You will probably know that many large companies actually consist of several companies controlled by one central or administrative company. Together these companies are called a group. The controlling company, called the parent or holding company, will own one some or all of the shares in the other companies, called subsidiary and associated companies.
There are many reasons for businesses to operate as groups; for the goodwill associated with the names of the subsidiaries, for tax or legal purposes and so forth. Company law requires that the results of a group should be presented as a whole.
In traditional accounting terminology, a group of companies consists of a holding company and one or more subsidiary companies which are controlled by the holding company.
There are two definitions of a group in company law.
- Uses the terms holding company and “subsidiary” and applies for general purposes.
- Wider and applies only for accounting purposes. It uses the terms parent “undertaking” and “subsidiary undertaking”
The purpose of this widening of the group for accounting purposes was to curb the practice of structuring a group in such a way that not all companies or ventures within it had to be consolidated. This is an example of off balance sheet financing and has been used extensively to make consolidated accounts look better than is actually justified.