Is Minority Interest An Asset Or A Liability?

– the equity balances include both pre-acquisition and post-acquisition amounts. Gain the confidence you need to move up the ladder in a high powered corporate finance career path. One important thing to remember is that when it comes to the valuation of minority interest, there are many factors to consider, both external and internal, that are applicable to a company and its industry of operation.

Recall from our lesson on important accounting changes that even when less than a 100% controlling interest is acquired, 100% of the acquired net assets are recorded at fair value . Previously, only the controlling interest was recorded at FV while the remaining noncontrolling interest was recorded at its carrying value. The new rules result in goodwill attributable to both the acquirer and the noncontrolling interest. For the majority of publicly traded companies, most shareholders would be classified as holding non-controlling interests, as most have a wide shareholder base. It is generally not until an investor holds 5%-10% of the total outstanding shares that they can push for a seat on the board, or significantly drive changes at shareholders’ meetings by publicly lobbying for them. A non-controlling interest occurs when an ownership stake is less than 50% of the outstanding voting shares. However, sometimes the threshold is lower, as a shareholder may hold only 49% of a company, but by controlling the board of directors, is able to direct decisions of the company.

Changes In Controlling Interest

The FASB’s FAS 160 and FAS 141r significantly alter the way a parent company accounts for NCI in a subsidiary. Liability is the compulsion of a company due to previous undertakings resulting in an outflow of resources.

In the corporate world, a corporation lists minority ownership on its balance sheet. In addition to being reflected on the balance sheet, a minority interest is reported on the consolidated income statement as a share of profit belonging to minority equity holders. Minority interest represents a percentage of ownership in a company by less than 50% of the outstanding shares with a voting right. Hence, minority shareholders have a little say in a company’s decision-making, and they cannot exert control over the company through voting. Usually, non-controlling interest ranges between 20 and 30%, or even less of the voting shares.

In accounting terms, only the dividends received from the minority interest are recorded for those with minority passive interests. This is referred to as the cost method—the ownership stake is treated as an investment at cost, and any dividends received are treated as dividend income. The most visible innovation in Statement no. 160 is the name change from “minority interest” to “noncontrolling interest.” The problem with the old terminology was that it did not encompass the full range of combination scenarios. Some majority ownership positions don’t lead to consolidation, such as when a subsidiary is in bankruptcy.

What Is A Consolidated Balance Sheet?

In turn, no adjustments will be made to the carrying values in the subsidiary’s accounting records for its assets and liabilities, apart from recognizing any consideration given up or received by the subsidiary from its stock transactions. In the consolidation process, the decrease or increase in the parent’s investment account will pass through to the NCI as an increase or decrease, respectively. If you’re the majority stockholder but own less than 100 percent, you still use consolidated financial statements. You report the other company’s income on your income statement and its assets on your balance sheet.

To summarize the underlying concept, a change in the ownership percentage resulting in a loss of control has a real economic impact on the financial interests of both the parent and the noncontrolling shareholders. Statement no. 160 will stipulate new requirements for transactions and other events that change a parent’s ownership percentage in a subsidiary. Depending on the particular facts, the percentage may change because the parent buys or sells subsidiary shares or because the subsidiary engages in its own stock transactions without involving the parent.

Noncontrolling Minority Interest

Consolidated net income is allocated to the parent and noncontrolling interests in proportion to their percentages ownership; 80% to Alpha and 20% to the noncontrolling interests, in this case. Statement no. 160 does not allow recognition of gains or losses on the consolidated income statement when the parent retains control after changes in its ownership percentage.

Under US GAAP 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. FASB FAS 160 and FAS 141r significantly alter the way a parent company accounts for non-controlling interest in a subsidiary.

Understanding Minority Interests

This type of stock differs in a few important ways from common stock sold in the secondary market. Key differences are that founders stock can only be issued at face value, and it comes with a vesting schedule. A minority interest is ownership of less than 50% of a subsidiary’s equity by an investor or a company other than the parent company. ABC records a $10 million minority interest as a noncurrent liability to represent the 10% of XYZ Inc. it does not own. Peggy James is a CPA with over 9 years of experience in accounting and finance, including corporate, nonprofit, and personal finance environments.

• If the parent still has influence, it will apply the equity method; if not, it will account for the investment as trading or available-for-sale.
• GAAP allows minority interest to be shown under the equity or liability section.
• Recall from our lesson on important accounting changes that even when less than a 100% controlling interest is acquired, 100% of the acquired net assets are recorded at fair value .
• 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.
• A consolidated balance sheet must disclose the minority interest holders’ total share of the subsidiary’s net assets.

Previously, ARB 51 required that losses attributable to the noncontrolling interest in a subsidiary that exceeded the noncontrolling interest’s equity be instead attributed to the parent. Therefore, under the new rules, parents may report higher net income because noncontrolling interests are now allocated their proportionate shares of any losses. Note in the new rules example that the noncontrolling interest is valued at $20.00 per share rather than the $22.00 per share paid by Alpha. This might be because Alpha pays a control premium of $2.00 per share to acquire a controlling interest in Sierra. If Sierra’s seller is a company, the seller will record its 20% noncontrolling interest in Sierra using the equity method of accounting. Minority interest provides users with important information when reading a financial statement.

How To Calculate Interest Payable In Accounting

In accounting, 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, or the corporation would generally cease to be a subsidiary of the parent. We then proceed to calculate the net income that belongs to PCP’s minority interest owners. We do this by multiplying PCP’s net income of $1,533 by its remaining minority share of 10%, or to arrive at $153.3 million. Again, this figure gets reported on BRK’s consolidated income statement as “net income attributable to the minority interest,” a separate non-operating line item. Dividends are treated as a return of capital, decreasing the value of the investment on the balance sheet.

If you receive ​$5,000​ in dividends, you report them as income, but you reduce your investment asset by ​$5,000​ as well. This practice is deficient because that GAAP-based book value doesn’t reliably describe the future cash flow potential inherent in those shares. If you own 20 percent or less of the company, you account for your investment by the cost method, Accounting Tools advises. For example, say your company buys 50,000 shares of Consolidated Copper for ​$100,000​, giving you a 10 percent interest. You don’t have to change or reevaluate the asset’s worth in later periods unless the fair market price of the shares drops. Minority interest, also referred to as non-controlling interest , 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 of 50 to less than 100 percent in the subsidiary and reports financial results of the subsidiary consolidated with its own financial statements.

On Sept. 15, FASB issued an exposure draft proposing revisions to Interpretation no. 46. Among other things, the proposal requires performing new qualitative analysis when determining if a financial interest in a VIE is to be consolidated. When you own 100 percent of a subsidiary, its finances and yours merge into a single, consolidated balance sheet, the Corporate Finance Institute explains. How you account for your investment depends on how much stock you hold and how much influence you wield in the other company. Finally, minority shareholders of one company are usually majority shareholders in another company. Losses attributable to the parent and the noncontrolling interest in a subsidiary are attributed to those respective interests, even if doing so results in a deficit noncontrolling interest balance .

Michael Marz has worked in the financial sector since 2002, specializing in wealth and estate planning. After spending six years working for a large investment bank and an accounting firm, Marz is now self-employed as a consultant, focusing on complex estate and gift tax compliance and planning. Investors will then be better positioned to form their own opinion regarding the effect of an NCI on the various ratios and items in the financial statements. An Indirect NCI receives a proportionate share of a subsidiary’s post-acquisition equity only. Founders stock refers to the equity that is given to the early founders of an organization.

Minority Interest: Liability Or Asset?

Specifically, the NCI’s portions of a subsidiary’s assets and liabilities often are included on the consolidated balance sheet at their book values as of the acquisition date. Because the parent’s portions of those same assets and liabilities are reported at fair value, the consolidated assets and liabilities are presented in the statements as an indecipherable mixture of old book and new fair values. Company XYZ reports a consolidated net income of $435,500, yet the non controlling interest is 20% of net income, hence $87,100. The net income that is finally attributable to the company’s shareholders is $348,400. Also, non-controlling interest is reported as a liability on the consolidated statement of financial position, representing the percentage of ownership by minority shareholders. The result will be more informative financial statements that reflect how the existence of and changes in noncontrolling interests can affect cash flow potential for the consolidated entity and its shareholders.

• Return on Equity is a measure of a company’s profitability that takes a company’s annual return divided by the value of its total shareholders’ equity (i.e. 12%).
• Statement no. 141 and Statement no. 160 are integrally linked to work together to apply the new acquisition method to consolidated financial statements and reports and thus bring more useful information to the capital markets.
• Although minority interest does not meet the preconditions that would qualify it as equity, assets on a consolidated balance sheet receive some form of contribution from minority assets.
• While an asset possesses value, the controlling company exercises no control over the value.
• Well, any financial ratio that involves investment structures should take into consideration the implication of a minority stake.

In the numerical growth method, previous figures are analyzed to ascertain existing trends. The model predicts the growth of a subsidiary at a uniform rate based on past trends. Also called statistical growth, numerical growth uses a number of important tools to forecast trends, such as time series analysis, moving averages, and regression-based analysis. However, the analysis method is not applicable to companies experiencing dynamic growth such as FMCG. A minority, or non-controlling interest is ownership or equity interest that consists of less than 50% of an enterprise.

For example, if you own 40 percent of the stock but want to use the cost method, you have to prove you don’t have significant influence. You can show that you have no representation on the board, that the majority owner ignores your views, or that you’ve gone to court to try and force the company to listen to you.

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Certainly, minority interest is not a debt because a company is not obligated to repay. Thus, because minority interest is not a payable quantity, it can’t be considered a debt. Although minority interest does not meet the preconditions that would qualify it as equity, assets on a consolidated balance sheet receive some form of contribution from minority assets. If it’s financially advantageous for any reason to use a different method, you have to justify it.