What Is an Associate Company?
An associate company, in its broadest sense, is a corporation in which a parent company possesses a stake. The actual 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.
Usually, the parent company owns only a minority stake of the corporation, as opposed to a subsidiary company, in which a majority stake is owned.
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.
How an Associate Company Works
An associate company may be partly owned by another company or group of companies. As a rule, the parent company or companies do not consolidate the associate company's financial statements, as is the case with a subsidiary (where the parent company usually consolidates the financial statements). Typically, the parent company records the associate company's value as an asset on its balance sheet.
- Most jurisdictions have rules that provide for the use of arm's length pricing when associates are transacting with one another.
- Internationally, the Organization for Economic Development and Co-operation (OECD) has put forth several transfer pricing guidelines for cross-border transactions between parent companies and their associated companies.
- Purchasing a smaller stake can be cost-effective and may serve to reduce any negative stigma connected to foreign ownership.
Example of Associate Companies
Associate companies may also be used in the context of a joint venture between 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.
For example, in July 2015, software giant Microsoft Corporation invested $100 million in Uber Technologies Inc., thus taking a foothold in the ride-sharing industry, which is not directly Microsoft's usual line of business. However, the industry is heavily reliant on software and is a path to diversification and growth for Microsoft.
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, there are, in most countries, tax rules that need to be considered when preparing financial statements and tax returns.