Question

Non-controlling interest (NCI) is the ownership interest of those shareholders who hold shares in a subsidiary that are not owned by the immediate parent or the other group members. Discuss the implication of reporting NCI as a separate item of owner’s equity.

Answer 1

What is a non-controlling interest?

A non-controlling interest (NCI) is an ownership stake of less than 50% in a corporation, where the position held gives the investor little influence or an insufficient amount of influence to determine how the company is run. Non-controlling interests are measured at the respective net asset value of entities that include other shareholders than the controlling shareholder. Potential voting rights are taken into account when measuring an NCI. Another name for such a type of investment is minority interest.

Types of Non Controlling Interest

There are generally two types of non controlling interests:

1. A Direct NCI receives a proportionate share of all equity recorded by the subsidiary – the equity balances include both pre-acquisition and post-acquisition amounts.

2. An Indirect NCI receives a proportionate share of a subsidiary’s post-acquisition equity only.

Calculating Share of Equity

In calculating the NCI share of equity, it is consolidated equity rather than recorded equity on which the NCI is calculated. Hence, in calculating both the DNCI and INCI share of equity, adjustments must be made to eliminate any unrealized profits or losses arising from transactions within the group.

It is important to investors that companies provide transparency regarding non controlling interests, because it will give them a better understanding of the effect of the NCI on a group’s financial position, financial results, and cash flows, and also the risks faced by the group. Investors will then be better positioned to form their own opinion regarding the effect of an NCI on the various ratios and items in the financial statements.

Accounting Treatment of Non Controlling Interest

A parent with controlling interest implements the consolidated method of accounting. The parent company combines 100% of the assets and incomes from the subsidiary to its financial statements. The percentage of the parent’s ownership of the subsidiary’s equity does not matter.

However, to keep track of the value owned by the non-controlling shareholders, the parent company needs to report separate non controlling interest lines on its balance sheet and income statement.

Companies owning less than 50% of the subsidiary implement either the cost method (20% or less) or the equity method (above 20% and below 50%). Neither of the methods reports non controlling interest