Reciprocal ownership and parent’s shares held by subsidiaries: how to account for indirect treasury stock
- Graziano Stefanelli
- Jul 27
- 2 min read
Shares of the parent company owned by group subsidiaries must be eliminated in full.
In some group structures, subsidiaries may acquire shares in their own parent. These holdings are not considered assets at the consolidated level and must be accounted for as indirect treasury shares. The parent company, when preparing consolidated financial statements, must eliminate these holdings to avoid inflating group equity or net assets.
Under both IFRS and US GAAP, a group cannot hold equity in itself, whether directly or through a controlled entity. As a result, shares of the parent held by subsidiaries must be subtracted from issued capital and not shown as investments.
Indirect treasury stock reduces equity, not increases group assets.
The substance of the transaction is that the group repurchased its own shares.
Example:
ParentCo has issued 1,000,000 shares
SubCo owns 60,000 of those shares
SubCo is fully consolidated (100% owned)
In the consolidated financial statements:
The 60,000 shares are treated as treasury stock
The investment in ParentCo recorded by SubCo is eliminated
Group equity is reduced by the acquisition cost of those shares
No gain or loss is recognized on the transaction
The logic is straightforward: the group cannot record an asset for owning its own equity. This treatment applies even if the parent is unaware of or uninvolved in the subsidiary’s purchase.
Partial ownership of the subsidiary affects the equity attribution.
Non-controlling interest absorbs part of the treasury share effect.
If ParentCo owns less than 100% of SubCo, only the portion of treasury shares attributable to the parent’s interest reduces group equity. The rest reduces the non-controlling interest (NCI).
Example:
ParentCo owns 80% of SubCo
SubCo owns 50,000 ParentCo shares
Cost of shares = $1,000,000
Then:
80% × $1,000,000 = $800,000 reduction in Parent equity
20% × $1,000,000 = $200,000 reduction in NCI
This allocation ensures that group equity reflects the true economic position of the parent and non-controlling shareholders.
No dividend income or investment income is recognized on these shares.
Intercompany income flows related to treasury stock must be eliminated.
Subsidiaries that own parent shares may receive dividends or register investment income. However, from the group perspective, this is an internal transaction, not an inflow of funds from outside parties.
Thus, the group must eliminate:
Dividend income recognized by the subsidiary
Corresponding dividend expense or retained earnings decrease by the parent
Any changes in fair value (if accounted for as financial assets)
These eliminations ensure the group’s net income is not overstated by circular flows.
Regulatory frameworks prohibit asset recognition for parent shares held by subsidiaries.
IFRS and US GAAP converge in prohibiting these positions at group level.
According to:
IFRS 10, IAS 32, and IAS 27: Parent shares held by subsidiaries are deducted from equity; no asset is recorded.
ASC 810 and ASC 505 (US GAAP): These shares are treated as treasury stock and reduce shareholders’ equity.
The treatment ensures that consolidated financial statements reflect only external capital and avoid misrepresenting financial position through internal holdings.
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