Wholly Owned Subsidiary

Wholly Owned Subsidiary Definition

When a company’s almost all of the outstanding shares are owned by another company (parent) then it can be said that it is a wholly-owned subsidiary of that company and it is controlled by the parent company like for example Walt Disney Entertainment holds 100 percent of Marvel Entertainment which produces movies.

Wholly Owned Subsidiary is a separate independent legal entity which is 100% owned and control by other company (parent company) and directly works under the guidance and decision making of the parent company. It has its own senior management to control the business operations of the company however all the strategic decisions at the group level are been taken by the parent companyParent CompanyA holding company is a company that owns the majority voting shares of another company (subsidiary company). This company also generally controls the management of that company, as well as directs the subsidiary's directions and policies.read more only.

Wholly Owned-Subsidiary

You are free to use this image on your website, templates etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Wholly Owned Subsidiary (wallstreetmojo.com)

Examples

Example #1

  • Starbucks company Japan is a wholly-owned subsidiary of the Starbucks group.
  • The Walt Disney Company holds 100% of the share capital of Marvel entertainment and EDL Holdings.
  • Volkswagen AG owns the entire Volkswagen America.

Example #2

ABC holds 100% in DEF and DEF holds 100% in XYZ. In this case, DEF and XYZ both are the wholly-owned subsidiary companies of ABC and the financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more of both the companies needs to be merged into the parent company ABC at the group level.

Example #3

ABC holds 99% in DEF. In this case, there are 1% minority shareholdersMinority ShareholdersMinority interest is the investors' stakeholding that is less than 50% of the existing shares or the voting rights in the company. The minority shareholders do not have control over the company through their voting rights, thereby having a meagre role in the corporate decision-making.read more in the company which is not been acquired. Hence this is not a wholly-owned subsidiary company since ABC does not control 100% of the share capital of the companyShare Capital Of The CompanyShare capital refers to the funds raised by an organization by issuing the company's initial public offerings, common shares or preference stocks to the public. It appears as the owner's or shareholders' equity on the corporate balance sheet's liability side.read more. In order to become a wholly-owned subsidiary, the parent company ABC needs to acquire the 1% minority shares from the public to gain full control over the operations of the company.

Example #4

ABC holds 99% in DEF and DEF holds 100% in XYZ. In this Case since DEF holds full share capital of XYZ, XYZ is a wholly-owned subsidiary of DEF and DEF is a parent company for XYX. But DEF is not the wholly-owned subsidiary of ABC since full capital is not owned. Here DEF will prepare consolidated financialsPrepare Consolidated FinancialsConsolidated Financial Statements are the financial statements of the overall group, which include all three key financial statements – income statement, cash flow statement, and balance sheet – and represent the sum total of its parents and all of its subsidiaries.read more with XYZ and ABC will prepare the financials of its own but there will not be any need to reflect the results of the subsidiary companies in its annual report since there is no full control by ABC and still, 1% shares are pending to be acquired.

Advantages

  • Due to 100% control, it is easier to follow the parent company policies and procedures thus helping the group to achieve synergies.
  • Easy to manage as the strategic decision making lies with the parent company.
  • The subsidiary company gets a tag of the parent group since it is merged in the group fully due to the 100% acquisition.
  • It increases the valuation of the subsidiary company since now it is under the umbrella of the parent group which is a big brand in the market.
  • Results are been grouped under the parent company at each balance sheet date.
  • The subsidiary company gets a good brand name by getting acquired by the top brand thus increasing the valuation and the market share of the parent company by acquiring an established player in the market.
  • Building relations with customers and investors become easy if the parent has strong connections in the market.

Disadvantages

Conclusion

Wholly Owned Subsidiary is a 100% controlled companyControlled CompanyThe controlled company refers to the business entity whose 50% or more voting stocks are held by other organizations. Such a corporation is not required to adhere to public company rules, and the major stakeholders have the right to select the company's directors.read more. All the 100% controlled companies need to report their balance sheetsBalance SheetsA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company.read more, income statementsIncome StatementsThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements.read more, and cash flow statementsCash Flow StatementsStatement of Cash flow is a statement in financial accounting which reports the details about the cash generated and the cash outflow of the company during a particular accounting period under consideration from the different activities i.e., operating activities, investing activities and financing activities.read more to the group in order to merge the same with the parent financials on each reporting date as per the accounting framework. There are certain exemptions for the wholly-owned subsidiary company both in legal and tax laws to encourage new investment by the parent company and creating more companies in order to increase employment.

Recommended Articles

This has been a guide to what is a Wholly Owned Subsidiary and its definition. Here we discuss examples of wholly-owned subsidiary along with advantages and disadvantages. You can learn more about Corporate Finance from following articles –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *