Financial management: Sally Baker explains how to account for complex groups featuring sub-subsidiaries.
| Author | Baker, Sally |
| Position | Study notes |
The term "complex group" is used to refer to a situation where a parent entity has a subsidiary without directly owning shares in it. Instead it owns the shares indirectly via another subsidiary. Remembering that control is normally achieved by owning most of an entity's shares and, therefore, a majority of voting rights, let's consider the two complex group scenarios illustrated in the diagram.
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The first step to take when dealing with complex groups is to test for control. It's clear from scenario one that the Elm company is a subsidiary of Durian, but we need to consider whether Fig is also a subsidiary of Durian. Imagine a meeting of Fig's shareholders, at which Elm holds 70 per cent of the voting rights and so has control. Since Durian has control of Elm, it can instruct Elm how to vote at the meeting. In reality, therefore, Durian is able to control Fig indirectly via its control of Elm, so we can conclude that Fig is a subsidiary of Durian.
In scenario two it's clear that Ruby has a controlling majority of voting rights in Sapphire. Similarly, Sapphire can control Topaz. Ruby can, therefore, control Topaz via Sapphire, which makes Topaz a subsidiary of Ruby as well. In both scenarios the structure is known as a vertical group and Fig and Topaz are referred to as sub-subsidiaries (sub-subs).
Once you've determined that the relationship of control exists, the second step is to consider the effective ownership percentages--ie, the respective percentages of the sub-sub that the parent and non-controlling-interest shareholders (NCIs) own in effect. These percentages are used in the mechanics of the consolidation process.
Returning to scenario one, Durian owns 90 per cent of subsidiary Elm, so the remaining 10 per cent is owned by NCIs. Elm owns 70 per cent of Fig, so in effect Durian owns 90 per cent x 70 per cent = 63 per cent of its sub-sub Fig. The remaining 37 per cent is owned by NCIs. (An alternative way to calculate the NCIs' effective percentage is to consider that there are shareholders other than Elm who own 30 per cent of Fig. Also, the NCIs of Elm own ten per cent of its 70 per cent holding in Fig and so own 10 per cent x 70 per cent = 7 per cent of Fig. So the NCIs of the group own 30 per cent + 7 per cent = 37 per cent of Fig.)
In scenario two, Ruby owns 75 per cent of Sapphire and the NCIs own 25 per cent. In effect, Ruby owns 75 per cent x 60 per cent = 45 per cent of Topaz, so the NCIs' effective...
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