Financial Statement Treatments of Subsidiary, Joint Venture and an Associate

Subsidiary

What is a Subsidiary?

Subsidiary is an investee company when the shares held in it by the investor company gives the investor company a control of more than 50% of the votes and thus the control over the board of directors of the investee company. Such an influence by the investor company is termed as “Dominant influence / control”.

What is the treatment of a subsidiary in the financial statement?

When a subsidiary is incorporated the effect in balance sheet is seen as follows. The investment costs increase in the balance sheet – Asset side of the investor (one can also now call it a group company). This would be balanced by the share capital and the pre-acquisition reserves of the subsidiary. The consolidated value of Assets and Liabilities is then found out which represents the value of the resources controlled by the group.

But what about the portion of the subsidiary held by people outside the group? By taking the consolidated value of Assets and Liabilities in the group BS, aren’t we skewing the BS as the group only owns some percentage (> 50%) of the total assets and the rest belongs to some other stake holders?

Yes this indeed will skew the BS and thus we incorporate the line item “Minority interest” which reflects the portion of the subsidiary held by people outside the group.The Book Value of Equity of the parent company seen alone excludes the equity held by minorities. But to balance the Total Assets, Minority Interest is included as a separate line item below the Shareholder’s Equity. Now the BS is balanced. 🙂

Are there any other treatments?

The revenues, EBITDA, Net Debt etc will be consolidated. The Net income of the group will exclude the portion held by minorities. This will be shown as Minority Interest in the income statement.

For Eg:

There are two companies A and B. A is a 100 % owned subsidiary and B is an 80 % owned subsidiary.

Company	Revenue (in Rs ‘000s)	EBITDA (‘000s)	Net Income (‘000s)	Net Debt (‘000s)	Book Value of Equity (‘000s)
A	100	50	30	50	50
B	100	50	30	50	50
Group	200	100	60-0.2×30 = 54	100	100-0.2×50 = 90

Associate

What is an Associate?

When the control of the investor company is such that it owns more than 20% but less than 50% of the shares of a company (investee) then the investee company is said to be an associate of the investor company. This gives the investor company a “Significant Influence / Control” over the associate.

What is the treatment of an associate in the financial statement?

The treatment of an associate is referred to as “One Liner” treatment. In this treatment the interest in the associate is reported as a single line on the balance sheet of the group. For e.g you may find line items like “Investments in associates”  on the Asset side of the balance sheet of the group company. Thus only the share of the group in Associate is recorded on the balance sheet.

Joint venture

What is a Joint Venture?

A joint venture is an investee which is under the joint control of two or more investees.. It is a startegic alliance between two or more companies which contribute resources and share revenues along with the control they exhibit over the JV. This treatment is similar to that of an Associate.