Associated company

3 Key Takeaways

• Associated companies are not subsidiaries but have a significant relationship with another company.
• The relationship is usually defined by ownership or voting rights.
• Associated companies are accounted for differently than subsidiaries in financial statements.

What is an Associated Company?

An associated company, also known as an associate or affiliate, is a company in which another company (the investor) has significant influence but not control. This influence is typically established through ownership of 20% to 50% of the associate’s voting shares. The investor can influence the associate’s operating and financial policies but cannot control them entirely.

Importance of Associated Companies

• Strategic Investments: Companies often invest in associated companies to gain access to new markets, technologies, or resources.
• Financial Reporting: The accounting treatment for associated companies differs from that of subsidiaries, impacting the investor’s financial statements.
• Tax Implications: The relationship between associated companies can have tax implications for both parties.

How Associated Companies Work

The relationship between an investor and an associated company is based on significant influence. This influence can be exercised through board representation, participation in policy-making processes, or the provision of essential technical information. The investor accounts for its investment in the associate using the equity method, which reflects the investor’s share of the associate’s profits or losses.

Examples of Associated Companies

• A company owning 25% of another company’s shares and having a seat on its board of directors.
• A joint venture where two companies each own 50% of the venture and share decision-making power.

Real-World Applications

In the real world, associated companies are a common feature of the corporate landscape. They allow companies to form strategic alliances, expand into new markets, and share risks and rewards. For investors and analysts, understanding the relationship between an investor and its associated companies is crucial for evaluating the investor’s financial performance and growth potential.pen_sparktunesharemore_vert