What Is an Unconsolidated Subsidiary?
An unconsolidated subsidiary is a company that is owned by a parent company but whose individual financial statements are not included in the consolidated or combined financial statements of the parent company to which it belongs. Instead, an unconsolidated subsidiary appears in the consolidated financial statements of the parent as an investment. This usually applies when the parent company does not have a controlling stake in the subsidiary.
Key Takeaways
- Unconsolidated subsidiaries are owned by a parent company, but their individual financial statements are not included in the consolidated financial statements of the parent company.
- Rather than their individual financial statements, unconsolidated subsidiaries appear as investments on the parent company's consolidated financial statements.
- Companies are considered to be unconsolidated subsidiaries when the parent company is not in control of the subsidiary, has only temporary control, or if the parent's business operations are different than that of the subsidiary.
- Depending on the equity stake of the parent company in the subsidiary, the investment has to be recorded either using the equity method or the historic cost method.
- Parent companies most often have less than a 50% ownership stake in the unconsolidated subsidiary. The accounting method used depends if the ownership stake is more or less than 20%.
Understanding an Unconsolidated Subsidiary
A company may be treated as an unconsolidated subsidiary when the parent company is not in control of a subsidiary, has temporary control of the subsidiary, or if the parent company's business operations are considerably different than that of the subsidiary.
Different accounting treatments apply, depending on the percentage owned by the parent company. The ownership stake, however, is always less than 50%. If the ownership stake is 20% or more (but less than 50%), the parent typically can exert some type of control over the subsidiary.
Here, the parent will use the equity method of accounting as the unconsolidated subsidiary is treated as an investment with more than 20% ownership in the voting stock of the subsidiary. This is known as an influential investment. Under this method, the parent must record any profit or losses realized from the subsidiary on its income statement.
Parent companies with less than a 20% stake and no control of the subsidiary merely record the investment at historical cost or the purchase price on its balance sheet. This is known as a passive investment. However, if dividends are paid, which are cash payments to shareholders, the parent records the dividend income but does not record any investment income earned from the subsidiary.
Reasons to Have an Unconsolidated Subsidiary
Most often, a parent company will create the unconsolidated subsidiary itself. There are a variety of reasons it may do so, including creating joint ventures (JVs) to split costs with another company or special purpose vehicles (SPVs) to segregate revenues, costs, and profits for special projects from that of the parent company.
When a subsidiary or affiliated entity is a sizable operation, a parent company’s financial statements may not fully reflect its true exposure to all attached elements of its business.
While a parent company may not have managerial control of a subsidiary, it could have significant exposure to the financial and operational dealings of the subsidiary. For instance, a multinational enterprise may experience political risk in another region. From an accounting sense, it might not make sense to account for the subsidiary beyond an investment on a parent’s financial statements, but the exposure does extend to the parent’s core business.
Example of an Unconsolidated Subsidiary
As an example, let's say that Company ABC has a 40% controlling interest in its unconsolidated subsidiary, Business XYZ, which it created as an SPV for a new construction project in a foreign country that will only last for a year.
XYZ records $1 billion in profits for the year. Because ABC owns more than 20% of XYZ (but less than 50%), it will use 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 exerts some control over XYZ. Also, ABC needs to record the increase in the value of the initial investment, listed on the balance sheet, by $400 million.
FAQs
What Is an Unconsolidated Subsidiary? An unconsolidated subsidiary is a company that is owned by a parent company but whose individual financial statements are not included in the consolidated or combined financial statements of the parent company to which it belongs.
What is the difference between consolidated and unconsolidated assets? ›
A consolidated statement is that of a holding company where it incorporates figures of its subsidiary companies too. Unconsolidated or standalone statements are that of the particular entity without any of subsidiary company figures in it.
What is the meaning of unconsolidated accounts? ›
Meaning of unconsolidated in English
relating to or involving the separate financial accounts or results of each company in a group, not combined with the others: The company's unconsolidated pretax profit rose 25% to 63.87 billion yen.
In what circ*mstances does a subsidiary not have to be consolidated? ›
Subsidiary undertakings may be excluded from consolidation on the following grounds: (1) an individual subsidiary may be excluded from consolidation if its inclusion is not material for the purpose of giving a true and fair view; (2) an individual subsidiary may be excluded from consolidation for reasons of ...
What is equity income from unconsolidated subsidiaries? ›
Equity in the Earnings of Unconsolidated Subsidiaries means the Company's interest in the net income (losses) of entities that are partially owned by the Company, and the financial results of which are not consolidated with the Company's financial results.
What are unconsolidated subsidiaries? ›
An unconsolidated subsidiary is a company that is owned by a parent company but whose individual financial statements are not included in the consolidated or combined financial statements of the parent company to which it belongs.
What is an example of an unconsolidated structured entity? ›
Examples of entities that are regarded as structured entities given in IFRS 12:B23 include, but are not limited to: securitisation vehicles; asset‑backed financings; some investment funds.
What is the simple meaning of unconsolidated? ›
Definition of 'unconsolidated'
1. utterly different or distinct in kind.
What is another word for unconsolidated? ›
consisting of particles that do not stick together unconsolidated soil. loose. incoherent. rough. unconnected.
What does subsidiaries consolidated mean in accounting? ›
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.
Understanding subsidiary companies
A subsidiary company is a business entity or corporation either fully owned or partially controlled by another company, known as the parent company. The parent company usually holds a controlling interest in the subsidiary company, from 51 to 99 percent.
What is the major disadvantage of a subsidiary? ›
One of the main disadvantages of setting up a subsidiary company is costs. In addition to the extra day-to-day running and staff costs, you may have to factor in additional costs associated with running a limited company, such as accountant and legal fees.
Can a parent company be liable for its subsidiary? ›
A parent corporation is typically not held liable for the acts of a subsidiary. As such, disregarding the corporate form (i.e., by piercing the corporate veil) and holding the parent liable is an extraordinary remedy.
What is the difference between consolidated and unconsolidated income statements? ›
An unconsolidated financial statement would treate each subsidiary separately from an accounting perspective, while a consolidated one accounts for every subsidiary together. When you are compiling a consolidated financial statement, the ownership percentage of the parent company matters.
What is the difference between consolidated and unconsolidated investments? ›
A consolidated statement is that of a holding company where it incorporates figures of its subsidiary companies too. Unconsolidated or standalone statements are that of the particular entity without any of subsidiary company figures in it.
What is unconsolidated debt? ›
Unconsolidated debt is the sum of outstanding financial liabilities arising from past borrowing. Debt may be owed to external or domestic creditors and typically, debt financing is in the form of loans or bonds. The debtor may be either a public (government) or private sector entity.
What does consolidated assets mean? ›
Consolidated Assets means all assets which should be listed on the consolidated balance sheet of the Borrower and its Subsidiaries, as determined on a consolidated basis in accordance with GAAP.
What does it mean to consolidate your assets? ›
To consolidate (consolidation) is to combine assets, liabilities, and other financial items of two or more entities into one. In financial accounting, the term “consolidate” often refers to the consolidation of financial statements wherein all subsidiaries report under the umbrella of a parent company.
What is consolidated and non consolidated accounts? ›
Consolidated financial statements are typically required by accounting standards when a company has subsidiaries or affiliates. Non-consolidated financial statements are used when a company does not have any subsidiaries or affiliates or when the company's management decides not to consolidate the financial statements.
What does total consolidated assets mean? ›
Total Consolidated Assets means, as of any date of determination with respect to the Company, the total of all assets appearing on the consolidated balance sheet of the Company and its consolidated Subsidiaries most recently furnished pursuant to Section 6.01.
