Editing How to Account for Subsidiaries

When accounting for subsidiaries, there are several key steps that need to be followed to ensure accurate and complete reporting. These steps are:

1. Determine the type of subsidiary: The type of subsidiary will determine how it should be accounted for. There are two types of subsidiaries: wholly-owned and partially-owned. A wholly-owned subsidiary is one in which the parent company owns 100% of the subsidiary's stock. A partially-owned subsidiary is one in which the parent company owns less than 100% of the subsidiary's stock.

2. Create a consolidation worksheet: If the subsidiary is a wholly-owned subsidiary, the parent company must consolidate the subsidiary's financial statements with its own. A consolidation worksheet is a tool used to combine the financial statements of the parent company and the subsidiary into one set of financial statements.

3. Eliminate intercompany transactions: Intercompany transactions occur when the parent company and the subsidiary do business with each other. These transactions must be eliminated in the consolidation worksheet to avoid double-counting revenues and expenses.

4. Record non-controlling interest: If the subsidiary is a partially-owned subsidiary, the parent company must record the non-controlling interest in the subsidiary. This represents the portion of the subsidiary that is owned by other investors.

5. Evaluate goodwill: Goodwill is an intangible asset that represents the value of a subsidiary's reputation, brand, and other intangible assets. If the parent company paid more for the subsidiary than the fair market value of its net assets, it must record the excess as goodwill. The value of goodwill must be evaluated annually for impairment.

6. Prepare consolidated financial statements: Once the consolidation worksheet has been completed, the parent company must prepare consolidated financial statements that reflect the financial position and performance of both the parent company and the subsidiary.

In conclusion, accounting for subsidiaries can be a complex process, but by following these key steps, companies can ensure accurate and complete reporting of their financial results.