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  Types of Group Relationship

Introduction to the Types of Group Relationship

Up to now we have referred a situation where there is the simple relationship among a parent and its subsidiary or subsidiaries that is displayed in Figure below:

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Figure: a simple parent/subsidiaries relationship

In the diagram Subsidiary 2 is a subsidiary through virtue of being through by another company (Subsidiary 1), i.e. in turn, a subsidiary of the parent. In these conditions, Subsidiary 2 is generally termed a 'sub-subsidiary' of the parent. The parent company here is occasionally termed as the 'ultimate' parent company of Subsidiary 2.

Subsidiary 3 is a simple subsidiary. Before in this section, it was indicated that one company is a subsidiary of other since the latter controls the former. This is generally like a result of the parent owning a majority, or all, of the voting shares of another, but this does not require being the case.

Consider Figure below and assume that the parent owns 60% of the voting shares of Subsidiary 1 and that Subsidiary 1 owns 60% of the shares of Subsidiary 2. Effectively, the parent only owns 36 % of the shares of Subsidiary 2 (i.e. 60% of 60%), yet the latter is a subsidiary of the former. This is since the parent has complete control over (although not total ownership of) Subsidiary 1, that in turn has complete control over (however again not total ownership of) Subsidiary 2.

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Figure: a more complex parent/subsidiaries relationship

Though ownership and control do not essentially go hand-in-hand, in practice this tends to be the case.

The cause that we are regarded as to whether one company is a subsidiary of another is, of course, that group financial statements must be ready in which there is a parent/subsidiary relationship, but not otherwise.

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