Minority interest represents a situation in which an individual, group of individuals or company owns a portion of another company that is equal to less than 50% of its voting shares, otherwise known as ordinary shares. It was devised by accountants as a way to track any divisions of ownership and control over a company. A company that holds more than 50% of the voting shares is referred to as the parent company.
For example, Company X owns 85% of Company Y with the remaining 15% of the voting shares being owned by a group of individual ordinary shareholders. Company X still has a controlling interest in Company Y because it is the majority shareholder or parent company. Fifteen percent is, however, not under the control of Company X and it represents the minority interest of the individual group. This type of arrangement is not uncommon, but it must be reflected in the consolidated financial accounting of Company X, the parent company.
Effective from 15 December 2008, the Financial Accounting Standards Board (FASB) issued an amendment to Accounting Research Bulletin (ARB) 51. This amendment detailed the specific accounting treatment of minority interests. Prior to the amendment, minority interest was included on the balance sheet statements either under long-term liabilities or shareholder’s equity or between these two sections. In most cases, minority interest was placed under the long-term liabilities section because it represented the portion of the company’s shares that were "owed" to an outside entity. The trouble with reporting it under the liabilities section is that it is not a real debt, but instead represents a statement of ownership.
With the amendment, the FASB ruled that placing minority interest under the shareholder’s equity section was a better solution because it gave a clearer picture of what the concept represents. Minority interest is a reflection of how much of the company’s equity is owned by other entities. Therefore, it fits seamlessly under the shareholder’s equity section as it is concerned with the issue of ownership and control, as opposed to liability or debt.
The amendment to ARB 51 aims to improve the comparability of accounting statements between companies. It requires that all companies record minority interests under the shareholder’s equity section of the balance sheet to provide uniformity. In reality, a company can have minority interests in several of its subsidiaries and these will all be added together to report a cumulative figure on the consolidated balance sheet of the parent company.