What Is Minority Interest in Financial Statements?
Learn how financial reporting addresses a parent company's partial ownership of a subsidiary, ensuring the claims of all shareholders are represented.
Minority interest represents an ownership stake in a company of less than 50% of its outstanding shares. Although the term is common, official accounting standards refer to it as Non-Controlling Interest (NCI). This ownership is held by investors or other companies who are not the controlling parent company. An NCI arises when a parent entity purchases a majority of a company’s shares, but not all of them. The remaining portion of equity that the parent does not own is the non-controlling interest.
The Principle of Consolidation
When a corporation, known as the parent company, acquires a controlling financial stake in another entity, the subsidiary, it must combine their financial statements. A controlling stake is defined as ownership of more than 50% of the subsidiary’s voting shares, which gives the parent the power to direct its activities.
This process is called consolidation, and it requires the parent company to report 100% of the subsidiary’s assets and liabilities on its balance sheet. Likewise, 100% of the subsidiary’s revenues and expenses are included on the parent’s income statement. This full consolidation is mandated by both U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).
This requirement to consolidate 100% of a subsidiary that is not 100% owned creates an accounting puzzle. The parent company’s financial statements would be misleading if they appeared to claim all of the subsidiary’s assets and income without acknowledging the portion it does not own. To solve this, a separate line item is created to account for the share of the subsidiary’s equity and income that belongs to the other, non-controlling owners.
Presentation on the Balance Sheet
On a consolidated balance sheet, the minority interest is presented within the equity section. It appears as a distinct line item, separate from the equity attributable to the parent company’s shareholders, often labeled “Non-Controlling Interest.” This presentation highlights that not all of the equity of the consolidated subsidiaries belongs to the parent.
The value of this line item represents the claim that non-controlling shareholders have on the net assets of the subsidiary. Net assets are calculated as the subsidiary’s total assets minus its total liabilities. The amount reported on the balance sheet is the NCI shareholders’ proportional share of the subsidiary’s net asset value.
Think of the total equity of the consolidated company as a complete pie. The largest portion represents the equity belonging to the parent company’s stockholders. A smaller, separate slice represents the equity belonging to the minority owners of the subsidiary. By presenting it this way, the balance sheet clearly communicates the ownership structure and shows how the consolidated assets are divided among the different shareholder groups.
Presentation on the Income Statement
The treatment of minority interest on the income statement mirrors the logic used on the balance sheet. Because the parent company consolidates 100% of the subsidiary’s revenues and expenses, the resulting net income figure is for the entire consolidated entity, not just the parent. To accurately reflect the parent’s share of the profit, an adjustment must be made.
After the calculation of consolidated net income for the period, a specific line item appears that deducts the portion of income attributable to the minority shareholders. This line is typically labeled “Net income attributable to non-controlling interest.” This amount is subtracted from the total consolidated net income to arrive at the final earnings figure on the statement.
The resulting number, often labeled “Net Income Attributable to Parent,” represents the profit that belongs exclusively to the shareholders of the parent company. This is the figure used to calculate the parent company’s earnings per share (EPS), a widely used metric for assessing a company’s profitability. Without this deduction, the parent’s EPS would be overstated.
Calculating Minority Interest
The calculation for minority interest is performed in two distinct parts, one for the balance sheet and one for the income statement. The process is straightforward and relies on the ownership percentage held by the non-controlling shareholders. The key is to apply this percentage to the correct financial figures from the subsidiary’s standalone statements.
For the balance sheet, the first step is to determine the subsidiary’s book value, or net assets. This is found by taking the subsidiary’s total assets and subtracting its total liabilities. The resulting figure represents the subsidiary’s equity. The minority interest is then calculated by multiplying the subsidiary’s book value by the percentage of ownership held by the minority shareholders. For example, if a parent company owns 80% of a subsidiary, the minority interest is 20%. If the subsidiary has net assets of $500,000, the minority interest reported on the consolidated balance sheet would be $100,000 ($500,000 x 20%).
The income statement calculation follows a similar principle but uses the subsidiary’s net income. To find the portion of profit attributable to the minority interest, you take the subsidiary’s net income for the reporting period and multiply it by the minority interest percentage. This calculation isolates the share of the subsidiary’s earnings that belongs to the non-controlling owners. Continuing the previous example, if the same subsidiary generated a net income of $80,000 for the year, the amount attributable to the non-controlling interest would be $16,000 ($80,000 x 20%).