Definition
An associated undertaking, often termed an “associate,” is a company that is not classified as a subsidiary but in which another company or group has significant influence. Significant influence typically refers to the power to participate in financial and operational policy decisions of the associate, but not control them. This influence is often evidenced through ownership of 20% to 50% of the voting power.
Accounting Guidelines
Financial Reporting Standard in the UK and Ireland
In the UK and Republic of Ireland, accounting for associates is governed by Section 14 of the Financial Reporting Standard (FRS) applicable in these regions.
International Accounting Standard 28 (IAS 28)
Globally, the accounting treatment for investments in associates is regulated by IAS 28, which requires that these investments are accounted for using the equity method, except when classified as held for sale.
Examples
- Company A owns 30% of Company B: Although not a subsidiary, Company A has significant influence over Company B due to its substantial shareholding.
- Joint Ventures: A scenario where Company X and Company Y each own 45% of Company Z. Both X and Y have significant influence over Z, but no single company controls Z, meaning each company considers Z an associate.
Frequently Asked Questions (FAQs)
What is the Equity Method?
The equity method is an accounting technique used to record investments in associates. Under this method, the investor recognizes its share of the associate’s profits or losses in its financial statements.
How to Identify Significant Influence?
Significant influence is often evidenced by representation on the board of directors, participation in policymaking processes, material transactions between the entities, interchange of managerial personnel, or provision of technical information.
What is the Difference Between an Associate and a Subsidiary?
A subsidiary is a company controlled by another company, known as the parent company, typically through owning more than 50% of its voting shares. An associate, however, is influenced but not controlled by another company, usually with ownership between 20% to 50% of voting shares.
How is Dividends from Associates Treated?
Dividends received from an associate reduce the carrying amount of the investment and are not recognized as income in the investor’s profit and loss statement.
Related Terms
- Undertaking: A business entity or enterprise.
- Subsidiary: A company controlled by another company, typically through the majority ownership of its voting shares.
- Significant Influence: The power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.
- Equity Method: An accounting technique for recording investments in associates and joint ventures.
Online Resources
- International Accounting Standard 28 (IAS 28)
- Financial Reporting Standard (FRS) Applicable in UK and Republic of Ireland
Suggested Books for Further Studies
- “IFRS and US GAAP: A Comprehensive Comparison” by Steven E. Shamrock
- “The Vest Pocket Guide to IFRS” by Steven M. Bragg
- “Understanding IFRS Fundamentals, 2010” by Nandakumar Ankarath
Accounting Basics: “Associate (Associated Undertaking)” Fundamentals Quiz
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