Significant subsidiaries: Overview, definition, and example
What are significant subsidiaries?
Significant subsidiaries refer to subsidiaries of a parent company that are considered important due to their size, financial impact, or role within the corporate structure. These subsidiaries typically contribute a substantial portion of the parent company's revenue, assets, or profits. The term is often used in financial reporting, particularly in compliance with accounting standards and regulations, where significant subsidiaries are required to be disclosed in the parent company’s financial statements. A subsidiary may be deemed significant if it meets certain thresholds, such as having a large percentage of consolidated revenue or assets.
For example, a large corporation might own multiple subsidiaries, but one or two of them may be considered "significant" because they generate a substantial portion of the company’s total income or hold a significant percentage of its total assets.
Why are significant subsidiaries important?
Significant subsidiaries are important because they often play a critical role in the parent company’s overall business operations and financial health. Investors, creditors, and regulators closely scrutinize these subsidiaries to assess the financial position and risk exposure of the parent company. By identifying and disclosing significant subsidiaries, companies provide transparency and help stakeholders better understand the sources of their revenue, risk, and potential growth.
For businesses, the identification of significant subsidiaries ensures compliance with financial reporting and regulatory requirements, especially when it comes to consolidation, reporting of financial results, and related-party transactions. It also helps investors understand the strategic importance of certain subsidiaries in the context of the overall business.
Understanding significant subsidiaries through an example
Imagine a multinational corporation, GlobalTech, that owns several subsidiaries in different sectors. One of these subsidiaries, TechSolutions Inc., generates 40% of GlobalTech’s total revenue and holds a large portion of its assets. Because of its significant contribution to the overall business, TechSolutions Inc. is considered a significant subsidiary. As part of GlobalTech's annual financial reporting, TechSolutions Inc.'s financial performance and position must be disclosed in more detail, as it is considered a key part of the company's operations.
In another example, a retail conglomerate might own dozens of brands, but one particular brand, LuxuryFashions, accounts for 60% of the group’s overall sales. This subsidiary would be categorized as significant, and the group would need to provide additional information on its financial performance in the company’s consolidated financial statements.
An example of a "significant subsidiaries" clause
Here’s how a "significant subsidiaries" clause might appear in a corporate agreement or financial statement:
“For purposes of this Agreement, the term ‘Significant Subsidiaries’ refers to subsidiaries that, individually or in the aggregate, account for more than 10% of the consolidated revenues or assets of the Parent Company. The Parent Company agrees to provide annual financial disclosures of all Significant Subsidiaries in accordance with relevant accounting standards and regulatory requirements.”
Conclusion
Significant subsidiaries are key entities within a corporate group that have a major impact on the parent company's financial performance, operations, or strategic direction. Identifying and reporting on significant subsidiaries ensures transparency, aids in compliance with financial reporting standards, and helps investors assess the risk and growth potential of a business. By recognizing the importance of these subsidiaries, businesses can better manage their operations and provide stakeholders with valuable insights into their overall financial health.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.