What is an Unconsolidated Subsidiary
An unconsolidated subsidiary is a company that is owned by a parent company, but whose individual financial statements are not included in the consolidated or combined financial statements of the parent company to which it belongs. Instead, this type of company appears in the combined financial statement as an investment.
BREAKING DOWN Unconsolidated Subsidiary
A company may be treated as unconsolidated subsidiary even when a parent company owns 50% or more of its voting common stock. This usually occurs when the parent is not in actual control of a subsidiary, has temporary control of the subsidiary or if the parent company's business operations are considerably different than that of the subsidiary.
By using the equity method of investment, an unconsolidated subsidiary is treated simply as an investment. When a subsidiary or affiliated entity is a sizable operation, a parent company’s financial statements may not fully reflect its true exposure to all attached elements of its business.
While a parent company may not have managerial control of a subsidiary, they could have significant exposure to the financial and operational dealings of the subsidiary. For instance, a multinational enterprise may experience political risk in another region. From an accounting sense, it might not make sense to account for the subsidiary beyond an investment on a parent’s financial statements, but the exposure does extend to the parent’s core business.
Example of an Unconsolidated Subsidiary
As an example. In early 2011, protests in Egypt took billions from Apache Corporation’s market value. The U.S. based oil exploration and production company had significant holdings and operations in Egypt. When the political turmoil broke out, investors started to dump Apache’s stock. Some of this activity was justifiably reactionary. But investors may have overreacted by shaving so much value off Apache’s market cap without referencing their financial statements first.