatility: IFRS may show P&L swings if liability measured at fair value; GAAP isolates changes in equity.

  • Earnings per share (EPS): Under IFRS, full profit attributed to parent; GAAP continues partial attribution to NCI until settlement.

  • Equity metrics: IFRS equity lower from day one; GAAP reduces total equity only when redemption becomes probable.

Analysts comparing groups under different frameworks must adjust for presentation asymmetry when interpreting leverage, ROE, and ownership dilution.

·····

.....

Operational considerations

  • Maintain contract registers for all shareholder agreements with put/call clauses.

  • Evaluate redemption terms—mandatory vs discretionary—to classify correctly.

  • In IFRS groups, track fair value changes consistently and align with treasury’s discount-rate assumptions.

  • Under US GAAP, ensure correct presentation in temporary equity and track share of income and dividends separately.

  • Disclose significant judgment areas regarding control, redemption probability, and fair value hierarchy (IFRS 13 / ASC 820).

Proper classification and consistent remeasurement of NCI puts and calls ensure transparent reporting of ownership structures and obligations—preventing hidden leverage or overstated equity in consolidated statements.

·····

.....

FOLLOW US FOR MORE

DATA STUDIOS

bottom of page