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In this blog, we will cover various scenarios in which we calculate Non Controlling Interest. Non Controlling Interest (Minority Interest) is calculated when acquirer doesn’t acquire 100 percent stake in the company but more than 50 percent stake. This concept will be relevant in BPC or BoFC implementations. 

 

Non Controlling Interest

Non Controlling Interest (Minority Interest) is calculated when acquirer doesn’t acquire 100 percent stake in the company but more than 50 percent stake. As we have majority stake in the company we are/can financially and operationally governing the company. So in acquisition method, we add all the assets and liabilities of the subsidiary directly and then to account for the assets/liabilities we don’t own we keep Non Controlling Interest entry in Balance sheet. Read the below example and the concept will be clear.

 

Scenario 1 Non Controlling Interest:

Company P acquires 100 percent stake in company S

Assumption: Book values represent fair value of the company’s assets and liabilities.

 

Company P Balance Sheet

Asset                                    Liabilities + Owner’s Equity

100                                              60         +             40

 

Company S Balance Sheet

Asset                                   Liabilities + Owner’s Equity

40                                               30        +             10

Now since we are acquiring 100 percent stake in the company, add assets and liabilities of the company directly.

 

Consolidated Balance Sheet

Asset                                   Liabilities              +             Owner’s Equity

140  (100 + 40)                            90 (60 + 30)      +        50

 

Notice there is no Non controlling interest in the consolidated balance sheet as 100 percent stake is owned by Parent company. Owner’s Equity increased from 40 to 50.

Assumption: Book Values of the company represent fair value.

Value of the company = Asset – Liabilities = 40 – 30 = 10.

To acquire the company parent company has issued shares worth 10 units, therefore owner’s equity increased from 40 to 50 in the consolidated balance sheet.

 

 Scenario 2 Non Controlling Interest:

Company P acquires 80 percent stake in company S and book values represent fair value of the company’s assets and liabilities. Since we own only 80 percent stake in the company ideally we should only add 80 percent of the assets and the liabilities of the company in the consolidation, but in acquisition method we add 100 percent of the assets and liabilities and to represent the 20 percent stake we don’t own, we show it as Non controlling interest on the liability side of the balance sheet.

 

Company P Balance Sheet

Asset                                    Liabilities + Owner’s Equity

100                                              60            +             40

 

Company S Balance Sheet

Asset                                   Liabilities + Owner’s Equity

40                                                  30       +             10

Since we own only 80 percent stake in the company we should have only added 40 * .8 = 32 Asset and 30 * .8 = 24 liabilities from the target company but in acquisition method we will add 100 percent of the assets and 100 percent of the liabilities i.e. Assets = 40 & Liabilities = 30 and to represent 20 percent stake we don’t own we will use NCI (Non controlling interest Account).

To calculate NCI:

Let us assume Book values represent fair value of the target company.

Value of the company is Asset-Liability i.e. 40-30 = 10.

To buy 80 percent of the company, Parent company would have paid 8 (80 percent of 10) to get the stake. Value of the stake which doesn’t belong to Parent company is 2 (20 percent of 10).

 

Consolidated Balance Sheet

Asset                                 Liabilities              +             Owner’s Equity   

140  (100 + 40)                         90 (60 + 30 + 2)      +                 48     

 

 Scenario 3 Non Controlling Interest:

Company P acquires 80 percent stake in company S, in this case book value does not reflect fair value.

 

Company S Balance Sheet (Book Value)

Asset                                  Liabilities           +             Owner’s Equity

40                                                 30                                  10

Book Value of Company S = Asset – Liabilities = 40 – 30 = 10

 

Company S Balance Sheet (Fair Value of Assets/Liabilities)

Asset                  Liabilities               +             Owner’s Equity

55                                  35                                20

Fair Value of Company S = Assets – Liabilities = 55 – 35 = 20

Value of 80 percent stake in the company = .8 * 20 = 16

Since the acquirer company feels that Target Company makes strategic sense for it, so it is ready to pay more than the fair value to acquire 80 percent stake.

Amount paid by company P to acquire 80 percent stake = 20 (Given).

Goodwill = amount paid to acquire stake – fair value of the stake

            = 20 – 16 = 4

 

Company P Balance Sheet

Asset                       Liabilities       +             Owner’s Equity

120                                80           +                  40

 Consolidated Assets = Assets of parent company + Assets of Subsidiary Company (fair value) + Goodwill

          =   120              +        55             +   4

Consolidated Liabilities = Liabilities of parent company + Liabilities of Subsidiary Company (fair value) +    NCI

             = 80              +      35              +    4

Non Controlling Interest Calculation = Fair value of 20 percent stake of the company

                                                = .2 * 20 = 4

 

Consolidated Balance Sheet

Assets                                           Liabilities                              +             Owner’s equity

120 + 55 + 4                                115 + 4                                  +             60   

In the next blog, we will look at the purchase method of consolidation.

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2 Comments

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    1. Archit Agrawal Post author
      Hi Greg….naah..I haven’t come across the mentioned report yet…if you can tell me what exactly you are looking for…probably in next blogs I can try to cater to that.
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