December 7, 2021

Accounting + Finance Blog

Meaning of Non-Controlling Interest (NCI) and Key Explanations

In financial statement consolidation, it is a requirement of accounting standards that the holding company must state the amount of profit for the year attributed to non-controlling interest shareholders. In this article, I will explain this term in detail.

Definition of Non-Controlling Interest

Non-controlling interest or minority interest are holders of ordinary shares that own less than 50 percent of the stock of a company and therefore have limited voting rights.

Key Explanations of NCI

It is also called minority interest. They are called so because their interest in the company is small compared to shareholders with majority interest. NCI shareholders may have a little as 0.1 percent of a company’s total issued shares capital. It may also own as much as 49 percent, either as an individual or as a group.

In most blue-chip companies, it is difficult to see a non-controlling interest shareholder with 49 percent shares right. An individual with 10 percent of the issued share capital may be said to own a substantial share right of the company. Also, someone with 10 to 20 percent shares of a company is referred to as an associate. He or she can influence the decision of the company’s board of directors.

Non-controlling interest shareholders can’t influence the decision of the board of directors of a company either as an individual or as a group. Their total vote in the annual general meeting or extraordinary meeting cannot hold weight. However, a collaboration of some NCI holders and associate holders may affect the board’s decisions.

Non-controlling interest does not apply only to companies. The term can also be used in a joint venture or partnership business. In this case, it means business partners with little capital contributions to the entity.

How to Calculate Non-Controlling Interest

To calculate non-controlling interest, you must know the total percentage of these shareholders. If the company has 50,000 shares for example, and the holding company has a total of 30,000 shares, that means that the remaining 20,000 shares are NCI. So, the percent of NCI is 20,000 ÷ 50,000 × 100%. This gives 40%. If the company earns a total of 2,000,000 Naira profit after tax, then the income attributable to NCI is 40% × 2,000,000. This gives 800,000 Naira.

Conclusion

Non-controlling interest is the holders of shares of a company. They own shares that are not up to 50 percent of the total issued share capital. These shareholders cannot influence the decision of the board of directors at an AGM. The reason is that their total vote is not up to the voting right of controlling interest shareholders.