Having a bit of trouble logically understand this concept.
Speaking of business combinations and acquisition method. When Parent acquires let’s say 80% of target company - parents equity account wont’ be adjusted just a minority interest will be listed as separate component of stockholder’s equity
Minority interest is equal to the proportion of the company that parent does not own - in this case a minority interest should be listed at 20% of net equity of subsidiary
My question is why is that? Why list on BS of Parent, something Parent does not own?
I memorized this definitions but can’t completely logically understand this.
It’s cause owning 80% of the firm gives the firm total control over the target. On the income statement they’ll report 100% of targets net income, ebitda, etc. As we know all the net income (assuming 0 divs) transfers into retained earnings (including 20% minority interest). To account for this they’ll add the 20% minority interest to their equity account. It’s one of the reasons you also add minority interest while calculating EV multiples.
I think I understand it better now… but still this does not seem too logical to me. Why do we need to show interest that we do not own on our BS. We are showing something that is owned by some other company.
Is this all because of consolidation process? So that balance sheet would balance.
To account for the additional 20% income you’re recording on your Income statement. Because that 20% doesn’t belong to you but to the minority investor.
Every asset on the balance sheet that’s financed with a secured loan falls into that category.
As for reporting of subsidiaries that are less than 100% owned, there are good arguments in favor of full consolidation, and there are good arguments in favor of proportional consolidation. Ultimately, the ability of full consolidation to make it easier to compare one parent to another probably trumps all others.
