Minority Interest | Definition | How to Calculate? - YouTube

hello everyone hi welcome to the channel of WallStreetmojo watch the video

till the end also if you are new to this channel then you can subscribe us by

clicking the bell ican friends today we are going to learn a to tutorial on minority

interest and let's study regarding what all things are there what exactly

minority interest is all about so let's get into the nitty-gritty of the same

now what what's in the name the famous you know age of the 6

year you know does not always hold minority interest is one such exception

as the name suggests minority interest if you go at sea can simply be define as

the value of a share or the interest that is attributable to the

shareholdings the less than 50% okay of the total number of

shares so shareholders holding less than 50% of the total outstanding

number of shares are known as the minority share holders it is also known

as the non-controlling interest in NCI okay so in this tutorial we are going to

discuss couple of thing but we'll start with first is what exactly is what is

minority interest so in accounting world minority interest means the ownership in

subsidy company not owned by the holding company for a company to be a holding

company it must always hold more than 50% of the shares in its

subsidiary company like for example let's say there is company A and there's

this company B they are the two shareholders of the company called let's

say pine-apple Limited okay they are holding 80% and 20%

respectively in the balance sheet of fine pine Apple Inc shareholder

B over here will be considered as the minority shareholder since it owns less

than 50% of the total shares and its net worth as on the date has to

be shown under the separate head as a minority interest

various shareholders a is the majority shareholders of the pine-apple limited

so the concept of the minority interest arises only in the case when the company

prepares two sets of the financial statements so a separate set of

financial statements and consolidated financial statement it is reported

separately on only in the consolidated financial statement see minority

interest adjustments occurs when the parent does not own it does not own 100%

of the subsidiary this is when it happens now in the consolidated profit

and loss account the minority interest is is that proportion of the result for

the year that relates through the minority holding it is disclosed on the

face of the consolidated profit and loss account under the profit on the ordinary

activities of Taxation now as per if you see the IFRS as for IFRS the

minority interest is shown under the equity section of the consolidated

balance sheet whereas if you see in case of the US GAAP in case of a US GAAP it

can be reported under the liabilities and equities liabilities and equities so

this is the case now the reason for the separate line item with respect to the

minority is to give a clearer picture to the users the financial statement about

the various controlling interest in the company it helps them in making an

informed economic decision and also helps them in making comparison on the

shareholding patterns of the different companies it plays a huge role in

analyzing various investment opportunity that's a big thing in itself and calls

for its consideration while computing various ratios and analyzing the

financial statement one another reason for separate disclosure is to provide

certain protection you can say to the minority shareholders as they

are in a position offer disadvantage and since they are hardly involved in the

decision making process there is no need to make a need to protect them operation

or mismanagement the conduct of the company's affairs by the management so

let's understand with the help of an example how minority interest has been

calculated in a consolidated way let's see the calculation like as mentioned

earlier by me minority interest arises when whenever a company or holding

company owns a controlling interest which is less than 100% so in in

a subsidiary company so the claim of the shareholders on the net asset of the

company are known as minority interest this minority founders like any other

shareholders have an equal but proportion net claim on the earnings and

the assets of the subsidiary the consolidated balance sheet comprises of

all the assets and the liabilities

of the subsidiary similarly the consolidated income statement includes

all the revenues and expense of the subsidiary so the controlling interest

of the parent company gives it enough right to manage of the net assets of the

subsidiary subsidiary which justifies the inclusion of the 100%

of these subsidiaries assets Liabilities revenue expenses in the consolidated

statements so let's start with an example let's assume that there is a

company called H Inc it has acquired 80% of the equity shares in S

Inc okay so for $6,50,000 in January 15 2015 on the

date of the acquisition the book value of the equity was close enough to $6,50,000

which comprises of the equity share of $5,00,000 and the retain earning of

$1,50,000 so the exhibit over here shows us some details the equity shares in

amount the percentage what is attributable to edge and what is

attributable to the minority shareholders and the retained earning

details at is 1,50,000 which would be again distributed in 80% and 20%

that gives your total equity bifurcation in 80 and 20 let's see how

the minority interest goodwill will be calculated and shown in the consolidated

balance sheet if we see the 20% of $650,000 that is the total equity

130,000 which will be the calculation of the minority shareholders so the total

equity into the minority shareholders ratio will give us the total value of

the minority interest now the calculation of the goodwill the amount

paid for 80% of the equity share of S Inc that is $6,50,000 and the book

value of the 80% of the equity is just how much $5,20,000 as you can see

over here so the difference is your goodwill or your capital reserve so the

acces excess amount that has been paid or goodwill is 1,30,000 so minority

interest that will be shown will be 1,30,000 and in the intangible assets

intangible assets the goodwill that will be amounting to 1,30,000 a minority

interest 1,30,000 will not appear in the separate financial statement of

either H or s so it no it won't be reported in the standalone financial

statement rather it will appear in the consolidated financial statement of H

Inc now let's understand the minority interest valuation see any valuation of

a company requires a forecasting of the financial statement so for the future on

the basis of the certain assumptions in parameter while all mostly financial

figure has a direct relation with revenue and net profit but forecasting the

minority interest based on the revenue and net profit figures will lead to an

because data hence in order to address the above issue analysts have drawn out

you know four core common methods or approaches for connect computation the

first one is called constant growth method the second method is called the

statistical growth method the third method is called modeling each

subsidiary modeling each subsidiary separately okay and this this are the

basically the methods that the 3 methods how the valuation is been done

so after discussing all this let's make the final conclusion minority interest

does provide the users of the financial statement with useful insight which

helps them to analyze and make us informed decision the degree of the

influence of the manner minority interest influences the decision making

appointment of the directors on the board of director of the company and

fixing their compensation second making the changes in the articles of the

association's and important application regulatory provisions third the

registration of the company's shares for initial public offerings and finally

fourth making changes in the capital structure of the company so the concept

of the minority interest has evolved over the time in the past it has not

received a great deal of attention in the accounting literature it was

referred to as the liability equity on neither even as of today there is a very

little guidance on the treatment of the presentation of the minority interest

and there is no consensus on any position thank you everyone so that's it

for this part topic if you have learned and enjoyed

watching this video please like and comment on this video and subscribe to

our channel for the latest updates thank you everyone

Cheers