How written put options over non-controlling interests are accounted for under IFRS and US GAAP

Groups sometimes grant minority shareholders a put option to sell their non-controlling interests (NCI) back to the parent at a future date or upon a trigger. These contracts can radically change liability recognition, equity presentation, EPS, and leverage metrics. IFRS generally requires recognizing a financial liability at the present value of the redemption amount with a corresponding debit to equity (eliminating NCI on “gross-up” or recorded against parent equity), while US GAAP typically classifies redeemable NCI in temporary equity and applies accretion up to redemption value, with additional derivative analysis where terms are more complex.

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Why NCI puts are used and what they imply.

NCI puts are common in phased acquisitions, founder retention deals, and joint ventures where the parent promises future liquidity to the minority. The contract can be physically settled (parent purchases shares) or net-cash settled (pay the intrinsic value). Key variables—fixed/floor price, formula multiples, caps, collars, and timing—drive classification and subsequent measurement.

When a substantive put exists, the parent may, in substance, be obligated to acquire the NCI, which affects whether the NCI remains in equity, becomes a liability, or is presented in temporary equity (US GAAP).

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IFRS mechanics — initial recognition and presentation.

Scope and basis: Under IFRS 9 / IAS 32, a written put over NCI is usually a financial liability measured at the present value of the redemption amount (if the parent cannot unilaterally avoid settlement). On day one:

• Debit to equity (policies vary):

  • Gross-up approach: eliminate the NCI balance (to zero) and post any difference to Parent’s equity.

  • Parent-entity (contra-equity) approach: recognize the liability with a debit directly to equity attributable to owners of the parent (NCI remains for profit attribution until exercise).

• Credit a financial liability (NCI put liability) at PV of redemption.

Subsequent measurement: Remeasure the liability at amortized cost or fair value depending on terms (most contracts behave like financial liabilities at amortized cost, accreting to redemption amount). Changes are typically recognized in profit or loss as finance cost (unwinding) and remeasurement (if FV). Some entities, by policy choice, take certain remeasurements to equity to avoid P&L volatility—auditors expect consistent application and clear disclosure.

Profit attribution: If you gross-up and derecognize NCI, all profit is attributed to owners of the parent; if you keep NCI, profits continue to be split until settlement.

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US GAAP mechanics — temporary equity, accretion, and derivatives.

Redeemable NCI (ASC 480-10-S99 / SEC guidance): If NCI is redeemable at the option of the holder (the minority) and outside the control of the issuer, it is presented in temporary equity (mezzanine)—between liabilities and equity. It is not a liability unless other criteria are met.

• Initial measurement: At the greater of (i) carrying amount and (ii) redemption value if redemption is probable or the instrument is currently redeemable.

• Subsequent measurement: Accrete each period to the redemption value (typically through equity adjustments, not earnings) unless the arrangement meets liability or derivative classification.

• Derivative assessment (ASC 815): If the put is net cash-settled or fails own-equity scope exceptions, the embedded or freestanding feature may be a derivative liability at fair value through earnings.

Physically settled, fixed-for-fixed structures usually remain in temporary equity with accretion; variable-priced or net-settled terms more often drive derivative liability accounting with P&L volatility.

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Comparative framework — IFRS vs US GAAP in one view.

Topic	IFRS (IFRS 9 / IAS 32 / IFRS 10)	US GAAP (ASC 810 / 480-10-S99 / 815)
Core classification	Financial liability if the parent cannot avoid settlement	Temporary equity for redeemable NCI; liability only if other criteria met
Initial measurement	PV of redemption amount; debit to equity (NCI eliminated or parent equity)	At carrying or redemption value (depending on redeemability/probability); in temporary equity
Subsequent	Accrete/remeasure; typically through P&L (finance cost) unless policy to equity	Accretion to redemption value (generally through equity); derivatives at FV through earnings
Profit attribution	If NCI eliminated, 100% to parent; else split continues	NCI remains; profit split continues; separate temporary equity roll-forward
EPS	Liability remeasurement may affect P&L; diluted EPS considers assumed settlement	Derivative liabilities hit earnings; accretion typically bypasses earnings but affects equity
Presentation	Liability within financial liabilities; NCI may be eliminated	Temporary equity on face; separate from liabilities and permanent equity

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Worked example A — Fixed-price NCI put (IFRS liability; GAAP temporary equity).

Facts: Parent owns 80% of Sub; NCI 20%. Parent grants NCI a put in 3 years at €12m fixed. Current NCI carrying amount = €9m. Discount rate = 5%. PV of €12m in 3 years ≈ €10.36m.

IFRS day-one entries (gross-up approach):

• Dr Equity (Parent’s owners) 1.36m

• Dr NCI 9.00m

• Cr NCI Put Liability 10.36m

(Profit thereafter fully to parent if NCI eliminated; finance cost unwinds liability to €12m over 3 years.)

US GAAP:

• Reclassify NCI of $9m to temporary equity; no liability.

• Each period accrete toward $12m (equity adjustment).

• If the put includes net cash settlement or variable pricing, evaluate derivative accounting (FV through earnings).

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Worked example B — Variable formula and net cash settlement (derivative under GAAP; FV under IFRS).

Facts: Put price = 8× trailing EBITDA (variable), net cash-settled at exercise. Current FV of obligation = €14m.

IFRS:

• Recognize financial liability (FVPL) at €14m; remeasure each period through P&L.

US GAAP (ASC 815):

• Feature likely a freestanding/embedded derivative failing equity scope exceptions → derivative liability at FV through earnings.

• NCI itself remains in temporary equity; derivative movements hit earnings.

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Journal entries summary.

IFRS (common patterns):

1. Initial recognition (fixed price):

   • Dr NCI (to eliminate) xx

   • Dr / Cr Parent’s Equity (balancing) xx

   • Cr NCI Put Liability (PV) xx

2. Unwinding / remeasurement:

   • Dr Finance Cost / Loss on Remeasurement xx

   • Cr NCI Put Liability xx

3. Settlement (physical):

   • Dr NCI Put Liability xx

   • Cr Cash xx

US GAAP (temporary equity, no derivative):

1. Reclassify NCI:

   • Move NCI to Temporary Equity (no P&L).

2. Accretion to redemption value:

   • Dr Additional Paid-In Capital / Retained Earnings xx

   • Cr Temporary Equity xx

US GAAP (derivative):

• Dr/Cr Derivative Liability (FV change) xx

• Cr/Dr Gain/Loss (P&L) xx

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Disclosure package that avoids surprises.

• Nature and terms of NCI puts (price formula, caps/floors, settlement method, windows).

• Carrying amount of liabilities (IFRS) or temporary equity (US GAAP) and reconciliation of period movements.

• P&L effects from unwinding/remeasurement or derivative fair value changes.

• Sensitivity of the redemption amount to key drivers (EBITDA, multiples, discount rates).

• Policy choice under IFRS for equity vs P&L remeasurement, applied consistently.

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Impact on financial performance and ratios.

• Leverage: IFRS liability increases net debt-like metrics; GAAP temporary equity affects capitalization ratios but not debt.

• EBITDA & earnings: IFRS remeasurements (and GAAP derivative FV) create earnings volatility; GAAP accretion usually bypasses P&L.

• EPS: IFRS P&L volatility and GAAP derivative marks can swing EPS; diluted EPS should consider assumed acquisition of NCI if substantive.

• Equity and distributions: Equity reductions under IFRS (and temporary equity accretion under GAAP) may constrain dividend capacity or covenants.

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Operational considerations.

• Draft terms with accounting in mind: Avoid net cash settlement and highly variable formulas if earnings volatility is a concern.

• Model the path to redemption: Build schedules for accretion, discount unwinding, and sensitivity to valuation drivers.

• Document the policy (IFRS) for where remeasurements go (P&L vs equity) and apply it consistently.

• Coordinate legal and finance: Ensure triggers, windows, floors/caps, and settlement mechanics are unambiguous and auditable.

• Explain EPS and leverage impacts in MD&A to keep stakeholders aligned with economic intent.

Clear, policy-consistent accounting for NCI puts preserves transparency over control economics and protects comparability across reporting periods and jurisdictions.

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