Definition of Non-Controlling Interest
Non-controlling interest is defined as a part of the net assets and net results of operations of any subsidiary which is a part of the holding company. Non-controlling interests are not owned directly or indirectly through any subsidiary’s interest by the holding company. Non-controlling interest is the share capital of the subsidiary related to outsiders and the reserves and profits of the subsidiary company.
Explanation
Non-controlling interest is the portion of the interest that is left out after the holding company’s claim. Say, for example, Zee ltd wants to acquire 60% of equity shares of B ltd so in this case, out of 100% holding of B ltd, 60% will be given to Zee now Zee will be the holding company, and the rest of shares % which is 40% will be considered as Non controlling interest. They will not be allowed to manage any affairs of the company and are not required to interfere in the company’s decision. Sometimes a situation arises when there are losses in the company, so in that case, the losses which are applicable to the non-controlling interest in a combined subsidiary may exceed the non-controlling interest of the single subsidiary. The non-controlling interest holders get the share as per the confined % of the controlling interest they share in the company.
Example of Non-Controlling Interest
Alpha Ltd is a big company and wants to acquire 80% of equity shares of MMM Co ltd. The price at which the deal was done was $8, 00,000 and it was done on 1st January 2017. MMM, co ltd had equity shares of $ 8,00,000 and reserves and a surplus of $60,000. Calculate the Non-controlling interest of each year.
Solution:
| Particulars | Total | Holding Company
Controlling Interest (80%) |
Non controlling interest ( 20%) |
| Share Capital | 800,000.00 | 640,000.00 | 160,000.00 |
| Reserve | 60,000.00 | 48,000.00 | 12,000.00 |
| 860,000.00 | 688,000.00 | 172,000.00 |
Types of Non-Controlling Interest
- There are two types of non-controlling interest: direct non controlling interest and another is Indirect non controlling interest.
- In direct non controlling interest, the minority shareholders, i.e. the ones who are non controlling interest bearing in the company, will get both the profits to share of pre and post-acquisition, whereas in the case of indirect non controlling interest, only post-acquisition profits are shared with the minority interest holders, and the pre-acquisition profits are not shared. The non-controlling Interest holders get the share of this distribution as per their controlling interest percentage in the company.
Criteria for Non-Controlling Interest
In general, non-controlling interest, also known as Minority, Interest holders hold less than 50% stake in the company; sometimes, it can be even lesser than 30%-20%. Therefore they are not allowed to take any high-level decision. Minority Interest holders are also known for claiming the interest of the outside shareholders of a subsidiary. The holding company does not wholly own some parts of the subsidiary, and thus the net income of that part comes under Minority interest, also known as Non-controlling Interest. Hence Minority Interest is shown separately in the Balance sheet of the company. Minority interest holders get their share as per the % controlling in the company.
Recording of Non-Controlling Interest
- First of all, we have to find that the acquisition is taking place on which date.
- Then find out the company which is being acquired and the company which is acquiring.
- After that, we have to understand that the acquiring company taking how much stake of the acquired company and any other conditions posted.
- Calculation of Pre-acquisition and Post-acquisition profits are done.
- Calculation of Pre-acquisition and Post-acquisition of reserves and surpluses are done.
- In the next step, the distribution of profits takes place.
- The Minority Interest is recorded under the head Equity and Liability.
- Minority Interest is separately recorded in the Balance sheet with its own name.
Advantages
Some of the advantages are given below:
- Non-Controlling Interest holder can anyway get access to the company’s financial books.
- By taking a small share as a minority interest holder in a very and emerging business can help the growth of the individual investors.
- The Non-Controlling Interest holders can see the business developments and get an insider’s view to plan their investment in such a way.
- In most of the cases, the minority interest holders gain a huge amount of average return on their funds since they are aware of the company’s norms.
- The risk also subsides because a huge investment is not required from the minority interest holders, and thus they can enjoy the benefit of the low risk and more gains on returns.
- Minority Interest holders can take advantage of the technologies of the company and can grow its individual finance.
- In case of business sale, the minority interest holder can sell the part of this stake without much legal complications.
- Minority interest holder also gets the pre and post-acquisition of profits and reserves and surpluses. This is an added advantage for them. They get the share as per their controlling % in the company.
Conclusion
It is a very wide term. Minority shareholders of the company are not allowed to participate in the company’s meeting, but sometimes they can make a decision for the board members. If the performance of the board is not satisfactory, then the minority shareholders can ask the board to take action against them. In the corporate, the minority interest holder meeting and voting can be very influential. Non-controlling Interest holder also makes huge profits and returns on their investment in the company. They make a very little investment as per the company’s emerging business but can gain huge profits out of it. Non Controlling Interest also gets their share in case of an acquisition. Non Controlling Interest is given emphasis in the Balance Sheet and is shown as a separate item.
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This is a guide to Non-Controlling Interest. Here we also discuss the introduction and types of non-controlling interest along with advantages and an example. You may also have a look at the following articles to learn more –
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