Today we are going to talk about “Is Non-controlling interest part of Shareholders’ Equity”? Previously we talked about MINORITY SHAREHOLDER, CONCEPT OF SIGNIFICANT INFLUENCE, WAYS TO SUCCESSFULLY RAISE CAPITAL FOR YOUR START-UP.
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What is Non Controlling interest?
Non-controlling interest or minority interest simply refers to a situation where shares are owned by a company or investor that is less than 50% of the outstanding shares of the business. Consequently, they have less than 50% of the voting rights of a company.
International Accounting Standard (IAS) 27 defines non-controlling interest as “the equity in a subsidiary not attributable, directly or indirectly, to a parent.”
Shareholders’ Equity as well, represents the totality of all funds contributed by the investors of the company. Being that the value of all shareholder investments is aggregated in the statement of financial position of the business, the usual idea is that every form of finance-based investment is added to create one shareholder equity value.
Non-Controlling Interest Calculation
But, is a 5% investment in a company worthy of being regarded as a part of shareholder equity? In accounting, non-controlling interest, NCI, is shown separately in the equity part of the statement of financial position of a parent company. This is in compliance with the relevant standards used by every country, as well as the IFRS.
Under US GAAP, it can be reported under the liabilities or equity section; however, the International Financial Reporting Standards require it to be disclosed on its own. In other words, while it is part of shareholders equity, in theory, it has to be disclosed separately and not with it.
Even with its definition and disclosure, there are certain instances where it gets confusing as to whether or not it is part of Shareholders’ Equity. Most of the challenges come as a result of accounting computations. When computing a ratio that involves the use of the shareholder’s equity metric, is minority interest ignored since it isn’t disclosed as part of it? Isn’t it still generally a part of the shareholder’s equity? Simply put, all ratios that intend to value capital structure is required to account for minority interest one way or the other.
Different ratios have their various metrics and focus. For one, the Net Margin ratio is calculated before being adjusted for minority interest while the Return on Equity Ratio is accounted for a minority interest in the net income part and excludes it while showing total equity.
Non-Controlling Interest in Consolidated Financial Statements
Minority interest or non-controlling interest is neither an asset nor a liability as it doesn’t have the attributes of either of them. But, since the parent company is not in control of it, hence why it is shown on its own. It is shown in the Consolidated Balance Sheet Under Consolidated Reserves / Earnings.
Why Is Non-controlling interest disclosed separately?
- One core reason is to protect minority shareholders. Being the minority, the goal is to ensure that their interests and rights are protected.
- It helps the investors in making better decisions as regards the overall company.
- It gives a clear picture to all users of financial statement on the various shareholder’s interest in the company.
- It also helps the business owners in analyzing the many investment opportunities available to the company
- It is also used while computing various ratios and analyzing financial statements.
In next story, we will talk about HOW PRIVATE EQUITY FIRMS OPERATE?