Question

If a company has control, but less-than majority, must they consolidate? Please explain why or why not.

Answer 1

Yes, a company must consolidate if it has control but less than majority.

This is because, as per the accounting guidelines, consolidation is required if the holding company owns more than 50% of another company’s equity. Holding company is also known as parent company.   

It should be noted that a parent company also can consolidate its performance data with the results of an affiliate if it holds less than 50 percent ownership but wields considerable influence in the way the affiliate operates.

In case when a company holds less than 20% of another company’s equity then cost method is used. In this method the investment value will not fluctuate and when the stake is more than 20% then equity method is used.

Thus even if a company has less than majority but has control then it should consolidate because the test is whether the parent is able to exert significant influence over the subsidiary's business decisions.