The Effects on Measures of Profitability and Leverage of Recently Enacted Changes in Accounting for Minority Interests

Abstract

The recently enacted FASB Statements 160 and 141(R) bring changes to accounting for noncontrolling interests (formerly known as minority interests) for companies with fiscal years beginning after December 15, 2008. In particular, SFAS No. 160 will change the presentation of minority interests on the financial statements. The minority interests in shareholders' equity will be required to be reported as a component of total shareholders' equity. In addition, consolidated net income as presented on the income statement will include minority interests in income. For clarity, companies are instructed in both cases to break out the portions of equity or income attributed to the minority interest, but the "bottom line number" will change with the enactment of these statements. This report examines the consequences of these changes for companies reporting minority interests. In particular, we find that (1) shareholders’ equity will increase by 2%, though 10% of the companies will see increases of over 25%; (2) income from continuing operations will increase by 3%, though 12% of the companies will see increases of over 25%; (3) liabilities to shareholders’ equity will decline by 2%, though 10% of the companies will see declines of over 20%; and (4) times interest earned will increase by 1%, though 9% of the companies will see increases of over 10%. Investors, analysts and other users of financial statements will want to be prepared to take these upcoming accounting changes into account.