How To Consolidate Subsidiary Accounts

What are subsidiary accounts?

A subsidiary is a company that is controlled by another company, known as the parent or holding company. Control may be achieved by setting up the subsidiary, acquiring it, or obtaining a majority ownership or decision-making power.

Each subsidiary prepares its own financial statements, but parent companies are also required to account for transactions with their subsidiaries and, in most cases, prepare consolidated financial statements covering the entire group.

What does it mean to consolidate a subsidiary?

Consolidating a subsidiary means including its financial results within the group’s consolidated accounts. This approach is used where the parent company has control over the subsidiary - typically (though not always) where it owns more than 50% of the voting rights or otherwise has the power to direct financial and operating policies.

During consolidation, the subsidiary’s assets, liabilities, income and expenses are combined with those of the parent company. Any investment in the subsidiary recorded by the parent, and the corresponding equity recorded by the subsidiary, are eliminated through consolidation adjustments. This ensures amounts are not double-counted at group level.

Intercompany transactions and balances are also eliminated so the consolidated accounts present the group as a single economic entity.

When should a subsidiary be consolidated?

Group companies produce consolidated financial statements for each of their subsidiaries for compliance purposes. Many also choose to consolidate other aspects of management reporting and accounting, such as KPIs. This data gives management teams a detailed view of company performance at both a group and individual subsidiary level.

Subsidiary consolidation tends to take place at the end of an accounting period. This could be the end of the month, quarter, calendar or fiscal year. One of the benefits of financial consolidation software is that this traditionally time-consuming process can be automated, so subsidiary consolidation can be done quickly and easily.

How do you consolidate subsidiary accounts?

Many finance teams still use spreadsheets for consolidating the accounts of a subsidiary. However, this is an error-prone, manual and time-consuming process – especially for large, multi-entity organisations. The exact process and steps involved would vary across companies, but normally, the finance team would need to:

• Collect the data
• Calculate currency conversions if operating across borders
• Account for intercompany reconciliations
• Control all eliminations and adjustments
• Compile the financial statements and management reports.

How should a subsidiary be accounted for in the consolidated financial statements?

Subsidiary accounts are usually prepared in the same way as for the parent company and included in the consolidated financial statements.

Can subsidiaries be excluded from consolidation?

In certain circumstances, subsidiaries may be excluded from group consolidated accounts. These can include:

• The group qualifies as a small group and is exempt from consolidation under UK law
  
  
• The parent company does not have control over the entity (for example, it has significant influence only)
  
  
• Severe long-term restrictions prevent the parent from exercising control over the subsidiary
  
  

Subsidiaries are not excluded simply because they are privately held or intended for resale - instead, different accounting treatments may apply depending on the circumstances. If you’re unsure about the reporting or compliance requirements for your group or specific subsidiaries, professional advice should be sought.

Make subsidiary consolidation faster, more accurate and less manual with AccountsIQ’s financial consolidation software - built for growing, multi-entity organisations.

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