Non Controlling Interest in Business Combination With Examples

What is Non Controlling Interest

A non controlling interest is the authority benefit in case of combination of companies, the investors have no effects with the current status of business position. Net controlling interest can be calculated with the help of net asset values. Non controlling interest is measure when the authority issues are related to outstanding shares. It means any shareholder having less than 50% shares can be included in NCI but some time influence of such shareholders are higher while they have less than 50% shares. Also classified that NCI measured for accounting purpose or for strategic planning.

In many large publicly authorized companies, a bulk of outstanding shares is traded so a small position not disturbs its major decisions so that we calculate NCI.

Normally two Types of Non Controlling Interest we consider;

First is direct non controlling interest which includes pre acquisition and post acquisition equity and second is indirect non controlling interest which only includes post acquisition equity

In calculating NCI, combined equity is used and unrealized profit or loss adjusted in transactions with in group. Companies should provide clear information to investors regarding Non controlling interest because it will provide better information about group financial position, cash flow and financial results, also include risk. With the help of NCI, investor verify the actual value of assets and their portion in NCI. Investor also check the NCI effect on ratios and financial items.

Many shareholders received a right with the purchase of common shares, also include the right to receive cash dividend when company earn additional revenue. Shareholders also use their voting right in important company issues, merger or sale or in any other case.

Consolidation is a combined financial statement that merges the record of different elements in one place. Parent company, subsidiary company and NCI Company are part of it. Investors, creditors and company managers take all three companies as a single entity after consolidated financial statements. It shows that parent and NCI Company jointly purchase subsidiary company. Before consolidated statements, all those transactions are removed which occur between parent and subsidiary or parent and NCI. Here we assume an example, a parent company purchase 70% shares of ABC company, and 30% purchase by NCI company of subsidiary. Fair market value is considered of assets and liabilities of subsidiary and used in financial statements. If NCI and parent company pay to subsidiary more than fair value of assets and liabilities then the extra amount is consider as goodwill. Goodwill is an additional amount pay to subsidiary and amortized as expense.

Apply this study on collaborative holders; a non controlling interest is the authority interest in subsidiary company which is hold by exterior investors not by parent company. Normally minority interest means below 50% share holder in subsidiary company. Parent company present financial outcomes in their combined balance sheet statement of subsidiary company, declare the shares by minority shares and in its combined income statement shows as profit percentage related to minority shareholders. Minority shareholders has less interference in company’s decision or management matter, also having limited right of voting but on other side they are helpful for the growth and development of company.

There are too much rules to combine subsidiaries based on authority percentage and interference. Authority of interference is not in few hands. Minority shareholders also have a reasonable affect on company’s decisions although they didn’t hold majority portion. Like the example of Bill Gates, who only hold 8% in Microsoft before retirement but its influence on Company’s decision is very strong and preferable.

Non controlling interest is the part of capital authority in a subsidiary not related to parent company, which has more than 50% holding shares and also make combined financial statements.

For example, a Beta company achieves 85% of the stock outstanding of company Alpha. Beta can combine the financial statements for its own purpose because it acquires more than 50% shares. The 15% remaining Alpha’s equity is recorded as NCI in the financial statements of Beta. Combined income represent the according to authority percentage of Beta and non controlling interest: 85% to Beta and 15% to NCI.

NCI is saved in the section of shareholder’s equity of the balance sheet of parent differ from parents’ equity except the calculation of liabilities and equity.

The amount of combined income must be clearly mentioned which is related to parent and Non controlling interest and appear in combined income statement. Before this NCI is measured as an expense in combined income statement.

Whenever non controlling interest is gained less than 100%, all 100% assets are measured at their fair value. Before this, controlling interest calculated at fair value while non controlling interest measured at caring value but according to new rules goodwill related to both, NCI and acquirer.

As we know NCI is part of equity, any differ occur in controlling interest of parent in subsidiary which not affect its authority show as transaction. Before this, any change in equity control show as a new transaction or gain or loss in the income statement.

Acquiring the more non controlling interest is another acquirement while parent already has complete authority. Before this purchase method is used for  such type of transaction but now no need for using this method which decrease parent’s cost  also remove the additional working of assets and liabilities of subsidiary ‘s more acquire shares.

All the loses related to non controlling interest and parent companies related to subsidiary is according to their interest in subsidiary, even adverse result is show. Before this, according to ARB 51, all the loses related to subsidiary were recorded in non controlling interest except parent’s equity. But now parent company also shows its loss portion separately with non controlling interest.

Parent considers all the losses and gains when it separates the subsidiary. As we know parent and non controlling interests related to subsidiary equity, the whole investment is calculated with the help of fair value of non controlling equity investment. Before carrying amount was utilize but now fair value amounts are considered favorable.

In simple words, when we merge two or more companies, like parent and subsidiary then according to portion of authority we also calculated non controlling interest as part of measurement but not included in the equity of parent. Non controlling interest shows the portion not include in parent. All assets are measured at fair value. All the losses and gains are calculated fairly and become the part of parents and non controlling interest also. So, it’s clear that calculation of non controlling interest is very important in case of business combination and we have to clearly understand its methods and process to find out the correct values for the betterment of business.