Rules for consolidating subsidiaries

Posted by / 16-Nov-2015 22:19

Rules for consolidating subsidiaries

For example, if your company owns 100 percent of the outstanding stock in another corporation, your consolidated income statement will report the revenue of both businesses as a single figure after elimination of the transactions between the two companies.

When consolidation isn't necessary, both companies report their own operating activities on separate financial statements without any reduction for inter-company transactions or equity investments held by one company in the other.

Initially, your equity investment is reported on the balance sheet at cost.Each dividend payment you receive reduces the reported value of the investment, whereas it increases for your share of the net income reported by the company.Consolidation of financial statements and equity method accounting, however, don't apply to the typical or casual stocks you acquire.A consolidated financial statement, such as an income statement, combines the revenue, expenses and other items that companies typically report, of two or more businesses that are interrelated through a common equity investor.In the absence of owning a majority of the equity, extensive contractual agreements or other business arrangements between two enterprises may be sufficient to establish the requisite control that warrants consolidating financial statements.

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If your business holds between 20 and 50 percent of the equity in a company, GAAP recognizes that you likely exert “significant influence” over the business and may require that you report the investment on your company's financial statements under the equity method rules.