Minority investment refers to the situation where an investor owns less than 50 percent of the voting shares of an investee company. It is an important concept in business accounting and reporting. Proper accounting treatment and disclosures of minority investments are crucial for reflecting relevant information in financial statements. This article will illustrate the meaning of minority investments through examples and explain key accounting aspects including measurement methods, income statement impacts, impairment considerations, and disclosure requirements.
Definition and classification of minority investments
A minority investment means the investor has significant influence over the investee, but does not have control. Significant influence usually exists when the equity ownership percentage is 20% to 50%. Minority investments are accounted for using the equity method or fair value method under IFRS and equity method under U.S. GAAP. They are classified as associates on the balance sheet. Subsidiaries are investees controlled by the parent where the parent owns more than 50% of voting shares. Subsidiaries are fully consolidated.
Accounting treatments and income statement impacts
Under the equity method, the investment balance is initially recognized at cost on the balance sheet, then increased or decreased each period to recognize the investor’s share of the investee’s income/loss and other comprehensive income. Distributions received reduce the carrying amount. The investor’s share of the investee’s net income/loss is reported on the income statement. Under the fair value method, the investment is measured at fair value each period. Changes in fair value are recognized either in net income or other comprehensive income. Only dividends received are reported on the income statement.
Impairment considerations for minority investments
Investors need to assess minority investments for impairment regularly. Impairment loss should be recognized if the carrying amount exceeds recoverable amount. Recoverable amount is the higher of value in use (present value of future cash flows) and fair value less costs to sell. Impairment indicators include a significant or prolonged decline in fair value below cost, or a decline in the investee’s financial health. If impaired, the carrying amount is written down and an impairment loss is recognized on the income statement. Prior impairments may be reversed up to cost if conditions improve.
Disclosure requirements for minority investments
Extensive disclosures around minority investments are required under accounting standards. Key disclosures include name and percentage of ownership of investees, measurement method applied, carrying amount, share of income/loss and dividends received, fair value if measured at cost, commitments made, and restrictions on distributions. Any impairment losses must also be disclosed. These disclosures help financial statement users analyze the investor’s exposure to risks and assess the impact on financial performance.
In summary, minority investments are equity investments where the investor has significant influence but lacks control. Key accounting considerations include classification, measurement method, income statement impacts, impairment assessment, and disclosure requirements. Proper accounting ensures minority investments are accurately presented in financial statements.