Minority Interest
Minority interest, also referred to as non-controlling interest (NCI), refers to the portion of equity ownership in a subsidiary company that is not controlled by the parent company. The parent company holds a majority of the subsidiary’s shares (over 50%), giving it control over the subsidiary, while other shareholders own the remaining shares.
For example, if a parent company owns 75% of a subsidiary, the other 25% of the equity is considered the minority interest.
From an accounting perspective, minority interest is reported in the consolidated balance sheet of the parent company and it represents the share of the subsidiary’s net assets that the parent company does not own. It is classified as part of the equity section on the consolidated balance sheet, separate from the parent company’s equity.
In the income statement, the parent company reports 100% of the subsidiary’s revenues, expenses, and profits, but then deducts out the minority interest’s share of profits (since those profits do not belong to the parent company).
The treatment of minority interest can be complex and depends on the accounting standards used, the degree of control the parent company has over the subsidiary, and other factors.
Example of Minority Interest
Suppose Company A acquires 80% of the shares of Company B, a smaller firm. This gives Company A control over Company B, making Company B a subsidiary of Company A. However, the remaining 20% of Company B’s shares are still owned by other shareholders. This 20% stake is the minority interest.
Now, let’s say that Company B has net assets (total assets minus total liabilities) worth $1,000,000. In the consolidated balance sheet of Company A, the minority interest will be presented as 20% of $1,000,000, which is $200,000. This represents the portion of Company B’s net assets that is not owned by Company A.
Further, if Company B reports net income of $100,000 for a given period, the minority interest’s share of this profit is 20% of $100,000, which is $20,000. This amount is subtracted from the consolidated net income in Company A’s consolidated income statement, because it belongs to the minority shareholders, not to Company A.
This is a simplified example, but it should help illustrate the concept of minority interest in the context of financial reporting for a parent company and its subsidiary.
