ASSOCIATE COMPANIES (IAS 28)
An associate company is a company in which the investing company owns more than 20% but less than 50% of the voting rights. This means that the investing company does not control or own the associate company but has a participating influence in the financial and operating activities of the associate company.
The participating influence arises because the investing company virtue of its significant voting rights can be able to appoint one or two directors in the board of directors of the associate company. These directors will take part in the decision making process.
As the investing company doesn’t control the associate company, associate company are therefore NOT consolidated. However, due to the participating influence, they cannot be treated as mere investments and thus IAS 28 requires the use of equity method of accounting.
In summary, the equity method of accounting requires that the investment in associate company should initially be carried in the accounts at cost and thereafter the amount increased with the investing company’s share of post-acquisition retained profits in the associate company.