A subsidiary with net liabilities is consolidated in exactly the same way as a profitable one: its assets and liabilities are added in line by line and the parent’s investment is eliminated against its share of equity. FRS 102 paragraph 9.22 requires losses to be shared with the non controlling interest in proportion to ownership even if that pushes the non controlling interest into a deficit. Any price paid for a company that already had net liabilities produces goodwill equal to the price plus the parent’s share of the deficit.
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Does a loss making subsidiary still have to be consolidated?
Yes. Whether an entity is consolidated depends on control, not on whether it is solvent or profitable. Paragraph 9.2 requires a parent preparing group accounts to consolidate all its subsidiaries, and the only grounds for leaving one out are those in paragraphs 9.9 and 9.9A: severe long term restrictions, an interest held exclusively for resale that has not previously been consolidated, or immateriality. Paragraph 9.8 confirms that different business activities are not a reason to exclude, and paragraph 9.8A says the same about information that is costly or slow to obtain. A subsidiary in difficulty but still under the parent’s direction stays in.
The position changes only if control is lost, for example when an administrator is appointed. Paragraph 9.18 gives that example of a parent ceasing to control a subsidiary without any change in ownership. From that date the subsidiary is deconsolidated and a gain or loss is calculated under paragraph 9.18A, as described in selling a subsidiary: the gain in group accounts.
How is goodwill worked out when the company already had net liabilities?
The purchase method does not change. Paragraph 19.14 requires the identifiable assets, liabilities and contingent liabilities to be recognised at fair value at the acquisition date. Paragraph 19.22 measures goodwill as the cost of the combination less the acquirer’s interest in that net amount. When the net amount is negative, deducting it adds to goodwill. Paragraph 19.14A states the non controlling interest at its share of the same net amount, so it starts life as a negative figure.
Goodwill created this way deserves scrutiny. A buyer that takes on a company with a deficit is usually paying for something: a contract, a licence, a team, tax losses or a strategic position. If none of that supports the figure, the goodwill is impaired straight away. Paragraph 27.5 requires an impairment loss whenever recoverable amount is below carrying amount, and paragraph 27.25 allocates goodwill to the cash generating units expected to benefit. Where the subsidiary is not wholly owned, paragraph 27.26 requires the goodwill to be notionally grossed up for the non controlling interest’s share before the comparison is made.
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How are later losses split with the minority shareholders?
Paragraph 9.14 allocates profit or loss on the basis of existing ownership interests. Paragraph 9.22 then says total comprehensive income is attributed to the owners of the parent and to the non controlling interest even if this results in the non controlling interest having a deficit balance. There is no cap at zero and no rule that excess losses are absorbed by the parent.
That differs from the equity method. For an associate or a jointly controlled entity, paragraph 14.8(h) stops recognising further losses once the investor’s interest is reduced to zero, unless the investor has a legal or constructive obligation or has made payments on the investee’s behalf. The two rules are easy to confuse:
| Investee | Treatment of losses beyond the investment | Reference |
|---|---|---|
| Subsidiary with a non controlling interest | Losses keep being shared; the non controlling interest can go negative | Paragraph 9.22 |
| Associate | Stop at zero, then provide only for obligations or payments made | Paragraph 14.8(h) |
| Jointly controlled entity | Same as an associate | Paragraph 15.13 |
How does it work in numbers?
Illustration only. Parent Ltd buys 80% of Sub Ltd for £1. At the acquisition date the fair value of Sub Ltd’s identifiable net liabilities is £100,000. Parent Ltd then lends Sub Ltd £300,000 to keep it trading, and Sub Ltd makes a loss of £150,000 in its first year in the group. Goodwill is given a five year life and deferred tax is ignored.
| Item | Working | Amount |
|---|---|---|
| Parent’s share of net liabilities | £100,000 x 80% | (£80,000) |
| Goodwill | £1 less (£80,000) | £80,001 |
| Non controlling interest at acquisition | (£100,000) x 20% | (£20,000) |
| Non controlling interest share of the loss | (£150,000) x 20% | (£30,000) |
| Non controlling interest at the year end | (£20,000) + (£30,000) | (£50,000) |
| Loss attributable to the parent’s owners | (£150,000) x 80% plus amortisation of about £16,000 | (£136,000) |
The £300,000 loan is an intra group balance and disappears on consolidation under paragraph 9.15; the group balance sheet shows the cash it funded and the liabilities Sub Ltd owes to outsiders. The minority shareholder has contributed nothing and has no obligation to fund the deficit, yet the group shows a debit balance of £50,000 against its name within equity. That is what the standard requires. Before concluding the goodwill is sound, the group would test it against Sub Ltd’s expected cash flows, grossed up for the 20% minority share.
What happens in the parent’s own accounts?
The consolidation picture and the parent’s separate accounts can look very different. In its own accounts the parent holds the investment under paragraph 9.26, usually at cost less impairment, and the loan as a financial asset. Two tests apply:
- The investment. Section 27 applies; a subsidiary with sustained losses and a deficit is an obvious indicator, and the investment is often written down to nil. See investments in subsidiaries in the parent’s accounts.
- The loan. Paragraph 11.21 requires an assessment at each reporting date of whether there is objective evidence of impairment of financial assets measured at cost or amortised cost, and paragraph 11.22(a) lists significant financial difficulty of the obligor as one such loss event.
Any impairment of the intra group loan in the parent’s books is reversed on consolidation, because the loan and the related expense are both intra group items. The group’s losses are already captured through the subsidiary’s own results. Paragraph 9.15 notes that intragroup losses may indicate an impairment that the group itself must recognise, so the reversal is not automatic if the underlying assets have lost value.
What about going concern and parent support?
Paragraph 3.8 requires management to assess going concern looking at least 12 months from the date the accounts are authorised for issue, and paragraph 3.9 requires disclosure of material uncertainties. A subsidiary with net liabilities often relies on a letter of support from its parent. The subsidiary’s directors need to consider whether the parent can actually provide that support, which is why the group’s own position is relevant to the subsidiary’s accounts and the other way round. Where the parent has guaranteed the subsidiary’s bank borrowing, the borrowing is already in the group balance sheet; the guarantee is a question for the parent’s separate accounts, as discussed in financial guarantees for group borrowings.
How is the deficit presented?
Paragraph 9.20 requires the non controlling interest to be shown within equity, separately from the equity of the parent’s owners, and paragraph 9.21 requires its share of profit or loss to be shown separately. Company law has the same requirement: Schedule 6 paragraph 17 to SI 2008/410 requires a separate item headed “non controlling interests” for the capital and reserves attributable to outside shareholders, and another for their share of profit or loss. A deficit is shown as a negative figure in that line, not netted off elsewhere. The movement in the balance is explained further in non controlling interests explained.
What mistakes come up most often?
- Capping the non controlling interest at nil and loading the excess losses onto the parent’s owners.
- Excluding the subsidiary because it is insolvent on a balance sheet basis, when the parent still controls it.
- Calculating goodwill against the share capital paid rather than against the fair value of net liabilities.
- Recognising large goodwill on a nominal price and never testing it.
- Leaving the parent’s impairment of an intra group loan in the consolidated profit and loss account, which double counts the subsidiary’s losses.
- Applying the equity method rule that stops losses at zero to a subsidiary.
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Related Accountapedia entries
- Consolidating a charity’s trading subsidiary
- Net current liabilities: what it means
- Consolidating a subsidiary bought part way through the year
- Offsetting assets and liabilities in the accounts
- D&O insurance and work liabilities: the exemption
Sources
- Financial Reporting Council: FRS 102 September 2024 tmKYWO6
- legislation.gov.uk: SI 2008/410, schedule 6
Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.