Non Controlling Interest was previously known as Minority Interest in the accounting world. However, the difference in accounting for the NCI (Non Controlling Interest) arises because of the existence of both a DNCI (Direct Non Controlling Interest) and an INCI (Indirect Non Controlling Interest). The basic rules are as follows:
• Direct NCI receives a proportionate share of all equity recorded by the subsidiary — these equity balances include both pre-acquisition and post-acquisition amounts.
• Indirect NCI receives a proportionate share of a subsidiary’s post-acquisition equity only.
• In calculating the NCI share of equity, it is consolidated equity rather than recorded equity on which the NCI is calculated. Hence, in calculating both the DNCI and INCI share of equity, adjustments must be made to eliminate any unrealized profits or losses arising from transactions within the group.
The calculation of the DNCI share of equity is therefore the same as the calculation of NCI. The extra adjustments have to be made for the INCI as it receives a share of post-acquisition equity only. First, however, why is the INCI limited to a share of post-acquisition equity only?
In analyzing why the INCI receives a share of post-acquisition equity only, it is important to remember that an INCI arises only when a partly owned subsidiary holds shares in another subsidiary. The INCI arises because there exists a DNCI. The DNCI is the same group of shareholders as the INCI.
Assets are recorded at amounts that differ from fair value, these affect pre-acquisition equity. In other words, as goodwill is impaired, inventory sold or non-current assets depreciated, there is an adjustment made to the balance of pre-acquisition amounts via the business combination valuation entries. As the INCI receives a share of post-acquisition equity only, the adjustment to pre-acquisition equity reflected through the pre-acquisition entry must be considered when calculating the INCI share of equity.
