Associate rules may be tightened

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The Independent Online
Companies will have to demonstrate significant management influence over associates if they want to consolidate their results, if proposals published by the Accounting Standards Board today come into operation.

The plans - which also include suggestions for tightening up the treatment of joint ventures - are designed to be a response to what Sir David Tweedie, ASB chairman, describes as "an increasing - and an increasingly complex - element of modern business life".

The proposals were welcomed by Gerry Acher, head of audit and accounting at KPMG and chairman of the Institute of Chartered Accountants' audit faculty, as "a move in the right direction". He added: "The definition of an associated company is one that has been abused in the past, and I am pleased that the ASB has sought to clarify the position."

For influence to be regarded as influential the investor company would have to participate in key policy decisions, such as those concerning strategy, and the recipient would have to implement policies consistent with the strategy of the investor and avoid those that were contrary to the investor's interests.

These requirements are designed to avoid situations like the one that occurred several years ago, during United Newspapers' bid for Fleet Holdings. Because United had built up a stake in its prey ahead of the bid it was able to include a share of Fleet's profits in results designed to show its financial strength - even though it was hardly likely to be able to exert the influence required for associate company status.

The ASB is also keen to encourage certainty -trying to ensure that companies do not change the treatment of such stakes from associate to trade investment when the profits in the investee company turn to losses, as the Asda supermarket group did with its MFI interest in the early 1990s.

The paper also moves on from previous rules by suggesting a new definition of joint ventures.