What is a Parent Company?
A parent company refers to a firm that controls the management of another firm, and takes an active part in its operations. Based on the control offered to subsidiary company, parent company can work as hands-on or hands-off owners for the subsidiary firm.Â
Key points:
- A parent company is an organization that has an influential control over the other company.
- Parent firms can operate as hands-off or hands-on owners of the subsidiary firms on the basis of the extent of managerial powers offered to subsidiary executives.
- Parent companies are a result of acquisition or merger.
How Does a Parent Company Work?
A parent company and a holding firm are different from one another. While parent companies operate independently, holding companies are formed in order to own and control a cluster of subsidiaries, which is mostly for tax objectives. Parent companies can be a result of conglomerates that comprise of a number of varying businesses such as General Electric, that operates a diverse range of business units which get benefitted from cross-banding. Also, there can be a horizontal integration between parent companies and their subsidiary firms. For example, Gap Inc is the parent company of Old Navy and Banana Republic. On the other side, there can be a vertical integration between companies if they own many firms at varied production or supply chain levels. AT&T acquired Time Warner which means that besides its telecommunications network, the firm is now the owner of film production and broadcast networks.
Becoming a parent company
Companies can be parent companies either by acquiring smaller firms, or by spinoffs. Usually, big companies acquire small companies for eliminating competition, increase their business operations, decrease overhead costs, and to achieve growth. For instance, the acquisition of Instagram by Facebook was done to enhance user engagement, and make its social media platform more strong and powerful. At the same time, Instagram received benefit from getting one more platform to advertise and promote. However, Facebook has been lenient in controlling Instagram’s operations, and has further retained the founders and CEO of Instagram. Companies may want to maintain the pace of their operations by spinning off subsidiary businesses that are not profitable or efficient. For instance, a firm can spin off its subsidiary business units that have stopped growing, and can further emphasize on some other product or service that has more potential for growth. In case, a business unit that has a strategic policy different from that of the parent company, can be spun off so as to identify its worth on an individual level.
Special considerations: accounting for subsidiaries
Since parent companies need to own at least 50% of the stock of the subsidiary firm, they should create consolidated financial statements comprising both the parent and subsidiary company. It should be ensured to avoid any scope of overlaps including transfers, loans, payments, and inter-company, and duplication of data. The consolidated financial statements present complete information about the complete financial health of all companies instead of just one. In case, the parent company’s stake in the subsidiary company is less than 100%, the accountant should record a minority interest on the balance sheet representing the percentage of the subsidiary that the parent company doesn’t own.
