Minority interest is the percentage of equity that minority shareholders have in a company’s subsidiary. In the holding company’s balance sheet, minority interest is recorded in the shareholder’s equity section.
What does minority interest mean?
Minority interest, which is also known as non-controlling interest, always represents a holding of less than 50% in a company.
Consider a situation where company A holds 80% of the equity of company B. By virtue of this shareholding, company B is company A’s subsidiary. The assets and liabilities of company B are combined with company A’s in the consolidated financial statements prepared by company A.
However, company A does not own company B completely. Minority shareholders hold 20% of the equity of company B. The interest of these minority shareholders is reflected in company A’s balance sheet in the shareholder’s equity section.
Minority shareholders often don’t have a say in the management. In the example described above, a majority of company B’s equity is held by company A. Consequently, company A will manage company B. The shareholders of company B who hold only 20% of its equity are passive investors.
Why should a parent company allow a minority interest in its subsidiary? There are usually two reasons for this. One, some shareholders of company B may not want to sell their stock. Secondly, company A needs to own only 51% of company B to control its management.
Example of minority interest
GE is a giant multinational conglomerate. It has equity holdings in a large number of subsidiary companies. The following extract from its financial statements for the year 2017 indicates that the minority interest on December 31, 2017, is $17.506 billion.
GE – Statement of Financial Position. Figures in millions of dollars
Note that minority interest is referred to as Noncontrolling interests.
A minority interest represents a holding of less than 50% of a company’s equity. This portion of the equity is not owned by the parent company and is separately reflected in the parent company’s financial statements.