Associated Companies

GoldenRetreiver

Hi
Can anyone please tell me the difference (in plain English pretty please) between associated companies and minority interest when it comes to consolidated accounts?

Thanks

peugeot

An associated company is one where the parent has a significant influence over, but not control of the other company.

Significant influence is a 20% - 50% shareholding. Control is obtained when the parent acquires a 51% or more holding (i.e. a subsidiary).

Minority interest is the outside ownership. For example if H owns 75% of S, then the minority interest is the 25% that H does not own i.e. owned by other investors/companies.

Kind regards
Steve

GoldenRetreiver

Thanks however, I'm still struggling. Does this mean that associated companies are recognised from the company which is being controlled. Whereas minority interest is recognised from the company that has the % ownership of the the smaller company. E.g. If company A has a minority interest in company B, is company A also an assoicated company to company B, sorry but I just cant get my head round this one

peugeot

Let me see if I am understanding your question correctly. Your scenario is Company A owns 25% of the shares in Company B. This would mean that Company A has significant influence over Company B but does not control it - therefore Company B results would not be consolidated with Company A.

In your scenario, assuming Company B does not own any shares in Company A - then Company B would not recognise Company A as an 'associated company'. It works by looking at who owns the shares in a company. Let's work through an example here:

Company A owns 40% of Company B. Therefore, Company A does not have control over company B as it has less than 51% of the shares. It has significant influence over Company B because its shareholding falls between 20% and 50%. The minority interest in Company B is 60% i.e. the balance of shares held by other investors.

Conversely, if Company A owns 70% of Company B, then it would have control and would therefore consolidate Company B accounts with its own.

A further point to note, is that you only consolidate where you have a subsidiary company. Always ascertain the % holding before you start the consolidation process (it should be working 1 in your answer). You have a subsidiary company when you have 51% or more of the voting rights.

GoldenRetreiver

Hi I think the penny has dropped.

Are associated companies - a company who own between 20 to 50% of shares in another company? and the other companies would be called the minority interest in relation to Company A because they have shares in company B
And in the case of Company A if they own 70% of company B then company B would be a subsidiary to Company A who would be called the parent company?

peugeot

Absolutely! Spot on.

Kind regards
Steve

GoldenRetreiver

Thanks so much for your patience.

Sally

peugeot

No problem. Consolidated financial statements can be tricky in certain areas, but as long as you understand the basic mechanics of the whole consolidation process you will be fine on the day of the exam.

Just remember to have working 1 as your group structure - this should be done before any work starts on the consolidated financial statements. This demonstrates to the marker that you are aware of the fundamental principles of the consolidation process i.e. you only consolidate the subsidiaries, not associated companies.

Best wishes
Steve

GoldenRetreiver

Hi when you say have working 1 as your group structure, do you mean the parent company. In class when we have done consolidation, we have been told to basically add the income statements together, then eliminate for intra group sales, intra group profit in closing inventories, intra group dividends and group interest. We have always done the calcluations on consolidated income statement to show how the figures are arrived at. Do I understand from your comment there is a more logical approach than the one we have been doing?

peugeot

Thinking about it, more often than not DFS papers will give you the holding of the company i.e. the Q will tell you that parent has (say) a 75% holding in subsidiary. In this case you will not need to do a group structure working because it will be apparent from the question that it is either a subsidiary, associated company or otherwise.

Sorry about that, I forgot the AAT questions give you the actual holding!

GoldenRetreiver

Phew! one more less thing to worry about! Seriously though thanks for your help I have wondering about the associated companies thing for several weeks and I just couldnt get my head around it. Isnt it too nice to be doing this revision today - should be outside making the best of it!

sally