Non-controlling Interest (NCI)
International Accounting Standard 27 (IAS 27) defines non-controlling interest as “the equity in a subsidiary not attributable, directly or indirectly, to a parent”. The similar term "minority interest" was previously used in standards.
Non-controlling interest (NCI) is ownership of a company which does not give the shareholder the control of the company. The control means that the investor can govern the financial and operating policies of its subsidiaries to gain benefits from the operations of subsidiary. Usually the control can be gained if more than 50% of the voting rights are acquired by a party. This means that any position that holds less than 50% of the outstanding voting rights is deemed to be a non-controlling interest.
Majority of the investor positions are deemed to be non-controlling interests because their voting power is so insignificant relative to the total number of outstanding shares. For most of the publically traded companies, the number of outstanding shares is so large that a normal shareholder cannot significantly affect higher level decisions, which is why it is deemed to be a non-controlling interest. Usually it is not until a party controls about five to ten percent of the voting shares that it can be elected for a seat on the board of directors.
The accounting treatment of non-controlling interest can be understood with the help of an example. Suppose company Alpha acquires 75% of the outstanding shares of company Beta. Because Alpha owns more than 50% of Beta, Alpha will consolidate Beta's financial statements with its own. The 25% of Beta's equity that Alpha does not own is recorded on Alpha's balance sheet as Non-controlling interest. Consolidated net income will be allocated to the parent and non-controlling interests in proportion to their ownership percentages i.e. 75% to Alpha and 25% to the non-controlling interests.
Non-controlling interest is recorded in the equity section of the parent company's balance sheet; separate from its own equity. NCI is presented in the mezzanine between equity and liabilities.