What categorizes an entity as a subsidiary?

What categorizes an entity as a subsidiary?

• A. Control by owning a majority of shares
• B. Influence through substantial ownership
• C. Joint control with another company
• D. Passive investment with no operational involvement

Answer: (A)

An entity is categorized as a subsidiary primarily due to control exerted through the ownership of a majority of shares. When a parent company owns more than 50% of the voting shares of another company, it has the ability to direct the financial and operating policies of that company, thereby exerting control. This definition aligns with the International Financial Reporting Standards (IFRS) regulations, particularly IFRS 10, which stipulates that control is the basis for determining whether an entity is a subsidiary. The concept of control entails not just ownership but also the power to govern financial and operating policies in order to obtain benefits from its activities. Therefore, possessing a majority stake typically confers the ability to make key decisions impacting the subsidiary's operations and strategy. This fundamental aspect of control reflects the broader intent behind the consolidation of financial statements, ensuring that the financial performance and position of the parent company include those of the subsidiaries it controls.

An entity is categorized as a subsidiary primarily due to control exerted through the ownership of a majority of shares. When a parent company owns more than 50% of the voting shares of another company, it has the ability to direct the financial and operating policies of that company, thereby exerting control. This definition aligns with the International Financial Reporting Standards (IFRS) regulations, particularly IFRS 10, which stipulates that control is the basis for determining whether an entity is a subsidiary.

The concept of control entails not just ownership but also the power to govern financial and operating policies in order to obtain benefits from its activities. Therefore, possessing a majority stake typically confers the ability to make key decisions impacting the subsidiary's operations and strategy. This fundamental aspect of control reflects the broader intent behind the consolidation of financial statements, ensuring that the financial performance and position of the parent company include those of the subsidiaries it controls.