The Financial Accounting Standards Board released FASB Statement No. 160 to introduce a single standard for how companies account for minority interests. The statement is effective for fiscal-year ends after Dec. 15, 2008. Before this guidance, companies reported their minority interest on consolidation in many different ways. Often, it was shown as a liability on the balance sheet and did not accurately reflect the nature of the ownership.
Definition of a Minority Interest
A minority interest is also called a non-controlling interest. It represents an ownership investment in a company that is controlled by another entity. Control is most often defined as owning 50 percent or more of the voting shares. For example, if Jones Inc. owned 75 percent of Sub Inc. and Min Inc. owned the other 25 percent, Min Inc. is a minority shareholder. Because Jones Inc. owns more than half of the voting shares, it will have to consolidate Sub Inc.'s financial statements into its own. Part of that consolidation will be recognizing Min Inc.'s minority holding.
The net balance of the minority shareholder's equity claim on the company must be reported in the equity section of the consolidated statement rather than as a liability. The amount of income in the current year that represents the minority shareholder's income increases the equity balance, and any repayment of contributed capital reduces it. If there is more than one non-controlling interest in the company, each equity section must be separate and clearly record only transactions related to that interest.
FASBs Statement No. 160 requires that the consolidated financial statements apportion the net income on the statement of profit and loss between the ownership interests. The income attributable to the parent company must be shown separately from that of minority owners. Before the date for which the statement is active, the income related to the minority interest was often reported as an expense on the profit and loss statement, leaving only the net income related to the parent's interest.
Changes in Ownership
Changes in the parent's ownership of a subsidiary must be recorded as equity transactions. Before Statement No. 160, these types of transactions often generated gains or losses on the profit and loss statement rather than simply adjustments to equity in the consolidated statements. A gain or loss is still recognized if the ownership change results in a loss of control and, thereby, a non-consolidated statement.