What is uncontrolled interest?
A non-controlling interest (NCI), also known as a minority interest, is a position of ownership in which a shareholder owns less than 50% of the outstanding shares and has no control over the decisions. Non-controlling interests are valued at the net asset value of the entities and do not take into account potential voting rights. Most shareholders of public companies would today be classified as holding a non-controlling interest, even a 5% to 10% interest being considered a large interest in a single company.
A non-controlling interest can be contrasted with a majority or majority interest in a business.
Interest without control
Understanding an interest without control
Most shareholders are granted a set of rights when they purchase common shares, including the right to a cash dividend if the company has sufficient profit and declares a dividend. Shareholders may also have the right to vote on important corporate decisions, such as a merger or sale of a company. A company can issue different classes of shares, each with different shareholder rights.
Generally, there are two types of non-controlling interests: a direct NIC and an indirect NIC. A non-controlling interest receives a proportional allocation of all (amounts before and after acquisition) of the registered equity of a subsidiary. A non-indirect controlling interest receives only a proportional allocation of the amounts of the subsidiaries after the acquisition.
For the majority of publicly traded companies, the number of shares outstanding is so large that an individual investor cannot influence senior management decisions. It is generally not before an investor controls 5% to 10% of the shares that he contests for a seat on the board of directors or adopts changes at shareholders’ meetings through lobbying efforts.
Key points to remember
- A non-controlling interest (NCI), also called a minority interest, is a position of ownership by which a shareholder owns less than 50% of the outstanding shares.
- As a result, minority shareholders have no individual control over the decisions of the company or the votes by themselves.
- A non-controlling interest receives a proportional allocation of all (amounts before and after acquisition) of the registered equity of a subsidiary.
- A non-indirect controlling interest receives only a proportional allocation of the amounts of the subsidiaries after the acquisition.
Factoring in consolidations
A consolidation is a set of financial statements that combines the accounting records of multiple entities into a single set of financial statements. It is generally a parent company, as the majority owner; a subsidiary or a business purchased; and an NCI company. The consolidated financial statements allow investors, creditors and business owners to see the three separate entities as if the three businesses were one business.
Consolidation also assumes that a parent company and an NCI company jointly purchase the equity of a subsidiary. All transactions between the parent company and the subsidiary, or between the parent company and NCI, are eliminated before the creation of the consolidated financial statements.
Examples of non-controlling interests
Suppose a parent company buys 80% of XYZ and an NCI company buys the remaining 20% of the new subsidiary, XYZ. The assets and liabilities of the subsidiary on the balance sheet are adjusted to fair market value and these values are used in the consolidated financial statements. If the parent company and an ICN pay more than the fair value of the net assets or assets less the liabilities, the excess is recorded in a goodwill account in the consolidated financial statements.
Goodwill is an additional expense incurred to buy a business at a price above fair market value, and goodwill is amortized to an expense account over time.