Consolidation of Indirect Subsidiaries

Let’s take for example a Parent Company owning 100% interest in Company A, which in turn owns 100% interest in Company B. Here, clearly the Parent Company owns indirectly through Subsidiary A 100% of Company B. Hence, clearly the Parent Company should incorporate the operations of Company B in its consolidated financial statements.

Now, let’s take another example. Say, the Parent Company owns 70% interest in Company C, which in turn owns 80% interest in Company D. In this example, the Parent Company owns indirectly through Subsidiary C 56% of Company D (80% x 70%). Again, clearly the Parent Company should include Company D in its consolidated financial statements because it owns more than half of the latter.

The problem will arise when, for example, a Parent Company owns 60% of Company E, which in turn holds 60% interest in Company F. Now here, the Parent Company holds only 36% interest indirectly of Company F. The big question: Shall the Parent Company include Company F in its consolidated financial statements?

According to Floyd A. Beams,, “Advanced Accounting”, it is not the direct and indirect ownership of the parent company that determines whether an affiliate should be consolidated. The decision to consolidate is based on whether a majority of the stock of an affiliate is held within the affiliation structure, thus giving the parent an ability to control the operations of the affiliate. Hence, consolidation of Company F would still be appropriate, because 60% of F’s stock is held within the affiliation structure.

Thus, in a Father-Son-Grandson consolidation structure, it is essential to determine whether control exists in order to decide whether to consolidate the affiliate. It is not merely a matter of percentage figures. If the father can control the son, and the son on the other hand can control the grandson, then the father has an indirect control of the grandson. This control may not be immediate, because it may require the intervention of the son. But clearly, control can be demonstrated.

Therefore, in the third case mentioned above, it is clearly necessary that the Parent Company should include Company F in its consolidation, unless otherwise control can be demonstrated and proved not to exist.

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