Non-Controlling Interest

Minority interest in a subsidiary​

What is a Non-Controlling Interest?

A non-controlling interest (NCI) is an ownership stake in a corporation where the held position gives the investor no influence on how the company is run. Non-controlling interests are measured at the respective net asset value of entities, which have other shareholders than the controlling shareholder. Potential voting rights are not taken into account when measuring non-controlling interests.

 

Non-Controlling Interest

 

What is the criteria for Non-Controlling Interest?

The majority of investor positions are deemed to be a non-controlling interest because their ownership stake is insignificant relative to the total number of outstanding shares. For smaller companies, any position that holds less than 50% of the outstanding voting shares is deemed to be a non-controlling interest. For the majority of publicly traded companies, the number of outstanding shares is so large that a normal position cannot influence higher level activity, which is why it is deemed as a non-controlling interest. It is generally not until one control’s 5-10% that they can push for a seat on the board, or enact changes at the shareholders meetings by publicly lobbying for them.

 

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 — these 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 Non-Controlling Interest

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 this will give them a better understanding of the effect of the non-controlling interests on a group’s financial position, financial results and cash flows, and therefore also the risks faced by the group. Investors will thus be better informed regarding the actual value of the assets and liabilities of the non-controlling interests, and also the extent to which the assets and liabilities are attributable to the holders of the non-controlling interests. Investors will then be better positioned to form their own opinion regarding the effect of non-controlling interests on the various ratios and items in the financial statements.

 

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