Opinions on Minority interest

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In accounting, minority interest (or non-controlling interest) is the portion of a subsidiary corporation's stock that is not owned by the parent corporation. The magnitude of the minority interest in the subsidiary company is generally less than 50% of outstanding shares, otherwise the corporation would generally cease to be a subsidiary of the parent. It is, however, possible (e.g. through special voting rights) that a controlling interest requiring consolidation be achieved without exceeding 50% ownership depending on the accounting standards being employed. Minority interest belongs to other investors and is reported on the consolidated balance sheet of the owning company to reflect the claim on assets belonging to other, non-controlling shareholders. Also, minority interest is reported on the consolidated income statement as a share of profit belonging to minority shareholders.

The reporting of 'minority interest' is a consequence of the requirement by accounting standards to 'fully' consolidate partly owned subsidiaries. Full consolidation, as opposed to partial consolidation, results in financial statements that are constructed as if the parent corporation fully owns these partly owned subsidiaries; except for two line items that do reflect partial ownership of subsidiaries: net income to common shareholders and common equity. The two minority interest line items are the net difference between what would have been the common equity and net income to common if all subsidiaries were fully owned, versus the actual ownership of the group. All the other line items in the financial statements assume a fictitious 100% ownership.

Some investors have expressed concern that the minority interest line items cause significant uncertainty for the assessment of value, leverage and liquidity. A key concern of investors is that they cannot be sure what part of the reported cash position is owned by a 100% subsidiary and what part is owned by a 51% subsidiary.

Minority interest is an integral part of the enterprise value of a company. The converse concept is an associate company.


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