Lesson 24 - Advanced Accounting Course

Lesson 24: Non-Controlling Interests and Their Treatment

In group accounting, Non-Controlling Interests (NCIs) are a crucial concept. They represent the portion of a subsidiary not owned by the parent company. Understanding how to treat them is essential for consolidating financial statements correctly.

In this lesson, we will cover:

• ✅ What Non-Controlling Interests (NCIs) are
  
  

• 🔍 How to calculate and report them
  
  

• 🧾 The treatment of NCIs under IFRS
  
  

• ⚖️ The difference between full and partial consolidation
  
  

• 🚨 Common mistakes and best practices
  
  

🤔 What Are Non-Controlling Interests (NCIs)?

A Non-Controlling Interest (NCI) refers to the portion of equity (net assets) in a subsidiary that is not owned by the parent company.

• If a parent company owns 80% of a subsidiary, the remaining 20% is the NCI.
  
  

• NCIs represent the claims of minority shareholders in a subsidiary who do not have control.
  
  

🔢 How to Calculate Non-Controlling Interests

To calculate NCI, you need to:

1. Determine the ownership percentage that the parent does not own (NCI's share).
   
   

2. Allocate the NCI's share of the subsidiary’s equity (assets, liabilities, and income).
   
   

📘 Formula:

🧮 Example:

• Parent owns 75% of Subsidiary X.
  
  

• Subsidiary X’s total equity (net assets) = $1,000,000.
  
  

• The NCI share = 25% × $1,000,000 = $250,000.
  
  

🧾 NCI in the Consolidated Financial Statements

When preparing consolidated financial statements, NCI is shown separately in both the balance sheet and income statement:

1. Balance Sheet:

• NCI is shown as a separate line item in the equity section of the consolidated balance sheet.
  
  

• It represents the portion of net assets of the subsidiary not owned by the parent.
  
  

2. Income Statement:

• NCI's share of the subsidiary's net profit or loss is subtracted from the parent’s share of profit to reflect only the parent's earnings.
  
  

• For example, if the subsidiary earned $100,000, and the NCI holds 25%, then $25,000 will be allocated to the NCI.
  
  

🔄 Treatment of NCI Under IFRS

Under IFRS 10, the treatment of NCIs requires the following:

1. Full Consolidation Method: The parent must consolidate 100% of the subsidiary’s assets and liabilities, even if it does not own 100%.
   
   

2. NCI’s Share: In the equity section of the balance sheet, the NCI represents the portion of the subsidiary’s net assets that belongs to the minority shareholders.
   
   

3. Non-Controlling Interest Share of Profit or Loss: The NCI’s share of profit or loss is deducted from the consolidated profit. This is essential for showing the parent’s share of earnings only.
   
   

⚖️ Full vs. Partial Consolidation: Where Does NCI Appear?

🚨 Common Mistakes and How to Avoid Them 

✅ Best Practices for NCI

1. Calculate NCI accurately – Use the correct percentage and net asset value.
   
   

2. Allocate profits/losses properly – Ensure NCI gets its correct share of profit or loss.
   
   

3. Disclose clearly – Always disclose NCI in both the balance sheet and income statement.
   
   

4. Reassess regularly – NCI may change with new share issues, dividends, or profit adjustments. Always update it.
   
   

5. Stay consistent – Once you establish an NCI amount, keep using the same method throughout all periods.
   
   

📑 Quick Recap