Subsidiary

A subsidiary is a company that is controlled by another company, known as the parent company. The parent company owns a majority of the subsidiary’s shares and has the ability to influence the subsidiary’s decisions.

Types of Subsidiaries:

• Controlled subsidiaries: Subsidiaries where the parent company has the ability to control the subsidiary’s operations and financial activities.
• Equity-accounted subsidiaries: Subsidiaries where the parent company has less than a controlling interest, but nevertheless accounts for its investment in the subsidiary using the equity method.
• Joint ventures: Subsidiaries controlled jointly by two or more companies, with each company having a separate ownership interest.

Financial Reporting:

• Subsidiaries are consolidated into the parent company’s financial statements if they are controlled by the parent.
• The parent company accounts for its investment in equity-accounted subsidiaries using the equity method, which requires the parent to account for its investment at fair value and make adjustments for any changes in the subsidiary’s equity.
• Joint ventures are accounted for separately from the parent company’s financial statements.

Examples:

• A company has a subsidiary that manufactures electronics.
• A parent company owns a majority of the shares in a subsidiary that provides logistics services.
• A parent company and a subsidiary each own 50% of a joint venture that operates a factory.

Key Points:

• Subsidiaries are companies controlled by another company.
• Controlled subsidiaries are consolidated into the parent company’s financial statements.
• Equity-accounted subsidiaries are accounted for using the equity method.
• Joint ventures are accounted for separately.