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Hi,
I have a question on consolidation on investment in subsidiaries.
1-General Background:
-US Parent company has subsidiaries in Europe (EU)
-All EU subsidiaries are owned 100% directly or indirectly by the US Parent Company (US1)
-US Parent Company consolidates all its subsidiaries and is a publicly traded company in SEC.

Although US1 follows US GAAP, its European subsidiaries follow country GAAPs for statutory reporting.
Entity structure is : US1 owns 100% of EU2 that owns 100% of EU3.

2-Detailed background:
For statutory reporting, EU2 reports its investment in subsidiary EU3 as an investment in subsidiary (Asset).
This amount is only adjusted if:
1) In the yearly valuation of the entity it appears that that the value of EU3 is lower than the book value (if higher, no adjustment)
2) If EU3 repays share premium. For illustration let’s say transaction is 100 euros. EU3 Debits Additional Paid In Capital and Credit Cash. EU2 Debits Cash and Credits Investment in Subsidiary.
3) If EU2 makes a cash contribution to EU3.For illustration let’s say transaction is 100 euros. EU3 Debit Cash and Credit APIC. EU2 Credit Cash and Debit Investment in Subsidiary.

3-Based on the above, I conclude that EU2 consolidates for stat reporting using the Cost Method.
However, I read that this was only possible if percentage of ownership was 20% or less. Is there any scenario that would allow EU2 to consolidate at cost even if it owns 100%?

it depends on the local GAAP, I assume that you don't have IFRS in mind when you write local GAAP, do you?

I wouldn't be surprised if local GAAP would exempt a subsidiary from full consolidation if this subsidiary is consolidated at higher level, especially if there is no non-controlling (minority) interest

which country is EU2 in?

In IFRS, an entity is exempted from the requirement to consolidate its subsidiaries if conditions in IFRS 10 par 4 are satisifed. This would not apply to EU2 subsidiary as the parent uses US GAAP

The example above refers to a US public corporation that owns direct or indirectly a lot of subsidiaries in Europe.
To my knowledge most of the EU subsidiaries report their investments-in other subsidiaries in one single line (Investments-in) and in general the ownership % is 100%.
One example of EU subsidiary with investments-in subsidiaries is Switzerland.
There must be a piece of information I am missing, because external auditors audit the statutory financial statements year after year.

to me the most likely scenario is that these subsidiaries are not required to prepare consolidated financial statements because their parent, that holds 100% interest, consolidates them at higher level

and in separate financial statements, it is perfectly normal to account for investment in subsidiaries at cost

Yes, the final Parent Company (US1) consolidates all subsidiaries worldwide in its books.

In the meantime, I received the below input from a colleague:
"Consolidation at country level is rarely required. It is not because you have investments that you need to consolidate. This depends on the country accounting rules.
Often , we are exempted if we match a certain criteria. Very few countries in Europe prepare consolidated books for their local books"

Does it make sense?
Thanks

yes, it would make sense that these subsidiaries are not required to prepare consolidated financial statements

or maybe some of them do prepare consolidated financial statements , but you're receiving separate financial statements only (did you ask?)

PS. and in your illustrative group structure: US1 owns 100% of EU2 that owns 100% of EU3

which data does US1 receive to prepare its consolidated financial statements? i.e. separate data from EU2 and EU3 or consolidated data from EU2?

US1 receives separate data from EU2 and EU3.
Adding again a piece of information included in my last message written after receiving your answers.

In the meantime, I received the below input from a colleague:
"Consolidation at country level is rarely required. It is not because you have investments that you need to consolidate. This depends on the country accounting rules.
Often , we are exempted if we match a certain criteria. Very few countries in Europe prepare consolidated books for their local books"

Does it make sense?

yes that makes sense

BTW, if you receive data from EU2 and EU3 separately, then it's much more convenient for you to receive it as non-consolidated in my opinion

So regarding your 1st comment "In IFRS, an entity is exempted from the requirement to consolidate its subsidiaries if conditions in IFRS 10 par 4 are satisifed. This would not apply to EU2 subsidiary as the parent uses US GAAP"... does it mean that IFRS will require E2 to consolidate but country Requirements will exempt it?

yes, under IFRS, EU2 would be required to prepare consolidated financial statements

but not all entities domiciled in the EU are required to use IFRS, local GAAP still applies to smaller entities

BTW Switzerland is not a EU member

You are right... it is not
For reporting pourposes , we are nice and let her join our European group

Forgot the most important thing... Big thanks , all clear now
Cheers,
Lasa

I don't know if's the same elsewhere but a UK sub group can get exemption from group accounts in certain circumstances, but that requires the higher group to file their accounts publicly. So if it's a private US topco, or higher group, these group accounts are probably not otherwise available, so preferable to file UK sub accs rather than the whole group.