Accounts Demystified, 6th Edition

a c c o u n t s d e m y s t i f i e d

106

The new rules are considerably more complicated, as investments have to

be put into one of several different categories, each of which is treated in

a different way. The key difference from the old rules, however, is that

many investments are included on the balance sheet at fair value.

So if the value of the investment rises in a year, you show it on the balance sheet

at that new value and recognise a profit? That is, Increase investments, Increase

retained profit?

Correct. I’ll come on to how we actually show the profit shortly.

Associates and subsidiaries

Many companies carry on a large percentage of their business through

investments in other companies. This may be because they have bought

the companies (in total or just substantial stakes in them) or because they

have started new businesses through separate companies. The way we

account for investments means that you wouldn’t get a very meaningful

picture of such an investor company.

We therefore define certain investments as either associated under-

takings or subsidiary undertakings. They are usually just known as

associates and subsidiaries and there are special rules by which we

account for them.

So how are associates and subsidiaries defined?

The rules are actually quite complex, but very generally:

A company is a subsidiary of yours if you own more than 50 per cent of

the voting rights or you are able to exert a dominant influence over the

running of that company.

A company is usually an associate of yours if it is not a subsidiary, but you

exert a significant influence over the company. If you own 20 per cent or

more of the voting rights of a company, you would normally be consid-

ered to exert significant influence over it but this threshold is determined

on a case-by-case basis.

Let’s now look at how we account for each of these in turn.