In
accounting
Accounting, also known as accountancy, is the process of recording and processing information about economic entity, economic entities, such as businesses and corporations. Accounting measures the results of an organization's economic activit ...
, minority interest (or non-controlling interest) is the portion of a subsidiary corporation's stock that is not owned by the parent corporation. The magnitude of the minority interest in the subsidiary company is generally less than 50% of
outstanding shares
Shares outstanding are all the shares of a corporation that have been authorized, issued and purchased by investors and are held by them. They are distinguished from treasury shares, which are shares held by the corporation itself, thus representi ...
, or the corporation would generally cease to be a subsidiary of the parent.
It is, however, possible (such as through special voting rights) for a controlling interest requiring consolidation to be achieved without exceeding 50% ownership, depending on the accounting standards being employed. Minority interest belongs to other investors and is reported on the consolidated
balance sheet
In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business ...
of the owning company to reflect the claim on
assets
In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can b ...
belonging to other, non-controlling shareholders. Also, minority interest is reported on the consolidated
income statement
An income statement or profit and loss accountProfessional English in Use - Finance, Cambridge University Press, p. 10 (also referred to as a ''profit and loss statement'' (P&L), ''statement of profit or loss'', ''revenue statement'', ''statement o ...
as a share of profit belonging to minority shareholders.
The reporting of 'minority interest' is a consequence of the requirement by
accounting standards
Publicly traded companies typically are subject to rigorous standards. Small and midsized businesses often follow more simplified standards, plus any specific disclosures required by their specific lenders and shareholders. Some firms operate on t ...
to 'fully' consolidate partly owned subsidiaries. Full consolidation, as opposed to partial consolidation, results in financial statements that are constructed as if the parent corporation fully owns these partly owned subsidiaries; except for two line items that reflect partial ownership of subsidiaries: net income to common shareholders and common equity. The two minority interest line items are the net difference between what would have been the common equity and net income to common, if all subsidiaries were fully owned, and the actual ownership of the group. All the other line items in the financial statements assume a fictitious 100% ownership.
Some investors have expressed concern that the minority interest line items cause significant uncertainty for the assessment of value, leverage and liquidity. A key concern of investors is that they cannot be sure what part of the reported cash position is owned by a 100% subsidiary and what part is owned by a 51% subsidiary.
Minority interest is an integral part of the
enterprise value
Enterprise value (EV), total enterprise value (TEV), or firm value (FV) is an economic measure reflecting the market value of a business (i.e. as distinct from market price). It is a sum of claims by all claimants: creditors (secured and unsecure ...
of a company. The converse concept is an
associate company
An associate company (or associate) in accounting and business valuation is a company in which another company owns a significant portion of voting shares, usually 20–50%. In this case, an owner does not consolidate the associate's financial st ...
.
Accounting treatment
Under the
International Financial Reporting Standards
International Financial Reporting Standards, commonly called IFRS, are accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB). They constitute a standardised way of describing the company's fi ...
, the non-controlling interest is reported in accordance with
IFRS 5 and is shown at the very bottom of the Equity section on the consolidated
balance sheet
In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business ...
and subsequently on the
statement of changes in equity
A statement of changes in equity is one of the four basic financial statements. It is also known as the statement of changes in owner's equity for a sole trader, statement of changes in partners' equity for a partnership, statement of changes in ...
. Under
US GAAP
Generally Accepted Accounting Principles (GAAP) is the accounting standard adopted by the U.S. Securities and Exchange Commission (SEC), and is the default accounting standard used by companies based in the United States.
The Financial Accountin ...
minority interest can be reported either in the liabilities section, the equity section or, preceding changes to acceptable accounting standards, the mezzanine section of the balance sheet. The mezzanine section is located between liabilities and equity. FASB FAS 160 and FAS 141r significantly alter the way a parent company accounts for non-controlling interest (NCI) in a subsidiary. It is no longer acceptable to report minority interest in the mezzanine section of the balance sheet.
Public sector usage
From 2013 onwards, the
UK Government
His Majesty's Government, abbreviated to HM Government or otherwise UK Government, is the central government, central executive authority of the United Kingdom of Great Britain and Northern Ireland. stated that it would become a minority equity co-investor in future
Private Finance Initiative
The private finance initiative (PFI) was a United Kingdom government procurement policy aimed at creating "public–private partnerships" (PPPs) where private firms are contracted to complete and manage public projects. Initially launched in 1992 ...
projects, which thereafter were referred to as "PF2 projects".
[Local Government Lawyer]
Projects and Regeneration: Treasury issues model for public sector equity participation in PF2 projects
published October 2013, accessed 26 April 2024
See also
*
Associate company
An associate company (or associate) in accounting and business valuation is a company in which another company owns a significant portion of voting shares, usually 20–50%. In this case, an owner does not consolidate the associate's financial st ...
(the converse concept)
*
Articles of incorporation
Article often refers to:
* Article (grammar), a grammatical element used to indicate definiteness or indefiniteness
* Article (publishing), a piece of nonfictional prose that is an independent part of a publication
Article(s) may also refer to:
...
*
Business valuation
Business valuation is a process and a set of procedures used to estimate the economic value of an owner's interest in a business. Here various valuation techniques are used by financial market participants to determine the price they are willing ...
*
Consolidation (business)
In business, consolidation or amalgamation is the merger and acquisition of many smaller companies into a few much larger ones. In the context of financial accounting, ''consolidation'' refers to the aggregation of financial statements of a group ...
*
Drag-along right Drag-along right (DAR) is a concept in corporate law, often encountered in the context of venture capital and private equity.
Under the concept, if the majority shareholder(s) of an entity sells their stake, the prospective owner(s) have the right ...
*
Equity method
*
Pre-emption right
A pre-emption right, right of pre-emption, or first option to buy is a contractual right to acquire certain property newly coming into existence before it can be offered to any other person or entity. It comes from the Latin verb ''emo, emere, emi, ...
*
Share capital
A corporation's share capital, commonly referred to as capital stock in the United States, is the portion of a corporation's equity that has been derived by the issue of shares in the corporation to a shareholder, usually for cash. ''Share ...
*
Tag-along right
Tag along rights (TARs) comprise a group of clauses in a contract which together have the effect of allowing the minority shareholder(s) in a corporation to also take part in a sale of shares by the majority shareholder to a third party under the ...
*
Voting interest
Voting interest (or voting power) in business and accounting means the total number, or percent, of votes entitled to be cast on the issue at the time the determination of voting power is made, excluding a vote which is contingent upon the happenin ...
References
External links
Minority InterestMinority Interest at Investopedia.com
* ttp://beginnersinvest.about.com/od/analyzingabalancesheet/a/minority-interest-on-the-balance-sheet.htm Minority Interests on the Balance Sheet
{{DEFAULTSORT:Minority Interest
Corporate law
Corporate finance
Financial capital
Mergers and acquisitions
Shareholders