What is 'Minority Interest'
A minority interest, which is also referred to as noncontrolling interest (NCI), is ownership of less than 50% of a company's equity by an investor or another company. For accounting purposes, minority interest is a fractional share of a company amounting to less than 50% of the voting shares. Minority interest shows up as a noncurrent liability on the balance sheet of companies with a majority interest in a company, representing the proportion of its subsidiaries owned by minority shareholders.
BREAKING DOWN 'Minority Interest'In accounting terms, if a company owns a minority interest in another company but only has a minority passive position, for example it is unable to exert influence holding only less than 20% of the subsidiary's voting stock, then only dividends received from the minority interest are recorded from this investment. This is referred to as the cost method; the ownership stake is treated as an investment at cost and any dividends received are treated as dividend income.
The alternative accounting method for a minority interest is referred to as the equity method, where the company has a minority active position, such as being able to exert influence by having greater than 20% but less than 50% of the voting shares. Both dividends and a percent of income are recorded on the company's books. Dividends are treated as a return of capital, decreasing the value of the investment on the balance sheet. The percentage of income the minority interest is entitled to from the company is added to the investment account on the balance sheet as it effectively increases its equity share in the company.
The parent company with the majority interest owns greater than 50% but less than 100% of a subsidiary's voting shares and recognizes a minority interest on its financial statements. The parent company consolidates the financial results of the subsidiary with its own, and as a result, a proportional share of income shows up on the parent company's income statement attributable to the minority interest. Likewise, a proportional share of equity in the subsidiary company shows up on the parent's balance sheet attributable to the minority interest. The minority interest can be found in the noncurrent liability section or equity section of the parent company's balance sheet under U.S. GAAP rules. Under IFRS, however, the minority interest must be recorded in the equity section of the balance sheet.
Example of Minority Interest
ABC Corporation owns 90% of XYZ Inc., which is a $100 million company. ABC records a $10 million minority interest as a noncurrent liability to represent the 10% of XYZ Inc. it does not own. XYZ Inc. generates $10 million in net income, so ABC recognizes $1 million, or 10% of $10 million, of net income attributable to minority interest on its income statement. Correspondingly, ABC marks up the $10 million minority interest by $1 million on the balance sheet. The minority interest investors do not record anything unless they receive dividends, which are booked as income.