Question

Define noncontrolling (minority) interest. List three methods that might be used for reporting the noncontrolling interest in a consolidated balance sheet, and state which is preferred under current GAAP.

Answer 1

When a controlling interest in a subsidiary is achieved, the consolidated method of accounting for share purchase is used. This method requires that many line items in the financial statements of the parent incorporate financial results of the acquiree, i.e. reflect a fictitious 100 percent ownership of the subsidiary. The parent must, however, maintain separate accounts on the balance sheet and income statement that track the value of the minority interest in the subsidiary, as well as its profit belonging to the minority owners.

The other two methods are the cost method, where the parent owns 20 percent or less in subsidiary’s voting stock, and the equity method, where the percentage of ownership is 21–49 percent. Neither method uses minority interest to report a subsidiary’s share of assets or income anywhere on the parent’s financial statements.

Under U.S. GAAP, the financial accounting treatment of minority interest requires that it be recorded either as a non-current liability or as part of the equity section on a consolidated balance sheet of the parent company to reflect non-controlling shareholders’ claim on assets.