when a subsidiary or affiliated entity is a sizable operation a parent company s financial statements may not fully reflect its true exposure to all attached elements of its business 
while a parent company may not have managerial control of a subsidiary it could have significant exposure to the financial and operational dealings of the subsidiary for instance a multinational enterprise may experience political risk in another region from an accounting sense it might not make sense to account for the subsidiary beyond an investment on a parent s financial statements but the exposure does extend to the parent s core business example of an unconsolidated subsidiaryas an example let s say that company abc has a 40 controlling interest in its unconsolidated subsidiary business xyz which it created as an spv for a new construction project in a foreign country that will only last for a year xyz records 1 billion in profits for the year because abc owns more than 20 of xyz but less than 50 it will use the equity method of accounting for its unconsolidated subsidiary abc must record 400 million in earnings on its income statement since abc has a 40 stake and exerts some control over xyz also abc needs to record the increase in the value of the initial investment listed on the balance sheet by 400 million 