If a parent company invests in its subsidiary company how to you know the impact of the same on the parent co.

Question

Say is the investment is shown at cost in the balance sheet, however the market value of investment has gone down. how does a third party know the true impact of the same on the parent company

Answer 1

Unfortunately your question has many possible answers depending on the business combination and what you mean by investment, but I'll go by IFRS and let anyone correct me if I make any mistakes.

If your parent company acquired the subsidiary through an acquisition, then subsequently finds any of the assets it has bought are not as valuable as they were expected to be then goodwill is impaired, you reduced goodwill and a corrsponding loss is posted through P&L.

If parent owns a minority interest in the subsidiary i.e. it cannot exert control and therefore be classed as being the owner, then it will be carrying the investment at fair value in BS like any financial instrument. If the share price of the subsidiary falls then the asset will be revalued accordingly with an adjustment going through P&L.

These are the two main examples I can think of from your question, I'm sure people could think of others but im pretty sure any change in an investment value made by parent will be recorded through parent and group accounts on BS and P&L with a corresponding footnote if required.

Answer 2

The parent company is required to disclose such info. in its balance sheet. when its investment in subsidiary is shown at cost, the market value of such investments are shown as a foot note to the parent's balance sheet. this is how it is as per Indian Accounting standards..

Answer 3

You have to workout the networth of the parent company and subsidiary company.Then only you can know

Answer 4

You don't.