The manner in which you calculate investment in a subsidiary depends on the degree of influence your investment buys you. When your investment in smaller, you usually treat the funds as just another line item on your balance sheet, while a larger investment may require you to post earnings, expenses and intercompany balances. Guidelines are available to guide your accounting practices, but exceptions exist for a wide range of investments.
1. Determine what the percentage of your investment in the company includes and how much influence you exert in the subsidiary. For example, owning less than 20 percent of the voting stock gives you very little influence over the profit and loss decisions. Owning more than 50 percent of a subsidiary gives you legal control and carries significantly more accounting requirements.
2. Record the purchase at cost on your balance sheet if the funds were used as an investment and equate to less than a 20 percent ownership in the subsidiary. This is called the equity method of accounting. The investment is treated just as you would treat any other investment you make on behalf of your company with company funds. Adjust accordingly as the market value changes. Dividends, earnings and losses should be listed as “other income” on your income statement.
3. Develop a separate non-current asset account under which you record the cost of the investment when you have a considerable stake -- typically between 20 percent and 50 percent -- in the subsidiary, but not a majority stake. Record earnings as they occur on this separate statement utilizing the equity method of accounting. Reduce the cost of the investment by the amount of your dividends to balance your records. You do not record actual profits and losses of the subsidiary when you don’t have a majority interest.
4. Consolidate the subsidiary’s accounting books with your own when you invest more than 50 percent in the other company. Integrate all of the subsidiary’s profits and losses on your own balance sheet and income statements. Subtract your non-controlling interest from the net income to arrive at the balance.
- Add up non-controlling interest in more than one subsidiary as one entry on your balance sheet.
- In the past, non-controlling interest in subsidiaries was reported in a number of ways. Some companies consolidated financial statements while others kept separate accounts. To align reporting procedures and make comparisons fair, the Financial Accounting Standards Board in 2009 enacted stricter rules regarding non-controlling subsidiary investments to increase transparency in accounting for substantial investments that fall within the a range of investment of 20 percent to 50 percent. The equity method of accounting keeps records separate from your own company’s accounting books, providing clearly identifiable differences in your income statements. Disclosures from both your company and the subsidiary are clearly identifiable under the new rules.
Items you will need
- Separate set of books
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