Vertical group structures and indirect ownership: how parent companies consolidate lower-tier subsidiaries
- Graziano Stefanelli
- Jul 26
- 2 min read
Group entities held through other subsidiaries must still be consolidated at the top level.
In a vertical ownership structure, a parent company controls one or more subsidiaries that themselves control other entities. Even if the parent company has no direct equity in the lower-tier subsidiaries, it must include them in the consolidated financial statements if effective control is established through the chain of entities.
This layered ownership creates indirect control. IFRS 10 and ASC 810 both require the parent to assess whether control exists at the group level—not just from a legal shareholding perspective, but in terms of the ability to govern financial and operating policies and access economic benefits.
Consolidation requirements extend beyond legal ownership.
Control is based on substance, not just on formal shareholding positions.
Consider the following group configuration:
TopCo owns 100% of MidCo
MidCo owns 60% of SubCo
SubCo owns 70% of EntityX
TopCo has no direct interest in EntityX. However:
TopCo controls MidCo entirely
MidCo controls SubCo by majority
SubCo controls EntityX by majority
As a result, TopCo indirectly controls EntityX, and must consolidate it. The consolidated financial statements of TopCo must therefore include:
100% of EntityX's assets, liabilities, income, and expenses
A non-controlling interest representing the portion not owned by TopCo
Non-controlling interest must reflect indirect minority ownership.
NCI includes minority interests from every layer of the ownership chain.
In the example above, NCI in EntityX reflects:
30% not owned by SubCo
40% not owned by MidCo
And their effects as compounded percentages
The effective interest of TopCo in EntityX is:
100% (TopCo → MidCo) ×60% (MidCo → SubCo) ×70% (SubCo → EntityX) = 42%
Therefore, NCI = 58% and must be reported in equity. This percentage reflects the group’s true residual ownership and is critical in measuring earnings attribution and dividend distribution.
Journal entry overview for consolidation with multiple layers.
The group eliminates intra-group investments and recognizes NCI at each level.
During the consolidation process, the following adjustments are typically required:
Elimination of investment balances between layers
Reclassification of equity accounts of the lower-tier entities
Recognition of NCI at each intermediate and final level
For example:
Dr. Common stock (EntityX)
Dr. Retained earnings (EntityX)
Cr. Investment in EntityX (on SubCo’s books)
Cr. Non-controlling interest (58%)
Each elimination is performed layer by layer to ensure the group-level financials reflect only external positions and ownership proportions.
Disclosure and presentation follow the control principle, not the shareholding form.
Indirect interests are treated like direct ones when control is established.
Both IFRS and US GAAP require that control—whether direct or indirect—be the basis for consolidation. The ownership form is relevant only in calculating non-controlling interests, not in determining whether consolidation is required.
Top-level parent companies must carefully analyze all group relationships, especially in vertical structures where ownership is distributed across several levels, to ensure that all controlled entities are correctly included in the consolidated financial statements.
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