Minority Interest

What Is a Minority Interest?

A minority interest is ownership or interest of under half of an enterprise. The term can allude to either stock ownership or a partnership interest in a company. The minority interest of a company is held by an investor or another organization other than the parent company. Minority interests generally accompany a few rights for the stakeholder, for example, the participation in sales and certain audit rights.

A minority interest appears as a noncurrent liability on the balance sheet of companies with a majority interest in a company. This addresses the proportion of its auxiliaries owned by minority shareholders.

Understanding Minority Interests

Minority interests are the portion of a company or stock not held by the parent company, which has a majority interest. Most minority interests range somewhere in the range of 20% and 30%.

While the majority stakeholder — much of the time, the parent company — has voting rights to set policy and procedures, the minority stakeholders generally have almost no say or influence toward the company. That is the reason it's additionally alluded to as non-controlling interests (NCIs).

At times, a minority might have a rights, for example, the ability to partake in sales. There are laws that additionally permit minority interest holders to certain audit rights. They likewise might have the option to go to shareholder or partnership gatherings.

In the world of private equity, companies and investors with a minority interest might have the option to arrange control rights. For instance, venture capitalists might ask to haggle for a seat on the board of directors in exchange for his investment in a startup.

In the corporate world, a corporation records minority ownership on its balance sheet. As well as being considered the balance sheet, a minority interest is reported on the consolidated income statement as a share of profit having a place with minority equity holders.

The consolidated income statement must have a reasonable differentiation between the net income from the parent company and that of the minority interest.

Illustration of Minority Interest

ABC Corporation possesses 90% of XYZ Inc., which is a $100 million company. ABC records a $10 million minority interest as a noncurrent liability to address the 10% of XYZ Inc. it doesn't possess.

XYZ Inc. creates $10 million in net income. Accordingly, ABC perceives $1 million — or 10% of $10 million — of net income attributable to minority interest on its income statement. Correspondingly, ABC increases the $10 million minority interest by $1 million on the balance sheet. The minority interest investors record nothing except if they receive dividends, which are reserved as income.

Types of Minority Interests

A minority interest can either be passive or active. Passive minority interests, where a company claims 20% or less, are those where a company has no material influence on the company wherein it keeps a minority interest. In accounting terms, just the dividends received from the minority interest are recorded for those with minority passive interests. This is alluded to as the cost method — the ownership stake is treated as an investment at cost, and any dividends received are treated as dividend income.

Active minority interests — possessing 21% to 49% — are those where a company can materially influence the company in which it holds a minority interest. Not at all like passive interests, dividends received and a percentage of income is recorded for those with active minority interests. This is alluded 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 qualified for is added to the investment account on the balance sheet as this actually expands its equity share in the company.

The Majority Stakeholder: The Parent Company

The parent company is a majority stakeholder in the subsidiary. It possesses over half however under 100% of a subsidiary's voting shares and perceives a minority interest in its financial statements.

The parent company solidifies the financial consequences of the subsidiary with its own, and subsequently, a proportional share of income appears on the parent company's income statement attributable to the minority interest. In like manner, a proportional share of equity in the subsidiary company appears 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 generally accepted accounting principles (GAAP) rules. Under International Financial Reporting Standards (IFRS), be that as it may, the minority interest must be recorded in the equity section of the balance sheet.

Features

• Companies with a majority interest will list the minority interest on their balance sheet as a noncurrent liability.
• A minority interest is ownership or interest of under half of an enterprise.
• Minority interests generally range somewhere in the range of 20% and 30%, and stakeholders have next to no say or influence in the enterprise.