Non-Controlling Interest can be described as the minority ownership of one business in another business. A business is said to have a non-controlling interest in another business if the shareholder of that particular company owns less than 50% of the outstanding shares of the company.
Therefore, because of the fact that non-controlling interest is described as the minority interest, it can be seen that there is no control over the corporate decisions that are taken by the company.
Hence, their shareholding is just representative of their ownership, but is it not substantial or significant enough for it to be categorized as a ‘controlling element.’
In other words, having a non-controlling interest does not make a company entitled to the decision-making process in the company in which they own the non-controlling interest.
Given the fact that individuals or business with a non-controlling interest has no individual decision over corporate decisions, it can be seen that they are still entitled to receive their proportionate allocation of the amounts respective to their ownership in the company.
How to calculate Non-Controlling Interest?
Non-Controlling Interest is the proportion of shareholding of one company in the other company. Regardless of the fact that it is minority ownership, it is still declared on the financial statements of both the companies to represent the ownership stake.
However, in order to calculate the non-controlling interest in the company, it is also important to ensure that there are certain steps that are undertaken by the accountants in order to accurately calculate to Non-Controlling Interest.
The first step in this regard is to ensure that companies are able to find the book value of the subsidiary. The book value is calculated using the net assets of the company (which are net assets minus net liabilities).
After book value has been duly calculated, businesses are then required to multiply the book value of the company, with the percentage of ownership of the Non-Controlling Interest.
This would render the dollar value of the non-controlling interest that is to be described on the balance sheet, and the income statement of the company.
The second step in this regard is to ensure that net income is computed, relevant to the non-controlling interest percentage.
Hence, it can be seen that non-controlling interest is mainly computed by ensuring that the relevant share of profits of the non-controlling interest is duly calculated by both, the company, as well as the subsidiary.
Example of Non-Controlling Interest
Non-Controlling Interest can further be explained using the following illustration:
Pop Co. purchased 20% shares in Kid Co. on 1st January 2019. During the year ended, Kid Co. was able to generate $200,000 as Net Income for the year. In the same manner, the book value of the assets of Kid Co. is estimated to be $3,000,000.
In the example above, it can be seen that Net Co has a Net Income of $200,000 that is attributable to all the shareholders.
Assuming there are two main shareholders, Pop Co. and Kid Co., it can be seen that by default Pop Co. is a minority stakeholder since they only have 20% ownership in the company.
In this regard, the value for non-controlling interest for the Income Statement and Balance Sheet is as follows:
Non-Controlling Interest – Income Statement
Non-Controlling Interest – Pop Co. 20%
Net Income for the year = $200,000
Non-Controlling Interest share = $40,000
Non-Controlling Interest – Balance Sheet
Non-Controlling Interest – Pop Co. 20%
Net Income for the year = $3,000,000
Non-Controlling Interest share = $600,000
Treatment of Non-Controlling Interest in Balance Sheet
Non-Controlling Interest is specifically mentioned in the balance sheet for both companies. In the example given above, it can be seen that the Non-Controlling Interest is declared in the Financial Statements of both, the parent, as well as the subsidiary.
The calculation that is carried out includes the retained earnings, as well as dividends that might have been paid out to the shareholders.
In the same manner, it is also important to ensure that organizations are able to include non-controlling interest so that shareholders and users of the financial statement have a clear idea about the proportion of assets (as well as net income) that is attributable to the Non-Controlling Interest.
Non-Controlling Interest and Retained Earnings
By definition, retained earnings are the earnings that are withheld by the company to be used for any future expansionary projects a company might have.
In this regard, it is highly important to ensure that even if the consolidated earnings are retained by the company, then the financial statements represent the part of retained earnings that are attributable to the Non-Controlling Interest.