Associates

Associates

Definition

IAS 28 Accounting for Investments in Associates and Joint Ventures defines an associate as 'an entity over which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture.'

Significant influence

Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.

Significant influence is assumed with a shareholding of 20% to 50%.

Accounting for associates

Associates are accounted for using the 'equity method,' whereby the investment is initially recorded at cost and adjusted thereafter for the post-acquisition change in the investor's share of net assets of the associate. In other words the value of the investment is the cost plus the group's share of the associates profits and losses.

The effect of this is that the statement of financial position of the group includes a single 'investments in associates' line within non-current assets that includes their share of the assets and liabilities of any associate.  This is calculated as follows:

The consolidated income statement of the group includes a single 'share of profit of associates' line which includes their share of any associate's profit after tax.

Note: in order to equity account, the parent company must already be producing consolidated financial statements (i.e. it must already have at least one subsidiary).

Trading with the associate

Generally the associate is considered to be outside the group. Therefore any sales or purchases between group companies and the associate are not normally eliminated and will remain part of the consolidated figures in the income statement.

Instead it is normal practice to adjust for the group share of any unrealised profit in inventory.

Dividends from associates

Dividends from associates are excluded from the consolidated income statement; the group share of the associate's profit after tax for the year is included instead.

Simple investments

Where an entity invests in the shares of another entity but acquires neither control, nor significant influence this is referred to as a 'simple' or 'trade' investment. In this case the investment is carried as an intangible non-current asset on the statement of financial position and any dividends received are reflected in the income statement.

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