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.
FAQs
What is a subsidiary of a company?
A subsidiary is a company that is controlled or owned by another company, known as the parent company. The parent company typically holds more than 50% of the subsidiary’s shares, giving it control over the subsidiary’s operations.
What is the purpose of a subsidiary company?
The purpose of a subsidiary is to allow the parent company to expand its business operations, enter new markets, or separate certain functions or risks from the parent company. Subsidiaries often focus on specific products, services, or regions.
What is an example of a subsidiary company?
A well-known example of a subsidiary is YouTube, which is a subsidiary of Alphabet Inc., the parent company of Google. Another example is Instagram, which is owned by Facebook’s parent company, Meta.
What is a subsidiary in accounting?
In accounting, a subsidiary is treated as a separate legal entity, but its financial results are consolidated into the financial statements of the parent company. This allows the parent company to present a unified view of its financial health.
Is a subsidiary 100% owned?
A subsidiary can be either wholly owned (100% owned) or partially owned by the parent company. If it’s 100% owned, it’s referred to as a “wholly-owned subsidiary.”
