When one company owns a significant stake in another business -- generally defined as at least 20 percent -- it must account for that stake in its books using either consolidation or the equity method of accounting.
Which method to use depends on how much it actually owns.
Internally, the parent is free to treat the subsidiary as a completely separate entity, but it must consolidate its finances in statements prepared for outside observers, such as banks, regulators and potential investors.
In financial accounting, consolidated financial statements provide a comprehensive view of the financial position of both the parent company and its subsidiaries, rather than one company's stand-alone position.
In business, consolidation occurs when two or more businesses combine to form one new entity, with the expectation of increasing market share and profitability and the benefit of combining talent, industry expertise or technology.
This information is also reported on the income statement of the parent company.
This is used when the parent company holds a majority stake by controlling more than 50% of the subsidiary business.