Parent company and subsidiary accounting methods depend on how much of the subsidiary the parent owns and how much influence that ownership carries. Three tiers govern the choice: passive investments below roughly 20% are measured at fair value (or a cost-based alternative), holdings between 20% and 50% typically use the equity method, and controlling interests above 50% require full consolidation under the acquisition method. The percentages are presumptions, not bright lines, so the underlying facts about influence and control drive the final answer.
Passive Investments Below 20%
When an investor holds less than 20% of the voting stock, the assumption is that it cannot meaningfully affect the investee’s operating or financial decisions. These holdings fall under ASC 321. If the securities have a readily determinable fair value, such as shares traded on a public exchange, the investor remeasures the investment to fair value at each reporting date and runs the changes through net income.
For equity securities without a readily determinable fair value, the investor can elect a measurement alternative: carry the investment at cost, less any impairment, adjusted for observable price changes in identical or similar securities from the same issuer.1PwC. Analysis of Equity Interests This is the closest surviving cousin of the old cost method, but it is not a set-it-and-forget-it balance. Observable transactions in the same issuer’s securities have to be tracked and reflected.
The Equity Method Between 20% and 50%
Once the stake reaches 20%, the presumption flips. The investor is treated as having significant influence over the investee’s operating and financial policies, even without control.2Deloitte Accounting Research Tool. General Presumption That triggers the equity method under ASC 323.
The investor records the investment initially at cost. After that, the carrying amount moves with the investee’s results. The investor’s proportionate share of the investee’s net income increases the investment balance; its share of losses reduces it. Dividends do not hit income. They reduce the investment account, because the earnings that funded the dividend were already picked up when the investee earned them.3Deloitte Accounting Research Tool. Equity Method Earnings and Losses Booking the dividend as income on top of the earnings share would count the same dollars twice.
Consolidation When the Parent Has Control
Owning more than 50% of the outstanding voting shares generally establishes a controlling financial interest, and the parent must consolidate the subsidiary line by line.4Deloitte Accounting Research Tool. General Consolidation Principles Every asset, liability, revenue, and expense is combined so the group presents as a single reporting entity.
Control can also exist below 50%. The codification notes that “the power to control may also exist with a lesser percentage of ownership.” Board representation, contractual rights, or debt covenants that let one party direct the other’s key decisions can establish control without a majority stake. These situations require judgment and a full review of the relationships between the parties.
Variable Interest Entities
Voting stock isn’t the whole story. Some entities are structured so that voting rights don’t reflect who actually bears the economic risks or receives the rewards. Under ASC 810 those are variable interest entities, and every entity has to be evaluated under the VIE framework first before falling back to the voting-interest model.5Grant Thornton. Applying the VIE Consolidation Model
To consolidate a VIE, the reporting entity must be the primary beneficiary. That requires meeting two conditions at once: the power to direct the activities that most significantly affect the VIE’s economic performance, and the obligation to absorb losses or the right to receive benefits that could be significant to the VIE.6Deloitte Accounting Research Tool. Determining the Primary Beneficiary A party with the economic exposure but no decision-making power isn’t the primary beneficiary, and neither is one with the power but no meaningful exposure.
How the Acquisition Method Works
When control is established through a business combination, the parent applies the acquisition method in ASC 805. The point is to present the combined entity as if it had been a single company from the closing date onward.
Fair Value Reset at Acquisition
The parent measures the subsidiary’s identifiable assets and liabilities at fair value on the acquisition date. This is a one-time reset of the subsidiary’s balance sheet for consolidation purposes, and it usually produces meaningful differences from the subsidiary’s historical book values.7Deloitte Accounting Research Tool. Business Combinations Achieved in Stages Post-acquisition depreciation and amortization on the consolidated statements are based on those restated fair values.
Identifiable intangibles that the subsidiary may never have carried on its own books, such as customer relationships, trade names, and technology, have to be recognized at fair value if they meet the criteria. They are then amortized over their estimated useful lives.
Deal Costs
Advisory, legal, accounting, and valuation fees to get the deal done are expensed as incurred. They aren’t rolled into the purchase price or capitalized with the acquired assets.8Deloitte Accounting Research Tool. Acquisition-Related Costs The exception is the cost of issuing debt or equity to fund the acquisition, which follows the normal rules for those instruments.
Goodwill and Bargain Purchases
Goodwill is the residual when the purchase price exceeds the fair value of the net identifiable assets acquired. It captures what the parent paid for things like reputation, assembled workforce, or expected synergies that don’t qualify as separately identifiable assets.
Sometimes the math runs the other way and the fair value of net identifiable assets exceeds the price paid. Before booking anything, the acquirer has to go back and reassess whether every asset and liability was identified and whether the fair value measurements are sound.9Deloitte Accounting Research Tool. Measuring a Bargain Purchase Gain If the excess still remains, it’s recognized as a gain in earnings on the acquisition date. Bargain purchases are uncommon and usually involve distressed sellers.
What Happens to Goodwill Afterward
For public companies, goodwill isn’t amortized. Each reporting unit that carries goodwill tests it for impairment at least annually and more often when a triggering event arises.10Deloitte Accounting Research Tool. When to Test Goodwill for Impairment A qualitative “Step 0” screen is available first: if it’s not more likely than not that fair value has fallen below carrying amount, no further testing is required.11Deloitte Accounting Research Tool. Qualitative Assessment (Step 0) The quantitative test compares the reporting unit’s fair value to its carrying amount; if the carrying amount is higher, the impairment loss equals the difference, capped at the goodwill allocated to that unit.12Deloitte Accounting Research Tool. FASB Eliminates Step 2 From the Goodwill Impairment Test
Private companies and not-for-profits that aren’t SEC filers can elect a different path. They can amortize goodwill straight-line over ten years, or a shorter period if a more appropriate useful life can be demonstrated.13Deloitte Accounting Research Tool. Goodwill Amortization Alternative Impairment still has to be evaluated when a triggering event occurs, but annual testing goes away.
Non-Controlling Interest When Ownership Isn’t 100%
If the parent owns less than all of the subsidiary, the outside stake is the non-controlling interest. Even at 80/20 ownership, the entire subsidiary is consolidated line by line, and the NCI’s share is then carved out so readers can tell the parent’s claim apart from outsiders’.
US GAAP measures the NCI at fair value on the acquisition date. The per-share fair value assigned to the NCI can differ from what the parent paid per share, because the parent’s price often reflects a control premium while the NCI reflects a discount for lack of control.7Deloitte Accounting Research Tool. Business Combinations Achieved in Stages Because the NCI itself is at fair value, consolidated goodwill reflects both the parent’s and the NCI’s share.
On the consolidated balance sheet, the NCI is a separate line within total equity, distinct from the parent’s equity.14Deloitte Accounting Research Tool. Balance Sheet Presentation On the income statement, the full subsidiary net income rolls into consolidated net income, and a separate line then deducts the NCI’s share to arrive at net income attributable to the parent. That split keeps parent EPS tied to earnings that actually belong to parent shareholders.
Eliminating Intercompany Transactions
Consolidated statements are meant to show what the group looks like when it deals with the outside world. Anything that moved between parent and subsidiary is just money changing pockets, so it has to come out.15Deloitte Accounting Research Tool. Transactions Between Parent and Subsidiary Leaving intercompany flows in would overstate revenue, expenses, assets, and liabilities.
Inventory Sales
When a parent sells inventory to a subsidiary, or the reverse, the intercompany revenue and matching cost of goods sold are stripped out. Consolidated sales should only include sales to external customers. The harder piece is inventory bought from an affiliate that hasn’t been sold outside the group by period-end. That inventory sits on the books at the transfer price, which contains an unrealized markup from the group’s perspective. The elimination backs out the unrealized profit and brings consolidated inventory back to the original cost. When the receiving entity sells it to an outside buyer in a later period, the previously eliminated profit is recognized then.
Intercompany Loans
Loans between group members create a receivable in one entity and a payable in the other. On a consolidated basis these are internal IOUs. The receivable comes off consolidated assets, the payable comes off consolidated liabilities, and the related interest revenue and interest expense are removed from the consolidated income statement.16Deloitte Accounting Research Tool. Attribution of Eliminated Income or Loss Only debt owed to outside creditors survives.
Fixed Asset Transfers
If a parent transfers equipment or real estate to a subsidiary above its carrying amount, the seller books a gain. From the group’s perspective the gain is unrealized because the asset never left the group. The gain is eliminated and the asset is reported at its original cost basis to the group, not the transfer price.15Deloitte Accounting Research Tool. Transactions Between Parent and Subsidiary If the asset is depreciable, there’s a follow-on adjustment: the receiving entity depreciates the inflated transfer price, so consolidated depreciation is overstated and has to be scaled back to what it would have been at the group’s original cost. The correction repeats every period until the asset is fully depreciated or sold outside the group.
Controlled Entities That Aren’t Consolidated
Consolidation doesn’t reach every controlled entity. The codification carves out specific scope exceptions. Investment companies within the scope of ASC 946 generally don’t consolidate their investees and instead measure them at fair value. Employee benefit plans under ASC 712 or 715, governmental organizations, and legal entities that operate like registered money market funds under Rule 2a-7 of the Investment Company Act are also excluded from the standard consolidation framework.17PwC. Scope Exceptions to the Consolidation Guidance The economics of those entities are captured through specialized models rather than line-by-line consolidation.