Understanding Minority Interest
Minority interest is a portion of the subsidiaries that is not owned by the parent company. It is also known as ‘non-controlling interest’. This concept becomes relevant when a parent company owns less than 100% of a subsidiary. It is a critical component in financial reporting and consolidation processes, reflecting the interests of shareholders who own a stake in a subsidiary but not the majority. It is reflected on the balance sheet along with majority interest under ‘non-current liability’. Usually, minority interest ranges up to 20 or 30% and the rest stays with the parent company or shareholders.
Since the interest percentage is less, the say in formation of policies or procedures is also less for the minority stakeholders. However, it also varies depending on the policies of a particular company. In some cases, minority stakeholders can make decisions for sales and be a part of the shareholder or partnership meetings.
Example of Minority Interest
Imagine a company, XYZ Ltd., owns 75% of a subsidiary, ABC Pvt. Ltd., while the remaining 25% is held by other investors.
- If ABC Pvt. Ltd. has total equity of ₹40,00,000, the minority interest would represent the 25% owned by these external shareholders.
- To calculate this, you would multiply the total equity of ₹40,00,000 by 25%, resulting in a minority interest of ₹10,00,000.
- This ₹10,00,000 is reported in the consolidated balance sheet of XYZ Ltd. as the equity attributable to the minority shareholders of ABC Pvt. Ltd., reflecting their share in the subsidiary’s net assets.
Purpose of Minority Interest
- Financial Reporting: Minority interest is vital for accurate financial reporting in consolidated financial statements. When a parent company consolidates its financial statements with those of its subsidiaries, it must include all of the subsidiary’s assets, liabilities, revenues, and expenses. Minority interest ensures that the portion of the subsidiary not owned by the parent is appropriately accounted for, representing the interests of external shareholders.
- Equity Representation: Minority interest reflects the value of the subsidiary’s equity that is attributable to minority shareholders. This is reported separately in the consolidated balance sheet under equity, distinguishing it from the parent company’s equity. This separate presentation provides clarity on the equity portion belonging to non-controlling shareholders.
