What Is Non-Controlling Interest?
A non-controlling interest is an ownership position in which a shareholder owns less than 50% of outstanding shares and has no control over decisions. It's also known as a minority interest. Non-controlling interests are measured at the net asset value of entities. They don't account for potential voting rights.
Most shareholders of public companies would be classified as holding non-controlling interests even with a 5% to 10% equity stake that would be considered to be a large holding in a single company. A non-controlling interest may be contrasted with a controlling or majority interest in a company where the investor does have voting rights and can often affect the course of the company.
Key Takeaways
- A non-controlling interest, also known as a minority interest, is an ownership position in which the shareholder owns less than 50% of outstanding shares.
- Minority interest shareholders have no individual control over corporate decisions or votes.
- A direct non-controlling interest receives a proportionate allocation of all recorded equity of a subsidiary, both pre- and post-acquisition amounts.
- An indirect non-controlling interest receives a proportionate allocation of a subsidiary's post-acquisition amounts only.
- The opposite of a non-controlling interest is a controlling interest where a shareholder has voting rights to determine corporate decisions.
Understanding Non-Controlling Interest
Most shareholders are granted a set of rights when they purchase common stock, including the right to a cash dividend if the company has sufficient earnings and declares a dividend. Shareholders may also have the right to vote on major corporate decisions, such as a merger or company sale. A corporation can issue different classes of stock, each with different shareholder rights.
There are generally two types of non-controlling interests: a direct non-controlling interest and an indirect non-controlling interest.A direct non-controlling interest receives a proportionate allocation of all pre- and post-acquisition amounts of recorded equity of a subsidiary.An indirect non-controlling interest receives a proportionate allocation of a subsidiary's post-acquisition amounts only.
An investor generally can't communicate specific proposals to the board and management unless they control 5% to 10% of the shares. They can't propose changes to the board of directors, propose changes at shareholder meetings, or team with other investors to make their actions more likely to succeed until they control this number of shares. Such investors are termed activist investors.
Activist investors range widely in style of action and objectives that can range from seeking operational improvements to restructuring to natural environment and social policy.
Financial Statements and Non-Controlling Interest
Consolidation is a set of financial statements that combines the accounting records of several entities into one set of financials. These typically include a parent company as the majority owner, a subsidiary or a purchased firm, and a non-controlling interest company. The consolidated financials allow investors, creditors, and company managers to view the three separate entities as if all three firms are one company.
A consolidation also assumes that a parent and a non-controlling interest company jointly purchased the equity of a subsidiary company. Any transactions between the parent and the subsidiary company or between the parent and the non-controlling interest firm are eliminated before the consolidated financial statements are created.
Example of Non-Controlling Interest
Assumethat a parent company buys 80% of XYZ firm and that a non-controlling interest company buys the remaining 20% of this subsidiary. The subsidiary’s assets and liabilities on the balance sheet are adjusted to fair market value and those values are used on the consolidated financial statements. The excess is posted to a goodwill account in the consolidated financial statements if the parent and a non-controlling interest pay more than the fair value of the net assets.
Goodwill is an additional expense incurred to buy a company for more than the fair market value. Goodwill is amortized into an expense account over time after an impairment test. This is done under the purchase acquisition accounting method approved by the Financial Accounting Standards Board (FASB).
What Is Net Asset Value?
Net asset value (NAV) is the value that remains after all liabilities have been expensed. It's typically just one factor considered in the performance of an asset.
How Many Shares Are Necessary to Become an Activist Investor?
An activist investor acquires an average of 6% of a company's outstanding shares, according to the Harvard Law School Forum on Corporate Governance. Less than 5% of outstanding shares awards a minor ownership position but even 5% might be a large holding in a small, single company.
What Is Goodwill in Accounting?
Goodwill is considered to be an intangible asset. The term is commonly used to describe a situation in which Company A is willing to pay more than the fair market value of Company B's net assets in a bid to acquire Company B.
The Bottom Line
A non-controlling interest is a minority interest. The shareholder owns less than half the number of outstanding shares. This type of shareholding typically awards no control over corporate decisions or votes. Shareholders with controlling interests have voting rights.
Always consult with a professional if you’re unsure about the status of shares of a company in which you’re thinking of investing.
