Interpretation of non controlling interests and effect on EPS and EV
Posted: September 9th, 2018, 8:49 am
I'm currently researching what is meant by a firm reporting "non-controlling" interests in their financial statements, that is, in their income statement and equity/balance sheets, and of course the financial impact of those interests.
The rationale for my latest research, is firstly to understand their effect on EPS/dividend calculation (i.e. how much the share holder of the parent company is awarded), and to understand the equity effect and how and why this effects EV (enterprise value, which is another topic on my radar.)
The background behind non-controlling (NC) interests, also known as minority interests, was explained to me before, and I believe it relates to when a company (which becomes known as the parent) buys the bulk (>50%) of the shares of another company, which is then known as a "subsidiary". When this occurs the parent effectively takes control of the subsidiary, and then includes the subsidiary's earnings along with it's own in the "Consolidated Accounts". (I believe these are also known as "Group Accounts".)
The contribution which the subsidiary makes to the Consolidated Income Statement, is that all of the profit/loss generated by the subsidiary is added to that of the parent (I think!!), so as an example if we have a situation where CompanyA generates 60 GBP million profit after tax, and it owns 80% of CompanyB which itself made 10 GBP million PAT, then the accounts will presented as follows:
So although the Consolidated accounts includes CompanyB's earnings, the percentage of CompanyB's earnings, equal to the percentage of equity of the CompanyB which CompanyA does not own, is returned the CompanyB and hence cannot be used for CompanyA, for example it cannot be used in any dividend payment for CompanyA's shareholders.
Hence in the above scenario, if the CompanyA currently has 1 billion shares in the market, the Earnings per share (EPS) value will be 68/1000, i.e. 6.8p per share.
This is what I have learnt so far regards non-controlling interests, feel free to correct/comment/add etc. as I'm not totally sure on whether I have it right.
Now an example of how this looks for shareholders in a firm with a reasonable amount of non-controlling interests reported, GlaxoSmithKline (GSK). Looking at their income statement for 2017 (page 158 of https://www.gsk.com/media/4751/annual-report.pdf), all figures in million GBP:
So as there were approximately 4,941M shares (including dilutive effects), the earnings per share (EPS) can be calculated as 1532/4941 = 0.31, i.e. 31p per share, in agreement with the reported figure. So it looks as if a residual part of the earnings of the group are withheld from the owners of the parent.
Whilst I find the effect of NC interests quite explicable regards the statement of income, I find it harder to understand in terms of equity. Returning again to the example of GSK in the 2017 report, this time the equity section of their balance sheet:
Whilst I'm ok with the maths side of things, I'm less sure about exactly what all the numbers themselves represent.
It seems clear that the first 4 rows imply that a "big part of the company" is "in the red", i.e. the shareholders equity is negative, however, the Total equity figure is positive, by virtue of the contribution from the NC interests. Now seeing as the above comprises the balance sheet, then things have to balance, right? That is, the Total equity = Net Assets, so what exactly does the "Non controlling interests=3557" mean?
Presumably the NC interests have contributed substantially to the non-current asset position? i.e. the PPE, goodwill, intangibles etc.
So what does the non-controlling interest part in the equity (and it's implied shadow in the NC assets) relate to in terms of the subsidiaries and the parent? In other words if, for example, GSK own 80% of each of their subsidiaries (to keep the example simple), then does this imply that 80% of those subsidiaries equity and assets are included in the Consolidated accounts?
thanks
M&M
The rationale for my latest research, is firstly to understand their effect on EPS/dividend calculation (i.e. how much the share holder of the parent company is awarded), and to understand the equity effect and how and why this effects EV (enterprise value, which is another topic on my radar.)
The background behind non-controlling (NC) interests, also known as minority interests, was explained to me before, and I believe it relates to when a company (which becomes known as the parent) buys the bulk (>50%) of the shares of another company, which is then known as a "subsidiary". When this occurs the parent effectively takes control of the subsidiary, and then includes the subsidiary's earnings along with it's own in the "Consolidated Accounts". (I believe these are also known as "Group Accounts".)
The contribution which the subsidiary makes to the Consolidated Income Statement, is that all of the profit/loss generated by the subsidiary is added to that of the parent (I think!!), so as an example if we have a situation where CompanyA generates 60 GBP million profit after tax, and it owns 80% of CompanyB which itself made 10 GBP million PAT, then the accounts will presented as follows:
Profit for the Year 68 (after tax)
Attributable to:
Equity shareholders of Parent 70 (all Profits and losses of parent and subsidiaries summarised)
Non-controlling interests 2 (20% of the subsidiary is not owned by parent)
--------------------------------
68
So although the Consolidated accounts includes CompanyB's earnings, the percentage of CompanyB's earnings, equal to the percentage of equity of the CompanyB which CompanyA does not own, is returned the CompanyB and hence cannot be used for CompanyA, for example it cannot be used in any dividend payment for CompanyA's shareholders.
Hence in the above scenario, if the CompanyA currently has 1 billion shares in the market, the Earnings per share (EPS) value will be 68/1000, i.e. 6.8p per share.
This is what I have learnt so far regards non-controlling interests, feel free to correct/comment/add etc. as I'm not totally sure on whether I have it right.
Now an example of how this looks for shareholders in a firm with a reasonable amount of non-controlling interests reported, GlaxoSmithKline (GSK). Looking at their income statement for 2017 (page 158 of https://www.gsk.com/media/4751/annual-report.pdf), all figures in million GBP:
Profit for the year 2169
Attributable to:
Shareholders 1532
Non-controlling interests 637
-------------------------------
2169
So as there were approximately 4,941M shares (including dilutive effects), the earnings per share (EPS) can be calculated as 1532/4941 = 0.31, i.e. 31p per share, in agreement with the reported figure. So it looks as if a residual part of the earnings of the group are withheld from the owners of the parent.
Whilst I find the effect of NC interests quite explicable regards the statement of income, I find it harder to understand in terms of equity. Returning again to the example of GSK in the 2017 report, this time the equity section of their balance sheet:
Share capital 1343
Share premium account 3019
Retained earnings -6477
Other reserves 2047
------------------------------
Shareholders' equity -68
Non controlling interests 3557
------------------------------
Total equity 3489
Whilst I'm ok with the maths side of things, I'm less sure about exactly what all the numbers themselves represent.
It seems clear that the first 4 rows imply that a "big part of the company" is "in the red", i.e. the shareholders equity is negative, however, the Total equity figure is positive, by virtue of the contribution from the NC interests. Now seeing as the above comprises the balance sheet, then things have to balance, right? That is, the Total equity = Net Assets, so what exactly does the "Non controlling interests=3557" mean?
Presumably the NC interests have contributed substantially to the non-current asset position? i.e. the PPE, goodwill, intangibles etc.
So what does the non-controlling interest part in the equity (and it's implied shadow in the NC assets) relate to in terms of the subsidiaries and the parent? In other words if, for example, GSK own 80% of each of their subsidiaries (to keep the example simple), then does this imply that 80% of those subsidiaries equity and assets are included in the Consolidated accounts?
thanks
M&M