What is Non-Controlling Interest?
Non-controlling interest refers to the minority shareholders of the company who own less than 50% of the overall share capital and therefore doesn’t have control over the decision-making process of the company.
Generally, in the case of publicly traded companies, most of the shareholders are minority shareholders, and only promoters could be categorized as majority or controlling shareholders. In case of consolidation of accounts, the amount attributable to minority, based on net assets value, is shown separately as a Non-controlling interest in the Balance Sheet reserves and a surplus of the entity.
Non-Controlling Interest Types
There are two types – Direct and Indirect.
#1 – Direct
Company B has reserved as on 31.03.2018, aggregating to $ 550,000. On 01.04.2018, Mr. X bought 10% shares of company B. Since it is a case of Direct Non-controlling interest, Mr. X would be entitled to 10% of pre-existing/past profits of Company B, in addition to the future profits accruing post 01.04.2018.
#2 – Indirect
It is one where the minority shareholders receive a proportionate allocation of post-acquisition profits only, i.e., he would not receive a share in the pre-existing profits of the company.
Company A holds 20% shares in Company B, company A also acquired 60% shares of Company P, which holds 70% of the shares of Company B. Thus, the shareholding of Company P and Company B would look as under, post-acquisition:
- Shares held by Company A: 60%
- Direct Non-controlling interest: 40%
- Shares held by Company A: 62%
- Direct Non-controlling interest: 40%
Indirect Non-controlling interest: It is calculated using the direct interest on Balance Sheet of P ltd, i.e., 40% * 70% = 28%
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Accounting for Non-controlling interest on Balance Sheet
Accounting for minority interest comes into picture while consolidation of books of accounts by the holding company. Consolidation refers to the process by which financial statements of two or more companies are combined to form one set of financials.
Consolidation is applicable when an entity holds the majority stake in another entity, which is known as the subsidiary entity. As Consolidation combines two or more than two sets of financial statements, it allows the stakeholders, such as investors, creditors, lenders, etc. to view the combined financial statements of all the three entities as if that was one entity.
While consolidating the financial statements of the subsidiary company with the holding company, the net assets value of the shared held by the minority shareholders is recognized as a Minority interest in the reserves and surplus in the consolidated financial statements.
Company L acquired 85% of the shares outstanding of Company M. Thus, the remaining shares held by minority shareholders were 15%. At the end of the year, Company M reported revenues of $ 500,000 and expenses of $ 300,000, whereas Company L reported revenues of $ 1,000,000 and expense of $ 400,000.
Net income of Company L and M can be computed as under:
Allocation of net income of Company M, between controlling and non-controlling interest, is as under:
Consolidated net income can be computed as under:
The following extract is from the Financial statements of Nestle for the year ended 31st December 2018, which shows the profit is attributed to the non-controlling interest and shareholders of parent:
Following is the extract of the consolidated balance sheet of Nestle which shows the amount attributable to Non-controlling interest:
It thus represents the amount attributable to shareholders who are not the significant shareholders of the company and have no authority of decision making in the company. The amounts attributable to NCI are shown separately in the consolidated financial statements, as it is the amount that doesn’t belong to the parent entity and is attributable to minority shareholders.
This article has been a guide to What is Non-Controlling Interest and its Definition. Here we discuss the two types of non-controlling interest on the balance sheet and its accounting while consolidating the books with examples. You can learn more about accounting from the following articles –