Unconsolidated subsidiary definition
/What is an Unconsolidated Subsidiary?
A unconsolidated subsidiary is a subsidiary whose financial statements are not included in the consolidated financial statements of its parent entity. Instead, the parent entity only reports its investment in the subsidiary, using the equity method of investment. A subsidiary's financial statements are unconsolidated when the parent does not exercise control over the entity.
Types of Unconsolidated Subsidiaries
The main types of entities that are classified as unconsolidated subsidiaries are as follows:
Minority ownership subsidiaries. These subsidiaries are not consolidated because the parent company owns less than a controlling interest, typically below 50% of the voting shares. Without control over financial and operational decisions, the parent must account for its investment using methods like the equity method or fair value method. The subsidiary’s results are reported separately and do not impact the parent’s consolidated financial statements directly.
Foreign subsidiaries with severe restrictions. If a foreign subsidiary operates in a country where severe restrictions—such as currency controls or legal barriers—prevent the parent from exercising control, consolidation may not be appropriate. These restrictions can limit the parent's access to the subsidiary’s assets and operations. As a result, the subsidiary remains unconsolidated, and its results are disclosed separately or through other accounting treatments.
Subsidiaries held for sale. When a subsidiary is classified as "held for sale" under accounting standards like IFRS 5 or ASC 205-20, it is excluded from consolidation. Instead, it is reported as a single line item on the balance sheet at fair value less costs to sell. This reflects management's intention to dispose of the entity in the near term rather than continue integrating its operations.