Depending on how great a stake is held in the companies....see business-times.asia1.com.sg/story/ 0,4567,82430-1053806340,00.html - 45k for definitions


emepresa participada is the company in which the parent has an equity stake...
affiliates are NOT necessarily subsidiaries...

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Note added at 2003-06-18 13:46:08 (GMT)
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OR income from equity holdings or from associated companies



If the stake is between 20 and 50 per cent, it is assumed to have significant control. The investment is then considered an associated company and equity accounting will be used.

In equity accounting, the affiliate\'s income is treated as income to the parent in proportion to ownership shares, irrespective of actual payments.

For example, if the affiliate made $60 million net profit, a company which owns a 30 per cent stake in it and has significant control will record $20 million as share of profits from associated companies. This will be added to the group net earnings.

On the balance sheet, the amount the \'parent\' paid for its stake in the affiliate will be recorded. The affiliate\'s debts are not shown.



For stakes of 50 per cent or more, the investments are subsidiaries. This means the parent has control over the units. The two units will thus be viewed as a single unit even though they may be separate legal entities.

All revenues and expenses, net of inter-company transfers, are added to the parent\'s income. The subsidiaries\' assets and liabilities are also consolidated into the parent\'s group balance sheet. Minority interests will be deducted subsequently.

The ownership percentages are just guidelines. Whether a unit is classified as just an investment, an associated company or a subsidiary will depend ultimately on the control issue.


Due to the different accounting treatments, investors should not take the group net earnings figure at face value.

A company may have investments in a few associated companies, and its share of profits in these companies may add up to a substantial amount in group net earnings.

But if the associated companies decide not to pay any dividends, the company may not lay its hands on any of the profits at all, short of selling its stakes.

This danger is particularly real for associated companies incorporated in countries with relatively poor corporate governance, such as China. The alert signal should further be heightened if a company, which doesn\'t have a cash-generating core business, borrows heftily to invest in a hodge-podge of associated companies.

A case in point is Lion Asiapac. The company\'s main subsidiary is in the electronic component distribution and turnkey supply-chain project management business. In at least the last two years, the business has not been generating enough cash to cover its expenses.

Meanwhile, its other businesses are in the manufacturing of light trucks, motorcycles and automotive chassis in China. All are held through associated companies. This means the cash flows it gets from these companies will be dividends.

The problem is these companies are facing stiff competition in China and one would not really consider them as cash cows. So there is the question of consistency in the dividend payments.

To fund its investments in China, Lion Asiapac has taken up substantial borrowings. As at Dec 31, 2002, it had some $55 million debt payable in one year. Interest payments amounted to some $2.5 million a year.

As at the end of its financial year 2002, the company had $2 million in cash.

While the company is expecting to return to profitability this year, it might be more pertinent for investors to pay closer attention to its cash flows and liquidity needs.

The writer, a senior correspondent in BT, is a CFA charterholder. Her email: [email protected]



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