For example, if Company A acquires 70% of Company B, Company A has a controlling interest and consolidates Company B’s financials into its own. However, the remaining 30% interest in Company B still held by other investors is considered the minority interest. CFI is the global institution behind the financial modeling and valuation analyst FMVA® Designation. CFI is on a mission to enable anyone to be a great financial analyst and have a great career path.

Introducing Minority Interest in Finance

The parent company consolidates the subsidiary’s financial statements with its consolidated financial statements. In summary, minority interest accounting enables parent companies to report full subsidiary results while separately disclosing minority stakes held by outside investors. Proper reporting provides clarity for financial statement users evaluating a company’s consolidated performance. The other two methods are the cost method, where the parent owns 20% or less of the subsidiary’s voting stock, and the equity method, where the percentage of ownership is 21% to 49%. Neither method uses minority interest to report a subsidiary’s share of assets or income anywhere on the parent’s financial statements. Minority shareholder valuation evaluates the value of minority shareholders’ stakes in a company.

Minority Interest in Consolidated Financial Statements

Learn about emerging trends and how staffing agencies can help you secure top accounting jobs of the future. The pros and cons of a minority interest and majority interest investment are described in the following table. A minority interest is an investment structure, where the investor’s equity ownership is less than 50% post-investment. For example, suppose that Company A acquires a controlling interest of 75% in Company B. The latter retains the remaining 25% of the company.

Since minority interest sits below debt and above common equity on the balance sheet, it is essentially treated as a “quasi-equity” claim on the company’s value. Therefore, minority interest must be added to the market capitalization to arrive at a company’s total enterprise value. So on the balance sheet, minority interest sits below liabilities, but above equity belonging to the parent company’s shareholders.

Minority Shareholder Valuation

We hope this has been a helpful guide to minority interest in enterprise value calculations. CFI is the official global provider of the Financial Modeling and Valuation Analyst (FMVA)® certification, designed to transform anyone into a world-class financial analyst. Goodwill is the purchase price of the company minus the difference between the fair market value of the company’s assets and liabilities. Minority interests usually refer to the portion of a company or stock not held by the parent company, which holds the majority interest.

1. Non-controlling interest typically occurs when one company owns greater than 50% of another company but not 100%.
2. This measurement is then reported on the parent’s consolidated balance sheet and income statement in accordance with IFRS or U.S.
3. Each multiple has pros and cons and may be more or less relevant depending on the subsidiary’s industry and profitability profile.
4. These financial statements are considered to be consolidated financial statements, and require extra work to strip out any intercompany transactions.
5. Understanding how to calculate, record, and interpret minority interest is critical for corporate financial reporting.
6. Assuming markets are efficient and a stock is fairly priced, a company’s market cap reflects the parent’s partial ownership of a consolidated subsidiary.

By calculating and presenting minority interest, the parent company avoids overstating its net assets and equity. Depending on the size of the stake, the minority shareholders generally have less say in the business’s operations or strategic decisions. For this reason, minority stakes, especially those below 20%, are often referred to as “non-controlling interests.” However, control rights are negotiable.

There has always been a distinction between equity and responsibility when referring to a minority holding. Although it’s called minority interest, academics have paid little attention to this concept. This section provides examples and case studies to illustrate concepts around minority interest in finance. International Financial Reporting Standards (IFRS), which are set by the International Accounting Standards Board (IASB), contain similar guidance around minority interest reporting.

Multiples should be applied judiciously in conjunction with DCF models and market comps. Weightings can be assigned to each methodology to derive a final valuation range for the subsidiary and minority interest calculation. When valuing a subsidiary as part of a minority interest calculation, it is important to consider both the market value and book value of the subsidiary’s assets. The market value reflects the subsidiary’s worth based on current market conditions, while the book value is based on the historical cost of the assets less depreciation and amortization. The income statement method calculates minority interest expense each period, while the balance sheet approach determines minority interest at a point in time.

When a business has a minority interest in another entity and it has no substantial influence over that entity, the business accounts for its ownership share using the cost method. If dividends are received from the other entity, they are recorded as dividend income. Besides these, the rights of minority shareholders to view and inspect the company’s records, vote, and get dividends can all affect the minority shareholder valuation.

1. For example, suppose that Company A acquires a controlling interest of 75% in Company B. The latter retains the remaining 25% of the company.
2. It goes beyond just reporting dividends received and requires recognizing a proportional share of income/losses.
3. In addition, there is no general agreement over how the representation of minority interests should occur.
4. For these ratios to be meaningful, the numerator must be adjusted to allow for an “apples to apples” comparison between EV and Total Sales, EBIT, and EBITDA, etc.
5. When calculating a company’s enterprise value (EV), it is important to consider how minority interest is treated.
6. The minority may be granted certain privileges, such as the ability to participate in sales, under specific circumstances.

For example, if Company A buys 60% of Company B, Company B becomes a majority-owned subsidiary of Company A. The remaining 40% of Company B not owned by the parent is the minority interest. Companies seeking a hostile takeover of another company, seek to acquire a controlling interest in the target company by acquiring enough shares. In some cases, a minority may have some rights such as the ability to take part in sales.

With TRG International Blogs, it is our mission to be your preferred partner providing solutions that work and we will make sure to guide your business to greatness every day. Careful normalization adjustments are required to ensure consistency when benchmarking consolidated statements vs standalones. Understanding minority interest finance concepts can seem complicated for those unfamiliar.

Modeling subsidiaries individually

This indicates the parent has effective control over the subsidiary’s operations and policies. Partial consolidation recognizes that non-controlling shareholders still maintain an interest in the subsidiary. As such, their portion of the subsidiary’s equity and net income are reported separately.

Below is simplified financial information from XYZ’s balance sheet and income statement. Prior to 2008, minority interest could be reported as either equity or a noncurrent liability under the rules of U.S. This ambiguity was later what is minority interest eliminated by a requirement to report minority interests with the parent company’s equity.