What’s it: Minority interest or non-controlling interest refers to a small proportion of shareholders in companies where more than 50% control is held by holding company. Hence, ownership is less than 50%.
Minority interest in accounting and the financial statement reporting
In presenting the financial statements, the parent company consolidates the balance sheet of the subsidiary as if it were full ownership, even if only partially owned.
The company also presents minority interests in the balance sheet in such a way that users of financial statements can see clearly all-controlling interests in the parent company. Under IFRS, the company presents it in the equity section, separate from the parent’s equity.
Meanwhile, under US GAAP, the presentation is more flexible. The parent company can choose to present it as a non-current liability or as part of equity.
Meanwhile, in the consolidated statements of income, the company reports a portion of the profits belonging to minority shareholders on a separate account.
Let’s take the case of PT Astra Agro Lestari Tbk (AALI) case. AALI reported a consolidated net profit of Rp1.52 trillion in 2018. However, of the total net profit, around 5% or Rp82.2 billion was attributed to minority shareholders. Therefore, net income, which was ultimately attributed to AALI shareholders amounted to Rp1.44 trillion.
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Meanwhile, in the balance sheet, AALI’s non-controlling interests are liabilities, which amounted to Rp.484.9 billion. This figure represents the percentage of ownership by minority shareholders.
Reporting methods
Accountants classify minority ownership as active and passive, depending on the portion of ownership. Passive interest if ownership is below 20% in the voting shares of a subsidiary. The company records it using the cost method. When receiving dividends, the company reports it as a dividend income.
Meanwhile, minority interests are active if ownership ranges from 21% to 49%. Accountants use the equity method when reporting on the balance sheet.
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Implications
Minority shareholders have a weaker power in voicing their interests. They cannot exercise control over the company through voting. Conversely, the majority shareholders can oppress them and abuse their power when there are differences in interests.
These differences in interests often arise in some corporate actions in which they must decide, such as:
- Merger and takeover
- Raising company capital
- Dismissal and appointment of directors or commissioners
- Initial public offering or stock buyback
Furthermore, minority rights do not meet the prerequisites to be presented as equity in the consolidated balance sheet. However, it is also not debt because the company has no obligation to pay as in bonds or bank loans.
