In this article, the relationship between a subsidiary and a parent company will be viewed in detail to address issues relating to minority interest and how they pertain to financial consolidation.
What is minority interest?
If company X buys 100% ownership of company A, company A then becomes the wholly-owned subsidiary of the parent company X. By contrast, when company X only acquires, for example, 80% equity ownership of company A, company A then becomes the partially-owned subsidiary of X.
The 80% ownership is the majority interest (controlling interest) that is attributable to the parent company, while the remaining 20% is the minority interest—the equity in a subsidiary that is not attributable, directly or indirectly, to a parent.
Minority interest (non-controlling interest or NCI) is the proportion of equity or net assets in a subsidiary that is neither directly nor indirectly attribute to a parent . While the parent has to consolidate its subsidiaries’ assets, liabilities, etc., into its financial statements, the asset/income attributable to minority interest should not be added to the group’s consolidated financial statements.
A subsidiary with minority shareholders must also provide its separate financial statements.
How to show minority interest in consolidated financial statements
In the consolidated balance sheet, the minority interest should be shown within equity, but separate from the parent’s shareholders’ equity. Profit/loss of the minority interest should also be shown separately, instead of leaving it to be deducted from the consolidated income statement.
If loss is attributable to the minority interest that exceeds the minority interest’s equity, these excess losses are attributable to the group, unless the minority is obliged to and able to pay for the losses. When excess losses are accounted for by the group, any profit recognised for the minority interest in subsequent periods will be attributable to the group until excess losses are recovered.
Transactions with NCI: How is purchase or disposal of equity in a subsidiary accounted for?
A parent company might enter into transactions that result in changing its equity interest in a subsidiary. Some examples are:
- The parent acquires additional ownership or disposes some of its ownership over a subsidiary
- The subsidiary buys back equity ownership
- The subsidiary issues new equity shares to the parent, NCI shareholders, or third parties
Transactions that increase or decrease the parent’s ownership but do not result in a loss of control over the related subsidiary (i.e., the parent company still retains more than 50% ownership of the subsidiary) are accounted for as transactions with equity holders in the consolidated financial statement.
When the carrying amount of the subsidiary’s net assets remains unchanged and no gain/loss arose from these transactions, these assets are recognised in the consolidated income statement. The carrying amount of minority and majority interest is adjusted to reflect changes in a parent’s ownership of the subsidiary (e.g., increases in NCI, decreases in majority interest, and vice versa).
Any difference between the adjustment made to the carrying amount of NCI and the fair value of the consideration paid (for acquiring ownership interest) or received (for disposal of ownership) shall be recognised directly in equity attributable to the parent.
If the parent disposes its ownership interest over a subsidiary (e.g., through disposal of shares) that results in loss of controlling interest, the parent shall deconsolidate the subsidiary, i.e. remove the previously recognised subsidiary’s assets, liabilities, and NCI from the consolidated financial statement.
However, gain/loss and fair value of consideration received from the disposal of equity will be recognised. In addition, although the company ceases to have majority interest, it may still retain minority interest in the subsidiary. That retained NCI is measured and recognised at fair value and is used to calculate gain/loss from the deconsolidation.
Confused about how to account for transactions between subsidiaries and parent companies? Don’t miss our next blog, where intercompany transaction issues will be examined in detail.