What is Minority Interest?
Minority interest, also termed as non-controlling interest, refers to the ownership stake in a company that is less than 50%. This ownership percentage is held by shareholders other than the holding company that holds a controlling interest (more than 50% of the company).
For example, if a holding company owns 60% of the ordinary shares in a subsidiary, the remaining 40% of shares would constitute the minority interest. Minority shareholders will receive their share of the company’s profits through dividends; however, they do not possess sufficient voting power to influence the company’s policy or strategic direction, as the majority voting power rests with the holding company.
Examples of Minority Interest
-
Example 1: Subsidiary of a Multinational Corporation
- Imagine a multinational corporation (MNC) that owns 70% of a local company in a foreign country. The remaining 30% shares are held by local investors. The local investors’ stake is considered a minority interest.
-
Example 2: Joint Ventures
- In a joint venture, Company A owns 55% of the joint venture while Company B owns 45%. The 45% owned by Company B represents a minority interest as Company A holds the majority shares.
Frequently Asked Questions (FAQs)
What rights do minority interest holders have?
Minority interest holders typically have the right to receive dividends and a proportional share of the assets if the company is dissolved. They do not have significant voting power to influence the company’s major decisions since they hold less than 50% of shares.
How is minority interest reported on financial statements?
Minority interest is reported on the consolidated balance sheet under shareholders’ equity. It’s also shown within the equity section but separately from the equity attributable to the parent company’s shareholders.
Can minority interest shareholders sell their shares?
Yes, minority shareholders can sell their shares unless restricted by any shareholders’ agreements or regulatory constraints. The liquidity of such shares, of course, will depend on the market and demand for those shares.
How are dividends paid to minority shareholders?
Dividends distributed to minority interest shareholders are proportionate to their ownership percentage in the company. If the company declares a dividend, minority shareholders will receive their share based on their stake.
Is minority interest the same as minority shareholder risk?
While minority interest refers to the portion of equity ownership, minority shareholder risk pertains to the potential risks that minority shareholders may face, including lack of control over decisions and policy setting, which can impact their investments.
Related Terms
- Controlling Interest: Ownership interest that gives a shareholder a majority of voting rights, allowing for control over corporate policies and decisions.
- Holding Company: A parent corporation that owns enough voting stock in another corporation to control its policies and management.
- Participating Interest: A portion of ownership interest in a joint venture or similar investment, allowing the holder to gain benefits according to their share percentage.
Online References
- Investopedia: Minority Interest
- Corporate Finance Institute: Minority Interest
- SEC.gov: Consolidation and Majority Ownership
Suggested Books
- “Financial Reporting and Analysis” by Charles H. Gibson
- “Accounting Made Simple: Accounting Explained in 100 Pages or Less” by Mike Piper
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
Accounting Basics: “Minority Interest” Fundamentals Quiz
Thank you for delving into the comprehensive understanding of minority interest and for taking the time to test your knowledge. Keep exploring to sharpen your financial acumen!
