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In a consolidated group of entities, control over the subsidiaries in the group:

Question

In a consolidated group of entities, control over the subsidiaries in the group:

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Solution

In a consolidated group of entities, control over the subsidiaries in the group:

  1. Is Exercised by the Parent Company: The parent company, also known as the holding company, has the power to govern the financial and operating policies of its subsidiaries. This is typically evidenced by ownership of more than 50% of the voting rights of the subsidiaries.

  2. Results in Consolidated Financial Statements: Because the parent company has control over its subsidiaries, it is required to prepare consolidated financial statements. These statements combine the financial information of the parent and all of its subsidiaries into a single set of financial statements.

  3. Can Be Direct or Indirect: Control can be exercised directly by the parent company or indirectly through other subsidiaries. For example, a parent company may control a subsidiary which in turn controls another subsidiary. In this case, all of these entities would be part of the consolidated group.

  4. Is Not Temporary: Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries, more than half of an entity’s voting power. However, control can also exist in situations where the parent owns less than half of the voting power of an entity but has the power to govern the financial and operating policies by statute or agreement.

So, in a consolidated group of entities, control over the subsidiaries in the group is exercised by the parent company, either directly or indirectly, and is not temporary. This control results in the preparation of consolidated financial statements.

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