An affiliate is an entity in which another entity owns or holds a minority interest (non-controlling interest). An investment in an affiliate is one in which an entity owns a non-controlling stake (i.e., between 20% and 50% of the shares), implying “significant influence” which entails that the affiliate is accounted for under the equity method of accounting.
An affiliation can also take the form of a relationship between two different entities, where both are subsidiaries or associates of the same parent. In this context, the terms “affiliate” and “associate” have the same meaning. However, while all associates are affiliates, not all affiliates are considered associates.
On the other hand, an associate is an entity (investee) over which an investor can exercise significant influence (but not control, as is the case with a subsidiary). Generally, significant influence exists or is presumed to exist when an investor holds, directly or indirectly through subsidiaries, 20 per cent or more of the voting power of that entity (i.e., the investee). Voting rights arise from ordinary share holdings as well as other types of holdings (e.g., preferred share holdings). Other types also include loans, advances, debt securities, trade receivables, and options exercisable to ordinary shares.
An affiliate is also established by the level of ownership held by another entity (as a parent). The parent has a minority stake in the affiliate, and hence the affiliate is usually subordinate to its parent that owns between 20% to 50% of its shares or ownership stake.
In most cases, the terms affiliate and associate are used interchangeably to describe an entity whose parent only has a minority stake in its ownership base.
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