Definition
Minority interest, also known as non-controlling interest, refers to the portion of a subsidiary company’s equity that is not owned by the parent company. This is the stake that smaller shareholders hold in the parts of a business organization that the parent company doesn’t control. It’s generally less than 50% ownership and doesn’t allow the shareholder to control company decisions.
Phonetic
The phonetic spelling of the keyword “Minority Interest” is:Minority: /mɪˈnɒrɪti/Interest: /ˈɪntrɪst/
Key Takeaways
- Part of Consolidated Entities: Minority interest, also known as non-controlling interest (NCI), reflects the portion of equity ownership in a subsidiary’s stock not owned by the parent company. Typically, it occurs when the parent company owns more than 50% but less than 100% of the subsidiary.
- Impact on Financial Statements: Minority interest is reported on the consolidated balance sheet of the parent company and shows up as non-current liability. Likewise, the portion of net income attributable to the minority interest is subtracted from consolidated net income on the income statement to give investors a clearer picture of the net income belonging only to the parent company.
- Acquisition and Valuation Method: When a parent company acquires a subsidiary, it records the fair values of the subsidiary’s identifiable assets and liabilities. A minority interest is then created for the unowned equity. The valuation methodology can be complex and plays a large role in mergers and acquisitions.
Importance
Minority interest is a crucial concept in business and finance as it refers to a significant, but non-controlling stake, in a company owned by shareholders outside the main parent corporation. This term is important because it represents an ownership stake in a corporation that is less than 50% of the total available shares, thereby giving the owner no substantial control over the company’s operational and financial decisions. However, the percentage owned might be significant enough to influence minor decisions or be consulted on major ones. Additionally, minority interest can impact the parent company’s financial statements, as it is required to report this ownership stake separately, affecting the calculated financial health and value of the company. This concept also promotes concepts of diversity and inclusion in business, by acknowledging and giving importance to shareholders who own less than the majority in a company.
Explanation
Minority interest plays a significant role in corporate finance, particularly in the realm of mergers and acquisitions. By definition, it refers to a situation where a company owns less than 50% of another company’s stock and subsequently, doesn’t have control over its operational decisions. However, in context of its purpose, it denotes an important stake in the company which allows influence, albeit indirect, on the company’s decisions to protect investment interests. Companies purchase minority interest stakes as a strategic move to tap into another company’s industry expertise, customer base, technology, or geographic location without having to fully acquire or merge with the company.When it comes to financial consolidation and reporting, minority interest becomes a significant factor. Because companies are required to report their financials on a consolidated basis if they own more than 50% of another company, they must also show the minority interest (the less than 50% of the company they don’t own) on their balance sheet as a non-current liability, elaborating the proportion of that subsidiary not directly controlled by them. This presents a more transparent image of the company’s true earnings and liabilities, facilitating a more accurate analysis of the company’s financial health by stakeholders.
Examples
1. Company Acquisitions: Consider a hypothetical situation where Company A acquires 90% stake in Company B but 10% of the equity still belongs to the original shareholders. This 10% portion is the minority interest. When Company A reports its financials, it needs to include both the profits it is making from its own operations and also the 90% of profits from Company B. The remaining profit that belongs to the minority shareholders, which is 10% of Company B’s total profits, must be accounted for separately, identified as ‘minority interest’.2. Joint Ventures: Let’s say Company X and Company Y form a joint venture, where Company X holds 75% stake and the remaining 25% stake is held by Company Y. This 25% portion is recognized as ‘minority interest’. Company Y still has rights to the profits and assets of the joint venture, but it’s a smaller, ‘minority’ stake, as compared to Company X’s majority stake.3. Corporate Group Structures: In many large corporate group structures, the parent company often holds a majority share with various other minority shareholders holding a less significant stake in the organization. For instance, if a parent company owns 80% of a subsidiary, the remaining 20% stake owned by minority shareholders is considered the ‘minority interest’. This can often be seen in multinational corporations with complex ownership structures.
Frequently Asked Questions(FAQ)
What is Minority Interest in finance and business term?
Minority Interest, also known as non-controlling interest, refers to a scenario where a company owns less than 50% of another company’s stocks. The company with the minority interest does not have control over the subsidiary’s operations.
How is minority interest calculated?
Minority interest is calculated by multiplying the minority ownership percentage by the subsidiary’s total net assets or equity. For instance, if a subsidiary has net assets of $1 million, a 30% ownership interest would be worth $300,000.
Where is the minority interest reported on the financial statements?
Minority interest is reported on the consolidated balance sheet of the majority owner. It is typically listed on the equity section, but separate from the parent company’s equity.
Can minority interest be negative?
Yes, minority interest can be negative if the subsidiary incurs a loss. It implies that the minority shareholder’s share of the loss exceeds their equity investment in the subsidiary company.
What does a high minority interest mean?
High minority interest means that the non-controlling stakeholders own a significant portion of a subsidiary. It can reduce the parent company’s control and potentially its profits from the subsidiary company.
How does minority interest impact the valuation of a company?
Minority interest is taken into account in the valuation of a company. Since it represents an ownership right by another entity, it can decrease the total value attributable to the parent company, particularly in the case of high minority interest percentages.
Does minority interest affect earnings per share?
Yes, minority interest can affect earnings per share (EPS). If the subsidiary company makes a profit, the minority interest would reduce the consolidated EPS as it reflects the portion of earnings attributable to the minority shareholders.
Can minority interest become controlling interest?
Minority interest only becomes a controlling interest when the entity increases its stake and owns more than 50% of the shares in another company. In such a scenario, it ceases to be a minority interest and gains the power to influence the subsidiary’s operations and decision-making process.
Related Finance Terms
- Equity Ownership
- Subsidiary Company
- Consolidated Financial Statement
- Non-Controlling Interest
- Majority Stakeholder
Sources for More Information
