What it means
Group accounts work on the principle of control rather than ownership percentage. If a parent controls a subsidiary, typically through owning more than half the voting shares, it must consolidate the whole of that subsidiary line by line, even if it owns only 60% or 80% of it.
That creates an obvious problem: the consolidated numbers include revenue and profit that partly belong to somebody else. The non-controlling interest is the accounting device that fixes it, appearing in two places in the statements.
On the balance sheet it sits within equity as a separate line, representing the outside shareholders' share of the subsidiary's net assets. On the income statement, total profit is split at the bottom into the amount attributable to the owners of the parent and the amount attributable to the non-controlling interest.
This split matters for anyone reading the numbers. Earnings per share is calculated on profit attributable to the parent's owners only, so using total consolidated profit inflates it, and return on equity is distorted in the same way if the non-controlling portion of equity is left in the denominator.
One nuance worth knowing is what happens when the parent's stake changes without control changing. Buying an extra slice from the minority, or selling one while keeping control, is treated as a transaction between owners and goes through equity, so it produces no gain or loss in the income statement.
In practice
Real-world examples
Example 1
A drinks group owns 75% of a regional bottling company that earns $4,000,000. The group accounts consolidate all of the bottler's revenue and costs, then allocate $1,000,000 of profit to the non-controlling interest and $3,000,000 to the group's own shareholders.
Example 2
An engineering firm holds 70% of a joint venture it controls. An analyst comparing it with a competitor has to remember that consolidated revenue includes all of the venture's sales even though nearly a third of the profit belongs elsewhere.
Example 3
An infrastructure group buys a further 10% of a subsidiary it already controls, taking its stake from 80% to 90%. No gain or loss appears in the income statement, because the transaction simply reallocates amounts within equity.
Think of it
Think of buying an apartment building with three friends. You put in eighty percent of the money and take charge of managing the property, but your friend holds the remaining twenty percent key and gets a corresponding slice of the rental income.
Formula
Calculation
Non-controlling interest in profit = Subsidiary profit x percentage not owned by the parent
Non-controlling interest in equity = Subsidiary net assets x percentage not owned by the parent
A parent company owns 80% of a subsidiary, so the non-controlling interest is 20%. The subsidiary earns a net profit of $2,500,000 for the year and has net assets of $12,000,000. The parent's own operations earn $8,000,000.
Non-controlling interest in profit = $2,500,000 x 0.20 = $500,000
Parent's share of subsidiary profit = $2,500,000 x 0.80 = $2,000,000
Total consolidated profit = $8,000,000 + $2,500,000 = $10,500,000
Attributable to owners of the parent = $8,000,000 + $2,000,000 = $10,000,000
Attributable to the non-controlling interest = $500,000
Non-controlling interest in equity = $12,000,000 x 0.20 = $2,400,000
If the parent has 5,000,000 shares in issue, earnings per share is $10,000,000 / 5,000,000 = $2.00, not the $2.10 that the total consolidated profit would suggest.Case study
Seen in the real world
Halcyon Foods Group is a fictional listed food business presented here as an illustrative example. It owns 60% of a fast-growing chilled snacks subsidiary that contributes $40,000,000 of revenue and $3,000,000 of profit, while the parent's other operations earn $6,000,000.
An investor building a quick valuation model takes the total consolidated profit of $9,000,000 and divides it by the 6,000,000 shares in issue, arriving at earnings per share of $1.50. The reported figure is lower, because $3,000,000 x 0.40 = $1,200,000 of that profit belongs to the non-controlling interest, leaving $9,000,000 - $1,200,000 = $7,800,000 attributable to the group's own shareholders and earnings per share of $7,800,000 / 6,000,000 = $1.30.
The investor's shortcut overstates earnings by roughly 15%, and the error grows as the subsidiary grows. In this illustrative case the mistake is caught before an investment is made, but it demonstrates why the two-line profit split at the foot of the income statement is worth reading rather than skipping.
Watch out
Common mistakes
- Using total consolidated profit for earnings per share instead of the profit attributable to the owners of the parent.
- Treating non-controlling interest as a liability, when accounting standards place it firmly within equity.
- Assuming consolidated revenue represents sales the parent's shareholders fully own, when a partly owned subsidiary is consolidated at 100%.
Questions
People also ask
Is non-controlling interest the same as minority interest?
Yes, non-controlling interest is the current term and minority interest is the older one for the same concept.
What if a parent owns less than 50% of a company?
Then it usually does not control it, and the holding is accounted for using the equity method or as an investment rather than consolidated.
Does a non-controlling interest get a share of goodwill?
It can, depending on whether the group measures it at fair value under the full goodwill method or at its share of net assets under the partial method.