If a company owns more than 20% but less than 50%, the company uses the equity method.Under both of these methods, consolidated financial statements are not permitted.Ownership is based upon the total amount of stock owned.If a company owns less than 20% of another company's stock, it may use the cost method of financial reporting.
The first note is an important one as, the unconsolidated equity affiliates, which we later discuss, were almost all half owned by Enron.
Each of these entities reports its own financial statements and operates its own business.
However, because the subsidiaries are considered to form one economic entity, investors, regulators, and customers find consolidated financial statements more beneficial to gauge the overall position of the entity.
If relevant, the parent and subsidiaries must all be accounted for using generally accepted accounting principles (GAAP) if the consolidated financial statements are to be in accordance with GAAP.
All subsidiary equity accounts such as common stock or retained earnings must be eliminated.