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Connected affiliations and mutual ownership: how reciprocal interests affect consolidation

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Cross-holdings between companies can distort control and must be adjusted in consolidation.

In some group structures, two entities hold shares in each other. These reciprocal interests—known as connected affiliations or mutual ownerships—raise technical challenges in preparing consolidated financial statements. The parent company must assess whether these reciprocal holdings affect its ability to control the investee or distort the presentation of group equity.

Both IFRS and US GAAP require specific adjustments to eliminate the effects of mutual shareholding and prevent overstatement of group assets, equity, or net income.



Mutual ownership can exist at various levels of a group.

Cross-holdings are not limited to parent–subsidiary relationships.

Typical scenarios include:

  • Subsidiary A holds shares in Subsidiary B

  • Subsidiary B holds shares in Subsidiary A

  • A subsidiary holds shares in the parent company

  • Two sister companies hold shares in each other

In all these cases, the principle is the same: a group cannot own itself. Any intra-group equity interest must be treated as treasury stock and eliminated in full, even if held indirectly.



Shares of the parent held by a subsidiary must be treated as treasury shares.

These shares do not count as outstanding equity at the group level.

If a subsidiary acquires shares in the parent company, those shares are not considered assets of the group. They must be eliminated and presented as a reduction of equity in the consolidated statement of financial position.

Example:

  • ParentCo has issued 1,000,000 shares

  • SubCo owns 50,000 of them

In the consolidated financial statements:

  • The 50,000 shares held by SubCo are excluded from outstanding shares

  • No investment asset is recorded for them

  • Group equity is reduced accordingly

This applies under both IFRS and US GAAP. The economic substance is that the group is holding its own shares, which cannot be recognized as an asset.



Reciprocal investments between subsidiaries require elimination entries.

Cross-holdings must be removed to avoid double counting.

Assume:

  • SubCo1 owns 20% of SubCo2

  • SubCo2 owns 10% of SubCo1

Even if both subsidiaries are controlled by the same parent, these reciprocal investments must be removed during consolidation. Otherwise, group equity and income would be overstated due to circular ownership.

Consolidation entries must eliminate:

  • Investment in associate (SubCo1’s holding in SubCo2)

  • Equity of investee (SubCo2)

  • And vice versa, on SubCo2’s side

Any dividends, unrealized gains, or equity method effects must also be reversed.



Mutual interests do not create control but can affect group results.

While reciprocal holdings do not give rise to control, they alter ownership structure and disclosure.

Connected affiliations rarely create new controlling relationships, but they complicate the ownership map. The parent must evaluate whether any rights (e.g., board representation or veto powers) arising from these holdings affect its ability to control the group entities or expose it to returns.

Disclosure is also important: IFRS and US GAAP both require that the nature and amount of such holdings be disclosed, especially when they affect voting rights, dividends, or equity classification.


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