Which statement defines a subsidiary?

• A. The controlled entity
• B. The parent
• C. An affiliate
• D. The reporting entity

Answer: (A)

A subsidiary is defined by control – it’s a separate legal entity that is under the control of another entity, typically the parent. Control means the parent can govern the subsidiary’s financial and operating policies, usually by owning a majority of voting shares or the power to appoint the majority of the board. This relationship is what allows the parent to consolidate the subsidiary’s financial statements with its own. The parent is the owner, not the subsidiary. An affiliate is a company where another has significant influence but not control, and the reporting entity is the entity for which financial statements are prepared (which could be the parent or the consolidated group).