Accounting: Subsidiaries and Parent Companies

Subsidiary, Parent, and Control

• A subsidiary is an entity controlled by another entity (the parent).
• A parent is an entity that has one or more subsidiaries.
• Control is the power to govern the financial and operating policies of an entity to obtain benefits from its activities.

Identification of Subsidiaries

• Control is presumed when the parent acquires more than half of the voting rights of the entity.
• Control may also be evidenced by:
  • Power over more than half of the voting rights through an agreement with other investors.
  • Power to govern the financial and operating policies of the entity under a statute or agreement.
  • Ability to appoint or remove the majority of the board of directors.
  • Ability to cast the majority of votes at a meeting of the board of directors.

Special Purpose Entities (SPEs)

• SPEs should be consolidated where the substance of the relationship indicates that the SPE is controlled by the reporting entity.
• This may arise even where the activities of the SPE are predetermined or where the majority of voting or equity are not held by the reporting entity.

Consolidation Procedures

• Intragroup balances, transactions, income, and expenses should be eliminated in full.
• Intragroup losses may indicate that an impairment loss on the related asset should be recognized.
• Financial statements of the parent and its subsidiaries used in preparing the consolidated financial statements should be prepared as of the same reporting date.
• If impractical, adjustments must be made for the effects of significant transactions or events that occur between the dates of the subsidiary's and the parent's financial statements.
• The difference in reporting dates should not be more than three months.

Consolidated Financial Statements

• Consolidated financial statements must be prepared using uniform accounting policies for like transactions and other events in similar circumstances.
• Minority interests should be presented in the consolidated balance sheet within equity, but separate from the parent's shareholders' equity.
• Minority interests in the profit or loss of the group should also be separately disclosed.
• Where losses applicable to the minority exceed the minority interest in the equity of the relevant subsidiary, the excess and any further losses attributable to the minority are charged to the group.

Disclosure

• Disclosures required in consolidated financial statements include:
  • The nature of the relationship between the parent and a subsidiary when the parent does not own, directly or indirectly, more than half of the voting power.
  • The reasons why the ownership, directly or indirectly, of more than half of the voting or potential voting power of an investee does not constitute control.
  • The reporting date of the financial statements of a subsidiary when such financial statements are used to prepare consolidated financial statements and are as of a different reporting date or period.
  • The nature and extent of any significant restrictions on the ability of subsidiaries to transfer funds to the parent in the form of cash dividends or to repay loans or advances.

Presentation of Consolidated Financial Statements

• A parent is required to present consolidated financial statements in which it consolidates its investments in subsidiaries.
• Exceptions to this requirement include:
  • The parent is itself a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and its other owners have been informed about and do not object to the parent not presenting consolidated financial statements.
  • The parent's debt or equity instruments are not traded in a public market.
  • The parent did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market.
  • The ultimate or any intermediate parent of the parent produces consolidated financial statements available for public use that comply with International Financial Reporting Standards.