Cost, Equity, and Consolidated Reporting Methods

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A minority interest is the proportion of a subsidiary company's stock not owned by its parent company. This is sometimes called a non-controlling interest. The amount of interest held in the subsidiary is typically less than 50 percent; otherwise, the corporation would no longer be a subsidiary to the parent company.

Minority Interest Example

If Federated Department Stores, the owner of Macy's and Bloomingdale's, purchased 5 percent of Saks Fifth Avenue, Inc., it stands to reason that Federated would be entitled to 5 percent of Saks' earnings. 

This begs the question of how Federated would report their share of Saks' earnings on their income statement. The answer depends on the percentage of the company's voting stock that Federated owns.

The Cost Method (Ownership: 20 Percent or Less)

Under this scenario, the company would not be able to report its share of Saks' earnings, except for the income from any dividends it received on the Saks stock. The asset value of the investment would be reported at the lower of cost or market value on the balance sheet

This means that, if Federated purchased 10 million shares of Saks stock at $5 per share for a total cost of $50 million, it would record any dividends received from Saks on its income statement. On the company's balance sheet, it would record $50 million under Investments

If Saks rose to $10 per share, the 10 million shares would be worth $100 million ($10 per share x 10 million shares = $100 million). Federated's balance sheet would be adjusted to reflect $50 million in unrealized gains, less a deferred tax allowance for the taxes that would be owed if the shares were sold.

On the other hand, if the stock dropped to $2.50 per share, this would reduce the investment's value to $25 million. The balance sheet value would be written down to reflect the loss of a deferred tax asset established to reflect the deduction that would be available to the company if it was to take the loss by selling the shares.

The income statement would never show the 5 percent of Saks' annual profit that belonged to Federated. Only dividends paid on the Saks shares would be shown as dividend income (which is, actually, added to total revenue or sales in most cases). Unless you delved deep into the company's 10-K, you may not even realize that the Saks dividend income is included in total revenue as if it were generated from sales at Federated's own stores.

Equity Method (Ownership: 21-49 Percent)

In most cases, Federated would include a single-entry line on their income statement reporting their share of Saks' earnings. For example, if Saks earned $100 million and Federated owned 30 percent, it would include a line on the income statement for $30 million in income (30 percent of $100 million), even if these earnings were never paid out as dividends (meaning they never actually saw $30 million).

Consolidated Method (Ownership: 50+ Percent)

With the consolidated method, Federated would be required to include all of the revenues, expenses, tax liabilities, and profits of Saks on the income statement. It would then also include an entry that deducted the percentage of the business it didn't own. 

For example, if Federated owned 65 percent of Saks, it would report the entire $100 million in profit and then include an entry labeled Minority Interest that deducted the $35 million (35 percent) of the profits it didn't own.