Minority interest, also referred to as non-controlling interest (NCI), is the share of equity ownership in a subsidiary’s equity that is not owned or controlled by the parent corporation. The parent company has a controlling interest when it owns 50% to less than 100% in the subsidiary and reports the financial results of the subsidiary consolidated with its own financial statements.
- A minority, or non-controlling interest is ownership or equity interest that consists of less than 50% of an enterprise.
- The parent company consolidates the financial results of the subsidiary with its own, and as a result, a proportional share of income shows up on the parent company’s income statement attributable to the minority interest.
- Likewise, a proportional share of equity in the subsidiary company shows up on the parent’s balance sheet attributable to the minority interest.
- The minority interest can be found in the noncurrent liability section or equity section of the parent company’s balance sheet under the generally accepted accounting principles (GAAP) rules.
For example, suppose that Company A acquires a controlling interest of 75% in Company B. The latter retains the remaining 25% of the company. That portion is the minority interest.
On its financial statements, Company A cannot claim the entire value of Company B without accounting for the 25% that belongs to the minority shareholders of Company B. Thus, company A must incorporate the impact of company B’s minority interest on its balance sheet and income statements.
The concept of minority interest is applied only when the ownership share in a subsidiary exceeds 50% but is less than 100%. A parent company may want to own less than 100% for a number of reasons. First, achieving control of a subsidiary with a smaller than 100% capital investment puts less capital at risk of loss.
Since control is obtained when the ownership percentage goes above 50%, investing 51% will guarantee control and will present less risk to capital compared to an investment of 100%. Second, it may be hard to acquire all shares in a subsidiary, since some of the existing shareholders may not be willing to part with their stock.
When a controlling interest in a subsidiary is achieved, the consolidated method of accounting for share purchase is used. This method requires that many line items in the financial statements of the parent incorporate the financial results of the acquiree, i.e. reflect a fictitious 100% ownership of the subsidiary.
The parent must, however, maintain separate accounts on the balance sheet and income statement that track the value of the minority interest in the subsidiary, as well as its profit belonging to the minority owners.
The other two methods are the cost method, where the parent owns 20% or less of the subsidiary’s voting stock, and the equity method, where the percentage of ownership is 21% to 49%. Neither method uses minority interest to report a subsidiary’s share of assets or income anywhere on the parent’s financial statements.
Under U.S. GAAP, the financial accounting treatment of minority interest requires that it be recorded either as a non-current liability or as part of the equity section on a consolidated balance sheet of the parent company to reflect non-controlling shareholders’ claim on assets.
Under IFRS, however, it can be reported only in the equity section of the balance sheet. It must be recorded as equity, but separate from the parent’s equity. On a consolidated income statement, minority interest is recorded as a share of the minority shareholders’ profit, in compliance with FASB standards.
How to Measure Minority Interest
There are a few basic steps to measuring minority interest. The first step is always to find the book value of the subsidiary as it appears on the subsidiary’s balance sheet. The book value, or the net asset value of a company, is its total assets less the intangible assets (patents, goodwill) and liabilities. You then proceed to multiply the book value by the percentage of the subsidiary owned by the minority shareholders.
If we use 25% from the example above for the minority share percentage and assume the subsidiary’s net asset value to be $2 million, then our minority interest will equal 25% x $2 million = $500,000. Once the dollar value of minority interest is calculated, we record it on the balance sheet as part of the equity section.
The second step is to compute the net income that belongs to the minority interest owners of the subsidiary. It is simply the subsidiary’s total net income multiplied by the minority interest percentage. Again, using the 25% minority interest percentage, and an assumed net income of $1 million, we calculate our minority income as 25% x $1 million = $250,000.
This amount is then recorded as a separate non-operating line item, such as “net income attributable to the minority interest,” on the consolidated income statement of the parent company.
Example of Minority Interest Calculation
Let’s look at a hypothetical example of an acquisition and apply our calculation of minority interest to it. Company ABC enters into an agreement to acquire Shoe House XYZ for $54.3 billion.
For the purpose of this exercise, we will assume that the agreement is for a controlling interest of 90% in XYZ. Below is simplified financial information from XYZ’s balance sheet and income statement.
|(in millions $)||Fiscal Year End|
|Property, Plant, and Equipment||2,567|
|Acquired Intangible Assets||3,834|
|(in millions $)||Fiscal Year End|
|Operating Costs and Expenses||7,673|
We first determine the net asset value of XYZ as total assets minus the intangible assets and liabilities, or $19,745 – ($6,456+$3,834) – $8,573 = $882. We then multiply this book value by 100% – 90% = 10%, which is the percentage of XYZ owned by minority shareholders, to arrive at the minority interest value of $88.2 million to be reported on ABC’s consolidated balance sheet.
We then proceed to calculate the net income that belongs to XYZ’s minority interest owners. We do this by multiplying XYZ’s net income of $2,121 by its remaining minority share of 10%, to arrive at $212.1 million. Again, this figure gets reported on ABC’s consolidated income statement as “net income attributable to the minority interest,” a separate non-operating line item.
Minority interest is important in analyzing prospective investments. It is most often used in calculating the enterprise value of a company and is treated much like the company’s debt and added to the market capitalization to arrive at the company’s enterprise value:
Hence, the main use of the minority interest is in valuation ratios, such as the Enterprise-Value-To-Sales (EV/Sales), Enterprise Multiple (EV/EBITDA), etc. As we already know, the consolidation method of accounting for an investment in a subsidiary requires that 100% of the subsidiary’s sales or EBITDA be included on the parent company’s income statement, even in cases when the parent owns less than 100% of the subsidiary.
For this reason, and to ensure consistency, we need to add minority interest so that the parent does not own back to the Enterprise Value. This ensures that both the numerator and the denominator of the above ratios reflect 100% of the subsidiary’s financials, even if the parent owns less than 100% of it.
What Is Minority Interest?
Minority interest is an ownership stake in a corporation that is less than 50%. This portion is held by an individual or organization that is not the parent company or the main actors of the business. A minority interest is still considered to be a large stake of ownership, more than just a few shares that a retail investor would hold.
Is Non-Controlling Interest the Same as Minority Interest?
Yes, non-controlling interest is considered to be the same as minority interest, where the shareholder owns less than 50% of a company’s outstanding shares and has some rights, but cannot influence all of the decisions of the firm.
How Is Goodwill Calculated?
Goodwill is the purchase price of the company minus the difference between the fair market value of the company’s assets and liabilities. It is the extra amount that a buyer pays that can be hard to value.
The Bottom Line
Minority interest comes into play when a shareholder has less than a 50% stake in a company. The calculation of minority interest is relatively simple and requires the use of minority shareholders’ percentage ownership of a subsidiary. This measurement is then reported on the parent’s consolidated balance sheet and income statement in accordance with IFRS or U.S. GAAP rules.