SUBSIDIARIES.docx - What Is a Subsidiary In the corporate world a subsidiary is a company that belongs to another company which is usually referred to

SUBSIDIARIES.docx - What Is a Subsidiary In the corporate...

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What Is a Subsidiary?In the corporate world, a subsidiary is a company that belongs to another company, which is usually referred to as the parent companyor the holding company.The parent holds a controlling interest in the subsidiary company, meaning it has or controls more than half of its stock. In cases where a subsidiary is 100% owned by another firm, the subsidiary is referred to as a wholly owned subsidiary. Subsidiaries become very important when discussing a reverse triangle mortgage.SubsidiaryHow a Subsidiary WorksA parent company buys or establishes a subsidiary to provide the parent with specific synergies, such as increased tax benefits, diversified risk, or assets in the form of earnings, equipment, or property. Still, subsidiaries are separate and distinct legal entities from their parent companies, which reflects in the independence of their liabilities, taxation, and governance. If a parent company owns a subsidiary in a foreign land, the subsidiary must follow the laws of the country where it is incorporated and operates.However, given their controlling interest parent companies often have considerable influence with their subsidiaries. They—along with other subsidiary shareholders, if any—vote to elect a subsidiary company's board of directors, and there may often be a board-member overlap between a subsidiary and its parent company.The purchase of an interest in a subsidiary differs from a merger: The purchase usually costs the parent corporation a smaller investment, and shareholder approval is not required to turn a company into a subsidiary as it would be in the event of a merger. Nor is a vote required to sell the subsidiary.To be designated a subsidiary, at least 50% of a firm's equity has to be controlledby another entity. If the stake is less than that, the firm is considered an associateor affiliate company. When it comes to financial reporting, an associate is treated differently than a subsidiary.Subsidiary FinancialsA subsidiary usually prepares independent financial statements. Typically, these are sent to the parent, which will aggregate them—as it does financials from all its operations—and carry them on its consolidated financial statements. In contrast, an associate company's financials are not combined with the parents. Instead, the parent registers the value of its stake in the associate as an asset onits balance sheet.
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As is common practice and per the Securities and Exchange Commission(SEC),public companies should generally consolidate all majority-owned firms or subsidiaries. Consolidationis typically seen as a more meaningful method of accounting than providing separate financials for a parent company and each of its subsidiaries. For example, eBay reported total revenue on its consolidated income statement, for the year ended Dec. 31, 2017, totaling US$9.6 billion. The e-commerce firm notes in the annual report that the individual domestic and consolidated subsidiary, StubHub, generated revenue of $307 million.
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