Unconsolidated Subsidiaries
Candlefocus EditorThe parent company carries the unconsolidated subsidiary investments at either the cost or equity method, depending on the size of the parent company's ownership stake. If the parent has a controlling interest in the unconsolidated subsidiary, the account is adjusted to the cost method value. The difference between the cost method and the historic cost method is that the cost method will include market values of the parent company's interests in the subsidiary.
Unconsolidated subsidiaries may offer a number of advantages to their parent company. One of the most important advantages is that the parent company does not have any liability for the debts or obligations of the subsidiary. Another benefit is that the parent company does not need to publicly disclose its financial statements, making it a great tool for companies to manage their private financial interests. Finally, consolidating or combining the financial statements of a parent and an unconsolidated subsidiary may be difficult, as the subsidiary may have a different accounting method or financial policies to the parent.
In summary, unconsolidated subsidiaries are a valuable way for companies to manage their interests and financial risks by having investments that are not included in the parent company's consolidated financial statements. Parent companies must ensure that if the equity proportion of their unconsolidated subsidiaries is higher than 20%, the investment in the unconsolidated subsidiary should be carried at cost method value. The advantages of unconsolidated subsidiaries include zero liability for the debts or obligations of the subsidiary, no required public disclosure of financial statements, and the lack of complex consolidation process.