One group, one set of books
A parent company makes components. It owns 80% of a subsidiary that turns them into finished products. This quarter the parent sold a batch of components to the subsidiary for $50, and the subsidiary sold the finished product to an outside customer for $80. Two ledgers, two sales, one group. What did the group sell?
Consolidation shows the parent and everything it controls as one business. Assets, liabilities, revenues and expenses are combined line by line, and everything that happened between the members is removed. This unit sharpens the bridge reflex: how do two sets of books become one honest set? The answer changes both the Snapshot (balance sheet) and the Scorecard (income statement).
Remove the internal sale
Add the two ledgers and revenue reads 50 + 80 = $130. The $50 internal sale is eliminated, because a group cannot sell to itself. Consolidated revenue is the external $80. The components are carried at what the group paid to make them, and any internal profit sitting in unsold inventory is removed too, until the goods leave the group.
Control, not percentage
The parent owns 80%, so the tempting shortcut is to take 80% of every line. A controlled subsidiary is consolidated in full, not in proportion. All of its revenue, all of its debt and all of its cash enter the group totals. The share of its profit and equity that belongs to other owners is then shown separately as the noncontrolling interest. Consolidate all of it, then attribute; never multiply by 80%.
- Subsidiary revenue, profit, assets and debt100%
- Parent's owners80%
- Noncontrolling interest20%
The noncontrolling interest sits inside equity, not among the liabilities.
Control is the test, and control is not always a percentage. A majority of the votes usually means control, but substantive veto rights held by the minority can break it, contracts can create it below 50%, and structured entities need their own analysis. An investment without control is not consolidated. A significant stake that falls short of control usually uses the equity method: one line for the investment on the Snapshot, one line for the share of profit on the Scorecard, and no gross-up of revenue.
Shares, assets or a business
What was bought decides which rules apply. Buying shares brings the whole legal entity along, with its history, its tax attributes and its liabilities. Buying a set of assets can leave those behind and reset the tax values. Only the purchase of a business goes through business-combination accounting; a plant bought on its own is equipment, not goodwill. Identify the substance of the deal before assuming it creates goodwill.
A parent controls 80% of a subsidiary with $200 of revenue, of which $30 was sold to the parent. What does the subsidiary add to consolidated revenue?