What is non-controlling interest?

A non-controlling interest, also called a minority interest, happens when a shareholder owns less than 50% of a company’s shares and has no control over decision-making. Most people who own shares in any company would actually be considered to have a non controlling interest.

This is different from having a controlling interest, where the shareholder does have voting rights and can influence how the company works.

In this blog we will understand what non-controlling interest is and understand its calculation, reporting requirements and its treatment in financial statements.

Understanding non-controlling interest

Firstly, what is non controlling interest?

Non-controlling interest refers to the minority shareholders of a company. They lack control because they own less than half of the total shares. When the controlling company consolidates its accounts, it considers the minority interest.

Consolidation is when the financial accounts of multiple companies are combined into one set.

For example, if a parent company owns 70% of a subsidiary, the other 30% owned by other investors is the non controlling interest. This means that in the financial reports of the parent company, they have to clearly show that 30% of the subsidiary’s results belong to these minority shareholders. This helps everyone see exactly how well the subsidiary is doing financially.

There are mainly two kinds of non-controlling interests:

1.    Direct controlling interest

A direct non-controlling interest gets a piece of all the equity recorded by a subsidiary, both before and after the parent company buys it.

2.    Indirect controlling interest

An indirect non-controlling interest only gets a piece of what the subsidiary makes after the parent company buys it.

Calculating Non-Controlling Interest

Now let us look at non controlling interest calculation while preparing the consolidated financial statements.

The calculation of non-controlling interest generally involves these steps:

1. Compute the NAV (net asset value) of shareholder equity:

Determine the company’s total assets, deducting intangible assets and liabilities. For example, if a company has tangible assets worth ₹100,000, intangible assets worth ₹45,000, and liabilities worth ₹25,000, the net asset value would be ₹75,000.

2. Apply the percentage of minority ownership to the net asset value:

Suppose the company has a 25% minority ownership. Multiplying the net asset value by this percentage gives a minority interest value of (₹75,000) x (25%) =₹18,750.

3. Record the result on the balance sheet:

Once the final minority interest value is found, record this amount as a non-operating item on the balance sheet.

Treatment in Financial Statements

The non controlling interest in balance sheet arises from the consolidation of the accounts between the holding company and the acquired subsidiary. The value of the shares that the minor entity shareholders have in the subsidiary is recorded in the reserves and surplus section of the consolidated income statements as Minority Interest.

In India, the treatment of Non-Controlling Interests (NCIs) is governed by the Indian Accounting Standards (Ind AS), which are converged with the International Financial Reporting Standards (IFRS)12.

Here are the key points on how NCIs are treated under Ind AS:

1.    Terminology

In IFRS, the term was changed in 2008 from ‘minority interest’ to ‘Non-Controlling Interest’. This was to reflect the reality that a minority owner may totally control the entity, and vice versa for majority owners.

2.    Definition

Ind AS 110 defines NCI as equity in a subsidiary not directly or indirectly linked to a parent.

3.    Presentation

NCI would be presented in the Consolidated Financial Statements in the equity section of the CFS separately from the parent’s equity.

4.    Measurement

Ind AS 103 allows the acquirer to determine the measurement of ordinary NCI during any business combination, whether at fair value or the proportionate share of the acquiree’s identifiable net assets.

5.    Consolidation

A parent that owns more than 50% but less than 100% of another company consolidates the subsidiary’s financials, including 100% of revenues, expenses, assets, and liabilities.

6.    Income Statement Adjustment

Part of the subsidiary’s net income is allocated to the NCI by the parent company and reported on the income statement.

7.    Cash Flow Statement

As far as the treatment of non controlling interest in cash flow statement is concerned, the parent combines its financials with the subsidiary’s 100% on the cash flow statement as long as it owns 50% or more. Reversing adjustments are made to the deduction for the Net Income Attributable to NCI because it’s non-cash.

8.    Balance Sheet Presentation

Non controlling interest in balance sheet is shown separately under the shareholders’ equity and distinct from the equity attributable to controlling shareholders.

Special Considerations: Put Options Written on Non Controlling Interests under IFRS

Now let us look at put options written on non controlling interests IFRS.

Under IFRS, a put option written on non-controlling interests (NCIs) lets the holder (the non-controlling shareholder) sell their shares back to the parent company. The parent company, which issues the put option, must buy these shares for cash or another financial asset.

IAS 32 lays out the accounting rules for such put options. According to IAS 32, a NCI put creates a financial liability initially measured at the present value of the redemption amount in the parent’s consolidated financial statements.

Conclusion

To sum up, non-controlling interest is one of the fundamental concepts in corporate accounting. It plays a critical role in providing a true and fair view of the financial position of corporate groups with subsidiary operations. It promotes transparency in financial reporting because profits and assets belonging to minority shareholders are clearly recognized. 

Knowledge of the calculation, recognition, and presentation of NCIs on the face of the financial statements is essential to the compliance with Indian Accounting Standards, IFRS and the integrity of financial disclosures.

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