In the separate entity financial statements of a parent company, a subsidiary is held as a non-current

asset investment at cost. Any dividend income is recorded in the parent’s income statement.

The cost of the investment in the subsidiary is likely to differ significantly from the value of the net
assets owned. In the first years of ownership, the cost will normally exceed the net assets owned (the
excess being goodwill). After a number of years when the subsidiary has made profits, the cost of the
investment will be less than the book value of the net assets owned.

Similarly, the dividend paid by a subsidiary to its parent company and so reflected in their income
statement is unlikely to be equal to the parent company’s share of that subsidiary’s profits.

For these reasons, single entity financial statements of a parent company provide only a limited amount
of useful information about its subsidiaries.

Full consolidated accounts, whereby all of the subsidiary’s assets and liabilities and income and
expenses are added on a line by line basis (and then the share owned by the non-controlling interest
allocated to them) are more useful because:

• They reflect the fact that the whole of the subsidiary, its assets, liabilities and profits are
controlled by the parent company.

 They reflect the historic performance of the subsidiary by including accumulated profits.
 They quantify goodwill, being the premium paid on acquisition of the subsidiary.
 The full position and performance of a subsidiary (such as high gearing or losses) are revealed to
users of the accounts
 It saves the time and effort of the investors as they can at once analyse the complete
performance of overall group.