What is non-controlling interest (NCI) or minority interest and how does it impact an organizations consolidated financial results?

Non-Controlling Interest

Non-controlling interest or minority interest situation occurs when an organization does not own 100% of a subsidiary organization.  The organization only owns a part of the subsidiary.  The joint partnership agreement details the official relationship is between the two or more organizations that own the subsidiary.

The agreement outlines what ownership relationship is and thus how to account for the subsidiary when consolidating subsidiaries.  As a result, there are several different consolidation approaches when accounting for a subsidiary that isn’t 100% owned.

Controlling Interest

Controlling Interest occurs when an organization owns more than 50% but less than 100% of the subsidiary.  This means that control of the subsidiary lies in the hands of that organization.  The organization will need to consolidate 100% of the financial results (by line item) with a factor for the portion of income and equity owned by a 3rd party.  This controlling interest can also be achieved if the organization has substantial operational influence even if the ownership is below 50%.

Non-controlling Interest (Minority Interest) calculation

Income Statement

To calculate the NCI of the income statement, take the subsidiaries net income and multiply by the NCI percentage.  For example, if the organization owns 70% of the subsidiary and a minority partner owns 30% and subsidiaries net income say $1M.  The non-controlling interest would be calculated as $1M x 30% = $300k.  This $300k would be placed on a non-operating line item on the Income Statement.  Minority Interest $300k this would reduce the organizations Net Income by the amount of Net Income that is not owned by the organization.

Balance Sheet

To calculate the non-controlling interest of the balance sheet, take the subsidiaries book value and multiply by the non-controlling interest percentage.  For example, if the organization owns 70% of the subsidiary and a minority partner owns 30% and subsidiaries book value is $8M.  The non-controlling interest would be calculated as $8M x 30% = $2.4M.  This $2.4 would be placed on in either a non-current liability (US GAAP) or within equity in it’s own distinct section separate from the rest of the parent’s equity (US GAAP, IFRS).

Consolidation Implications

As you can see, the NCI calculation is a straight forward and easy to understand. But when does it take place and where is it accounted for it?

There are a variety of ways that this can be completed but in general this calculation is completed after the subsidiary finalizes (closes) their books and before the organization finalizes it’s financial statements for any time period.  Most often this calculation occurs at the time of consolidation and resides in the consolidation system.

The logic is stored and resides in the consolidation system. For instance, a purpose built consolidation solution like Oracles Hyperion Financial Management or OneStream XF or manually created in Excel or similar tool.  In general, most organizations do not create journal entries in their general ledger to hold these values.  So, if not correctly accounted for the calculation can quickly turn into a circular logic of excluding non-controlling interest from the non-controlling interest calculation.

In conclusion, you should remember the following:

  • Determine whether a subsidiary has a non-controlling partner
  • Calculate non-controlling interest
    • Ownership percentage
    • Net Income
    • Book Value
  • Non-Controlling Interest (non-operating line item)
    • Non-current Liability (US GAAP) or
    • Non-controlling Equity (US GAAP or IFRS)
    • Store non-controlling interest values in appropriate financial statement line items
  • Complete this calculation during the consolidation and store in a consolidation system

Situations that can make this complicated:

  • Multiple non-controlling interest subsidiaries
  • Foreign currency/ CTA
  • Complex ownership (multiple internal owners)
  • General ledger disparity

As these situations get more complex, it is advisable to evaluate usage of a purpose built consolidation solution.  These solutions have prebuilt configurable modules to account for NCI subsidiaries and minimize risk in incorrectly accounting for these subsidiaries.

If you desire assistance, please reach out to eCapital Advisors to discuss purpose built consolidation solutions.  There are a variety of tools to fit any organization’s situation.

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