An associate company is an organization in which another company (known as the parent company) possess an ownership stake.
Don’t get confused between subsidiary and associate company. In the subsidiary, the parent company uses to have a majority stake, whereas a company will be considered as an associate company if the parent company has a minority stake.
A parent company is not required to consolidate the associate company’s financial statements. The value of the amount invested is shown as an asset on the parent company’s balance sheet.
Most countries have their own rules and regulations while dealing with associate companies.
In India, as per section 2(6) of the companies act 2013, an associate company in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company.
For the purposes of this sub-section, “significant influence” means control of at least 20% of total share capital, or of business decisions under an agreement.
Vide General Circular No. 24/2014, dated 25.06.2014 it has been clarified that the shares held by a company in another company in a ‘fiduciary capacity’ shall not be counted for the purpose of determining the relationship of ‘associate company’ under section 2(6) of the Companies Act, 2013.
Joint venture means a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.
