Minority interest is defined as the ownership value of an individual or business that owns less than 50 percent of a business. Minority interests develop when businesses merge or a seller retains a small percentage of his recently sold company. Minority interests generally do not have a great economic impact on the financial status of a business, but they are included in the company's balance sheet numbers.
In order to understand the minority interest in profit and loss, it is important to first understand the relationship between the parent company and its subsidiary. The parent company is the entity that owns over 50 percent of the business, and the subsidiary is the entity that owns less than 50 percent. When preparing the accounting for the business, the parent company's majority interest will be listed in all categories, including assets and liabilities. The subsidiary's interests will also be included in the parent company's report to give a complete financial picture of the net worth of the business.
Income statements list the profits and losses of a business. This information is used to provide a global financial picture of how a company is doing for a specific period. Minority interests must be included in this statement to give an accurate financial report. The income statement usually lists the minority interest as a non-operating line item. This means the profits or losses by the minority interest are not a primary part of the business.
FAS No. 160
The Financial Accounting Standards Board issued FAS No. 160 to address issues concerning the proper way for a parent company to report a minority interest in a business. The board decided that parent companies should report minority interests as equity. Further, all income statements for the company must disclose both the parent company and minority interest's consolidated net income on the face of the statement to show the true value of the business.
A minority interest's losses are always included in the income statement for the parent company. Even if the losses place the minority's interest in the negative numbers, it must still be included to give an accurate financial report of the business. The minority interest losses must continue to remain on the books even if they continue to accrue over time and cause the minority interest to have a deficit in the company.
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