Definition
Minority interest, also known as non-controlling interest, refers to a portion of a subsidiary company’s equity that’s not owned by the parent company. The parent company usually holds less than 50% of the equity, hence the term “minority”. It represents the percentage of the subsidiary that is still owned by other shareholders outside of the controlling company.
Key Takeaways
- Minority Interest refers to the scenario where a company owns less than 50% of a subsidiary and thus doesn’t have controlling interest. Despite owning a substantial number of shares, the lack of controlling interest designates their ownership as a minority interest.
- This finance term is key when consolidating financial statements, as companies must accurately reflect ownership stakes in their subsidiary businesses. These stakes influence the parent company’s reported assets, liabilities, and net income.
- A change in the percentage of minority interest can significantly affect a company’s consolidated profits and losses. For example, if a company with minority interest increases its stake in a subsidiary from 40% to 60%, this means they have shifted to a majority stake, potentially increasing their influence and share in profits.
Importance
Minority interest is a crucial finance term as it refers to the portion of a subsidiary’s equity that is not owned by the parent company, which controls the subsidiary. It reflects the stake that outside investors or minority stakeholders hold in the subsidiary, which is typically less than 50% ownership.
This concept is essential because it helps to create an accurate picture of a company’s financial health. The recognition of minority interest is necessary not only for transparency and fairness to minority shareholders but also for lenders, investors, and analysts who rely on financial statements to assess a corporation’s true economic performance and financial position.
It also affects the calculation of corporate earnings and asset valuation. Hence, considering the minority interest is vital for comprehensive financial analysis and decision-making.
Explanation
Minority interest, also known as non-controlling interest, denotes a significant but non-controlling ownership of less than 50% of a company’s equity by another entity. The purpose of minority interest lies in its function as a global investing strategy, allowing a company to have a stake in another firm’s profits without needing to shoulder the risks and responsibilities of full ownership. This type of investment often occurs when a company prefers not to buy out the entire organization, but still wants to invest and get a portion of the profits.
It’s a way to invest capital and gain a return without the need for full-scale mergers or acquisitions. An important use of minority interest is seen in the consolidation of financial statements. In consolidated financial statements, all assets, liabilities, revenues, and expenses of a parent and its subsidiaries are combined.
However, the portion of equity (and hence, profits, dividends, etc.) that belongs to minority shareholders must be carefully tracked and accounted for. This is where minority interest comes in, providing the necessary accounting mechanism to ensure that the financial rights of minority shareholders are not ignored in the process of consolidation. It helps in presenting a fair and transparent picture of a company’s financial health, inclusive of all invested parties.
Examples of Minority Interest
**Berkshire Hathaway Inc and Precision Castparts Corp**: In 2016, Berkshire Hathaway Inc., led by Warren Buffet, acquired an 80% stake in Precision Castparts Corp., a world-leading manufacturer of complex metal components and products. The 20% remaining with the original shareholders is considered a minority interest because they no longer have control over the company’s decision making.
**Google and AOL**: In 2005, Google bought a 5% share in AOL for $1 billion. Despite having a small stake in AOL, Google had a minority interest in this media conglomerate. Even though the stake was small, Google could reap significant benefits from the advertising partnership with AOL.
**Vodafone and Verizon Communications**: In 2013, Verizon Communications Inc. bought out Vodafone Group Plc’s 45 percent minority stake in Verizon Wireless for $130 billion. Before the buyout, despite Vodafone holding considerable equity in the mobile provider, it is still considered as minority interest because they did not have deciding control or power in the company.
FAQs on Minority Interest
What is Minority Interest?
Minority interest, also known as non-controlling interest, refers to a situation where a shareholder or an investor owns less than 50% of a company’s shares and has less control over the company. The company is not a subsidiary of the shareholder or investor.
Where is Minority Interest shown on financial statements?
Minority interest is typically shown in the liabilities and equity section in a consolidated balance sheet. It features on the income statement as part of the net income that is attributed to the parent company.
Why is Minority Interest important?
Minority interest is important as it represents the portion of a subsidiary company that’s not owned by the parent company. Accurate representation of minority interest helps in assessing the total value of a company when consolidating financial statements.
How is Minority Interest calculated?
Minority interest is computed by taking the subsidiary’s net assets and multiplying it by the percentage of the subsidiary company’s stock that is not owned by the parent company.
Is Minority Interest considered a liability?
While it’s shown under the equity section in the financial statements, minority interest is sometimes considered a liability as payments are often made to non-controlling shareholders. However, it’s not a traditional liability since it represents equity in a subsidiary not owned by the parent company.
Related Entrepreneurship Terms
- Consolidated Financial Statements
- Non-Controlling Interest (NCI)
- Subsidiary Company
- Equity Method of Investment
- Mergers and Acquisitions
Sources for More Information
- Investopedia: This is a prominent source for extensive and simplistic explanation on various finance terms including minority interest.
- Corporate Finance Institute: They provide detailed courses and articles on different finance topics, which includes minority interest.
- Accounting Tools: This site has a great wealth of information on finance and accounting concepts including minority interest.
- The Balance: This resource provides insightful articles on finance and business concepts. They include a good deal of content on minority interest.
