What is a 'Non-Controlling Interest'
A non-controlling interest (NCI) is an ownership stake in a corporation, with the investors owning a minority interest and having less influence over how the company is managed. The majority of investor positions are deemed to be NCI, because the ownership stake is so insignificant relative to the total number of outstanding shares. For smaller companies, any ownership position that holds less than 50% of the outstanding voting shares is deemed to be an NCI.
BREAKING DOWN 'Non-Controlling Interest'Most shareholders are granted a set of rights when they purchase common stock, including the right to a cash dividend if the company has sufficient earnings and declares a dividend. Shareholders may also have the right to vote on major corporate decisions, such as a merger or company sale, and a corporation can issue different classes of stock, each with different shareholder rights.
Instances in Which an NCI Gains Influence
For the majority of publicly traded companies, the number of outstanding shares is so large that an individual investor cannot influence the decisions of senior management. It is generally not until an investor controls 5 to 10% of the shares that he can push for a seat on the board or enact changes at the shareholders meetings by publicly lobbying for them.
Factoring in Consolidations
A consolidation is a set of financial statements that combines the accounting records of several entities into one set of financials. These typically include a parent company, as the majority owner; a subsidiary, or purchased firm; and an NCI company. The consolidated financials allows investors, creditors and company managers to view the three separate entities as if all three firms are one company. A consolidation assumes that a parent and an NCI company jointly purchase the equity of a subsidiary company. Any transactions between the parent and the subsidiary company, or between the parent and the NCI firm, are eliminated before the consolidated financial statements are created.
Examples of Accounting Transactions
Assume, for example, that a parent company buys 80% of XYZ firm, and that an NCI company buys the remaining 20% of the new subsidiary, XYZ. The subsidiary’s assets and liabilities on the balance sheet are adjusted to fair market value, and those values are used on the consolidated financial statements. If the parent and an NCI pay more than the fair value of the net assets, or assets less liabilities, the excess is posted to a goodwill account in the consolidated financial statements. Goodwill is an additional expense incurred to buy a company for more than fair market, and goodwill is amortized into an expense account over time.