Financial Term Analysis: Explaining Minority Interests and Their Presentation in Financial Reports
In the world of finance, the presentation of minority interests in consolidated financial statements can vary significantly between International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (US GAAP).
The primary difference lies in their classification within the financial statements. Under IFRS, minority interest is presented as a separate component of equity in the consolidated balance sheet, reflecting the portion of net assets attributable to minority shareholders. In contrast, US GAAP historically presented minority interest outside of equity, often as a liability or mezzanine account. However, current practice aligns more closely with IFRS, with minority interest now being shown within equity, yet differences in detailed presentation and terminology persist.
According to IAS 1 and IFRS 10, the non-controlling interest (NCI) is required to be presented in the equity section, separate from the parent shareholders’ equity. It is also shown as part of consolidated profit or loss, attributable to NCI. On the other hand, US GAAP (ASC 810) mandates that non-controlling interest be shown in the equity section of the consolidated balance sheet, labelled as “non-controlling interests” or “minority interest.”
Although convergence efforts have been made, subtle differences remain. For instance, IFRS explicitly requires minority interest to be presented in equity as non-controlling interest, while US GAAP follows a similar classification but with somewhat different terminology and detailed treatment in ownership changes.
These differences reflect IFRS’s more principles-based approach and US GAAP’s more prescriptive rules. However, both frameworks now present minority interest within equity rather than liabilities as in the past.
It's essential to note that these differences can impact the power dynamics within a company. For instance, majority shareholders can potentially oppress minority shareholders and abuse their power when there are differences in interests. Passive minority interests, those below 20%, have weaker power in voicing their interests and cannot exercise control over the company through voting.
In the case of PT Astra Agro Lestari Tbk (AALI), the company reported a consolidated net profit of Rp1.52 trillion in 2018, with around 5% or Rp82.2 billion attributed to minority shareholders. In AALI's balance sheet, non-controlling interests are liabilities, amounting to Rp484.9 billion, which represents the percentage of ownership by minority shareholders.
In financial statement reporting, the parent company consolidates the balance sheet of the subsidiary as if it were fully owned, even if only partially owned. In the consolidated statements of income, a separate account is used to report a portion of the profits belonging to minority shareholders.
In conclusion, while IFRS and US GAAP are converging in their approach to presenting minority interests, subtle differences persist. Understanding these differences is crucial for investors, companies, and financial analysts to make informed decisions and ensure fair representation of financial information.
Investing in businesses under different accounting standards can lead to variations in the presentation of minority interests. While IFRS requires non-controlling interest to be presented as a separate component of equity in the consolidated balance sheet, US GAAP historically showed minority interest outside of equity, but now it is presented within equity.
Differences in the treatment of minority interests can impact the power dynamics within a company, especially for passive minority interests below 20% who may have weaker power in voicing their interests and cannot exercise control through voting.
