Associates are commercial entities that have a significant share in the equity of other business entities. But at the same time, influence is not enough to establish control over it. From the point of view of accounting, associated companies are structures whose share ranges from 20-50%. If this indicator exceeds the mark of 50%, then it will no longer be considered as such. After all, the company will go under full control.
general information
Clear definition criteria are very important, especially when investments are made in associates. IAS 28 regulates this moment at the international level (it is recommended by the Russian government to navigate it). Since there is no status of a fully consolidated legal entity, this means that the financial statements are maintained in a separate manner. That is, income and expenses, as well as profits or losses are not included in the data of the main company. This is especially true when creating joint ventures. In this case, joint reporting is provided for each legal entity. Although the sum of both balance sheets is considered as one investment.
World position
Associates are a common international practice. But the recognition of such a status may differ depending on the current legislation of a particular country. This is most often used to track investment related activities. In our conditions, this means that in the financial statements, dividends are displayed as income on capital. Identification of legal status is also important during acquisitions and mergers. This approach is due to the fact that knowledge of the share of partners in equity is important for individuals who want to gain control. And this can be achieved by investing in associates or merging it with structures that already belong to a potential buyer. But at the same time, it is necessary to take into account the interests of partners and provide a mechanism for protecting their interests to ensure loyalty in the future.
Specific moments
In practice, the recognition of the process of forming a large share in the equity owned by an associate is a very important matter, especially for those who issue shares. As a rule, supporting close cooperation with investors, whose share is more than 20%, can significantly simplify the process of developing and making decisions. This is especially important when urgency is needed to ensure the stable development of the company. Do not forget about situations such as hostile takeover. Indeed, it often depends on the decisions of large investors whether the attempt will be successful.
About accounting
So, it has already been considered that associates are companies with large shares of investments in other commercial structures. A few words should be added about accounting features. The nature of the relationship in this case is different from simple investment (passive investing). Regulates associates IFRS (International Financial Reporting Standard). We are interested in document number 28. To ensure an objective reflection of the situation, it is necessary to display a share in the financial result and net assets. To establish relationships using the following definitions:
- Control - management powers over the economic and financial policies of the company used to obtain benefits from activities.
- The method of accounting at cost. In this case, all funds are registered at par. In the statement of profit and loss, income is displayed solely to the extent that the investor receives dividends.
- Significant impact - the ability to participate in the process of discussing decisions on operating or financial policies, but not to control it.
- And finally, associated companies and subsidiaries are enterprises with which different types of relationships are established.
About the impact
If an investor directly or indirectly has 20% of the shares of the investee, this means that he can have a strong impact. An exception is if the opposite can be clearly demonstrated. And vice versa. If there is less than 20% of the shares, then this indicates that the investor has no significant influence. And again, unless the reverse can be clearly demonstrated. If someone else has a controlling or large block of shares, this does not always preclude the presence of strong influence. This is confirmed by the following provisions:
- Representation of interests on the board of directors (similar to the governing body).
- Participation in the process of forming an existing policy.
- Conducting large operations between the investor and the investee.
- Exchange and transfer of management personnel.
- Providing requested technical information.
It should be remembered that associates are not part of the group of commercial enterprises. It may include only parent and subsidiary firms.
Accounting Issues
This is a tricky thing. Consolidation is not carried out on an itemized basis. How are accounting records of investments in associates? When there is a commercial group A, then all relevant indicators of the investment object are also included in its net assets. In the consolidated balance sheet everything is displayed in one article. The same is with profit and loss. So, everything that remains in a separate article after taxes is also noted by such an approach. If the acquisition was extended over a year, then distribution is carried out on a time-proportion basis. When calculating and displaying investments, part of the funds deposited is replaced by net assets. In general, you should focus on IFRS 28. When reporting, the investor should give answers to the following questions:
- What financial interests should be included in the carrying amount of investments in an associate.
- Whether the investor’s participation in losses that exceed the nominal value of the contribution made to the enterprise should be recognized.
Search for answers
Now an agreement has been reached, according to which it is necessary to display tools that allow to ensure:
- Unlimited right to participate in losses and profits.
- Claim a share in the balance of equity of the invested investment.
If long-term losses are recorded, then this can be considered as evidence of the depreciation of committed investments. The exact current value is determined by adjustment. It should be noted that IAS 28 is not the only standard that is of interest under this article. Situations may arise that will force one to be guided by IAS 37 and 39. And in some cases, IAS 36 and 38.
Display of internal turns
Associated companies - this is a business entity with which various operations can be performed. For example, domestic trading activities. That is, you can safely carry out purchase / sale operations. As a result, receivables and payables arise. Therefore, internal momentum with such entities should not be excluded. If a debt arises from an associate, it is displayed as an asset.Otherwise, talk about commitment. The presence of receivables and payables in the consolidated balance sheet should be displayed separately.
And now about dividends. They are always displayed in full. To do this, it is necessary to ensure that all means are taken into account, as well as adequately recorded by the relevant services. Although this should not be excluded internal balances of dividends. There are certain nuances when displaying unrealized profits. Let's look at an example. The associate was deemed unnecessary and a decision was made to sell securities that secure rights to it. But if at the end of the year they could not be realized, then profit and cost are included in the balance sheets. Here, the avoidance of double counting (in various commercial structures and the payment of stipulated payments) becomes relevant. When considering this issue, a consensus was reached:
- Unrealized gains should be eliminated to the extent of the investor's share in the associate.
- Losses of the same nature are taken into account to the extent that they indicate a decrease in the value of the asset.
By the way, to exclude unrealized profits, it must be deducted before taxes.
Conclusion
So it is considered what are the associated companies. This information allows you to get an idea of the general state of affairs, as well as about certain specific nuances. And how to use the data, everyone decides for himself. In order to avoid problems, in relations with associates it is necessary to act in accordance with the letter of the law and adhere to the requirements of financial statements. In this case, it will be an order of magnitude easier to carry out activities and obtain the necessary result.