How to Account for Non Controlling Interest
Non controlling interest, also known as minority interest, refers to the ownership stake in a subsidiary that is not held by the parent company. This situation arises when the parent company owns less than 100% of the subsidiary’s shares. Accurately accounting for non controlling interest is crucial for providing a true and fair view of the consolidated financial statements. In this article, we will discuss the various methods and considerations involved in accounting for non controlling interest.
1. Initial Recognition
When a parent company acquires a subsidiary, the initial recognition of non controlling interest is essential. According to International Financial Reporting Standards (IFRS) 3, the non controlling interest is recognized at fair value. This fair value is typically the proportionate share of the net assets of the subsidiary that is not owned by the parent company.
2. Consolidation Process
Once the non controlling interest is recognized, it is crucial to properly consolidate the financial statements of the parent and the subsidiary. The consolidation process involves combining the assets, liabilities, and equity of the subsidiary with those of the parent company. The non controlling interest is reflected in the consolidated equity section of the balance sheet.
3. Measurement and Reporting
The measurement and reporting of non controlling interest are vital for maintaining transparency in the consolidated financial statements. The following methods are commonly used:
– Cost Method: Under this method, the non controlling interest is reported at its initial recognition amount, which is the proportionate share of the fair value of the net assets of the subsidiary. This method is simple and widely used, especially when the parent company has no significant influence over the subsidiary.
– Equity Method: The equity method is used when the parent company has significant influence over the subsidiary but does not have control. Under this method, the non controlling interest is initially recognized at fair value and subsequently adjusted for the parent company’s share of the subsidiary’s profits or losses and dividends.
– Proportionate Consolidation: This method is used when the parent company has a significant influence over the subsidiary but does not have control. The non controlling interest is reported in the consolidated financial statements proportionately, reflecting the parent company’s share of the subsidiary’s assets, liabilities, and equity.
4. Disclosure Requirements
It is essential to disclose the nature and extent of the non controlling interest in the consolidated financial statements. This includes information about the ownership percentage, the accounting policy used, and any significant transactions or events affecting the non controlling interest.
In conclusion, accounting for non controlling interest is a complex process that requires careful consideration of various factors. By following the appropriate accounting standards and ensuring transparency in reporting, companies can provide a true and fair view of their consolidated financial statements.
