What is are Affiliated Companies?

An affiliate is a term used to describe a company that is related to another, where one company owns a non-controlling stake in the other. An affiliation can also be a relationship between two different companies where they are both subsidiaries or associates of the same parent company. The terms “affiliate” and “associate” are often used interchangeably, and while all associates are affiliates, not all affiliates are associates.

Key Learning Points

  • Equity method accounting is used when there is significant influence but not control
  • An affiliate is an investment of between 20%-50% of equity stake in another company

Affiliates in a Group Structure

An affiliate is established by the level of ownership a parent company holds in another. The affiliate is usually subordinate to the other, and the parent has a minority stake in the affiliate.

Here’s an example. Topco Ltd owns 35% of Midico Ltd, and also 80% of Smallco Ltd. Topco and Midico are affiliates, and Midico is also an associate of Topco (see our blog on associates). Smallco is a subsidiary of Topco Ltd. Midico and Smallco would consider themselves affiliates with each other, as they both have an equity investment relationship with Topco.

Affiliates in a Group Structure Example

Other Definitions of Affiliates in Business

There are several other definitions of affiliate in business, depending on the sector.

Network Affiliates

In the broadcasting industry in the US, a network affiliate is a local broadcaster that is not owned by the network, but instead a separate company, which carries some or all of the lineup of programmes offered by a particular network. This affiliate setup exists in both radio and television broadcasting. The alternative to a network affiliate is an “owned & operated”, or “O&O” station, which is owned and operated by the network.

Retail Affiliates

A retail affiliate is a company that sells other suppliers merchandise for a commission. This is especially common in e-commerce, such as the Amazon Storefront programme.

Affiliate Network

An affiliate network (not to be confused with a network affiliate), is a group of associated, but not necessarily equity-related, companies that offer well-matched or complementary products. Examples of these might be preferred provider programmes, such as the vehicle insurance provider for your car having a preferred repair garage in your area that might offer reduced rates.

Affiliate Marketing

Affiliate marketing is a predominantly online type of performance-based marketing, where one company rewards another for steering traffic towards their website.

Affiliates Versus Subsidiaries

Aspect Affiliates Subsidiaries
Ownership Level Less than 50% ownership by the parent company. More than 50% ownership by the parent company.
Control Limited control due to minority ownership. Full control due to majority ownership.
Legal Status Separate legal entity but linked through equity. Separate legal entity fully controlled by the parent.
Financial Reporting May not be fully consolidated in financial statements. Fully consolidated in the parent company’s financial statements.
Decision Making Autonomous to an extent with oversight. Decisions are often directed by the parent company.
Risk Exposure Limited risk exposure for the parent company. Higher risk exposure due to direct control and integration.

Investments in Affiliates Example

In the provided scenario, A Inc. has engaged in a strategic financial move by purchasing a 30.0% equity stake in B Inc. for 15.0 million dollars in an all-cash transaction. This deal represents a significant investment by A Inc. into B Inc. and reflects confidence in B Inc.’s future potential and value. The purchase is recorded under “Equity method investments” on A Inc.’s balance sheet, signifying a notable but non-controlling interest in B Inc.

The transaction results in a decrease in A Inc.’s current assets, reflecting the cash outflow for the purchase. However, it does not impact A Inc.’s property, plant, and equipment (PP&E) or its liabilities. The total assets of A Inc. remain unchanged post-deal, as the cash outlay for the investment has been substituted with the investment in B Inc. itself. The move shows a balanced approach to expanding A Inc.’s asset portfolio without affecting its overall financial positioning, indicating a strategic diversification into the equity of another company.

Additional Resources

Goodwill calculation

Non-controlling interests

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