Crash Course in Accounting and Financial Statement Analysis, Second Edition

Minority Interest

Companies make frequent investments in other companies. Recall our earlier discussion of three accounting methods through which corporations record them:

1. Cost or market method: Typically used for investments comprising less than 20% ownership stake in another business entity. These investments are represented on the balance sheet as an asset line item called “Investments in Securities.”

2. Equity method: Typically used for investments comprising a 20% to 50% ownership interest in another company, recognizing a certain level of operational and strategic control. Represented on the balance sheet as an asset line item called “Investment in Affiliates.”

3. Consolidation method: Used for investments of greater than 50% in another business entity to reflect the investing company’s virtually complete operational and strategic control of the entity.

   • All financial reports of these majority-owned investments are consolidated into the parent company’s financial statements.

   • Note that even if a company does not own the entire subsidiary, but owns more than 50% of it, the company still consolidates all of the subsidiary’s assets and liabilities.

   • The company accounts for the portion of the subsidiary that it does not own in a line item called “Minority Interest.”

Companies that hold a majority ownership of more than 50% but less than 100% must account for minority interest they do not own. Minority interest represents ownership by the subsidiary’s shareholders who hold the remaining minority ...