Minority Interest, also called Non-Controlling Interest, is the share of a subsidiary’s net assets and earnings attributable to minority shareholders rather than the parent company. It appears in consolidated financial statements to acknowledge external ownership in controlled entities.
Why is Minority Interest Important?
Recognizing Minority Interest is important because it:
Ensures Accurate Consolidation: Reflects the true economic interest of the parent by separating third-party equity from the parent’s equity.
Affects Financial Ratios: Impacts metrics like Return on Equity (ROE) and earnings per share by adjusting the equity base and attributable earnings.
Provides Transparency: Discloses the extent of external ownership and obligations to minority shareholders in group financial statements.
How is Minority Interest Calculated?
Minority Interest is calculated at the reporting date by:
Minority Interest = Subsidiary’s Total Equity × Percentage of Shares Not Owned by Parent
Where:
Subsidiary’s Total Equity is the net assets of the subsidiary at carrying value.
Percentage Not Owned by Parent is the proportion of shares held by external investors.
In the income statement, the share of net income attributable to minority shareholders is:
Minority Share of Net Income = Subsidiary Net Income × Percentage Not Owned by Parent
Additional Considerations
Acquisition Accounting: Initial measurement may include recognizing fair value adjustments attributable to minority interests at acquisition.
Profit Allocation: Minority Interest’s share of profits reduces Net Income attributable to the parent company.
Disclosure Requirements: Companies must disclose the amount of Minority Interest in equity and consolidated net income allocated to non-controlling interests.