Definition
Non-controlling interest, also known as minority interest, refers to the ownership stake in a corporation where the holder does not have control over business decisions in terms of strategic direction or operations. This means they hold less than 50% of voting shares and cannot dictate the company’s operations or changes. It is often reflected in consolidated financial statements when a parent company holds majority share but not full ownership.
Key Takeaways
- Non-Controlling Interest (NCI) is a portion of a company that is owned by shareholders or interested parties who do not have a controlling interest in the business, often classified as minority shareholders.
- NCI is reflected within the consolidated financial statements of a company under the equity section. It’s calculated by adding the fair value of the considerate paid with the fair value of NCI at the acquisition date, and later adjusted for the NCI share of changes in equity.
- The presence of a Non-Controlling Interest in a company’s balance sheet indicates that the company has partially owned subsidiaries, resulting in lesser net income attributable to parent since a part of it goes to NCI. Therefore, it should be considered in valuation and M&A analysis.
Importance
Non-Controlling Interest (NCI), also known as minority interest, is a crucial financial concept that refers to ownership stakes in a company that are less than 50% of the total available shared equity, thus not enough to dictate the company’s strategic direction or operations.
The importance of Non-Controlling Interest lies in its impact on financial reporting and investment analysis.
It provides insight into a company’s consolidated financial health, as it represents the portion of a subsidiary’s net assets or profit that is owned by shareholders outside of the parent company.
Essentially, it helps to give a more accurate picture of a corporation’s true equity value, profitability, and risk profile.
NCI is a significant factor in merger and acquisition decisions, company valuations, and overall financial management strategies.
Explanation
Non-Controlling Interest serves a significant role in financial management, embodying the shares of equity ownership in a subsidiary company that are not held by the parent company. In simple terms, it’s the percentage of a company that is owned by public stakeholders, minority shareholders, or other organizations, rather than by the majority or parent company.
Its purpose emphasizes the governance rights and interests that the minority shareholders possess, thus ensuring transparent recognition of the economic values and benefits shared among all stakeholders instead of just the majority shareholders. The use of Non-Controlling Interest is paramount in realms of consolidation and financial reporting—which are often crucial for investors when considering their business decisions.
It helps in depicting a more precise and complete representation of a company’s financial standing. For instance, when a parent company consolidates its financials with its subsidiary, the portion relevant to the non-controlling shareholders isn’t ignored; instead, it is reported as an equitable portion in the consolidated financial statements.
Hence, Non-Controlling Interest brings a fair, comprehensive, and well-rounded view to a company’s financial health, reflecting better investment insights.
Examples of Non-Controlling Interest
Google-Alphabet Inc.: In 2015, Google introduced Alphabet Inc. as a multinational conglomerate to serve as its parent company. However, Google retained non-controlling interest in some of its smaller entities like YouTube, Android, and Google Search. This situation shows that while Google does not have complete controlling power over these entities, it still holds a significant share and influence over the operations.
Berkshire Hathaway’s Stake in Apple: Berkshire Hathaway, Warren Buffett’s company, owns a significant proportion of Apple’s shares. However, the proportion is less than 50%, which means Berkshire Hathaway holds a non-controlling interest in Apple. They are entitled to a share of Apple’s profits and have a say in the company’s affairs, but they don’t have absolute control.
Tencent’s Ownership of Supercell: Chinese internet giant Tencent purchased a majority stake in the Finnish mobile game developer Supercell (the company behind Clash of Clans) in
However, it retained a non-controlling interest in the company. It lets Supercell continue to operate independently – having a say, but no absolute control over the company’s operations and strategic decisions.
FAQs for Non-Controlling Interest
What Does Non-Controlling Interest Mean?
Non-Controlling Interest, also known as minority interest, refers to an ownership stake in a corporation where the holder owns less than 50% of the outstanding equity, and thus lacks the necessary votes to control the company’s activities and decisions. Essentially, it’s the portion of a subsidiary company that is owned by minority shareholders, not the parent company.
Why is Non-Controlling Interest Important in Financial Statements?
Non-Controlling Interest is important because it provides a clearer picture of a company’s financial health. It’s a line item reported on a consolidated balance sheet that shows the equity ownership stake in the company that is not attributable to the parent or controlling entity. This helps investors and analysts to understand the total comprehensive income of the company and its subsidiaries.
How is Non-Controlling Interest Calculated?
Non-Controlling Interest can be calculated in several ways. One way is by using the proportionate method which involves multiplying the subsidiary’s net income and net assets by the proportion of shares not owned by the parent company. It can also be calculated using the goodwill method, where the fair value of the subsidiary’s identifiable assets and liabilities are determined at the acquisition date.
How does Non-Controlling Interest affect Earnings Per Share?
Non-Controlling Interest can have a significant impact on the per share calculations of a company. When calculating earnings per share, only the parent company’s portion of earnings (net of the non-controlling interest) is used. Therefore, a larger non-controlling interest can result in smaller earnings per share, all else being equal.
Is Non-Controlling Interest an Asset or Liability?
Non-Controlling Interest is neither an asset nor a liability. It is actually reported in the equity section of the consolidated balance sheet. It represents the portion of equity (net assets) that is not owned by the parent company, but by other minority investors.
Related Entrepreneurship Terms
- Minority Shareholding
- Equity Method
- Investment Stake
- Subsidiary Entity
- Consolidated Financial Statements
Sources for More Information
- Investopedia: This website offers an ocean of knowledge about finance and related matters, including Non-Controlling Interest.
- Accounting Tools: A comprehensive site that provides information on accounting topics including Non-Controlling Interest.
- Corporate Finance Institute: A reliable platform for learning all about corporate finance, including the topic of Non-Controlling Interest.
- GAAP Dynamics: This website provides excellent educational resources on GAAP (Generally Accepted Accounting Principles), which often touches on Non-Controlling Interest.
