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. The company may be a wholly-owned subsidiary. Instead, an unconsolidated subsidiary appears in the consolidated financial statements of the parent as an investment.
Understanding an Unconsolidated Subsidiary
A company may be treated as an unconsolidated subsidiary when the parent company is not in 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.
Different accounting treatments apply, depending on the percentage owned by the parent company. By using the equity method of investment, an unconsolidated subsidiary is treated as an investment. The parent typically can exert some type of control over the subsidiary with more than 20% ownership in the voting stock of the subsidiary. Under this method, the parent must record any profit or losses realized from the subsidiary on its income statement.
Parent companies with less than a 20% stake and no control of the subsidiary merely record the investment at historical cost or the purchase price on its balance sheet. However, if dividends are paid, which are cash payments to shareholders, the parent records the dividend income but does not record any investment income earned from the subsidiary.
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.
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.
Example of an Unconsolidated Subsidiary
As an example, let's say that Facebook Inc. has a 40% controlling interest in its unconsolidated subsidiary Instagram. Instagram records $1 billion in profits for the year. Facebook must record $400 million in earnings on its income statement since Facebook has a 40% stake and exerts some control over Instagram. Also, Facebook needs to record the increase in the value of the initial investment, listed on the balance sheet, by $400 million.