How to Calculate Minority Interest

A minority interest represents less than 50% ownership in a company. You can calculate it by multiplying the book value of a subsidiary by the total percentage owned by its minority shareholders. We explore the definition of minority interest a little further below along with further details on how to compute it.

What Is a Minority Interest?

The minority interest in a subsidiary refers to ownership of less than 50% by shareholders who don’t have a controlling interest in the parent company. The parent company has a controlling interest in the subsidiary when it owns between 50% and 100% and consolidates the financial results of the subsidiary with its own on its financial statements.

The idea of minority interest is applied only when the majority ownership share in a subsidiary exceeds 50% but is less than 100%. A parent company may want to own less than 100% for several reasons. Achieving control of a subsidiary with less than 100% capital investment puts less capital at risk of loss.

Since control is obtained when the ownership percentage goes above 50%, investing 51% guarantees control and presents less risk to capital compared to an investment of 100%. It may also be hard to acquire all shares in a subsidiary, since some of the existing shareholders may not be willing to part with their stock.

Suppose Company A acquires a controlling interest of 75% in Company B. The latter retains the remaining 25% of the company. That portion represents the minority interest.

On its financial statements, Company A cannot claim the entire value of Company B without accounting for the 25% that belongs to the minority shareholders of Company B. Thus, Company A must incorporate the impact of Company B’s minority interest on its balance sheet and income statements.

How to Measure Minority Interest

There are a few basic steps to measuring minority interest:

1. Find the subsidiary’s book value or net asset value (NAV) as it appears on its balance sheet. This is the company’s total assets less the intangible assets and liabilities.
2. Multiply the book value by the percentage of the subsidiary owned by the minority shareholders.

If we use 25% from the example above for the minority share percentage and assume the subsidiary’s book value to be $2 million, then our minority interest will equal 25% x $2 million = $500,000. Once the dollar value of minority interest is calculated, we record it on the balance sheet as part of the equity section.

Compute the net income that belongs to the minority interest owners of the subsidiary. This is simply the subsidiary’s total net income multiplied by the minority interest percentage. Again, using the 25% minority interest percentage, and an assumed net income of $1 million, we calculate our minority income as 25% x $1 million = $250,000.

This amount is then recorded as a separate non-operating line item, such as “net income attributable to the minority interest,” on the consolidated income statement of the parent company.

Accounting Treatment of Minority Interest

When a controlling interest in a subsidiary is achieved, the consolidated method of accounting for share purchase is used. This method requires that many line items in the financial statements of the parent incorporate the financial results of the acquiree, i.e. reflect a fictitious 100% ownership of the subsidiary.

The parent must, however, maintain separate accounts on the balance sheet and income statement that track the value of the minority interest in the subsidiary, as well as its profit belonging to the minority owners.

The other two methods are the cost method, where the parent owns 20% or less of the subsidiary’s voting stock, and the equity method, where the percentage of ownership is 21% to 49%. Neither method uses minority interest to report a subsidiary’s share of assets or income anywhere on the parent’s financial statements. 

Under generally accepted accounting principles (GAAP), the financial accounting treatment of minority interest requires that it be recorded either as a non-current liability or as part of the equity section on a consolidated balance sheet of the parent company to reflect non-controlling shareholders’ claim on assets.

Under International Financial Reporting Standards (IFRS), however, it can be reported only in the equity section of the balance sheet. It must be recorded as equity, but separate from the parent’s equity. On a consolidated income statement, minority interest is recorded as a share of the minority shareholders’ profit, in compliance with Financial Accounting Standards Board (FASB) standards.

Importance of Calculating Minority Interest

Minority interest is important in analyzing prospective investments. It is most often used in calculating the enterprise value (EV) of a company and is treated much like the company’s debt and added to the market capitalization to arrive at the company’s enterprise value:

EV = Market Value (MV) of Common Stock + MV of Preferred Equity+ MV of Debt + Minority Interest – Excess Cash & Investments

Hence, the main use of the minority interest is in valuation ratios, such as the Enterprise-Value-To-Sales (EV/Sales), Enterprise Multiple (EV/EBITDA), etc. As we already know, the consolidation method of accounting for an investment in a subsidiary requires that 100% of the subsidiary’s sales or EBITDA be included on the parent company’s income statement, even in cases when the parent owns less than 100% of the subsidiary.

For this reason, and to ensure consistency, we need to add minority interest so that the parent does not own back to the EV. This ensures that both the numerator and the denominator of the above ratios reflect 100% of the subsidiary’s financials, even if the parent owns less than 100% of it.

Example of Minority Interest Calculation

Let’s look at a hypothetical example of an acquisition and apply our calculation of minority interest to it. Company ABC enters into an agreement to acquire Shoe House XYZ for $54.3 billion.

For the purpose of this exercise, we will assume that the agreement is for a controlling interest of 90% in XYZ. Below is simplified financial information from XYZ’s balance sheet and income statement.

Balance Sheet