Minorities, minority interest

Minorities, minority interest refers to the ownership stake in a subsidiary company that is held by shareholders other than the parent company, representing the portion of equity not controlled by the parent company.
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Updated: Jun 25, 2024

3 key takeaways

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  • Minority interest represents the equity ownership in a subsidiary not attributable to the parent company, typically less than 50%.
  • It is reported on the consolidated financial statements of the parent company, reflecting the portion of net assets and net income of the subsidiary belonging to minority shareholders.
  • Minority interest provides insights into the extent of control and financial performance of the subsidiary from the perspective of external shareholders.

What is minority interest?

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Minority interest, also known as non-controlling interest, is the portion of a subsidiary company’s equity that is owned by shareholders other than the parent company. This interest represents the rights of minority shareholders in the net assets and earnings of the subsidiary. Typically, the parent company consolidates the financial results of its subsidiaries in its financial statements, but it must separately account for the portion of the subsidiary’s equity and income that it does not own.

For example, if a parent company owns 80% of a subsidiary, the remaining 20% is considered minority interest, belonging to other investors. This minority interest is recognized in the equity section of the parent company’s consolidated balance sheet and also in the consolidated income statement, reflecting the share of profits attributable to minority shareholders.

Importance of minority interest

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Financial reporting

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In consolidated financial statements, minority interest ensures accurate representation of the ownership and economic interest in subsidiaries. It provides a clear distinction between the parent company’s and minority shareholders’ stakes, ensuring transparency in financial reporting.

Valuation and analysis

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Minority interest is crucial for analysts and investors in assessing the financial health and performance of a subsidiary. It helps in understanding the true extent of the parent company’s control and financial interest in its subsidiaries, which is essential for accurate valuation and investment decisions.

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Minority interest has implications for corporate governance and legal rights. Minority shareholders have certain rights and protections under corporate law, including voting rights, access to information, and the ability to challenge decisions that may adversely affect their interests.

Reporting minority interest

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Balance sheet

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On the consolidated balance sheet, minority interest is reported as a separate line item within the equity section. This reflects the portion of net assets of the subsidiary that belongs to minority shareholders. For example, if the subsidiary has net assets worth $10 million and the parent company owns 80%, the remaining 20% (or $2 million) is reported as minority interest.

Income statement

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In the consolidated income statement, the share of net income attributable to minority shareholders is deducted from the total consolidated net income. This ensures that the parent company’s shareholders see only their portion of the net income. For instance, if the subsidiary earns $1 million in net income and the parent company owns 80%, $200,000 (20%) is attributed to minority interest and deducted from the consolidated net income.

Examples of minority interest

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Acquisition scenarios

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When a company acquires a controlling interest in another company but not 100%, the remaining shares are held by minority shareholders. For example, if Company A acquires 70% of Company B, the remaining 30% is the minority interest held by other shareholders.

Joint ventures

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In joint ventures, where multiple companies share ownership but none has complete control, the interests of each participant that does not have control are considered minority interests. For example, if three companies equally own a joint venture, each holding 33.33%, they each have a minority interest in the venture.

Challenges and considerations

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Valuation complexity

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Valuing minority interest can be complex, especially when determining the fair value of the subsidiary’s net assets and income attributable to minority shareholders. Accurate valuation requires a thorough understanding of the subsidiary’s financials, market conditions, and potential risks.

Impact on financial ratios

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The presence of minority interest can affect key financial ratios, such as return on equity (ROE) and earnings per share (EPS). Analysts need to account for minority interest to ensure accurate comparisons and evaluations of financial performance.

Governance and control issues

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Managing the interests of minority shareholders can pose governance challenges. Ensuring that minority shareholders’ rights are respected while maintaining effective control and decision-making authority can be a delicate balance for the parent company.

Related Topics:

  • Consolidated financial statements
  • Equity method of accounting
  • Joint ventures and partnerships
  • Corporate governance
  • Financial statement analysis

Exploring these topics will provide a comprehensive understanding of minority interest, its implications for financial reporting, and its role in corporate governance and investment analysis.



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Arti
AI Financial Assistant
Arti is a specialized AI Financial Assistant at Invezz, created to support the editorial team. He leverages both AI and the Invezz.com knowledge base, understands over 100,000... read more.