What Is an Associate Company?
An associate company, in its broadest sense, is a corporation wherein a parent company has an ownership stake. Generally, the parent company claims just a minority stake of the associate company, rather than a subsidiary company, in which a majority stake is owned.
The genuine definition shifts significantly from one jurisdiction to another and in various fields, as the concept of the associate company is utilized in economics, accounting, taxation, securities, and then some.
How an Associate Company Works
An associate company might be partly owned by one more company or group of companies. As a rule, the parent company or companies don't consolidate the associate company's financial statements, just like with a subsidiary (where the parent company typically consolidates the financial statements). Normally, the parent company records the associate company's value as an asset on its balance sheet.
Consolidated financial statements are the combined financial statements of a parent company and its affiliated companies or auxiliaries. While there is generally no mandatory consolidation of an associate company's activities, there are, in many countries, tax rules that should be thought about while planning financial statements and tax returns.
Investing in a minority stake in an associate company might be a simple means of entry into another market for companies seeking to make foreign direct investments.
Illustration of Associate Companies
Associate companies may likewise be utilized with regards to a joint venture between several unique partners, every one of whom carries an alternate element to the group. For instance, one partner might claim production facilities, a second could have the technology for another product and the third might approach financing. Together, they can form another company, which is an associate of each of the three without being the affiliate of any of them.
For instance, in July 2015, software goliath Microsoft Corporation invested $100 million in Uber Technologies Inc., hence taking a traction in the ride-sharing industry, which isn't directly Microsoft's typical line of business. Nonetheless, the industry is intensely dependent on software and is a path to diversification and growth for Microsoft.
- Associate company connections frequently happen with joint ventures.
- An associate company is a firm that is owned in part by a parent company entity.
- Firms that have stakes in associate companies must precisely report those investments on their consolidated financial statements.
- Dissimilar to a subsidiary company, the parent will just possess a minority or non-controlling stake in the associate company.