Term
Associate company
A company in which an investor has significant influence, usually 20 to 50 % of voting rights, but not control. In consolidated financial statements it is not included line by line but accounted for using the equity method.
Updated
What it means
An associate company is one over which an investor has significant influence but not control. Significant influence is generally presumed with 20 to 50 % of voting rights and means the ability to participate in decisions on financial and operating policy, for example through representation on its bodies.
It differs from a subsidiary, which the investor controls, typically through a majority of votes. Subsidiaries are included line by line in consolidated financial statements, whereas associates are shown as a single line using the equity method.
Under the equity method the carrying amount of the stake is adjusted for the investor's share of the associate's profit or loss and reduced by dividends received. The investor thus sees its share of the results in its own accounts even though they do not flow to it directly.
How it works in practice
Significant influence is judged by substance, not just percentage. It can exist with a smaller stake if the investor has a seat on the board, takes part in policy-making, supplies key technology or managers, or trades significantly with the company.
Transactions between the investor and the associate are partly eliminated on consolidation, to the extent of the investor's share. An example is unrealised profit on inventory the companies sold to each other that is still in stock.
In a Slovak company's individual financial statements, an investment in an associate is shown as a long-term financial asset, usually at cost or, depending on the accounting policy, under the equity method. Equity accounting mainly matters for consolidation.
What to watch out for
The 20 and 50 % thresholds are only guides. With a mix of voting rights, options and shareholder agreements, significant influence can arise above or below them, and a wrong assessment leads to misstatement that the auditor will challenge.
An associate is also a related party. Transactions with it must be disclosed in the notes and priced at arm's length, otherwise transfer pricing tax issues arise.
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