Table of Contents
- What Is an Unconsolidated Subsidiary?
- Key Takeaways
- Understanding an Unconsolidated Subsidiary
- Reasons to Have an Unconsolidated Subsidiary
- Example of an Unconsolidated Subsidiary
- What Is the Difference Between a Consolidated and Unconsolidated Subsidiary?
- What Makes a Company a Subsidiary?
- How Are Subsidiaries Related to the Parent's Financial Statements?
- The Bottom Line
What Is an Unconsolidated Subsidiary?
Let me explain what an unconsolidated subsidiary is. It's a company that you, as the parent company, own, but you don't include its individual financial statements in your consolidated or combined financial statements. Instead, you list it as an investment in those statements. This setup typically happens when you don't have a controlling stake in the subsidiary.
Key Takeaways
You own unconsolidated subsidiaries as the parent, but their financial statements stay separate from your consolidated ones. They show up as investments on your consolidated financial statements rather than full integrations. This applies when you lack control over the subsidiary, have only temporary control, or if your business operations differ significantly from the subsidiary's. Depending on your equity stake, you record the investment using the equity method or the historical cost method. Usually, you hold less than 50% ownership, and the method shifts based on whether it's above or below 20%.
Understanding an Unconsolidated Subsidiary
You treat a company as an unconsolidated subsidiary when you, the parent, aren't in control, have only temporary control, or your operations are quite different from the subsidiary's. The accounting treatment varies by your ownership percentage, which is always under 50%. If you own 20% or more but less than 50%, you can exert some influence, so you use the equity method. This treats the subsidiary as an influential investment, and you record profits or losses from it on your income statement.
If your stake is under 20% with no control, you record it at historical cost or purchase price on your balance sheet as a passive investment. You note dividend income if paid, but not other investment income from the subsidiary.
Reasons to Have an Unconsolidated Subsidiary
As a parent company, you might create an unconsolidated subsidiary for various reasons. Often, you set them up as joint ventures to share costs with another company or as special purpose vehicles to separate revenues, costs, and profits for specific projects from your main operations.
Keep in mind that if the subsidiary is a large operation, your financial statements might not show your full exposure to all parts of your business. You may not have managerial control, but you could still face significant risks from the subsidiary's financial and operational activities. For example, if you're a multinational, political risks in another region could affect you through the subsidiary. From an accounting perspective, it might not justify more than listing it as an investment, but the exposure reaches into your core business.
Example of an Unconsolidated Subsidiary
Consider this example: Suppose you are Company ABC with a 40% controlling interest in your unconsolidated subsidiary, Business XYZ, which you created as a special purpose vehicle for a one-year construction project in a foreign country. XYZ makes $1 billion in profits that year. Since you own more than 20% but less than 50%, you use the equity method. You record $400 million in earnings on your income statement due to your 40% stake and some control. You also increase the value of the initial investment on your balance sheet by $400 million.
What Is the Difference Between a Consolidated and Unconsolidated Subsidiary?
A consolidated subsidiary gets included in your parent company's consolidated financial statements, while an unconsolidated one does not. This difference stems from factors like ownership percentage, similarity of business operations, and level of control.
What Makes a Company a Subsidiary?
A company becomes a subsidiary when you, the parent, own it partially or wholly. You can form it yourself or acquire it by buying another company. It's a separate legal entity from you, the parent.
How Are Subsidiaries Related to the Parent's Financial Statements?
If the subsidiary is public, it has its own financial statements, but for consolidated ones, it's aggregated into your parent's statements along with other subsidiaries. An unconsolidated subsidiary, however, isn't part of those consolidated statements.
The Bottom Line
In summary, an unconsolidated subsidiary is one you own as the parent but don't fully include in your consolidated financial statements. It appears as an investment on your balance sheet. This happens because you own less than 50%, lack full control, or the operations differ significantly from yours.
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