Crash Course in Accounting and Financial Statement Analysis, Second Edition

Minority Interest

When companies have an influential and controlling investment in another company (defined typically as ownership between 50% and 100%), they will account for their majority ownership using the consolidated method of accounting:

Consolidated simply means that financial reports of the parent company contain all financial information (revenues, net income, etc.) of all businesses in which it holds 50% to 100%.

Since companies often hold a majority ownership of less than 100%, they must eliminate income for minority interests, that is, the minority income belonging to other shareholders, by recording a minority interest expense on the income statement.

16. Minority Interest

Exercise Q1: Company A owns 80% of Company B, which just reported net income of $10 million. How much of minority interest expense should Company A record?

16. Minority Interest

Solution 1: Minority interest must reflect the 20% stake of Company B not owned by Company A: 20% x Net Income from Company B = 20% x $10 million = 20% of $8 million = $20 million