The current business relationships are diverse, the ownership of the company emerges as a fundamental factor in the organizational objective, dependency frames the administrative process that the economic entity follows.
In the social context of the company, ownership of assets, liability for liabilities and possession of assets may constantly vary depending on the capital contribution that investors have on it, the decisions made on the economic activity of the organization. it depends on the composition of the majority share package, that is why the figure of parent and subsidiary emerges as a business relationship based on a consolidation of financial activities.
Thematic compendium:
Matrices and subordinates:
A company is considered the parent of another when it exercises economic, financial and administrative control over it directly or indirectly, therefore the subordinate is one that lacks autonomy due to the fact that it is dominated by a parent.
The subordinate companies can be of two types:
- Subsidiaries: These are entities controlled and managed economically and administratively by the parent directly. Subsidiaries: They are those whose control and direction is exercised indirectly by the parent through one or more of its subsidiaries, or by companies that have some link with the parent or its subsidiaries.
Clarifying concepts
Subordinate companies cannot own; under no circumstances, interest parties or quotas or shares in the companies that control them economically.
A company is considered subordinate by a parent when the following cases arise:
- When 50% or more of the capital belongs to the parent, either directly or through its affiliates or subsidiaries. When the companies have the right to cast the votes that constitute the decision-making quorum at the shareholders' meeting or in the shareholders' meeting or on the company's board of directors. When the subordinate companies participate in 50% or more of the company's profits, either prerogatives or previously established covenants.
The following is the relationship between parent companies and subordinate companies:
Control:
Control can be of an economic, financial and administrative nature, below is a compilation of the most important aspects of each:
Economic control:
In this case, the subordinate entity receives direct or indirect contributions from the parent company of such magnitude, that it loses its autonomy, since the decisions depend on the parent company.
Financial control:
This results from the acquisition of commitments or obligations (Liabilities) complementary to the amortizations of the debt and the interests of the subordinate company that make it lose its autonomy in making administrative and financial decisions.
Administrative control:
The administrative control of the subordinate by the parent is presented when the parent imposes its criteria on the internal operation, such as the appointment of officials or the representation that is made of the subordinate.
There is a link between two or more companies when they have common administrative, economic and financial interests and when there is a dependency or control relationship.
Relationship between parent companies and subsidiaries:
Example 1.
If company A owns 75% of the capital of another B and 60% of another C, then A is a parent of B and C. Companies B and C will be subsidiaries of A, taking into account that between B and C there is no there is no link.
Example 2.
If company A owns 65% of the capital of another B and the latter owns 80% of the capital of another C, then A is a parent of B and C, B will be a subsidiary of A. Company C will be a subsidiary of A.
Example 3.
If company A owns 70% of the shares of another B and 40% of another C, over which company B also has 45% of its capital, then A is a parent of B and C, B will be a subsidiary of A and C will be a subsidiary of A.
Example 4.
If company A owns respectively 75% and 65% of the capital of two companies B and C and these have 45% and 40% of the capital of a fourth, then B and C will be subsidiaries of A. Company A does not have a direct relationship with D, but owns a part of it through B and C, therefore D is a subsidiary of A.
Consolidation of the financial statements:
When economic, financial and administrative links are created between two legally independent entities, where it has a subordinate relationship, a series of reports must be prepared that integrate the financial statements, consolidating those of one company with the other.
"The consolidated financial statements present the assets, liabilities, equity, income and expenses of a parent company and its subsidiaries as if it were a single accounting entity."
The consolidation of the balances between a parent and a subsidiary is achieved by integrating the accounts of each of them, eliminating accounts such as:
- The investment of the parent in the subordinate. Accounts receivable generated by transactions between the parent and the subsidiary. Accounts payable generated by transactions between the parent and the subsidiary. Sales and purchases between the companies. Dividends between the two companies. Profits between entities in the initial or final inventory.
Following is an example in which the consolidation of financial statements for two companies can be visualized.
Example 1.
The company ABC SA makes an investment of $ 500,000 in a company XYZ SA making it a subordinate of its own, on the date of the transaction the following Balance is presented:
|
ABC Company SA |
|
|
Balance sheet |
|
|
December 31, 19XX |
|
| Cash and banks | $ 520,000 |
| Accounts receivable | $ 630,000 |
| Property, plant and equipment | $ 950,000 |
| Deferred assets | $ 80,000 |
| Total assets | $ 2,180,000 |
| Current liabilities | $ 380,000 |
| Long-term liabilities | $ 465,000 |
| Subscribed capital | $ 1,100,000 |
| Accumulated earnings | $ 235,000 |
| Total liabilities and equity | $ 2,180,000 |
By considering the previous transaction and by totalizing the information that is presented between the balance sheets of the parent and the subordinate, the consolidation can be seen:
|
Bill |
Inc. ABC |
Inc. X AND Z |
Consolidation |
| Cash and banks | $ 20,000 | $ 500,000 | $ 520,000 |
| Accounts receivable | $ 630,000 | $ - | $ 630,000 |
| Investment in XYZ Company | $ 500,000 | $ - | $ 500,000 |
| Property, plant and equipment | $ 950,000 | $ - | $ 950,000 |
| Deferred assets | $ 80,000 | $ - | $ 80,000 |
| Total assets | $ 2,180,000 | $ 500,000 | $ 2,680,000 |
| $ - | |||
| Current liabilities | $ 380,000 | $ - | $ 380,000 |
| Long-term liabilities | $ 465,000 | $ - | $ 465,000 |
| Subscribed capital | $ 1,100,000 | $ 500,000 | $ 1,600,000 |
| Accumulated earnings | $ 235,000 | $ - | $ 235,000 |
| Total liabilities and equity | $ 2,180,000 | $ 500,000 | $ 2,680,000 |
It is observed that assets and participations have changed from $ 2,180,000 to $ 2,680,000, an incorrect situation because investing in the subordinate company does not change the amount of resources controlled by the parent. To avoid this double accounting, the reciprocal accounts must be eliminated, but without making accounting records either in the parent or in the subordinate.
The procedure to follow is as follows:
|
Bill |
Inc. ABC |
Inc. X AND Z |
Deletion of accounts |
Consolidation |
|
|
Debit |
Credit |
||||
| Cash and banks | $ 20,000 | $ 500,000 | $ - | $ - | $ 520,000 |
| Accounts receivable | $ 630,000 | $ - | $ - | $ - | $ 630,000 |
| Investment in XYZ Company | $ 500,000 | $ - | $ - | $ 500,000 | $ - |
| Property, plant and equipment | $ 950,000 | $ - | $ - | $ - | $ 950,000 |
| Deferred assets | $ 80,000 | $ - | $ - | $ - | $ 80,000 |
| Total assets | $ 2,180,000 | $ 500,000 | $ 2,180,000 | ||
| Current liabilities | $ 380,000 | $ - | $ - | $ - | $ 380,000 |
| Long-term liabilities | $ 465,000 | $ - | $ - | $ - | $ 465,000 |
| Subscribed capital | $ 1,100,000 | $ 500,000 | $ 500,000 | $ - | $ 1,100,000 |
| Accumulated earnings | $ 235,000 | $ - | $ - | $ - | $ 235,000 |
| Total liabilities and equity | $ 2,180,000 | $ 500,000 | $ 500,000 | $ 500,000 | $ 2,180,000 |
Now it is known which the two states are consolidated, verifying that the accounting accounts of the first are independent from those of its subsidiary. The use of this method is extremely useful, since it is the one that establishes the real participation and interference that the parent has over the subordinate. The mission of the financial administrator in these cases is to verify the financial reality of the subordinate because the operation of the latter may harm the plans and decisions made for the future of the investor.
