Consolidation is required under Article 1 of the Directive when any of the follow-
ing circumstances apply:
- The investor corporation holds a majority of the shares with voting rights.
- The investor corporation has a shareholding and the right to appoint a majority
of the board of directors. - The corporation has a dominant influence as a result of a contract.
The Directive permits the following parent relationships not to be reported in con-
solidated financial statements:
- Parent undertakings that are not companies incorporated with limited liability
- Parent undertakings that are themselves subsidiaries of a higher-level parent, if
the higher-level parent prepares financial statements that fully consolidate the
intermediate parent - Parent undertakings that are purely passive holding companies, that is, are not
involved directly or indirectly in the management of their subsidiaries and are
not represented on the subsidiaries’ boards of directors - Small parent undertakings that fall below certain size thresholds
The Seventh Directive permits member states some flexibility in defining control,
and thus in defining the subsidiaries that are to be fully consolidated. The first four
relationships listed below are defined by the Directive as constituting control and
thereby creating a parent–subsidiary relationship. Relationships five and six may be
defined by member states as constituting control.
1.The parent has majority voting rights in the subsidiary.
2.The parent is a shareholder and has the right to appoint or to remove a major-
ity of the subsidiary’s directors.
3.The parent has the right to exercise a dominant influence over the subsidiary
under a contract or pursuant to the subsidiary’s bylaws, and local law permits
such a contract or bylaw provision. Member states may prescribe that the par-
ent also must be a shareholder. (These contract or bylaw provisions may not be
permitted in some member states.)
4.The parent is a shareholder but controls alone, by agreement with the other
shareholders, a majority of the voting rights of the subsidiary. (Member states
may enact more detailed provisions concerning the form and content of the
agreement.)
5.The parent is a shareholder, and a majority of the subsidiary’s directors holding
office since the beginning of the preceding year have been appointed solely by
the parent’s exercise of its voting rights. This condition would not result in a
parent–subsidiary relationship if another entity were parent under relationship
1, 2, or 3 above. A member state electing this option may require that the par-
ent hold at least 20% of the subsidiary’s shares.
6.A parent holds a “participating interest” (long-term equity interest of 20% or
more), and either exercises dominant influence over the subsidiary or manages
the subsidiary on a unified basis with itself. (A member state could define a
“participating interest” to exist at a lower level of ownership.)18.5 ACCOUNTING FOR INVESTMENTS IN SUBSIDIARIES 18 • 9