An unconsolidated subsidiary is a company that is owned by a parent company, but whose individual financial statements are not included in the consolidated or combined financial statements of the parent company to which it belongs.
The shareholders of the parent company would not know the true value of the company’s assets and liabilities; the income statement would not reflect the company’s true revenues and expenses.
The Securities and Exchange Commission (SEC) and Financial Accounting Standards Board (FASB) tried to address the problem that shareholders and creditors of a subsidiary face by requiring parent companies to provide segmental reporting (reporting about subsidiaries, business units, and divisions of the company), which you also find in the notes to the financial statements.
When a company owns all the common stock of its subsidiaries, the company doesn’t really need to publish reports about its subsidiaries’ individual results for the general public to peruse.
Shareholders don’t even need to know the results of these subsidiaries.
A company may be treated as unconsolidated even when a parent company owns 50% or more of its voting common stock.
This usually occurs when the parent is not in actual control of subsidiary, has temporary control of the subsidiary or if the parent company's business operations are considerably different than that of the subsidiary.
Eliminating assets, liabilities, revenue, and expenses from public view makes determining a subsidiary’s financial results nearly impossible for shareholders or creditors.
But if these transactions were included, the value of the parent company’s stock would be distorted, because these transactions would be counted twice.
In preparing consolidated financial statements, the parent company must eliminate numerous transactions among the parent and its affiliates before presenting the consolidated financial statements to the public.