CONSOLIDATED INCOME STATEMENTS 1. Introduction.—Modern developments have brought forth new forms of business organizations, each of which has features peculiar to itself. The accounting system and the form of financial state ments adopted by the various types of business organi zations should provide a clear record undisturbed by any unusual features of organization. As in any science, the general principles of accounting practice are fixed and remain constant under all conditions. The proper method of applying these principles, however, will vary with the individual conditions of each undertaking and the type of development which it portrays. Therefore, a discussion of consolidated statements must be prefaced with a clear understand ing of the nature of these new forms of organization, the results of whose operations can best be disclosed thru the use of consolidated statements.
2. Distinction between parent and holding com is a financial, tho not a legal dis tinction between a parent and a holding company that is not always understood. A parent company is an operating company doing business under its own name and controlling, thru a majority of stock ownership, one or more corporations doing business in lines allied to its own. The subsidiary companies are new corporations, organized by the parent com pany, which retains stock control for itself and sells the balance of the stock, if need be, to secure either working capital or local stockholders.
A corporation holding a valuable patent may or ganize subsidiary corporations which are practically selling or manufacturing agencies. The parent com pany will lease the patent rights to the subsidiaries for use in certain territories. The parent company will retain at least the majority stock ownership in each subsidiary in exchange for the territorial rights in it. At the same time, the parent company may be engaged in business in all territories not leased. When all territories are leased, the parent company will cease to be an operating company and will then become a holding company of the pure type.
The holding company is not as a rule, an operating company, altho in some cases it may be. Its princi pal assets are the stocks and bonds of corporations which it controls thru a majority ownership of the stocks of the underlying companies. Frequently it may not even possess office equipment as its principal office may be that of one of its subsidiaries.
The central distinction between the two types of companies is that a parent company organizes and establishes its own subsidiaries. The holding com pany acquires the ownership thru stock control of corporations already in existence, and is organized primarily for the purpose of acquiring such stocks and thereby establishing a community of interest.
In the discussion which follows, the term "holding company" will be used in a general sense to include any type of combination involving stock control which one corporation exercises over other corporations. The principles of accounting involved remain the same whether the group is of the holding or parent company type.
3. Ownership of the stock of a company does not mean ownership of its assets.—Let us consider the legal phases involved in this type of financial organiza tion. The first point to be noted is that under the law, ownership of stock does not mean ownership of assets. Thus, if corporation "A" owned all the stock of corporation "B" it would not be the legal owner of corporation "B's" physical property. The title to corporation "B's" physical property rests in the artificial person, corporation "B," and it can only be divested of that property by due process of law.
Corporation "A," therefore, is in the same posi tion as any other stockholder of the corporation. The right of a stockholder in the assets of a corporation is only equitable. The ordinary form of common cap ital stock is not redeemable and the stockholders, while having the right to transfer their holdings, can not re-exchange their stock for the assets which they surrendered to the company in the original exchange for the stock.