Any valuation of company requires forecasting of financial statements for the future on the basis of certain assumptions and parameters.While most of the financial figures has a direct relation with revenue and net profit, but forecasting the minority interest based on the revenue and net profit figures will lead to ambiguous data.As per IFRS, Minority Interest is shown under the Equity section of consolidated balance sheet whereas US GAAP offers much flexibility for reporting.Under US GAAP, it can be reported under the liabilities or equity section.It plays a huge role in analyzing various investments opportunities and calls for its consideration while computing various ratios and analyzing financial statement.One other reason for separate disclosure is to provide certain protection to minority shareholders as they are in a position of disadvantage.$ 650,000 Books value of 80% equity $ 520,000 (650,000 x 80%) Excess amount paid or Goodwill $ 130,000 Let’s assume in the above example, Company S Inc.
The most important thing to remember in case of valuation of minority interest is that its valuation are affected by number of factors, internal and external, applicable to company and the industry in which it operates.
The consolidated balance sheet comprises of all of the assets and liabilities of a subsidiary.
Similarly, the consolidated income statement includes all of the revenues and expenses of a subsidiary.
Since, they are hardly involved in the decision making process, there is a need to protect them oppression and mismanagement of conduct of company’s affairs by management.
As mentioned earlier, minority interest arises whenever a holding company owns a controlling interest (Less than 100 percent) in a subsidiary company.