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

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