Definition: Minority interest, also known as non-controlling interest (NCI) represents an ownership of less than 50% in a company and being reported in the consolidated financial statements of the parent company.
What Does Minority Interest Mean?
What is the definition of minority interest? Minority interest represents a percentage of ownership in a company by less than 50% of the outstanding shares with a voting right. Hence, minority shareholders have a little say in a company’s decision-making, and they cannot exert control over the company through voting. Usually, non-controlling interest ranges between 20 and 30%, or even less of the voting shares.
Although most of the companies are managed by majority shareholders, there are cases in which minority shareholders have full control with 40% because a large number of shareholders hold the remaining 60% of the outstanding shares with very small percentages. Finally, minority shareholders of one company are usually majority shareholders in another company.
Let’s look at an example.
Example
Company XYZ has recently acquired company ABC. On December 31, 2015, Company ABC has released its fiscal year 2015 Consolidated Financial Statements, where it states the non controlling interest as follows:
Company XYZ reports a consolidated net income of $435,500, yet the non controlling interest is 20% of net income, hence $87,100. The net income that is finally attributable to the company’s shareholders is $348,400. Also, non-controlling interest is reported as a liability on the consolidated statement of financial position, representing the percentage of ownership by minority shareholders.
In addition, on the consolidated statement of changes in equity, Company XYZ reports the equity changes that took place within the fiscal year. Hence, the balance on January 1 is $2.8 million. After the sale of subsidiary shares to minority shareholders and the relevant deduction of net income as well as the distribution of dividends the total balance on December 31 is $3.1 million.
Note that the reporting of consolidated revenue and expenses implies that the parent company exerts control over the subsidiary company during the entire 12-month period of the fiscal year.
Summary Definition
Define Minority Interests: Minority interest means an ownership stake in a company that isn’t large enough to control of the business.
