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Unconsolidated Subsidiary

Unconsolidated Subsidiary

What Is an Unconsolidated Subsidiary?

An unconsolidated subsidiary is a company that is owned by a parent company yet whose individual financial statements are excluded from the consolidated or combined financial statements of the parent company to which it has a place. All things considered, an unconsolidated subsidiary shows up in the consolidated financial statements of the parent as an investment. This generally applies when the parent company doesn't have a controlling stake in the subsidiary.

Figuring out an Unconsolidated Subsidiary

A company might be treated as an unconsolidated subsidiary when the parent company isn't in control of a subsidiary, has impermanent control of the subsidiary, or on the other hand in the event that the parent company's business operations are extensively unique in relation to that of the subsidiary.

Different accounting medicines apply, contingent upon the percentage owned by the parent company. The ownership stake, nonetheless, is in every case under half. Assuming the ownership stake is 20% or more (however under half), the parent regularly can apply a control over the subsidiary of some sort.

Here, the parent will utilize the equity method of accounting as the unconsolidated subsidiary is treated as an investment with over 20% ownership in the voting stock of the subsidiary. This is known as a compelling investment. Under this method, the parent must record any profit or losses realized from the subsidiary on its income statement.

Parent companies with under a 20% stake and no control of the subsidiary just record the investment at historical cost or the purchase price on its balance sheet. This is known as a passive investment. Nonetheless, if dividends are paid, which are cash payments to shareholders, the parent records the dividend income however records no investment income earned from the subsidiary.

Motivations to Have an Unconsolidated Subsidiary

Most frequently, a parent company will make the unconsolidated subsidiary itself. There are different reasons it might do as such, including making joint ventures (JVs) to split costs with another company or special purpose vehicles (SPVs) to isolate incomes, costs, and profits for special projects from that of the parent company.

At the point when a subsidiary or affiliated entity is a sizable operation, a parent company's financial statements may not completely mirror its true exposure to all connected components of its business.

While a parent company might not have managerial control of a subsidiary, it could have critical exposure to the financial and operational dealings of the subsidiary. For example, a multinational enterprise might experience political risk in another region. From an accounting sense, it probably won't check out to account for the subsidiary past an investment on a parent's financial statements, however the exposure stretches out to the parent's core business.

Illustration of an Unconsolidated Subsidiary

For instance, suppose that Company ABC has a 40% controlling interest in its unconsolidated subsidiary, Business XYZ, which it made as a SPV for another construction project in a foreign country that will just last for a year.

XYZ records $1 billion in profits for the year. Since ABC possesses over 20% of XYZ (yet under half), it will involve the equity method of accounting for its unconsolidated subsidiary. ABC must record $400 million in earnings on its income statement since ABC has a 40% stake and applies some control over XYZ. Likewise, ABC needs to record the increase in the value of the initial investment, listed on the balance sheet, by $400 million.

Features

  • Companies are viewed as unconsolidated auxiliaries when the parent company isn't in control of the subsidiary, has just brief control, or on the other hand on the off chance that the parent's business operations are not quite the same as that of the subsidiary.
  • Unconsolidated auxiliaries are owned by a parent company, however their individual financial statements are excluded from the consolidated financial statements of the parent company.
  • Contingent upon the equity stake of the parent company in the subsidiary, the investment must be recorded either utilizing the equity method or the historic cost method.
  • Parent companies most frequently have under a half ownership stake in the unconsolidated subsidiary. The accounting method utilized depends assuming that the ownership stake is pretty much than 20%.
  • As opposed to their individual financial statements, unconsolidated auxiliaries show up as investments on the parent company's consolidated financial statements.