Question

"The accounting treatment of an investment in an associate entity is to record the investment as...

"The accounting treatment of an investment in an associate entity is to record the investment as an asset. The accounting treatment when a parent-subsidiary relationship exists is to merge the two sets of financial records. I think this different treatment is valid."

Justify whether you agree or disagree. You must explain why.

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Answer #1

Agree with the statement

When investor holds significant influence over the investee but not exercise full control it will be accounted as an investment . The investment done does not quality to be a subsidiary since there is no majority stake ( usually less than 50% but more than 20%) to get full control. The investor will report its proportionate share of investee's equity in the Balance sheet as an asset.

In case of Subsidiary at least 50% of the stake will be taken along with significant influence and control over the entity like appointment of directors or other important business decisions.The investments made in subsidiary are accounted in parent's books using the consolidation method.

Hence the treatment for associate and subsidiary in 2 different way is valid

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