Non-Controlling Interest: How to Calculate and Present Minority Interest

Non-controlling interest is the portion of a consolidated subsidiary's equity and profit that belongs to its other shareholders instead of to the parent. Older US practice calls the same item minority interest; some filings write it as one word, noncontrolling interest.

The item arises as soon as a parent fully consolidates a subsidiary it does not fully own. All assets, liabilities, revenue and costs of that subsidiary go into the group figures at 100 percent, and the part held by outside shareholders is then presented separately. That differs from simply holding a 25 percent stake in another company: without control there is no consolidation, so the item never appears.

For a controller this is more than a presentation rule. The share of outside shareholders determines how much of the group result accrues to the parent's own shareholders, and therefore earnings per share, return on group equity and often the outcome of a bank covenant. A group that tracks non-controlling interest on the balance sheet and skips it in the income statement reports a result that is too high for its own shareholders.

What is non-controlling interest?

It is the claim of outside shareholders on the equity and the profit of a subsidiary that is included in full in the consolidated figures. If the parent holds 70 percent of the shares, 30 percent of that subsidiary's equity and 30 percent of its profit after tax belong to those other shareholders.

Control, not the size of the stake, decides whether the item exists. A 51 percent holding with control leads to full consolidation and therefore to a minority interest of 49 percent; a 45 percent holding that carries control through a shareholders' agreement does exactly the same. Under IAS 1 the item sits inside equity on the consolidated balance sheet, as a separate component of total group equity, and the profit attributable to it is shown separately below the consolidated result. It is equity rather than a liability: there is no obligation to repay anything, only a claim on part of the net assets.

The non-controlling interest formula

Minority interest = (100% − parent ownership) × subsidiary equity on a consolidation basis

1. Fix the scope of consolidation and record the owner and the percentage held for each entity. Indirect holdings multiply through: 80 percent of 75 percent is an effective 60 percent.
2. Restate the subsidiary's equity to a consolidation basis: apply group accounting policies and strip out unrealised profit on intragroup deliveries. Equity from the statutory accounts is not automatically the right base.
3. Multiply that equity by the percentage held by outside shareholders. The outcome is the balance sheet item.
4. Do the same with the subsidiary's profit after tax. The outcome is the share of the result attributable to outside shareholders.
5. Reconcile the two in a movement schedule: opening balance, plus the share in the result, minus dividends paid out, plus the outside share in all other movements in equity. If that schedule does not close, a movement in the subsidiary's equity has not been allocated to outside shareholders, and that is almost always a dividend or a revaluation.

Worked example

A holding company owns 70 percent of subsidiary D. D opens the year with equity of € 750,000, earns € 150,000 after tax and pays a dividend of € 50,000.

Movement	Equity of D (100%)	Outside shareholders (30%)
Opening balance, 1 January	€ 750,000	€ 225,000
Profit after tax	+ € 150,000	+ € 45,000
Dividend paid	− € 50,000	− € 15,000
Closing balance, 31 December	€ 850,000	€ 255,000

The 255,000 is reached in two ways: as 30 percent of closing equity of 850,000, and as the opening balance plus the share in the result minus the dividend. If those two differ, a movement is missing. The consolidated statements then show that outcome in two places.

Item	Amount
Equity attributable to the group	€ 2,100,000
Non-controlling interest	€ 255,000
Total group equity	€ 2,355,000
Consolidated profit after tax	€ 480,000
Attributable to outside shareholders	€ 45,000
Attributable to the group	€ 435,000

The consolidated profit of 480,000 includes 100 percent of D. Only after deducting the 45,000 that belongs to outside shareholders does the 435,000 remain that accrues to the shareholders of the holding company. That is the figure earnings per share and return on group equity should rest on.

Scope of consolidation: which entities, at which percentage

The scope of consolidation is the set of companies taken into the group figures in full. The test is control, not the size of the stake: an entity whose policies the parent determines goes in completely, even at 55 percent. The percentage then only decides how large the outside share becomes. Three things go wrong in practice: indirect holdings that are not multiplied through, a joint venture that is taken in at 100 percent anyway, and an entity acquired halfway through the year that ends up in the result for a full year.

In Smartbooks the scope is set by dragging entities into the consolidation folder and specifying the owner and the ownership percentage for each entity; subconsolidations reproduce intermediate holding levels. The consolidation then runs automatically once the period has been published in the underlying entities. The page on consolidation shows what else that covers.

Full consolidation, proportionate consolidation or the equity method

A minority interest only arises under full consolidation. The two other methods do not produce the item at all, and that is precisely what separates them.

• Full consolidation applies when the parent has control. Every line goes in at 100 percent and the outside share is presented separately.
• Proportionate consolidation applies to joint control, such as a 50/50 joint venture. Each line is taken in at the holding percentage, so no outside share remains. Dutch accounting rules permit this method; under IFRS a joint venture is accounted for with the equity method.
• The equity method applies to significant influence without control, usually a stake of 20 to 50 percent. The investment stays as a single line on the balance sheet and moves with the result of the investee.

The most common error is a cross between the first two: adding a 70 percent subsidiary at 70 percent and presenting no separate outside share. The balance sheet still balances, but consolidated revenue, liabilities and total assets are 30 percent too low on that entity, and a lender testing a net debt to EBITDA ratio is working with the wrong figures.

A change in ownership without loss of control

If the parent raises its stake in D from 70 to 85 percent, the consolidation does not change: D was already included in full. Only the non-controlling interest drops. Under IFRS 10 this is a transaction between shareholders: reduce the item by the carrying amount of the share acquired and take the difference with the price paid directly to group equity, with no goodwill and no effect on profit. Under Dutch accounting rules the same transaction may be treated as an additional acquisition, and goodwill does then arise. Which treatment applies depends on the reporting framework, so settle that before posting the entry.

Losing control is a different story: the subsidiary leaves the scope of consolidation, any remaining stake is measured under another method, and the disposal result runs through the income statement.

Pitfalls

• Eliminating intragroup items pro rata. At a 70 percent holding, 100 percent of the intragroup revenue, receivable or payable comes out, not 70 percent. The article on intercompany transactions sets out how that works.
• Using statutory equity instead of equity on a consolidation basis.
• Tracking only the balance sheet item. Without the share in the result, the movement schedule does not close and the difference quietly shifts into group retained earnings.
• Allocating translation differences entirely to the group. For a foreign subsidiary, the part of the translation difference owned by outside shareholders belongs to them as well. How those differences arise is covered in the article on the settlement of exchange rate differences.
• Setting the percentage once a year. A share transfer halfway through the year changes the split of the result before and after that date.

Frequently asked questions about non-controlling interest

What is non-controlling interest?

It is the part of the equity and the profit of a consolidated subsidiary that belongs to the other shareholders of that subsidiary. If the parent owns 70 percent, 30 percent of that subsidiary's equity and result is non-controlling interest.

Is minority interest equity or a liability?

Equity, presented as a separate component of total group equity. There is no repayment obligation towards the minority shareholders, only a claim on part of the net assets.

What is the difference between minority interest and proportionate consolidation?

Under full consolidation the subsidiary is taken in at 100 percent and the outside share is presented separately; under proportionate consolidation every line is taken in at the holding percentage, so no outside share appears in the figures.

At what percentage does a minority interest arise?

There is no fixed percentage. What matters is whether the parent has control and therefore consolidates the subsidiary in full. If that is the case at 55 percent, the minority interest is 45 percent.

From a single line to group figures that tie

Non-controlling interest costs very little time once the ownership percentage per entity is fixed and the movement schedule runs every month instead of once a year. Make it part of the month-end close, alongside the intercompany reconciliation. The full sequence of consolidation steps is set out in the article on financial consolidation, and the gain from automating those steps in the power of automation in financial consolidation. For how this is arranged inside a system, see the page on consolidation software.