What Is a Non-Controlling Interest?
A non-controlling interest (NCI), also known as minority interest, is an ownership position whereby a shareholder owns less than 50% of outstanding shares and has no control over decisions. Non-controlling interests are measured at the net asset value of entities and do not account for potential voting rights. Most shareholders of public companies today would be classified as holding a non-controlling interest, with even a 5-10% equity stake considered to be a large holding in a single company.
A non-controlling interest may be contrasted with a controlling, or majority interest in a company.
Understanding a 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. A corporation can issue different classes of stock, each with different shareholder rights.
Generally, there are two types of non-controlling interests: a direct NCI and an indirect NCI. A direct non-controlling interest receives a proportionate allocation of all (pre and post-acquisition amounts) recorded equity of a subsidiary. An indirect non-controlling interest receives a proportionate allocation of a subsidiaries post-acquisition amounts only.
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 vie for a seat on the board or enact changes at the shareholders' meetings through lobbying efforts.
- A non-controlling interest (NCI), also known as minority interest, is an ownership position whereby a shareholder owns less than 50% of outstanding shares.
- As a result, minority interest shareholders have no individual control over corporate decisions or votes by themselves.
- A direct non-controlling interest receives a proportionate allocation of all (pre and post-acquisition amounts) recorded equity of a subsidiary.
- An indirect non-controlling interest receives a proportionate allocation of a subsidiaries post-acquisition amounts only.
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 Non-Controlling Interests
Assume 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 fewer 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 the fair market value, and goodwill is amortized into an expense account over time.