Question

Company A has 40% of Company B and 20% of Company C. However, the remaining shares of Company B are traded on the stock market. Company B also has 42% of Company C. Company C is a 51% shareholder of Company D. Company A also has a 32% minority stake in E Company. Which companies will cover a consolidated balance sheet to be prepared for Company A? Explain for reasons.

Answer 1

Under GAAP, a company has to consolidate the financial statements of other companies where it has majority voting power i.e. more than 50% of shares having voting rights. Even for cases where it holds 50% or less, consolidation may still be required. However, even if there is absense of majority equity control, contractual agreements or other arranagements between companies would be sufficient to establish significant control.

When a company own 20% to 50% of the shares, it can be said to exert "significance influence" over the company. In case the company owns more than 50%, the consolidation process is more exhaustive than the case of signifcance influence.

Any indirect control in other company through subsidiary or associate company is included in the consolidation of the parent company.

Thus, the A company will have to include B, C, D AND E.