An affiliated company refers to a company that is related to another company through a minority ownership stake, typically ranging from 20% to 50%. This relationship implies that one company has significant influence over the other company’s operations, financial decisions, or strategic planning, but does not have full control or majority ownership. In other words, an affiliated company is not a subsidiary, which would require majority ownership (usually more than 50%).
Affiliated companies usually account for their investments in each other using the equity method of accounting. Under this method, the investor company recognizes its share of the investee’s net income and adjusts the carrying value of the investment accordingly. The investor company also reduces the carrying value of the investment by its share of any dividends received from the investee.
Affiliated companies may collaborate on various projects, share resources, or enter into joint ventures to leverage each other’s strengths and expand their businesses. However, they remain separate legal entities and maintain their autonomy in terms of management and operations.
Example of an Affiliated Company
Let’s consider two fictional companies, TechCorp and GadgetWorld. TechCorp is a technology company that specializes in developing innovative software solutions. GadgetWorld is a consumer electronics company that designs and sells electronic gadgets, such as smartphones and laptops.
TechCorp sees potential in GadgetWorld’s innovative product line and decides to invest in the company. TechCorp acquires a 30% ownership stake in GadgetWorld. Since TechCorp now owns between 20% and 50% of GadgetWorld, the two companies are considered affiliated companies.
As affiliated companies, TechCorp and GadgetWorld might collaborate on projects or share resources to leverage each other’s strengths. For instance, TechCorp could develop software solutions for GadgetWorld’s electronic devices, while GadgetWorld could use TechCorp’s software to improve its products’ performance and user experience.
Although TechCorp has significant influence over GadgetWorld’s decision-making, it does not have full control or majority ownership. Both companies remain separate legal entities with their management and operations.