When you look at a balance sheet, you will see an entry called "Minority Interest". This refers to the equity of the minority shareholders in a company's subsidiaries. An example will help clarify. Beginning in 2008 and 2009, the FASB is requiring companies to classify minority interest under Shareholder Equity and not Liabilities. This is a major change and means that you will need to look further down the balance sheet for all newer reports!
In 1983, Nebraska Furniture Mart was the most successful home furnishings store in the United States. It's gross annual sales exceeded $88.6 million, and the company had no debt. At the time, Warren Buffett, the CEO of Berkshire Hathaway, was searching for great businesses to acquire. After noticing how successful the furniture business appeared to be, he approach the owner, Rose Blumpkin, and offered to buy the company.
Almost immediately, Rose offered to sell 90% of Nebraska Furniture Mart to Berkshire for $55 million. The next day, Buffett walked into the store and handed her a check. This made NFM a partially-owned subsidiary of Berkshire. (A subsidiary is a company controlled by another company through ownership of at least a majority of the voting stock.) Since subsidiaries are controlled by their parent companies, accounting rules allow for them to be carried on the parent company's balance sheet1. When Berkshire bought its 90% stake in Furniture Mart, it was able to add the assets of the furniture giant to its own balance sheet.
This presents a problem. Berkshire can now add the assets of Nebraska Furniture Mart to its balance sheet, but technically, it doesn't own them all. Remember, Rose Blumpkin only sold 90% of her company - she kept the other 10%. Berkshire will somehow have to show that some of the assets on its balance sheet belong to Rose, who has a minority interest in NFM. To do this, it will calculate the value of Rose's stake in the subsidiary and put it under a liability account called "Minority Interest". These are the assets Berkshire "owes" Rose. Again, in all reports following 2008 and 2009, this account will appear in the Shareholder Equity section of the balance sheet and not as a liability. This is extremely important. The theory behind this shift was that the money owed to Rose wasn't really a debt of the company, it represents allocation of ownership.
A company may have several minority partners in many subsidiaries. The minority interest of all of these partners is added together and placed on the balance sheet.
1.) A company can integrate the balance sheet of its subsidiary if it owns 80% or more. It can report earnings of the subsidiary if it owns 20% or more.
This page is part of Investing Lesson 3 - Understanding the Balance Sheet. To go back to the beginning, see the Table of Contents. If you have already read this lesson, you can skip directly to the Balance Sheet Quiz.