Unconsolidated Subsidiary

An unconsolidated subsidiary is a company that a parent firm owns (partially) but does not include in its consolidated financial statements. Instead of combining the subsidiary’s individual line-by-line results with the parent’s, the parent reports its stake as an investment on the balance sheet.

When a subsidiary is unconsolidated

A subsidiary is typically unconsolidated when the parent does not have control. Common scenarios include:
* Parent ownership is less than 50% (no controlling interest).
* Parent has only temporary control.
* Parent’s business operations are materially different from the subsidiary’s.
Even without consolidation, the parent may still have significant financial or operational exposure to the subsidiary.

Accounting treatment

Accounting depends on the level of influence or ownership:

20%–49% ownership (significant influence)
– The parent generally uses the equity method.
– The parent records its share of the subsidiary’s profits or losses on its income statement and adjusts the investment carrying value on the balance sheet accordingly.
– Dividends reduce the carrying amount of the investment (not recorded as dividend income under the equity method).

Below 20% ownership (no significant influence)
– The parent typically treats the investment as passive and records it at historical cost (or fair value, depending on applicable standards).
– Dividend receipts are recorded as income; the parent does not recognize a share of the subsidiary’s earnings on its income statement.

50%+ ownership or control
– The subsidiary is usually consolidated and its financial statements are combined with the parent’s on a line-by-line basis.

Why companies use unconsolidated subsidiaries

Common reasons include:
* Joint ventures (JVs) to share investment, risk, and returns with partners.
Special purpose vehicles (SPVs) to isolate assets, liabilities, or project cash flows from the parent’s core operations.
Regulatory, tax, or risk-management considerations that make consolidation undesirable or unnecessary.

Example

Company ABC forms Business XYZ as an SPV for a one-year construction project and owns 40% of XYZ. XYZ earns $1 billion in profit that year.
* Under the equity method, ABC records $400 million of profit (40% × $1 billion) on its income statement.
* ABC’s investment balance on the balance sheet increases by $400 million (subject to subsequent adjustments for dividends, losses, etc.).

Consolidated vs. unconsolidated subsidiary — quick summary

• Consolidated subsidiary: Parent has control (usually >50%) and combines subsidiary financials line by line with its own.
• Unconsolidated subsidiary: Parent lacks control; the subsidiary is shown as an investment rather than consolidated financial results.

What makes a subsidiary

A subsidiary is a separate legal entity that is partially or wholly owned by a parent company. Ownership may arise from direct formation by the parent or acquisition. Legal separation remains even when operational or financial ties are strong.

How subsidiaries appear in parent financials

• Consolidated subsidiaries: results and balances are aggregated into the parent’s consolidated financial statements.
• Unconsolidated subsidiaries: reported as investments on the parent’s balance sheet; accounting treatment depends on the level of influence and applicable accounting standards.

Key takeaways

• An unconsolidated subsidiary is owned by a parent but not included in consolidated financial statements.
• Ownership and influence thresholds guide accounting: the equity method is common for 20%–49% ownership; passive investments are typical below 20%.
• Corporations use unconsolidated subsidiaries for joint ventures, SPVs, risk isolation, and strategic reasons—yet financial exposure can still affect the parent even without consolidation.