A non-controlling interest, also referred to by the name of a minor interest or a minority interest, is an ownership position in which a shareholder has just less than 50 percent of the outstanding shares, and is not able to exercise any control over their decisions. Non-controlling interest is measured as an amount equal to the Net Asset Value of the company and do not include the possibility of vote rights.
The majority of investors of companies that are publicly traded are currently considered to have an interest that is not controlled as well as the 5%-10 percent equity stake is considered to be a substantial holding within a single firm. Non-controlling interests can be distinguished from the majority or controlling share of a company, in which the investor is entitled to vote and is often able to influence the direction of the company.
A majority of shareholders are granted certain rights when they buy common stock, such as the right to receive a dividend in cash dividend when the company earns enough profits and declares an income dividend. Shareholders can also be granted the ability to vote on important corporate decisions like the decision to approve a merger or sale of the company. A company can issue various kinds of stock, each having different rights for shareholders. In general, there are two types of non-controlling rights which are direct non-controlling interests as well as an indirect. A direct non-controlling interest is granted an equal share to all (pre and post acquisition amounts) that are recorded as equity of the subsidiary. A non-controlling indirect interest is granted an equitable share of the post-acquisition amount of a subsidiary only.
It’s generally only when an investor holds 5 to 10% of shares that they can make specific suggestions to management and the board and suggest changes at the direction of the board make changes during a shareholder meeting and work together with fellow investors for making their decisions more likely to be successful. These investors are referred to as active investors. Activist investors vary widely in their style of action and goal. Goals vary from improving operational efficiency and restructuring to the social policy and the natural environment.
Table of Contents
financial statements and non-controlling interest
Consolidation refers to a set of financial statements that blend the accounting data of several entities into a single complete set of figures. They typically comprise the parent company as an owner of the largest share, as well as a subsidiary or a purchased company or a non-controlling company. The consolidation of financials permits investors creditors, investors, and company managers to look at the three distinct entities as though all three firms were one.
It also presumes that a parent company and a non-controlling interest firm jointly bought the equity of a subsidiary firm. All transactions with the parent company and the subsidiary company and between the parent company and the non-controlling interest company, are removed prior to the consolidation accounting statements are prepared.
An example of non-controlling interest
It is assumed that a parent firm purchases 80percent of XYZ firm, and that a non-controlling interest corporation purchases all the other 20% in the newly created company, XYZ. The liabilities and assets of the subsidiary in the balance sheet have been adjusted according to the fair market value and these values are used to calculate the financial statements consolidated. If the parent and the non-controlling loan pay greater than fair values of net assets, that excess is transferred to the goodwill account on the financial statements consolidated.
Goodwill is an additional cost that is incurred in order to purchase a company at a higher price than its fair market value. the goodwill is then amortized to an expense account over the course of having an impairment testing. This is carried out in accordance with the purchase acquisition accounting method that is endorsed by the Financial Accounting Standards Board (FASB).