Impact of Non-Controlling Interests on Reliability of Consolidated Income Statement and Consolidated Balance Sheet

In this paper the selected problems of reliability and usefulness of consolidated financial statements, brought about by the existence of significant non-controlling interests, are discussed and illustrated with numerical examples. Non-controlling interests, labeled also as minority interests, reflect the participation of entities other than the parent company in economic benefits (both profits as well as net assets) generated by its non-wholly owned subsidiaries. If significant, non-controlling interests may dramatically erode the usefulness and credibility of individual line items of the parent company's consolidated financial statements, which also implies erosion of the usefulness of financial statement analysis tools, such as accounting ratios. This is so because under both IFRS (International Financial Reporting Standards) and US GAAP (US Generally Accepted Accounting Principles), financial results of controlled entities are fully consolidated with the parent's results, regardless of the actual share of the parent in its subsidiary's shareholder's equity. The possible distorting impact of non-controlling interests on individual line items of consolidated income statement and consolidated balance sheet, as well as on selected accounting ratios, is illustrated by the hypothetical scenarios, based on real-life data of Fiat Group