A minority interest refers to a stake in a company that is otherwise controlled by a parent company. This usually occurs in subsidiaries where the parent company owns more than 50% of the voting shares. Minority interests generally come with some rights for the stakeholder, such as participation in sales and certain audit rights.
Minority interests are also referred to as non-controlling interests. Under U.S. GAAP, non-controlling interests are listed on the equity section of the parent company’s consolidated balance sheet, but separately from the parent company’s equity. This represents the proportion of the subsidiary owned by minority shareholders.
Key Highlights of Minority Interests
- A minority interest is a stake in a company that is controlled by a larger parent company.
- Minority interests generally range between 20% and 30% of the company’s equity, compared to the majority interest of over 50%.
- The term “non-controlling interest” is used as a synonym for minority interest, reflecting situations where a controlling entity might not have majority ownership.
- Parent companies will list the minority interests in their subsidiaries in the equity section of their consolidated balance sheet.
- Although minority interests cannot outvote the parent company, they do have some rights, such as audit rights.
Diving Deeper into Minority Interests
Minority interests refer to the portion of a company or stock not held by the parent company, which holds the majority interest. Most minority interests range between 20% and 30%.
While the majority stakeholder—in most cases, the parent company—has voting rights to set policy and procedures, minority stakeholders generally have very little influence in the company’s direction, hence they are referred to as non-controlling interests (NCIs).
In some cases, a minority may have certain rights such as the ability to take part in sales and gain audit rights. Minority interest holders may also attend shareholder or partnership meetings.
In the private equity world, companies and investors with a minority interest may negotiate control rights. For example, venture capitalists might ask for a seat on the board of directors in exchange for their investment in a startup.
In the corporate world, minority ownership is listed on the balance sheet. In addition, minority interest is reported on the consolidated income statement as a share of profit belonging to minority equity holders. The consolidated income statement must also distinguish between net income attributable to the parent company and minority interest.
An Example to Illustrate Minority Interest
Enhancing the Concept with an Example
EveryTech Corporation owns 90% of InnovateSolutions Inc., which is a $100 million company.
On its consolidated balance sheet, EveryTech would account for $90 million as its share in InnovateSolutions Inc., while separately noting the $10 million non-controlling interest—representing shares that EveryTech doesn’t own.
If InnovateSolutions Inc. generates $10 million in net income, EveryTech recognizes $1 million—equating to 10% of the $10 million net income attributable to minority interest on its income statement. Simultaneously, EveryTech increments the $10 million minority interest by $1 million. Minority investors register income only upon receiving dividends.
In 2007, the terminology “non-controlling interest” was introduced to reflect scenarios where a non-majority stakeholder can still maintain a controlling interest—this necessitated clear definition within corporate governance and financial reporting.
Types of Minority Interests
Minority interests can either be passive or active:
- Passive Minority Interest: Ownership below 20%, with no material say in the company’s decisions. This type is recorded using the cost method, treating the stake as an investment at cost and considering dividends as income.
- Active Minority Interest: Ownership between 21% to 49%. This allows some influence over company decisions, encouraging the use of the equity method. Here, dividends are a return on capital and decrease the value of the investment on the balance sheet.
Essential Considerations
Most minority interests occur in subsidiaries where a parent company owns a majority of voting shares. However, a parent company could exert controlling interest without a majority stake through arrangements like variable interest entities.
Regardless of control type, the parent company consolidates the financial outcomes of subsidiaries with its own results. Thus, a proportional share of income reflects on the parent income statement and the balance sheet.
Since 2008, U.S. GAAP mandates that minority interest be reported in the equity section, ending the previous option of reporting as equity or a noncurrent liability. The International Financial Reporting Standards (IFRS) also require recording minority interest within the equity section of the balance sheet.
Related Terms: Parent Company, Subsidiary, Majority Shareholder, Dividends, Equity Method, Consolidated Financial Statements.
References
- Financial Standards Accounting Board. “Summary of Statement 160”.
- Financial Accounting Standards Board. “Summary of Statement No. 160”.
- Journal of Accountancy. “Non-controlling Interest: Much More Than a Name Change”.
- UpCounsel. “Minority Equity Investments: Everything You Need to Know”.
