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Accounting for Investments in Subsidiaries: A Complete Overview

Investments in subsidiaries represent one of the most significant areas in financial accounting and reporting. These investments are not just financial instruments—they represent control, the ability of one company to direct the activities of another. Proper accounting for these investments requires a clear distinction between separate financial statements and consolidated financial statements, and a firm grasp of recognition, measurement, and disclosure requirements.


In this guide, we explore how to account for investments in subsidiaries under IFRS, covering both the parent-only and group-level perspectives.



1. What Is a Subsidiary?

A subsidiary is an entity that is controlled by another entity, known as the parent. According to IFRS 10, control exists when the parent:


  • Has power over the investee;

  • Is exposed, or has rights, to variable returns from its involvement with the investee;

  • Has the ability to use its power to affect those returns.


In most cases, this means owning more than 50% of the voting rights, but control can also be established contractually or through other arrangements.



2. Accounting in Separate Financial Statements

In the separate financial statements of the parent, the investment in the subsidiary is recorded as a single line item. The entity may choose one of the following measurement bases:


2.1 Cost Method

  • The investment is recorded at historical acquisition cost;

  • Changes in the subsidiary’s net assets are not reflected;

  • Dividends received are recognized as income;

  • The investment must be tested for impairment if indicators arise.


Example – Initial Acquisition Entry


Debit: Investment in Subsidiary €1,000,000

Credit: Cash/Bank €1,000,000


Example – Dividend Receipt


Debit: Cash €50,000

Credit: Dividend Income €50,000


2.2 Fair Value Method

  • The investment is measured at fair value through profit or loss, or through other comprehensive income (OCI), depending on the accounting policy;

  • Typically used by investment entities.



3. Accounting in Consolidated Financial Statements

In consolidated financial statements, the parent and its subsidiaries are presented as a single economic entity. The investment is not reported as a single item, but is instead replaced by the full consolidation of the subsidiary's financials.


3.1 Full Consolidation Method

  • The entire assets, liabilities, revenues, and expenses of the subsidiary are included in the consolidated accounts;

  • All intragroup balances and transactions are eliminated;

  • Non-controlling interests (NCI) are presented separately in both equity and net income.


3.2 Goodwill Recognition

If the purchase price exceeds the fair value of the net identifiable assets acquired, the excess is recognized as goodwill.Goodwill = Purchase Price – Fair Value of Net Assets Acquired

Goodwill is classified as an intangible asset and subject to annual impairment testing.


3.3 Example Consolidation Adjustments

Assume ParentCo acquires 80% of SubCo.


To eliminate the investment in consolidation:

  • Debit: Share Capital (SubCo)

  • Debit: Retained Earnings (SubCo)

  • Debit: Goodwill (if any)

  • Credit: Investment in Subsidiary

  • Credit: Non-Controlling Interests


To eliminate intercompany sales:

  • Debit: Revenue (from SubCo)

  • Credit: Cost of Sales (to ParentCo)



4. Impairment of Investment in Subsidiary

When using the cost method in separate financial statements, the parent must assess whether the investment is impaired. Impairment indicators include:

  • Financial losses or distress in the subsidiary;

  • Long-term decline in value;

  • Operational restructuring or legal issues.


If impairment is confirmed, the investment must be written down:

Impairment Entry:Debit: Impairment LossCredit: Investment in Subsidiary



5. Disposal or Loss of Control

When the parent loses control over a subsidiary—typically through sale, liquidation, or deconsolidation—the following steps apply:


  • Derecognize the assets and liabilities of the former subsidiary;

  • Recognize any retained interest at fair value;

  • Record any gain or loss in the income statement.


Example – Sale of 60%, retaining 40% as associate:

  • Debit: Cash (proceeds from sale)

  • Debit: Investment in Associate (fair value of retained interest)

  • Credit: Assets and Liabilities of SubCo (net carrying amount)

  • Credit: Investment in Subsidiary

  • Credit: Gain on Disposal



6. Disclosures

Accounting standards require detailed disclosures about subsidiaries, including:

  • Name and country of incorporation;

  • Proportion of ownership interest and voting rights;

  • Nature of control (direct or indirect);

  • Restrictions on transferring funds or assets between group entities;

  • Non-controlling interest share in net assets and profits.


Additional disclosures may include the summarized financial information of material subsidiaries and any risks arising from their operations.


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