[go: up one dir, main page]

What Is an Associate Company and How Does It Work?

By
James Chen
Full Bio
James Chen, CMT is an expert trader, investment adviser, and global market strategist.
Learn about our editorial policies
Updated September 24, 2024
Reviewed by
David Kindness
David Kindness David Kindness
Reviewed by David Kindness
Full Bio
David Kindness is a Certified Public Accountant (CPA) and an expert in the fields of financial accounting, corporate and individual tax planning and preparation, and investing and retirement planning. David has helped thousands of clients improve their accounting and financial systems, create budgets, and minimize their taxes.
Learn about our Financial Review Board
Associate Company: A corporation whose parent company possesses only a minority stake in its ownership. Associate Company: A corporation whose parent company possesses only a minority stake in its ownership.

Investopedia / Michela Buttignol

What Is an Associate Company?

An associate company is a corporation in which a parent company has invested and possesses a significant but noncontrolling interest, a minority stake anywhere from 20% to 50%. This is different from a subsidiary company, in which a majority stake is owned. The definition varies greatly from jurisdiction to jurisdiction and in different fields, as the concept of the associate company is used in economics, accounting, taxation, securities, and beyond.

Key Takeaways

  • An associate company is a firm owned in part by a parent company.
  • Unlike a subsidiary company, the parent will only own a minority or noncontrolling stake in the associate company.
  • Associate company relationships often occur with joint ventures.
  • Firms that possess stakes in associate companies must accurately report those investments on their consolidated financial statements.

How Do Associate Companies Work?

An associate company may be partly owned by another company or group of companies. As a rule, and unlike a subsidiary, the parent company (or companies) does not consolidate the associate company’s financial statements. Typically, the parent company records the associate company’s value as an asset on its balance sheet. It uses equity accounting to record a profit or loss on its income statement.

Consolidated financial statements are the combined financial statements of a parent company and its affiliated companies or subsidiaries. While there is usually no mandatory consolidation of an associate company’s activities, in most countries there are tax rules that need to be considered when preparing financial statements and tax returns.

Investing in a minority stake in an associate company may be a simple means of entry into a new market for companies seeking to make foreign direct investments.

Example of Associate Companies

Associate companies may also be used in the context of a joint venture among several different partners, each of whom brings a different element to the group. For example, one partner may own production facilities, a second might possess the technology for a new product, and the third may have access to financing. Together, they can form a new company, which is an associate of all three without being the affiliate of any of them.

Here is one example of a company investing in an associate company: In July 2015 software giant Microsoft Corp. (MSFT) invested $100 million in Uber Technologies Inc. (UBER), thereby getting a foothold in the ride-sharing industry, which is not Microsoft’s usual line of business. However, Uber is heavily reliant on software, and so it promised to be a path to diversification and growth for Microsoft.

What Is the Difference Between an Associate Company and a Subsidiary?

An associate company is one in which a parent company owns a minority stake. The parent does not consolidate the financial statements of the associate company.

By comparison, a subsidiary is a company whose parent owns a majority share in it. In this case the parent company will often consolidate the financial statements of the subsidiary.

What Ownership Percentage Denotes an Associate Company?

When a parent company owns anywhere from 20% to 50% of another company, it is considered an associate company. Anything above 50% makes the company a subsidiary.

What Is the Purpose of an Associate Company?

A parent company has significant influence over its associate company, providing it with a number of advantages. However, the associate company may profit from the situation as well.

The arrangement could mean more financial backing and support for the associate, while for the parent it may provide exposure to technological innovation and advancement. In addition, the associate may help increase the overall profitability of the parent.

Why Do Companies Invest in Associate Companies?

Increasing profitability, growth potential, diversification, and gaining exposure to new markets and business segments are among the many reasons for a parent company to have an associate company. If a parent company is unable to acquire a majority stake in a company, purchasing a minority one can still provide benefits.

The Bottom Line

An associate company is a business that is partially owned by a parent company. If the percentage of ownership rises above 50%, the business is considered a subsidiary, not an associate company. A parent company will invest in an associate company for a variety of reasons, including to increase profitability, for diversification, because of growth potential, and to gain exposure to new markets. Both parent and associate companies can benefit from each other.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

  1. Acquire.Fi. "What Is an Associate Company: How Does It Work?"

  2. Encyclopedia Britannica. "Subsidiary."

  3. International Financial Reporting Standards (IFRS) Foundation. "Consolidated Financial Statements."

  4. Bloomberg. "Microsoft Said to Invest About $100 Million in Startup Uber."

  5. The New York Times. “Microsoft Said to Invest Big Sum in Uber.”