What is a noncontrolling interest?
How does a noncontrolling interest get created, what are the journal entries to record a noncontrolling
interest, and where does a noncontrolling interest show up in the financial statements?
Which of the financial statements mentions a noncontrolling interest?
Is it the balance sheet, the overview of what a company owns and what a company owes at
a point in time?
Or the income statement, the overview of the profit or income that the company generates
during a period?
Or the cash flow statement, the overview of how much cash the company generates, and where
it spends that cash during a period?
The answer is: all of the above!
Let’s illustrate how a noncontrolling interest works from a case study of Walmart, one of
the largest retail companies in the world.
In equity on the balance sheet, they have a noncontrolling interest balance at the end
of the year of $6.9 billion.
In the income statement, $320 million of net income for the year
is attributable to noncontrolling interest.
This amount is deducted from the consolidated net income, in order to report what is the
consolidated net income attributable to Walmart.
And in the cash flow statement, section “cash flows from financing activities”, $555 million
of dividends were paid during the year to noncontrolling interests.
This is a cash outflow.
Let’s start off with investigating how noncontrolling interest gets onto the balance sheet, and
then examine the relationship with the income statement and the cash flow statement.
Most of the noncontrolling interest balance in equity on the balance sheet is related
to Walmart’s acquisition in August 2018 of a majority stake in Flipkart, an Indian-based
eCommerce marketplace.
The noncontrolling interest is the share of ownership in the subsidiary entity Flipkart
that Walmart didn’t buy, but somehow has to account for.
Walmart bought 81 percent of the outstanding shares, or 77 percent of the diluted shares.
According to ASC 805, for a business combination to occur, an acquirer must obtain control
over a business.
This condition of obtaining control is satisfied, therefore Walmart began consolidating the
financial statements of Flipkart in the third quarter of fiscal 2019.
Through the line noncontrolling interest Walmart represents that it doesn’t own the remaining
approximately 20% of the equity in the subsidiary.
Let’s reconstruct on a very high level what Walmart’s journal entry is for the acquisition
of Flipkart.
Walmart assumes assets valued at $24.1 billion, including goodwill and intangible assets.
Walmart assumes liabilities valued at $3.7 billion.
The noncontrolling interest of around 20% of the shareholder capital in Flipkart is
valued at $4.3 billion.
In return for 81 percent of the outstanding shares, or 77 percent of the diluted shares,
Walmart pays approximately $16 billion in cash.
So the high level journal entry is debit assets $24.1 billion, credit liabilities $3.7 billion,
credit noncontrolling interest $4.3 billion, credit cash $16.1 billion.
That’s how a noncontrolling interest gets created on the consolidated balance sheet!
To understand how the ending balance of $6.9 billion on the balance sheet on January 31st,
2020 has developed over the years, we turn to an often overlooked, but in this case very
useful, schedule called the consolidated statements of shareholders’ equity.
This has a column for noncontrolling interest, with a “walk” between the balances.
The ending balance of the consolidated statements of shareholders’ equity ties to the ending
balance on the balance sheet.
Two years prior, the balance was $3 billion.
Last year, the balance was $7.1 billion.
Currently, the balance is $6.9 billion.
The biggest addition to the balance of noncontrolling interest in recent years was the $4.3 billion
related to Flipkart, that we have just discussed.
What are the other major movements in the noncontrolling interest balance?
First of all, the noncontrolling interest balance goes up when the part of the consolidated
net income that is attributable to the noncontrolling interest gets recorded.
This is the link between the income statement and noncontrolling interest in equity on the
balance sheet.
Second, the noncontrolling interest balance goes down when dividends are declared to the
noncontrolling interest.
This is the link between the cash flow statement and noncontrolling interest in equity on the
balance sheet.
Noncontrolling interest: the share of ownership in a subsidiary’s entity that the parent
company does not own.
It is reflected on the balance sheet (in equity), in the income statement (a share of the net
income), and in the cash flow statement (cash outflow in financing activities when a dividend
to the noncontrolling interest is paid).
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