Let Us Find About Minority Interest Valuation

The world of shares and accounting is quite a huge one. There are numbers of terms and concepts related to the same, and minority interest is one of them. In simple words, the term minority interest refers to the non-controlling interest or NCI in short. It is the share of a subsidiary company’s stock which the parent organization does not have control over. Hence, it is quite obvious that the amount of such share or stock usually remains less than 50 perfect of the total outstanding stocks. In other words, it can also be said that in this case, the company would no longer be a part of the parent organization.

Nevertheless, it is also possible that through the process of voting, certain amount of control is provided to the parent organization over the subsidiary company. But, it would be less than 50 percent again. Here, minority interest is related to other stock holders and the same is reported on the merged balance sheet of the company that owns the subsidiary. So, how to calculate the value of minority interest? In other words, how to do minority interest valuation? Let us find out.

Process of minority interest valuation

In the accounting department, a shareholder from the minority category will not hold the financials of the subsidiary company in the merged financial statements. Hence, in this kind of case, just the dividends related to the subsidiary company would be incorporated. But, in case the minority stockholders can use their influencing power then in it would lead to a different situation; in this situation, the dividends as well as a pro-rata fraction of the income generated by the subsidiary company will also be included.

When it comes to calculating the amount of minority interest stock in the subsidiary, there are certain steps involved. The first step is about figuring out the book value of the subsidiary company on the balance sheet it has. In the next step, you have to multiply the amount obtained in the first step by the percentage that the parent company owns. Let us provide you a simple example. Suppose, a public company A has control over 10 percent of the share of another company B; the total worth of company B accounts to 1 billion USD. In this case, the amount of minority interest would be 100 million USD.

So, minority interest valuation is really simple to understand. As a matter of fact, the rules associated with accounting need the parent company to put on the percentage of ownership it has on the subsidiaries. In addition, the amount of minority interest also has to be included in the balance sheet, particularly under the section of shareholders equity. As a matter of fact, the same amount of percentage can be used for deducing the fraction owned as well as the dividends and income related to the subsidiary. So, that is all about the valuation of minority interest. When it comes to the evaluation part, it is better to rely on experienced professionals.

The net income of the minority interest owners is then calculated. It is achieved by multiplying the total net income of the subsidiary by the minority percentage ownership (percent owned by the minority group).