Define: Minority Interest

Minority Interest
Minority Interest
Quick Summary of Minority Interest

The ownership interest in a company held by persons other than the parent company and it’s subsidiary undertakings. Also called a non-controlling interest.

Full Definition Of Minority Interest

A minority interest is any ownership or stake in an enterprise that is less than 50%.

The term can mean either owning stock in a company or having a stake in a partnership. A person or group other than the parent company owns a minority stake in a company. Most of the time, when someone owns a small stake in a company, they have some rights, like being able to participate in sales and having some audit rights.

On the balance sheet of companies that own most of a company, the minority interest shows up as a long-term debt that doesn’t have to be paid right away. This shows how many of its subsidiaries are owned by people who aren’t the company’s main shareholders.

  • A minority stake is ownership or interest in a business that is less than 50%.
  • Minority interests typically vary from 20% to 30%, and stakeholders have very little say or influence in the organisation.
  • Companies having a majority interest will report the minority holding as a noncurrent liability on their balance sheet.

Minority interests refer to the portion of a business or stock that is not owned by the parent corporation. The majority of minority interests fall between 20% and 30%.

While the largest shareholder—in most circumstances, the parent company—has voting rights to establish policies and procedures, minority shareholders typically have little say or influence over the company’s direction. That is why they are also known as non-controlling interests (NCIs).

In some instances, a minority group may enjoy certain rights, such as the right to participate in commerce. Minority stakeholders may also be entitled to certain audit rights under specific circumstances. Additionally, they may have the ability to attend shareholder or partnership meetings.

Companies and investors with a minority stake may be able to negotiate control rights in the field of private equity. For instance, venture investors may request a seat on the board of directors in exchange for investing in a firm.

In the corporate sector, a corporation’s balance sheet discloses minority ownership. In addition to being shown on the balance sheet, a minority stake is reported on the consolidated income statement as the minority equity holders’ share of profit.

Example

ABC Corporation owns 90% of XYZ Inc., a $100 million business. ABC reports a $10 million noncurrent liability for the 10% of XYZ Inc. that it does not own.

XYZ Inc. earns a profit of $10 million. As a result, ABC recognises on its income statement $1 million — or 10% of $10 million — of net income attributable to minority interest. ABC accounts for the $10 million minority investment in the same way, by increasing it by $1 million on the balance sheet. Minority stakeholders make no accounting entries unless they earn dividends, which are recorded as income.

Types of Minority Interests

Minority interests can be passive or active in nature. Passive minority interests, defined as those in which a corporation owns less than 20%, are those in which the company possesses no meaningful control over the company in which it holds a minority interest. For people having minority passive interests, only dividends earned from the minority interest are recorded. This is referred to as the cost method—the ownership stake is handled as a cost investment and any dividends received as dividend income.

Active minority interests—those in which a company owns between 21% and 49%—are those in which the firm holds a minority interest has the potential to meaningfully affect the company in which it holds a minority interest. Unlike passive interests, persons with active minority holdings declare dividends earned and a percentage of income. The equity method is a term that refers to this.

Dividends are viewed as a return of capital, lowering the balance sheet value of the investment. The minority interest’s percentage of income is added to the investment account on the balance sheet, thus increasing its ownership stake in the company.

The parent business owns the bulk of the subsidiary. It owns more than 50% but less than 100% of the voting shares of a subsidiary and records a minority stake in its financial statements.

The parent company consolidates the subsidiary’s financial results with its own, and as a result, a proportionate share of income attributable to the minority interest appears on the parent company’s income statement. Similarly, the minority interest appears as a proportional share of equity in the subsidiary company on the parent’s balance sheet.

According to generally accepted accounting standards (GAAP), the minority stake is recorded in the noncurrent liability or equity part of the parent company’s balance sheet. However, under International Financial Reporting Standards (IFRS), the minority interest must be recorded in the balance sheet’s equity section. (See “How To Calculate Minority Interest” for further reading.)

Related Phrases
Disclaimer

This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

This glossary post was last updated: 28th March, 2024.

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