A subsidiary company is a company that is majority owned by another entity.
The entity which owns the subsidiary company is called the parent company.
A subsidiary may be wholly owned or partially owned. A wholly owned subsidiary is a subsidiary company where all of the outstanding shares are owned by the parent company. A partially owned subsidiary is a subsidiary where the parent company owns 50% or more of the outstanding shares of the subsidiary company.
Under U.S. Generally Accepted Accounting Principles (GAAP), a subsidiary’s financials must be consolidated with the financials of the parent company when the parent company has control over the operations of the subsidiary. Control is assumed to occur when the parent company owns 50% or more of the outstanding shares of the subsidiary.
When the parent company owns less than 100% of the shares of the subsidiary, the parent company must recognize the noncontrolling interest – i.e., the portion of the subsidiary that is not owned by the parent company – within the parent company’s financial statements.
On the parent company’s balance sheet, the parent recognizes the noncontrolling interest in the subsidiary as a separate component of the shareholder’s equity section. The acquired assets, including the noncontrolling interest, must be recognized on the parent’s balance sheet at fair value as of the acquisition date.
On the parent company’s income statement, the parent company recognizes the income attributed to the noncontrolling interest as a separate line item. This line item is then subtracted from the consolidated income to show the net income attributed to the parent company.
