Definition
Non-controlling interest (NCI) is a type of investment in a company where the investor does not have significant influence on the business because their ownership stake is less than 50 percent. It represents the portion of the business not owned by the parent company, where the equity ownership is spread among various investors. Often seen in consolidated financial statements, it indicates that the subsidiary company is not entirely owned by the parent company.
Phonetic
The phonetics of the keyword “Non-Controlling Interest” is: Non – /nɒn/Controlling – /kənˈtroʊlɪŋ/Interest – /ˈɪntərɛst/
Key Takeaways
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- Non-Controlling Interest denotes the equity in a subsidiary not attributable to the parent company. This means the parent company holds less than 100% of the subsidiary shares, and the balance is referred to as NCI.
- Financial Reporting: NCI is reported as the equity component in the consolidated balance sheet of the owning entity. This accounts for the portion of the subsidiary’s net assets that the parent company does not own outright.
- Impact on Consolidations: Non-controlling interest often complicates business consolidations, as companies need to figure out profit allocation between the parent company and the minority shareholders represented by the non-controlling interest.
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Importance
Non-Controlling Interest (NCI), also known as minority interest, is a significant term in business and finance as it refers to the portion of equity ownership in a subsidiary company not attributable to the parent company. The understanding and use of “non-controlling interest” is important as it helps in providing a clearer picture of a company’s total worth, where the full value of a subsidiary is incorporated in the consolidated balance sheet, rather than just the proportional share owned by the parent company. As such, it plays a crucial role in accurately presenting a company’s financial health and performance to stakeholders, including shareholders and potential investors. Additionally, how a company manages its NCI can also impact its growth strategy and overall valuation.
Explanation
Non-Controlling Interest, also known as minority interest, serves a significant purpose in the realm of finance and business, particularly in the framework of consolidation accounting. When a company acquires majority, but not all shares of another company and hence has the power to control its operations, the remaining minority stake that is not in its ownership generates the non-controlling interest — an essential element in accurate financial reporting. This interest represents the share of equity in a subsidiary not attributable, either directly or indirectly, to a parent. The main goal here is to provide an accurate picture of the company’s financial health, giving investors a clear understanding of the portion of net assets and profits attributable solely to the parent company’s shareholders.The non-controlling interest is extensively used in financial analysis and valuation. Analysts often juxtapose the level of non-controlling interest with the company’s profits and losses to determine its financial performance and make informed decisions. In addition, it helps in assessing the worth of the subsidiary company by indicating what portion of it is not owned by the parent company. The non-controlling interest comes into play during mergers and acquisitions, shedding light on the equity held by other investors, thereby influencing the course of negotiations.
Examples
Non-controlling interest, also known as minority interest, is the share of a corporation’s equity that is not owned by the parent corporation or the primary shareholder. Here are three real-world examples:1. Alphabet Inc. and Google: Alphabet Inc., the parent company, owns a large percentage of the world-famous Google but not all of it. The rest of Google’s stakes, that’s not controlled by Alphabet, represents the non-controlling interest. It implies that while Alphabet has the majority decision-making power, it must also take into account the interests of the minority stakeholders who have some say in the company’s operation.2. Walmart and Flipkart: In 2018, Walmart Inc. purchased a 77% controlling interest in Flipkart, one of India’s largest e-commerce companies. The remaining 23% is owned by other shareholders, including the company’s founders, Tencent, Tiger Global and Microsoft. This 23% stake represents the non-controlling interest.3. Berkshire Hathaway and Kraft Heinz Company: Berkshire Hathaway holds a significant stake in The Kraft Heinz Company but does not have complete control over it. The shares that are owned by other shareholders, such as 3G Capital, represent the non-controlling interest. Even though Berkshire Hathaway has a significant say in the operations, 3G Capital and other shareholders still hold enough interest to influence the company’s decisions.
Frequently Asked Questions(FAQ)
What is a Non-Controlling Interest in finance and business?
Non-Controlling Interest (NCI) refers to the ownership stake in a corporation where the holder does not have control over business decisions. It is generally less than 50% of a company’s equity shares.
How is Non-Controlling Interest represented on financial reports?
On a consolidated balance sheet, Non-Controlling Interest is listed separately in the equity section. It reflects the portion of equity that is not owned by the parent company.
Why is Non-Controlling Interest important in business?
NCI provides a more transparent view of a company’s financial health. By acknowledging minority stakeholders, it presents a realistic picture of the company’s economic and financial standing.
How is Non-Controlling Interest calculated?
Non-Controlling Interest is calculated as the percentage of ownership equity in a subsidiary company not owned by the parent company multiplied by the subsidiary’s net assets.
What is the implication of Non-Controlling Interest for shareholders?
Non-Controlling Interest holders do not exert control over company management decisions. However, they share in profits and losses and have a claim on assets in case of liquidation.
Is Non-Controlling Interest an asset or liability?
It is neither an asset nor a liability. Instead, Non-Controlling Interest is considered equity on the balanc
Related Finance Terms
- Minority Interest: This is another term for Non-Controlling Interest, referring to shares of a corporation held by minority shareholders who do not have the power to control company decisions or operations.
- Equity Method: This is a method of accounting used for investments where the investor can exercise significant influence, but not full control, over the investee. This method is used for non-controlling interest accounting.
- Consolidated Financial Statements: The financial statements showing the combined financial results of the parent company and its subsidiaries, including those where there is non-controlling interest.
- Subsidiary Company: This is a company that is controlled by a parent company. The portion of the subsidiary that the parent company does not own represents the non-controlling interest.
- Controlling Interest: This is the opposite of Non-Controlling Interest. A controlling interest is an ownership interest in a corporation with enough voting stock shares to control the corporation’s board of directors, thereby dictating the direction of the business.
