When a subsidiary can be left out of group accounts

Under FRS 102 a subsidiary must be left out of the group accounts only where severe long term restrictions substantially hinder the parent’s rights, or where the interest is held exclusively with a view to resale and the subsidiary has never been consolidated. It may be left out if it is not material, judged together with any other excluded subsidiaries. The Companies Act also allows exclusion for disproportionate expense or delay, but FRS 102 closes that door, and different business activities are never a reason.

What does the Companies Act allow?

Section 405 of the Companies Act 2006 starts from the position that where a parent prepares Companies Act group accounts, all its subsidiary undertakings must be included in the consolidation. It then sets out the exceptions:

• Section 405(2): a subsidiary may be excluded if its inclusion is not material for the purpose of giving a true and fair view, but two or more may be excluded only if they are not material taken together.
• Section 405(3)(a): severe long term restrictions substantially hinder the exercise of the parent’s rights over the assets or management of the subsidiary.
• Section 405(3)(b): extremely rare circumstances mean the information needed cannot be obtained without disproportionate expense or undue delay.
• Section 405(3)(c): the parent’s interest is held exclusively with a view to subsequent resale.

The Act’s wording is permissive: these subsidiaries “may” be excluded. FRS 102 turns some of the permissions into requirements and removes others, and because FRS 102 accounts must also comply with the standard, the standard’s narrower rules govern in practice.

How does FRS 102 narrow the rules?

Ground	Companies Act s405	FRS 102
Not material	May exclude	May exclude (paragraph 9.9A)
Severe long term restrictions	May exclude	Must exclude (paragraph 9.9(a))
Held exclusively for resale	May exclude	Must exclude if not previously consolidated (paragraph 9.9(b))
Disproportionate expense or undue delay	May exclude in extremely rare cases	Not a ground (paragraph 9.8A)
Dissimilar activities	Not a ground	Not a ground (paragraph 9.8)

Paragraph 9.8 says a subsidiary is not excluded because its activities differ from the rest of the group; relevant information is provided by consolidating it and disclosing more about the different activities. So a manufacturing group with a finance or property subsidiary consolidates it.

What counts as held exclusively for resale?

The FRS 102 glossary defines an interest held exclusively with a view to subsequent resale as one:

1. for which a purchaser has been identified or is being sought, and which is reasonably expected to be disposed of within approximately one year of its date of acquisition; or
2. that was acquired as a result of the enforcement of a security, unless it has become part of the group’s continuing activities or the holder acts as if it intends it to; or
3. which is held as part of an investment portfolio.

An interest is held as part of an investment portfolio if its value to the investor is through fair value as part of a basket of investments rather than as a medium through which the investor carries out business. Appendix III (paragraph A3.16) explains that defining resale this way means portfolio subsidiaries are excluded under section 405(3) of the Act, so no true and fair override is needed to exclude them.

The condition in paragraph 9.9(b) that the subsidiary has not previously been consolidated is important. A group cannot stop consolidating a long held subsidiary simply because it has decided to sell it. That subsidiary stays in the consolidation until control is lost, at which point the disposal rules on our page on selling a subsidiary apply.

How is an excluded subsidiary accounted for?

Exclusion from consolidation does not mean leaving the investment out of the group balance sheet.

• Severe restrictions: paragraph 9.9B says the subsidiary is measured using the parent’s accounting policy for investments under paragraph 9.26 (cost less impairment or fair value), unless the parent still exercises significant influence, in which case it is treated as an associate using the equity method. See FRS 102 associates.
• Held for resale as part of an investment portfolio: paragraph 9.9C(a) requires fair value with changes through profit or loss. Paragraph A3.17 explains that where IFRS 10 would not require this, it is a departure from paragraph 36 of Schedule 1 to SI 2008/410 for the overriding purpose of a true and fair view, so the notes must give the particulars of the departure, the reasons for it and its effect.
• Held for resale but not in a portfolio: paragraph 9.9C(b) applies the parent’s policy under paragraph 9.26.

What if every subsidiary can be excluded?

Then the parent may not need group accounts at all. Section 402 of the Companies Act 2006 exempts a parent from preparing group accounts if all of its subsidiary undertakings could be excluded from consolidation under section 405. FRS 102 paragraph 9.3, as amended by the FRC in February 2026, lists the matching situation where all of the parent’s subsidiaries are either required to be excluded by paragraph 9.9 or permitted to be excluded by paragraph 9.9A, and paragraph 9.27A requires a parent using an exemption to disclose the grounds on which it is exempt. The other routes out of group accounts, such as the small group and intermediate parent exemptions, are on our page on when a parent must prepare group accounts.

Illustration only. A trading company has two dormant subsidiaries kept to protect old trading names, each with net assets of £1. Individually and together they are immaterial, so the parent can rely on paragraph 9.9A for both and on section 402 to avoid group accounts. If it later buys a trading subsidiary that is material, it must start consolidating that one unless another exemption, such as the small group exemption, applies; the dormant companies can still be left out if they remain immaterial taken together.

What must be disclosed?

Paragraph 9.23(e) requires the consolidated accounts to give the name of any subsidiary excluded from consolidation and the reason for exclusion. Company law asks for similar information: paragraph 16(2) of Schedule 4 to SI 2008/410 requires a statement of whether each subsidiary undertaking is included in the consolidation and, if not, the reasons for excluding it. For portfolio subsidiaries carried at fair value through profit or loss, the departure disclosures under paragraph A3.17 also apply.

Is losing control the same as exclusion?

No. Paragraph 9.18 notes that a parent may cease to control a subsidiary without any change in ownership, for example when the subsidiary becomes subject to the control of a government, court, administrator or regulator. If control has gone, the undertaking is no longer a subsidiary for FRS 102 purposes and is deconsolidated with a gain or loss under paragraph 9.18A. Severe long term restrictions are the case where the parent still has the legal rights of a parent but cannot exercise them. Deciding which applies needs the control analysis in paragraphs 9.4 to 9.6A; our page on FRS 102 consolidated accounts covers it.

What mistakes come up most often?

• Excluding a subsidiary because its accounts are late. FRS 102 paragraph 9.8A rules out disproportionate expense or undue delay, even though the Act allows it in extremely rare cases.
• Testing materiality one subsidiary at a time. Section 405(2) and paragraph 9.9A both require excluded subsidiaries to be immaterial taken together.
• Excluding a long held subsidiary that is up for sale. The resale ground only applies if the subsidiary has not previously been consolidated.
• Treating routine restrictions as severe ones. Paragraph 9.23(d) separately requires disclosure of significant restrictions, for example from borrowing arrangements or regulatory requirements, on subsidiaries’ ability to pay cash dividends or repay loans. Restrictions of that kind are disclosed; exclusion needs severe long term restrictions that substantially hinder the parent’s rights over assets or management.
• Dropping the investment altogether. Excluded subsidiaries are still measured under paragraphs 9.9B and 9.9C and disclosed under paragraph 9.23(e).

Solar Protect provides tax investigation insurance for businesses and fee protection schemes for accountancy practices. Read how our cover works or get a quote.

Related Accountapedia entries

• Consolidating a charity’s trading subsidiary
• Investments in subsidiaries in the parent’s accounts
• Reduced disclosures for qualifying entities
• Investments: fixed asset or current asset
• Subsidiaries with a different year end

Sources

• legislation.gov.uk: Act 2006 c. 46, section 405
• Financial Reporting Council: FRS 102 September 2024 tmKYWO6
• legislation.gov.uk: Act 2006 c. 46, section 402
• Financial Reporting Council: Amendments to FRS 102 The Financial Reporting Standard applicable in t
• legislation.gov.uk: SI 2008/410, schedule 4

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.