An Associate refers to an undertaking that is not classified as a subsidiary but is one where another company or group exerts significant influence. This term and its implications are crucial in the realms of accounting and financial reporting, and are regulated by standards like Section 14 of the Financial Reporting Standard applicable in the UK and Republic of Ireland and International Accounting Standard 28 (IAS 28).
Historical Context
The concept of associates has evolved with the development of corporate structures and financial reporting standards. Historically, companies needed a clear framework to account for investments where they had significant influence but not control. This led to the establishment of specific standards in accounting practices to ensure consistent and transparent reporting.
Key Regulations
Section 14 of the Financial Reporting Standard (UK and Republic of Ireland)
- Focuses on the treatment and reporting of associates.
- Establishes criteria for identifying significant influence, typically marked by a holding of 20% to 50% of voting rights.
International Accounting Standard 28 (IAS 28)
- Governs accounting for investments in associates and joint ventures.
- Provides guidelines for the equity method of accounting, which recognizes the investor’s share of the associate’s profits and losses.
Types of Associates
Associates can vary based on the nature of the influence:
- Minor Associates: Entities where the investor has minimal influence, just meeting the lower threshold.
- Major Associates: Entities where the investor has substantial influence, often approaching the upper limit without achieving control.
Mathematical Model: Equity Method
The equity method is used to account for associates, recognizing the investor’s share of the associate’s net assets.
Example Calculation
Sample Calculation
If a company invests $1 million in an associate and its share of profits for the year is $200,000, and it receives dividends worth $50,000:
Importance and Applicability
Importance
- Financial Transparency: Ensures accurate representation of significant investments.
- Investor Insight: Provides insights into the influence a company has on another.
- Strategic Decisions: Informs strategic decisions and valuation.
Applicability
- Financial Reporting: Crucial for preparing consolidated financial statements.
- Investment Analysis: Helps in assessing the value and performance of investments.
Examples
- Company A invests in Company B, holding 30% equity. Company A can influence Company B’s policies and decisions without control.
- A tech firm invests in a start-up, holding 25% of voting rights, allowing it to guide the start-up’s strategic direction.
Considerations
- Identification of Significant Influence: Requires judgment and thorough analysis of the influence.
- Compliance with Standards: Adherence to Section 14 and IAS 28 ensures legal and ethical compliance.
- Impact on Financial Statements: The equity method affects net income and reported assets.
Related Terms
- Subsidiary: An entity controlled by another entity.
- Joint Venture: A business arrangement where two or more parties agree to pool their resources.
- Equity Method: Accounting technique for associates and joint ventures.
Comparisons
| Term | Control | Influence |
|---|---|---|
| Associate | No control | Significant influence |
| Subsidiary | Full control | Majority voting rights |
| Joint Venture | Shared control | Collaborative influence |
Interesting Facts
- The term “associate” can vary in interpretation based on jurisdiction and specific financial regulations.
- Significant influence can extend beyond shareholding to include representation on the board of directors and policy-making processes.
Famous Quotes
“An investment in knowledge pays the best interest.” - Benjamin Franklin
Proverbs and Clichés
- Proverb: “Birds of a feather flock together.”
- Cliché: “The apple doesn’t fall far from the tree.”
Jargon and Slang
- Equity Stake: Ownership interest in a company.
- Holding Company: A company created to buy and hold shares of other companies.
FAQs
What defines an associate in accounting terms?
How is an associate different from a subsidiary?
What accounting method is used for associates?
References
- Financial Reporting Standard applicable in the UK and Republic of Ireland, Section 14.
- International Accounting Standard 28 (IAS 28).
Summary
The term Associate plays a pivotal role in accounting and financial reporting, representing entities where significant influence is exerted but without outright control. Governed by strict standards, the proper accounting for associates through methods like the equity method ensures transparency and accuracy in financial disclosures. Understanding associates helps in making informed investment decisions and maintaining robust financial reporting frameworks.
