Think of an associate company as not quite a subsidiary.
If one company owns another company outright, then the smaller firm is a subsidiary of the bigger one. But there are times when a larger company owns only a smallish stake in a smaller one, but not a majority of the shares. It has a sizable interest, possibly seats on the board and a heavy influence on management, but less than 50% of the voting stock. In this scenario, the smaller firm is an associate company.
The distinction has some impact on the accounting for the larger company. Even though it owns a notable stake in the smaller company, the smaller firm's holdings don't get rolled into the holdings for the larger company for accounting purposes, as would happen with a straight-up subsidiary. Instead, the holdings are viewed like an investment. The larger company holds shares in the smaller company as an asset, but doesn't hold the smaller company's assets directly.
Related or Semi-related Video
Finance: What is Cumulative Voting?6 Views
Finance, a la shmoop. What is cumulative voting? All right people there are two
flavors of voting in the land of common stock, there's cumulative and statutory. [Two ice cream cones held next to each other]
Cumulative voting just somehow sounds cooler, doesn't it? It allows teams to [Guy points at the ice cream cone and drops it]
join forces and pool their votes cumulatively
for target candidates to get elected that is it allows for the disaggregation,
$5 word there, of board members when voting. That is if a shareholder has one [5 dollar price tag appears]
percent of the common shares outstanding of a company and cumulative voting is [Pie chart showing the small 1% holding]
allowed and there are five candidates being elected, well that shareholder can
vote effectively five percent of their total shares voteable for just one
candidate. Said graphically with blood and guts it looks like this. Cumulative [Table showing shares equalling number of votes per candidate]
voting helps the little guy to have a big presence, with only 1% of the shares [Kid sat at a shareholder meeting]
the little guy can be felt as a 5% holder which makes you know him or her a [Kid jumping to hit a Mario coin box]
relatively major player. It also encourages boards to rotate seats [People swapping seats in the boardroom]
gradually, that is if there were seven seats coming up for election while that
1% could feel like 7% which starts to get dangerous in a contentious board and [The people in the boardroom start fighting]
company situation. You can imagine someone who only owns a small part of
the shares outstanding could elect a whole lot of board. Yeah that'd be a [Wooden boards replace the people in suits]
little scary. Well, score one for the little guy... [Kid laughing will an evil face]
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