Lecture 3: Control > Subsidiary > Consolidation
So there are few different types of relationships that a parent can have with the companies it invests in. We are going to be going through those different relationships over the next few lectures.
The first relationship we are going to be looking at, is if the holding company or the parent, controls the other company. The other company would then be called the subsidiary. Right, we already know this. Control, we are going to say, is if the holding company owns more than 50% of the subsidiary or has an investment in more than 50% of the subsidiary. We would then say that is control. When we have a holding company/subsidiary relationship, there is control, and we would then need to consolidate the group financial statements.
So how do we consolidate in the group financial statements? Remember the group financial statements are always going to be under the holding company umbrella. So it will be called the H Limited Group. When we consolidate, we are going to be taking all of our assets, liabilities, income, expenses, as well as OCI on a line-by-line basis, and we’re going to be adding H+S.
It’s very important to understand that all of these assets, liabilities, income, and expenses of S always comes in at a 100% of S. We always bring in the full amount of S. So what happens in the situation where the parent doesn’t own a 100% of S? What happens in the situation where the parent, say, for example, only owns 80% of S? Does it still bring in a 100% as part of the H Limited Group?
Yes, it always still brings in a 100% of S in the H Limited Group financial statements. But in this case, what it does is, it creates another line item within equity, called non-controlling interest. This non-controlling interest is basically going to show the amount in S that H doesn’t control. So in this case, H doesn’t control 20% of S. So 20% of S’s assets and liabilities are going to be shown within non-controlling interest, as the portion that is belonging to shareholders outside of the group or the non-controlling interest outside of the group.
And that, in a nutshell, is control and consolidate.