A non-controlling interest, spelled noncontrolling interest in the US standards, is the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent, and it is sometimes called a minority interest (FASB Statement No. 160, Accounting Research Bulletin No. 51 paragraph 25). It exists only in consolidated financial statements, because a subsidiary’s own books do not distinguish the shares its parent holds from the shares anyone else holds. The standard treats it as part of the equity of the consolidated group rather than as a claim against the group.
The FASB Accounting Standards Codification is the source of authoritative generally accepted accounting principles recognized by the FASB to be applied by nongovernmental entities, and an Accounting Standards Update is not itself authoritative but a document communicating how the Codification is being amended (FASB Accounting Standards Update 2015-02). The Codification carries consolidation and the noncontrolling interest as Topic 810, Consolidation (FASB Accounting Standards Update 2015-02), and the acquisition-date measurement as Topic 805, Business Combinations (FASB Accounting Standards Update 2017-01). A workpaper or a memo cites the topic, not the Statement the topic was built from.
Why the Standards Stopped Saying Minority Interest
Older textbooks and older filings call the same balance a minority interest. FASB amended the authoritative literature to replace that term because a holder of a minority of the ownership interests in an entity might have a controlling financial interest in it and, conversely, a holder of a majority might not, so noncontrolling interest describes those owners more accurately (FASB Statement No. 160, paragraph B28). Which entities a parent has to consolidate at all is a separate test, and consolidations works through both routes to a controlling financial interest.
How a Non-Controlling Interest Is First Measured
A noncontrolling interest arrives on the books in the same measurement step as everything else the acquirer took on. Any noncontrolling interest in an acquiree is measured at its acquisition-date fair value, under the one measurement principle that also governs the identifiable assets acquired and the liabilities assumed (FASB Statement No. 141 (revised 2007), paragraph 20). Where an active market price exists for the shares the acquirer did not buy, that price can supply the measurement, and where it does not, the acquirer uses other valuation techniques (paragraph A60).
Fair value is not the ownership percentage applied to the acquired net assets, and the standard explains the gap. The fair values of the acquirer’s interest and of the noncontrolling interest on a per-share basis might differ, mainly through a control premium in the acquirer’s per-share value or a discount for lack of control, also referred to as a minority interest discount, in the noncontrolling interest’s (FASB Statement No. 141 (revised 2007), paragraph A61). The same principle drives a purchase price allocation, ground multiples already covers.
Where It Sits on the Balance Sheet
The noncontrolling interest shall be reported in the consolidated statement of financial position within equity, separately from the parent’s equity, clearly identified and labeled, and an entity with noncontrolling interests in more than one subsidiary may present those interests in aggregate (FASB Statement No. 160, Accounting Research Bulletin No. 51 paragraph 26). That placement settled a genuine disagreement. Before that Statement, so-called minority interests were reported as liabilities or in the mezzanine section between liabilities and equity, and the Statement was issued in part to eliminate that diversity (FASB Statement No. 160, Summary).
The SEC’s balance sheet rule keeps the same separation and adds a disclosure to it. Caption 31 of Regulation S-X is noncontrolling interests in consolidated subsidiaries, and the caption directs the filer to state separately in a note the amounts represented by preferred stock and the applicable dividend requirements if that preferred stock is material in relation to the consolidated equity (17 CFR 210.5-02). Whether that caption belongs inside the equity denominator of a ratio is a separate choice, one the equity multiplier works through.
Not every claim the other owners hold qualifies. Only a financial instrument issued by a subsidiary that is classified as equity in the subsidiary’s own financial statements can be a noncontrolling interest in the consolidated statements, since an instrument classified there as a liability is not an ownership interest (FASB Statement No. 160, Accounting Research Bulletin No. 51 paragraph 27).
How Consolidated Income Is Split
Revenues, expenses, gains, losses, net income or loss, and other comprehensive income are reported in the consolidated financial statements at the consolidated amounts, which include the amounts attributable to the owners of the parent and to the noncontrolling interest (FASB Statement No. 160, Accounting Research Bulletin No. 51 paragraph 29). Net income or loss and comprehensive income or loss are then attributed to the parent and the noncontrolling interest (paragraph 30). Each of those amounts has to be clearly identified and presented on the face of the consolidated statement of income (FASB Statement No. 160, Summary).
The direction of that split is what changed. Net income attributable to the noncontrolling interest was previously reported, in general, as an expense or other deduction in arriving at consolidated net income (FASB Statement No. 160, Summary). It is now an attribution taken below the consolidated total rather than a cost on the way to it.
Losses keep being attributed even when they run past the balance. Losses attributable to the parent and the noncontrolling interest may exceed their interests in the subsidiary’s equity, and that excess and any further losses are attributed to those interests anyway, so the noncontrolling interest continues to take its share even where the attribution produces a deficit noncontrolling interest balance (FASB Statement No. 160, Accounting Research Bulletin No. 51 paragraph 31).
A Worked Example
Say a parent acquires most of a company’s shares, the shares it does not buy have no quoted market price, and the acquisition-date measurements come out at the amounts below.
Ownership acquired by the parent 80%
Consideration transferred $9,000,000
Implied value of the whole company at that price $11,250,000
Implied value of the other 20% at that price $2,250,000
Identifiable net assets, at fair value $10,000,000
Fair value of the noncontrolling interest $2,100,000
(valued with a discount for lack of control)The opening balance matches neither a fifth of the identifiable net assets nor the other fifth valued at the parent’s per-share price. It is a fair value in its own right, and the discount for lack of control is what holds it below the parent’s per-share price. The first year then runs through the income statement and back into that equity balance.
Subsidiary net income for the year $1,500,000
attributed to the noncontrolling interest $300,000
attributed to the parent $1,200,000
Consolidated net income $4,000,000
Less net income attributable to the NCI $300,000
Net income attributable to the parent $3,700,000
Subsidiary dividends declared $250,000
share declared to the other owners $50,000
Noncontrolling interest at the acquisition date $2,100,000
Plus its share of net income $300,000
Less its share of dividends $50,000
Noncontrolling interest at year end $2,350,000The attributed amount appears twice by design, once as a line under consolidated net income and once as the rise in the equity balance, and the dividend is what keeps the two from moving together.
What a Non-Controlling Interest Is Not
A noncontrolling interest is not an equity-method investment. The equity method is followed by an investor whose investment in voting stock gives it the ability to exercise significant influence over the operating and financial policies of an investee, even though the investor holds 50 percent or less of the voting stock, and an investment of 20 percent or more of the voting stock leads to a presumption of that ability in the absence of evidence to the contrary (APB Opinion No. 18, paragraph 17). Under that method the investment in common stock is shown in the balance sheet of the investor as a single amount, and the investor’s share of the earnings or losses of the investee is ordinarily shown in the income statement as a single amount (APB Opinion No. 18, paragraph 19(c)). None of that investee’s revenue or expenses reaches the investor’s own line items, and no part of the investor’s equity is labeled for anybody else. A noncontrolling interest is the opposite arrangement, since the subsidiary’s revenue and expenses already sit inside the consolidated lines and the slice the parent does not own is carried in consolidated equity under its own caption.
A minority interest and a minority interest discount are also two different things. The minority interest is the balance itself, the equity in the subsidiary held by owners other than the parent. The minority interest discount is the discount for lack of control included in the per-share fair value of the noncontrolling interest, and it is what can hold that balance below the acquirer’s own per-share value (FASB Statement No. 141 (revised 2007), paragraph A61).
Common Questions
The part of a subsidiary’s equity its parent does not own, directly or indirectly, carried inside the consolidated group’s equity. It appears only where a parent consolidates a subsidiary it does not own outright.
The standard supplies one. Where 80 percent of a subsidiary’s ownership interests are held by the subsidiary’s parent and 20 percent are held by other owners, the interests held by those other owners are the noncontrolling interest (FASB Statement No. 160, Accounting Research Bulletin No. 51 paragraph 25).
NCI is the common abbreviation. The opening balance is a fair value measurement made when the parent takes control, not a percentage of the acquired net assets, and it is rolled forward from there by the noncontrolling interest’s share of the subsidiary’s net income or loss and other comprehensive income, less the dividends the subsidiary declares to those owners.
Inside equity, on its own line, kept separate from the parent’s equity and set after the stockholders’ equity captions. Some financial instruments commonly called noncontrolling interests are instead classified as liabilities or in the mezzanine under other US GAAP or SEC guidance, and Statement 160 does not provide guidance for those instruments (FASB Statement No. 160, paragraph B35).
Accountably places trained offshore accountants inside US CPA and EA firms, and a firm whose multi-entity consolidations run long every close can grade that work for itself first through a trial task.
