Consolidated financial statements are the combined financial statements of the parent company and its subsidiaries. The accounting principles necessitate assets, liabilities, revenues, and expenses of majority-owned subsidiaries be incorporated with their parents. To do so, accountants must eliminate any transactions between the parent company and its subsidiaries. This step is a necessity because otherwise, the assets, liabilities, revenue and expenses of the combined company would be exaggerated.
To clarify the relationship between companies, it is best to define how the relationship is established. A parent/subsidiary relationship is created when the parent company purchases more than 50% of the common stock of another company. Acquiring more than 50% of the common stock entitles the owner to majority representation of the board of directors of its subsidiary. This gives the parent company ultimate control over the company’s undertakings.
Minority interest is created when the parent company does not own 100% of its subsidiary’s voting stock. Minority interest can be defined as the owners’ equity held by the other shareholders of the subsidiary. Accounting principles permit all the assets and liabilities of a subsidiary to be recorded in the consolidated financial statements. Therefore, the amount of assets and liabilities of the subsidiary not fully owned must be classified as minority interest.
There are two ways to record minority interest on the consolidated financial statement:
- As a liability. This representation denotes the amount the parent “owes” the minority shareholders.
- As a part of consolidated owners’ equity.
Additional activity of the subsidiary is included in the notes of the financial statements under “segments.”