What is subsidiary accounting?

The process of managing and maintaining the financial records of a subsidiary company is known as subsidiary accounting.Subsidiary company is a separate entity or controlled by the parent company. It involves tracking and recording all the subsidiary  financial transactions, including revenues, expenses, assets and liabilities. 

Important factor that contributes to subsidiary accounting?

There are some important components of subsidiary accounting. Below are the following ones.

• Financial records separation 

Each subsidiary keeps its own accounting books to comply with the local regulations and for the purpose of accurate reporting. 

• Intercompany transcations 

Transactions between the parent company or among its subsidiaries need to be recorded and eliminated during the consolidation process to avoid double meaning counting. 

• Conversion of currency

If the subsidiary operates in a different country, financial statements may need to be converted to the parent company reporting currency. 

• Compliance 

Subsidiary accounting must adhere to both local accounting standards and the parent company reporting standards such as IFRS and GAAP. 

• Consolidation with the parent company 

The parent company merges the financial statements of its subsidiaries into a consolidated report to provide a comprehensive view of the entire organization’s financial position.

What are subsidiary accounting methods?

Subsidiary accounting methods are the approaches used by parent companies to manage and report the financial activities of their subsidiaries. The only purpose of these methods is accurate financial consolidation and compliance with accounting standards. Correct subsidiary accounting is essential for maintaining accurate income standards, balance sheets and other financial reports.

Cost Method

In the cost method, the parent company records its investment in the subsidiary at the original purchase price. No adjustments are made for the subsidiary profit or losses. Dividends from the subsidiary are recognized as income. 

Pros: It is easy to implement 

Cons: Limited insights into the subsidiary’s ongoing financial performance. 

Equity Method

The parent company adjusts the investment account based on its share of the subsidiary profits and losses. This is known as the equity method. These adjustments are reflected in the parents income statement.

Pros: Suitable for the investment where the parent company has the most influence. 

Cons: Complex to maintain and may need frequent adjustment.

Consolidation Method

The consolidation method is used when the parent company has controlling interest (usually over 50% ownership) in the subsidiary. The subsidiary’s financial statements are fully non-segregated  with those of the parent company.

Pros: Comprehensive financial reporting facilitates financial management.

Cons: Complex and time consuming.

Fair value Method 

The fair value method records the investment in the subsidiary at its current market value. Parents’ financial statements reflect the changes in the market value.

Pros:Useful for investments held for trading purposes.

Cons: Not suitable for long-term investment 

Example

A multinational company like Apple inc have subsidiaries in different countries like Apple Japan and Apple india. Each subsidiary manages its own tax accounts, regulatory compliance and operational tracking. All these records are consolidated with Apple parent company financial statements.

The coca cola company is the  parent company of different regional bottle companies. 

Facebook meta parent company for whatsapp and Instagram.

Advantages of Subsidiaries 

Different advantages of subsidiaries are as follow:

• Subsidiaries help in structured planning for parent companies, to implement strategies and plans according to different markets.
• Isolating specific operations in subsidiaries helps in reduction of financial and legal risks.
• A well managed subsidiary structure supports long-term corporate strategy and growth. 
• Effective financial management allows streamline reporting and risk measurement. 

Disadvantages of subsidiaries 

Along with the advantages there are different disadvantages of subsidiaries as well. 

• Managing multiple subsidiaries needs complex accounting solutions and detailed financial consolidation.
• Poor performance or legal issues in a subsidiary can affect the parent company directly.
• Managing taxes across multiple jurisdictions can be unmanageable.
• It can be resource intensive to manage coordinating business operations across the subsdiaries.

How does subsidiary accounting help in Business

Subsidiaries have a very important role in enhancing a parent company’s business operations,expansion strategies and overall management.

Expansion of business 

Subsidiaries faciliatte business expansion by qualifying the company’s total into new markets. This approach supports mergers and acquisitions. It helps businesses grow in every possible direction. 

Business management 

Managing subsidiaries help parent companies in improving decision-making and operational efficiency. It supports financial and accounting management by separating distinct financial activities and risks. 

Business Operations

A subsidiary allows businesses to diversify their activities and penetrate new markets while preserving their primary business. It might focus on certain products or services, streamlining operations and lowering costs.

Conclusion 

Subsidiary accounting has a very important role in managing the business operations and planning. By understanding the different subsidiary accounting methods such as equity, considiolation, fair value method, and cost method companies can make decisions. It will help them in their corporate strategy and overall business structure. Engaging reputable accounting firms and or enrolling in an accounting institute in Ireland can further enhance financial management capabilities.

Frequently asked questions 

What are the most usual financial documents managed in subsidiary accounting? 

Income statements, balance sheets, general ledgers, and accounts payable are essential financial records in subsidiary accounting.

How does a subsidiary help a business grow? 

Subsidiaries enable businesses to explore new markets, offer various products, and improve their acquisition and merger plans.

Can accounting companies aid with subsidiary accounting? 

Yes, accounting companies, as well as financial and accounting experts, can offer specific accounting solutions and support to subsidiaries.

What is the main function of subsidiary accounting?

Parent accounting ensures accurate financial reporting, regulatory compliance, and efficient financial management.

When is the consolidation process applied?

The consolidation approach is utilized when a parent firm owns more than 50% of a subsidiary.