Syllabus A4j)
Define an associate and explain the principles and reasoning for the use of equity accounting.
Associates
An associate is an entity over which the group has significant influence, but not control.
Significant influence
Significant influence is normally said to occur when you own between 20-50% of the shares in a company but is usually evidenced in one or more of the following ways:
representation on the board of directors
participation in the policy-making process
material transactions between the investor and the investee
interchange of managerial personnel; or
provision of essential technical information
Accounting treatment
An associate is not a group company and so is not consolidated.
Instead it is accounted for using the equity method.
Intercompany balances are not cancelled.
