What is a Parent Company?

//What is a Parent Company?
What is a Parent Company? 2017-10-09T04:43:23+00:00

Definition: A parent company is a company that owns controlling interest in another company. A parent doesn’t have to own 100% of the subsidiary. It only has to own the controlling interest.

What Does Parent Company Mean?

What is the definition of parent company? Most of time when people think of investors, they think of individuals investing in corporations. Although individuals make up a large majority of investors, companies also invest in other companies as well. This happens quite regularly. Berkshire Hathaway, for example, is a company that invests in other companies. Another high publicity example is Microsoft in the 1990s. Microsoft put millions of dollars into Apple Computer when Steve Jobs return as CEO.

Most large companies have at least one subsidiary. Gap is good example. Gap, Inc. owns Old Navy and Banana Republic. Thus, Gap is considered the parent to Old Navy.

Let’s take a look at an example of how parents account for their subsidiaries.

Example

Parent companies have to use the equity method of accounting for their subsidiaries. Parent companies also have to issue consolidated financial statements that combine the parent and subsidiary financial statements into one larger set of financial statements. Common accounts like investment accounts are not included on the consolidated set of financial statements. This type of reports allows investors to see a true picture of the worth of the parent companies.

If a parent corporation owns 100% of the stock of a subsidiary company, it can choose to take control of the subsidiary’s assets, retire its stock, and consolidate the two companies. There are often tax and legal consequences for mergers and acquisitions. Many times corporations face anti-trust issues when merging horizontally with other companies in the same industry.

Summary Definition

Define Parent Companies: Parent company means a business that own controlling interest in another business, and thus, can control its activities.