When there are multiple companies exist under the common control, there is a need to consolidate them. This is called consolidation accounting for the group. In order to better understand the concept, we need to identify the parent company and the subsidiaries. Subsidiaries are those companies which are under the control of the parent company. By control we mean, the authority or the right to regulate the operating and financial policies of an entity. The purpose of doing so is to take maximum benefits from its activities.
The most common way to identify the subsidiary company is to look at how much percentage of shares are held by the parent company. If it is more than 50 percent, then it is a clear indication that the parent-subsidiary relation exists between the two companies. In order to comply with international accounting standard (IAS), an entity must have to prepare consolidated financial statements unless otherwise specifically exempted by the jurisdiction or by IAS.
The exclusion from the consolidation is possible in the case where the entity is acquired just for the purpose of disposal. In this case, there is no need to consolidate its financial figures along with the holding/ parent company financial statements.
It does not matter whether the subsidiary is in the same industry in which the holding company is doing the business. As a result, all subsidiary concerns are accounted for in the consolidation accounting irrespective of the nature of the business.
So far we have discussed 50% or more shares/ control in the subsidiary company, but what happen if the controlling shares are less than 50%. In this case, the entity is called
the associate company and for this, we have to follow the Equity method for consolidation.