What are subsidiary accounts?
A subsidiary is a company that is owned by another company. That could be a parent or holding company. The parent or holding company either sets up or acquires the subsidiary or invests heavily in the subsidiary.
Parent companies need to account for transactions with their subsidiaries, as well as prepare consolidated financial statements.
What does it mean to consolidate a subsidiary?
Consolidation of subsidiaries is a type of accounting used for incorporating and reporting the financial results of majority-owned subsidiaries. This method is used when the parent company possesses effective control of the subsidiary. This is usually (but not always) when the parent company owns at least 50.1% of the subsidiary shares or voting rights.
Subsidiary consolidation involves reporting the subsidiary’s balances in a combined statement along with the parent company’s balances. The parent company will report the “investment in subsidiary” as an asset, with the subsidiary reporting the equivalent equity owned by the parent as equity on its own accounts. When the companies are consolidated, an elimination entry must be made to eliminate these amounts to ensure there is no overstatement.
The elimination adjustment is made with the intent of offsetting the intercompany transaction so that the values are not double counted at the consolidated level.
When should a subsidiary be consolidated?
Group companies produce consolidated financial statements for each of their subsidiaries for compliance purposes. Many also choose to consolidate other aspects of management reporting and accounting, such as KPIs. This data gives management teams a detailed view of company performance at both a group and individual subsidiary level.
Subsidiary consolidation tends to take place at the end of an accounting period. This could be the end of the month, quarter, or calendar or fiscal year. One of the benefits of financial consolidation software is that this traditionally time-consuming process can be automated so subsidiary consolidation can be done quickly and easily.
How do you consolidate subsidiary accounts?
Many finance teams still use spreadsheets for consolidating the accounts of a subsidiary. However, this is an error-prone, manual and time-consuming process – especially for large, multi-entity organisations. The exact process and steps involved would vary across companies, but normally the finance team would need to:
- Collect the data
- Calculate currency conversions if operating across borders
- Account for intercompany reconciliations
- Control all eliminations and adjustments
- Compile the financial statements and management reports.
See our Guide to Financial Consolidation and Close for more details.
How should a subsidiary be accounted for in the consolidated financial statements?
Subsidiary accounts are usually prepared in the same way as for the parent company and included in the consolidated financial statements.
Can subsidiaries be excluded from consolidation?
There are some circ*mstances where subsidiaries may be excluded from group consolidated accounts. These can include:
- Groups classified as being in the ‘small’ threshold*
- The parent company has no controlling stake in the subsidiary
- The subsidiary is privately held
- There are severe long-term restrictions which substantially prohibit the exercise of the rights of the parent company over the assets or management of the subsidiary
- The interest of the parent is held exclusively with a view to subsequent resale.
*The definition of what constitutes ‘small’ is normally based on aggregate turnover and number of employees. The exact thresholds vary.
If you’re unsure about the compliance and reporting requirements for your group or for specific subsidiaries, you should seek professional advice.
