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You will probably know that many large companies actually consist of several companies controlled by one central or administrative company. Together these companies are called a group. The controlling company, called the parent or holding company, will own one some or all of the shares in the other companies, called subsidiary and associated companies.
There are many reasons for businesses to operate as groups; for the goodwill associated with the names of the subsidiaries, for tax or legal purposes and so forth. Company law requires that the results of a group should be presented as a whole.
In traditional accounting terminology, a group of companies consists of a holding company and one or more subsidiary companies which are controlled by the holding company.
There are two definitions of a group in company law.
1. Uses the terms holding company and "subsidiary" and applies for general purposes.
2. Wider and applies only for accounting purposes. It uses the terms parent "undertaking" and "subsidiary undertaking"
The purpose of this widening of the group for accounting purposes was to curb the practice of structuring a group in such a way that not all companies or ventures within it had to be consolidated. This is an example of off balance sheet financing and has been used extensively to make consolidated accounts look better than is actually justified.
Parent Undertaking
Financial Reporting Standards states that an undertaking is the parent undertaking of another undertaking if any of the following apply.
• It holds a majority of the voting rights in the undertaking.
• It is a member of the undertaking and has the right or appoints or removes directors holding a majority of the voting rights at meetings of the board on all, or substantially all, matters.
• It has the right to exercise a dominate influence over the undertaking:
1. By virtue of provisions contained in the undertakings memorandum or articles.
2. By virtual of a control contract (in writing, authorized by the memorandum or articles of the controlled undertaking, permitted by law).
• It is a member of the undertaking and controls alone, under an agreement with other shareholders or members, a majority of the voting rights in the undertaking.
• It has a participating interest in the undertaking and one of two things applies.
1. It actually exercises a dominant influence over the undertaking.
2. It and the undertaking are managed on a unified basis.
• A parent undertaking is also treated as the parent undertaking of the subsidiary undertakings of its subsidiary undertakings.
This replaced the provisions criterion of owing a majority of equity with one of holding a majority of voting rights. Also, the board is controlled to be controlled if the holding company has the right to appoint directors with a majority of the voting rights on the board (not just to appoint a simple majority of the directors, regardless of their voting rights).
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