An associate company represents a corporation in which a parent company holds an ownership stake, typically a minority share, distinguishing it from a subsidiary. This distinct relationship finds application in various sectors, such as economics, accounting, and taxation, among others.
An associate company, a term frequently encountered in corporate structures, delineates a unique ownership arrangement between corporations. Unlike a subsidiary where a parent company retains a majority stake, an associate company involves owning a minority share in a distinct entity. Let’s delve into the nuances, workings, and significance of these associations.
What is an associate company?
An associate company denotes a firm in which a parent company maintains partial ownership. Unlike a subsidiary, where the parent entity holds a majority stake, an associate company reflects a scenario where the ownership remains partial or noncontrolling. This relationship often surfaces within joint ventures, playing a pivotal role in various industries.
How do associate companies work?
When a corporation invests in another, obtaining a minority share or noncontrolling interest, the invested entity becomes an associate company. Typically, the financial statements of associate companies aren’t consolidated by the parent, unlike the practice with subsidiaries. Instead, the parent company records the associate’s value as an asset on its balance sheet.
Associate companies play a significant role in financial reporting, influencing consolidated financial statements and tax considerations. They can offer an entry route into new markets, particularly for companies pursuing foreign direct investments.
Here is a list of the benefits and the drawbacks to consider.
- Opportunity for market entry and expansion
- Less financial consolidation and reporting burden
- Access to diverse expertise and resources
- Limited control and decision-making power
- Potential complexities in financial reporting
- Risk of conflicts among partners
Example of associate companies
Associate companies often manifest within joint ventures where multiple partners contribute distinct elements to form a new entity. For instance, in 2015, Microsoft invested in Uber, showcasing a foray into a sector not within its core business. This strategic move granted Microsoft exposure to new markets and potential diversification.
What sets apart an associate company from a subsidiary?
An associate company entails a minority stake, whereas a subsidiary represents majority ownership by the parent company. The distinction lies in financial statement consolidation, where the parent doesn’t amalgamate the associate’s financial statements but usually does so for subsidiaries.
Frequently asked questions
What percentage qualifies as an associate company?
A stake between 20% to 50% usually designates an associate company. When ownership surpasses this range, the entity is classified as a subsidiary.
What is the purpose of an associate company?
An associate company signifies substantial influence due to the parent company’s ownership. This relationship offers advantages such as financial support and technological exposure.
Why do companies invest in associate companies?
Investing in associate companies presents opportunities for increased profitability, diversification, and market exposure, providing an alternative route when unable to acquire a majority stake.
- Associate companies involve partial ownership by a parent company, differing from subsidiaries.
- They offer an entry into new markets and diverse expertise without complete financial consolidation.
- Associate companies typically reflect ownership stakes between 20% to 50%.
View article sources
- Associates in Finance – Davenport University
- Financial Management – Associate Degrees – Franklin University
- Financial Advisors & Associates Inc. also d/b/a Freedom Financial , et al. – Federal Trade Commission
- Research Associates Explained: The Engine Driving Informed Financial Decisions – SuperMoney