Subsidiary (Group Undertaking)

A subsidiary is an undertaking that is controlled by another undertaking, often referred to as the holding or parent company. The specific criteria for what constitutes control are defined by legislation, such as the Companies Act. Typically, a subsidiary's financial statements are consolidated into the financial statements of the parent company.
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Definition

A subsidiary (or group undertaking) is a business entity that is either entirely or partially owned and effectively controlled by another entity, known as the parent or holding company. The criteria for what constitutes “control” are precisely defined under various regulations, such as the Companies Act in many jurisdictions. Control is usually defined as the power to govern the financial and operating policies of the subsidiary, typically by owning more than 50% of its voting rights.

Examples

  1. Alphabet Inc. and Google LLC: Alphabet Inc. is the parent company of Google LLC. Google operates as a subsidiary, fulfilling strategic roles within the holding company’s structure.

  2. Disney and Pixar: Pixar Animation Studios is a subsidiary of The Walt Disney Company. While Pixar operates independently in terms of creative processes, its financial and operational policies align with and contribute to Disney’s overall strategy.

  3. Procter & Gamble and Gillette: Gillette is a subsidiary of Procter & Gamble, which acquired the razor and personal care product company to expand its market presence and product portfolio.

Frequently Asked Questions

Q1: What is the main difference between a subsidiary and a branch?

  • A1: A subsidiary is a separate legal entity that operates independently but is controlled by a parent company. A branch, however, is not a separate legal entity but an extension of the parent company.

Q2: Can a subsidiary operate independently of its parent company?

  • A2: While a subsidiary may have its management and operations, it remains under the overall control and governance of the parent company, especially concerning major financial and strategic decisions.

Q3: How is a subsidiary different from a wholly owned subsidiary?

  • A3: A wholly owned subsidiary is one in which the parent company owns 100% of the subsidiary’s shares, giving it complete control. In contrast, a regular subsidiary may be less than wholly owned but still controlled by the parent company.

Q4: What are consolidated financial statements?

  • A4: Consolidated financial statements are financial statements that incorporate the financials of the parent company and all its subsidiaries, presenting them as a single economic entity.

Q5: How does the Companies Act define control of a subsidiary?

  • A5: The Companies Act typically defines control as holding a majority of the voting rights, having the right to appoint or remove a majority of the board of directors, or having the ability to govern the financial and operational policies of the subsidiary.

  • Parent Company: An entity that controls one or more subsidiaries through ownership of a majority of voting shares or similar control mechanisms.

  • Consolidated Financial Statements: Financial statements that integrate the financial information of a parent company and its subsidiaries into one single report.

  • Quasi-Subsidiary: An entity that is not legally a subsidiary but is treated as such for accounting purposes due to the level of control exercised by the parent company.

  • Wholly Owned Subsidiary: A subsidiary 100% owned by the parent company, allowing complete control over its operations and policies.

Online References

Suggested Books for Further Studies

  1. “Financial Statement Analysis and Security Valuation” by Stephen H. Penman
  2. “International Financial Reporting Standards (IFRS) 2019”
  3. “Advanced Accounting” by Floyd A. Beams, Joseph H. Anthony, Bruce Bettinghaus, & Kenneth Smith
  4. “Accounting for Mergers and Acquisitions” by Amir Amel-Zadeh & Graeme Rankine

Accounting Basics: “Subsidiary (Group Undertaking)” Fundamentals Quiz

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