Minority Interest
What is a Minority Interest?
A minority interest, also called a non-controlling interest (NCI), is the portion of a subsidiary company that is not owned by the parent company, either directly or indirectly through another group company. For a company to be considered a subsidiary within a group, the parent company must have control of the subsidiary, but this can be achieved through owning less than 100% of the shares of the subsidiary. This can be achieved if the parent has acquired more than 50% of the voting shares of a subsidiary. It is also possible for a controlling interest to be acquired with less than 50% of the shares of a company, through special voting rights or an alternative contractual arrangement.
Key Learning Points
- A minority interest, also known as a non-controlling interest (NCI) represents a shareholder or shareholder group that owns a minority stake in a company that is controlled by another company
- A minority interest is recognized when control is achieved (potentially through ownership of more than 50% of the shares outstanding) but without 100% ownership
- The acquiring company must produce consolidated accounts for all subsidiaries (which includes minority interests)
How is a Minority Interest Calculated?
The impact of the minority interest needs to be shown in both the consolidated balance sheet and consolidated income statement.
In the balance sheet, the first is to calculate the net asset value (also known as book value) of the subsidiary company. This is calculated as:
Total assets – Total Liabilities
Then the net asset value is multiplied by the percentage ownership held by non-controlling interests. If Company A owns 80% of Company B, and Company B had a net asset value of $5m, the NCI would be 20% x $5m = $1m.
Within the income statement, the proportion of the group’s net income that is attributable to the minority interest needs to be calculated. This is done by multiplying the subsidiary’s net income by the percentage of shares owned by non-controlling interests. Continuing from before, if Company B had net income of $400,000, multiplying by 20% would calculate the income attributable to non-controlling interests as $80,000.
How is a Minority Interest Reported?
Under International Financial Reporting Standards (IFRS), minority interest is shown at the bottom of the equity section within the consolidated balance sheet of the parent company, and in the statement of changes in equity. The consolidated balance sheet for a group reflects all assets and liabilities the group controls (say for simplicity’s sake this means to own over 50% of the shares). This results in the balance sheet of the group being partially funded by investors that retain non-controlling stakes as well as the parent company shareholders, meaning that the NCI balance is shown as a positive balance within equity.
In the income statement, all revenues and expenses of all companies in the group will be consolidated to create the group income statement. However, here it is necessary to deduct the net income attributable to NCIs in order to calculate the net income remaining for the shareholders of the group. This is also the starting point for EPS calculations.
Under US GAAP the minority interest can be reported either in the equity section or in the liabilities section.