Can net income attributed to shareholders exceed firmwide net income?

Question

I was looking at a publicly-traded company's annual report and I noticed that there was an instance where the income attributed to their common shareholders exceeded their actual firmwide net income of that year. To balance this out, they allocated a loss to their preferred shareholders.

1. It makes no sense to me how you can allocate any losses at all when your firmwide net income is positive. If so, couldn't they have chosen to allocate any arbitrarily large loss (e.g. a loss of $1B) to their preferred shareholders to completely eradicate their individual taxes then?

2. From the perspective of the actual cash flow, how exactly do the common shareholders receive their income if it exceeds the firm's income? Do the preferred shareholders have to jointly pay up $21.6M to the common shareholders?

Answer 1

Go to the notes on the Capital to see what the terms of those securities are. Without doubt those notes will also explain the negative amount. I think the label "Net(loss)income ..." was a poor choice of wording. That has probably lead to the OP's confusion. Notice how in both years there was Net Income without any losses, and that in both years the bottom number was smaller. Yet in one year there was brackets use around the 21,565. I would say there should not have been any brackets used.

The line item was labelled Preferred and Participating Units. These securities participate in (have a right to) the profits in some way. Eg. preferred shares pay their dividends out of after-tax income attributable to equity owners (which includes the preferreds). Or the equity owners of subsidiary companies have a right to the profits earned by the subsidiary.

So the Income Statement includes 100% of the consolidated entity. But the owners of the subsidiary get to keep their share of the sub's income and the equity owners of the mother ship only get what is left (after the 21,565 is subtracted).

Answer 2

The OP appears to have at least four misunderstandings:

1. It is not implausible for “income attributable to common shareholders” to exceed the net income of the parent company.
2. The amount allocated to ”preferred and participating units” is not just an amount to “balance this out”.
3. Income allocation to shareholders is independent of whether or not “attributable income” exceeds the firm’s net income.
4. the preferred shareholders will NOT have to “jointly pay up $21.6M to the common shareholders”.

The information supplied is insufficient to determine how or why the losses have been allocated to the “preferred and participating units”. Presumably there is more information elsewhere in the report, but unfortunately we do not have that.

I am sorry I cannot answer in more detail without knowing more about the nature of the preferred units in question.

I will just offer a bit of general knowledge:

The standard formulas relating to this question are:

Net income = Revenues – Expenses

Net income attributed to common shareholders = Net income - preferred dividends.