Subsidiaries, Joint ventures and Associates

Subsidiaries

International Accounting Standard 27 (IAS 27) defines a subsidiary as “A subsidiary is an entity, including an unincorporated entity such as a partnership, that is controlled by another entity (known as the parent).”

Subsidiary is an entity which is controlled by another entity. The control means that the parent company can govern the financial and operating policies of its subsidiaries to gain benefits from the operations of subsidiary. Control can be gained if more than 50% of the voting rights are acquired by the parent. This is usually done by purchasing more than 50% of the shares of subsidiary. But control can also be gained by following methods:

• Having more than 50% voting rights due to agreement with other investors
• Having ability to govern financial and operating policies by law or by agreement
• Having power to hire or fire majority of the members of board of directors
• Having power to cast majority of the votes at the meetings of board of directors

The last two points are valid only if the board of directors exercises control over the entity.

Joint Ventures

International Accounting Standard 31 (IAS 31) defines a joint venture as “A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control.”

Joint control means that the parties to the joint venture agree to share control over the economic activities of the joint venture. This means that unanimous consent of the parties involved is required to make strategic decisions.

Joint ventures can exist in three different forms as set out by IAS 31:

• Jointly controlled operations
• Jointly controlled assets
• Jointly controlled entities

Contractual arrangement is necessary for the formation of a joint venture. If the contractual agreements do not exist, the investments will not be deemed as a joint venture.

Associates

International Accounting Standard 28 (IAS 28) defines an associate as “An associate is an entity, including an unincorporated entity such as a partnership, over which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture.”

Significant influence means that the party has power to participate in the decision making of financial and operating policies but do not have control over them. Significant influence is usually acquired by purchasing more than 20% of voting power but less than 50%.