Canadian Securities Course (CSC) Level 1 Practice Exam

What is Non-controlling interest?

1. When a company owns less than 50% of a subsidiary.

2. Represents profits earned by minority shareholders.

3. When a company owns more than 50% of a subsidiary.

4. Combining financial statements of unrelated companies.

The correct answer is: When a company owns more than 50% of a subsidiary.

Non-controlling interest refers to the ownership stake in a subsidiary that is not held by the parent company. This means when a parent company owns less than 100% of a subsidiary, the portion owned by other shareholders is considered the non-controlling interest. When a parent company owns more than 50% of a subsidiary, it controls that subsidiary and must consolidate the subsidiary's financial performance into its financial statements. However, the portion of the subsidiary that the parent does not own—meaning the remaining equity interest held by other investors or minority shareholders—is reported as non-controlling interest in the consolidated financial statements. This allows for a clear representation of the total assets and liabilities of the subsidiary while also acknowledging the rights of minority shareholders to the profits generated by the subsidiary. The concept of non-controlling interest is important for accurately reflecting the ownership interests within financial reporting. It ensures that the financial statements provide a complete view of a company's total operations, including the contributions of minority stakeholders.