The two most common ways of becoming a parent company are as follows:
Acquisition of smaller companies: Large firms often buy smaller companies to eliminate competition, to reduce their expenses or overhead, and to broaden their operations and synergies.
Through spin-off: Companies want to streamline their operations by giving up less productive operations so they can provide better focus on the products with great future aspect growth.
Features of a Parent Company
Operations: A parent company has centralized control as all the transactions are routed through the parent company.
Management Structure: As it has a majority of stakes, the parent company elects the subsidiaries’ board of directors and organizes the management structure of subsidiaries.
Independence: The parent company exercises independence, makes its own decisions, and controls irrespective of subsidiaries.
Liability: The parent company has no liability over its subsidiaries.
Decision Making: As the parent has centralized control, a majority of decision making is done by the parent company.
Advantages of a Parent Company
Tax Benefits: The parent company can substantially reduce tax liabilities by providing deductions. For example, the income tax allows gains from one subsidiary to set off from the other subsidiary.
Risk Reduction: The merger of a subsidiary company in the parent company mitigates the risk. The losses incurred by subsidiaries do not transfer to the parent company.
Economies of Scale: Subsidiaries enjoy the economy of scale as they get the expansion, usage of resources, and labor at very little or no cost, thereby increasing production.
Increased Efficiencies: A parent company achieves greater operational efficiency by splitting the tasks for smaller companies.
Disadvantages of a Parent Company
Limited Control: Although decisions are taken by the parent company, the same creates issues or disputes in subsidiaries when decisions are not in their favor.
Legal Costs: The costs of taking a subsidiary sometimes become more than the future profits that the entity thought would result in a merger.
Lack of Motivation: Employees think that their issues, queries, and sentiments will be ignored as the management is centralized. This results in a lack of motivation.
Consolidation of Parent and Subsidiary Company
This is the result of combining financial accounts of subsidiaries with that of the parent company. The following are the procedures:
Intercompany Loans: If the parent company records the cash of its subsidiary as an investment, the parent company should record the intercompany loans from its subsidiary together with the interest income on investment from the parent company to its subsidiary company.
Overhead allocation: If the company charges corporate overhead, the same should be allocated to different subsidiaries.
Consolidate Payables: Payables (creditors) of all the subsidiaries and payables of the parent company should be consolidated.
Charge Payroll: If a company has a single payroll master, the payroll expenses of different subsidiaries should be allocated under the same.
Consolidate Assets: Assets of both the parent company and its subsidiaries should be consolidated after charging proper depreciation.
Eliminate Intercompany Transactions: If a company has intra transactions during the year, they should be eliminated at the time of consolidation so as to avoid double impact on financial statements.
Income Tax Liability: Recognition of tax liability is important at both the subsidiary level as well as the consolidated level so as to get the taxation benefits.
Conversion: If a parent company has different operational currency than its subsidiary company, then the financial accounts of the subsidiary company should be converted into the currency used by the parent company for consolidation.
The two most common ways of becoming a parent company are as follows:
Acquisition of smaller companies: Large firms often buy smaller companies to eliminate competition, to reduce their expenses or overhead, and to broaden their operations and synergies.
Through spin-off: Companies want to streamline their operations by giving up less productive operations so they can provide better focus on the products with great future aspect growth.
Features of a Parent Company
Operations: A parent company has centralized control as all the transactions are routed through the parent company.
Management Structure: As it has a majority of stakes, the parent company elects the subsidiaries’ board of directors and organizes the management structure of subsidiaries.
Independence: The parent company exercises independence, makes its own decisions, and controls irrespective of subsidiaries.
Liability: The parent company has no liability over its subsidiaries.
Decision Making: As the parent has centralized control, a majority of decision making is done by the parent company.
Advantages of a Parent Company
Tax Benefits: The parent company can substantially reduce tax liabilities by providing deductions. For example, the income tax allows gains from one subsidiary to set off from the other subsidiary.
Risk Reduction: The merger of a subsidiary company in the parent company mitigates the risk. The losses incurred by subsidiaries do not transfer to the parent company.
Economies of Scale: Subsidiaries enjoy the economy of scale as they get the expansion, usage of resources, and labor at very little or no cost, thereby increasing production.
Increased Efficiencies: A parent company achieves greater operational efficiency by splitting the tasks for smaller companies.
Disadvantages of a Parent Company
Limited Control: Although decisions are taken by the parent company, the same creates issues or disputes in subsidiaries when decisions are not in their favor.
Legal Costs: The costs of taking a subsidiary sometimes become more than the future profits that the entity thought would result in a merger.
Lack of Motivation: Employees think that their issues, queries, and sentiments will be ignored as the management is centralized. This results in a lack of motivation.
Consolidation of Parent and Subsidiary Company
This is the result of combining financial accounts of subsidiaries with that of the parent company. The following are the procedures:
Intercompany Loans: If the parent company records the cash of its subsidiary as an investment, the parent company should record the intercompany loans from its subsidiary together with the interest income on investment from the parent company to its subsidiary company.
Overhead allocation: If the company charges corporate overhead, the same should be allocated to different subsidiaries.
Consolidate Payables: Payables (creditors) of all the subsidiaries and payables of the parent company should be consolidated.
Charge Payroll: If a company has a single payroll master, the payroll expenses of different subsidiaries should be allocated under the same.
Consolidate Assets: Assets of both the parent company and its subsidiaries should be consolidated after charging proper depreciation.
Eliminate Intercompany Transactions: If a company has intra transactions during the year, they should be eliminated at the time of consolidation so as to avoid double impact on financial statements.
Income Tax Liability: Recognition of tax liability is important at both the subsidiary level as well as the consolidated level so as to get the taxation benefits.
Conversion: If a parent company has different operational currency than its subsidiary company, then the financial accounts of the subsidiary company should be converted into the currency used by the parent company for consolidation.
Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.
You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.
Read moreEach paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.
Read moreThanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.
Read moreYour email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.
Read moreBy sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.
Read more