A minority interest arises when an investor owns less than half of a corporation's outstanding shares. When a business has a minority interest in another entity and it has no substantial influence over that entity, the business accounts for its ownership share using the cost method. Under the cost method, the investing entity records its original investment at cost. If dividends are received from the other entity, they are recorded as dividend income.
When a business has a minority interest in another entity and it has substantial influence over that entity, the business accounts for its ownership share using the equity method. Under the equity method, the initial investment is subsequently adjusted for dividends received (which reduces the investment) and a proportional share of the investee's earnings (which increases the investment).
For example, Retro Corporation owns 25% of the outstanding stock of Leading Edge Corporation. Retro has recorded its initial investment in Leading Edge, which is $3.7 million. In the next year, Leading Edge reports $500,000 of income. Retro recognizes its proportional share of this profit, which is $125,000. Retro's investment in Leading Edge therefore increases to $3,825,000. Later, Leading Edge pays Retro a dividend of $25,000. Retro records this amount as a reduction of its investment, which then declines to $3.8 million.
A minority interest is also known as a non-controlling interest.