SERVING THE QUANTITATIVE FINANCE COMMUNITY

 
User avatar
albertmills
Topic Author
Posts: 380
Joined: March 13th, 2007, 1:09 pm

accounting for subsidiary

April 22nd, 2014, 7:45 pm

If a company owns a subsidiary the subsidiaries voting stock is more than 50% controlled by the parent company, and the parent company is supposed to consolidate the ifnancial statements of both companies. If the parent company owns between 20 to 50% of another company it must report the other companies income on its own financial statements based on the percentage of the other company the parent company owns.I don't get this. If a company owns 20 to 50% or even over 50% of another company, it's not as if it receives income directly from that other company as far as i know. it's just like the public owning stock in a company, you only get the dividends the other company decides to pay, nots its income. So if the parent company is only receiving dividends (possibly) from the other company it owns shares of, how come it has to report the other companies income on its own financial statements, as if its receiving the other companies income?
 
User avatar
ppauper
Posts: 70239
Joined: November 15th, 2001, 1:29 pm

accounting for subsidiary

April 22nd, 2014, 8:29 pm

Quote20% to 50% ownership ? Associate companyWhen the amount of stock purchased is between 20% and 50% of the common stock outstanding, the purchasing company?s influence over the acquired company is often significant. The deciding factor, however, is significant influence. If other factors exist that reduce the influence or if significant influence is gained at an ownership of less than 20%, the equity method may be appropriate (FASB interpretation 35 (FIN 35) underlines the circumstances where the investor is unable to exercise significant influence).To account for this type of investment, the purchasing company uses the equity method. Under the equity method, the purchaser records its investment at original cost. This balance increases with income and decreases for dividends from the subsidiary that accrue to the purchaser.Treatment of Purchase Differentials: At the time of purchase, purchase differentials arise from the difference between the cost of the investment and the book value of the underlying assets.Purchase differentials have two components: The difference between the fair market value of the underlying assets and their book value. Goodwill: the difference between the cost of the investment and the fair market value of the underlying assets.Purchase differentials need to be amortized over their useful life; however, new accounting guidance states that goodwill is not amortized or reduced until it is permanently impaired, or the underlying asset is sold.they record the income the way you say to keep the asset on the parent's books at book value + original goodwillhttp://en.wikipedia.org/wiki/Consolidation_%28business%29
 
User avatar
tagoma
Posts: 18351
Joined: February 21st, 2010, 12:58 pm

accounting for subsidiary

April 23rd, 2014, 8:32 am

Accounting standards are no brainers. Just apply those fancy principles.
ABOUT WILMOTT

PW by JB

Wilmott.com has been "Serving the Quantitative Finance Community" since 2001. Continued...


Twitter LinkedIn Instagram

JOBS BOARD

JOBS BOARD

Looking for a quant job, risk, algo trading,...? Browse jobs here...


GZIP: On