What is Minority Interest
A minority interest, which is also referred to as a non-controlling interest (NCI), is ownership of less than 50% of a subsidiary's equity by an investor or a company other than the parent 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 addition to being reflected on the balance sheet, minority interest is reported on the consolidated income statement as a share of profit belonging to minority equity holders.
Types of Minority Interests
A minority interest can either be passive or active. Passive minority interests (owning 20% or less) are those in which a company has no material influence on the company in which it maintains a minority interest. Active minority interests (owning 21%-49%) are those in which a company has the ability to materially influence the company in which it holds a minority interest. In accounting terms, only the dividends received from the minority interest are recorded for those with minority passive interests. 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. Contrastingly, dividends received and a percentage of income are recorded for those with active minority interests; this is referred to as the equity method. 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 is added to the investment account on the balance sheet as this effectively increases its equity share in the company.
The Parent 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 in 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 the US Generally Accepted Accounting Principles (GAAP) rules. Under International Financial Reporting Standards (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; as a result, 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.