Non-Controlling Interest

A non-controlling interest (NCI) is the portion of a subsidiary's equity that is not owned by the parent company. NCIs can arise when a company acquires a controlling interest in another company, but does not acquire all of the shares. In such cases, the parent company will own a majority of the shares and will have control over the subsidiary, but the minority shareholders will retain a minority interest in the subsidiary.

NCIs are accounted for using the equity method. This means that the parent company will record its share of the subsidiary's net income or loss in its own income statement. The parent company will also record its share of the subsidiary's assets and liabilities on its balance sheet.

The NCI is calculated as the minority shareholders' share of the subsidiary's net assets. This is equal to the minority shareholders' share of the subsidiary's total assets minus the minority shareholders' share of the subsidiary's liabilities.

NCIs can have a significant impact on the parent company's financial statements. For example, if the subsidiary is profitable, the NCI will increase the parent company's net income. Conversely, if the subsidiary is unprofitable, the NCI will decrease the parent company's net income.

NCIs can also affect the parent company's return on equity (ROE). ROE is a measure of how efficiently a company uses its equity to generate profits. NCIs can reduce a company's ROE because they dilute the parent company's ownership of the subsidiary.

NCIs can be either temporary or permanent. A temporary NCI occurs when a company acquires a controlling interest in another company, but does not acquire all of the shares. The NCI will become permanent if the parent company eventually acquires all of the shares of the subsidiary.

Permanent NCIs can be either marketable or non-marketable. A marketable NCI is an NCI that can be sold on the open market. A non-marketable NCI is an NCI that cannot be sold on the open market.

The accounting treatment of NCIs depends on whether they are temporary or permanent. Temporary NCIs are accounted for using the equity method. Permanent NCIs are accounted for using the fair value method.

The fair value method is used to account for permanent NCIs because it is more reflective of the true value of the NCI. The fair value of an NCI is the price that would be paid to acquire the NCI in an arm's-length transaction.

The fair value method is more complex than the equity method. However, it is more accurate and provides more information about the value of the NCI.