What is the Difference Between Subsidiary and Associate?
🆚 Go to Comparative Table 🆚The main difference between a subsidiary and an associate lies in the level of ownership and control that the parent company has in each entity.
A subsidiary is a company where the parent company owns a majority share (usually more than 50% of the voting shares). In this case, the parent company has control over the subsidiary's operations and decision-making, and it often consolidates the financial statements of the subsidiary. Subsidiaries are separate legal entities from their parent companies, which means they have their own legal rights and liabilities.
An associate, on the other hand, is a company in which the parent company holds a significant ownership stake, typically between 20% and 50% of the voting shares. While the parent company has significant influence over the associate, it does not have control. Associates are accounted for using the equity method, meaning that the investment in the associate is initially recorded at cost and then adjusted to reflect the investor's share of the associate's profit or loss. Associates do not have separate legal identities and are usually subject to less legal implications compared to subsidiaries.
In summary, the key differences between a subsidiary and an associate are:
- Ownership: A parent company owns a majority share (more than 50%) in a subsidiary, while it holds a significant ownership stake (between 20% and 50%) in an associate.
- Control: A parent company has control over a subsidiary's operations and decision-making, while it only has significant influence over an associate.
- Accounting Treatment: Subsidiaries are consolidated with the parent company's financial statements, while associates are accounted for using the equity method.
- Legal Implications: Subsidiaries are separate legal entities with their own legal rights and liabilities, while associates do not have separate legal identities and are usually subject to fewer legal implications.
Comparative Table: Subsidiary vs Associate
Here is a table comparing the differences between a subsidiary and an associate:
| Subsidiary | Associate |
|---|---|
| Definition: A subsidiary is a company that is owned and controlled by another company, known as the parent company. | Definition: An associate is a company in which another company holds a significant ownership stake, usually between 20% and 50% of the voting shares. |
| Ownership: The parent company owns more than 50% of the subsidiary's shares, giving it control over the subsidiary's operations and financial matters. | Ownership: The investing company holds between 20% and 50% of the associate's voting shares, giving it significant influence but not control over the associate's operations. |
| Accounting: Subsidiaries are accounted for using the consolidation method, where the parent company consolidates the financial statements of the subsidiary into its own financial statements. | Accounting: Associates are accounted for using the equity method, where the investing company records its share of the associate company's profits or losses on its own financial statements. |
| Taxation: Subsidiaries generally have tax benefits, as the parent company may be able to claim tax deductions for losses incurred by the subsidiary. | Taxation: Associates may be subject to different rules depending on the jurisdiction, but they generally do not have the same tax benefits as subsidiaries. |
In summary, the key difference between a subsidiary and an associate lies in the level of ownership and control that the parent company has over the respective entities. Subsidiaries are fully owned and controlled by the parent company, while associates are partially owned and only have significant influence from the investing company.
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