Investment in Affiliates
In insurance, the term investment in affiliates represents stocks, bonds, collateral loans, and short term or interim investments in affiliated properties as well as real estate properties held by the business.
Stocks refer to the original paid-in capital of a business either paid by stockholders or invested by the business’ founders. It functions as a form of security for the business creditors since it cannot be easily withdrawn by investors. A stock’s value and quantity may fluctuate as it is traded in the stock market. Bonds refer to debt instruments that are issued for over a year to increase capital through borrowing. Cities, states, corporations, and the government typically sell bonds to raise its current capital. Bonds are viewed as a guarantee to pay off the interest in addition to the principal on its date of maturity.
On the other hand, collateral loans are loans that are secured by a particular asset owned by a company or a person. If you are not able to pay back the loan as arranged, then you must hand over the asset; while short term or interim investments are investments held by a company for a period of less than one year. Real estate properties, alternatively, take in buildings, land improvements, and all other improvements to immovable properties.
On the other hand, investment income in insurance represents the returns obtained by insurers from respective investment portfolios. This may include dividends, interest, and capital gains on stocks realized. However, it does not contain the company’s current stock or bond values.
An affiliate is an inter-company relationship of a company owning less than the majority of the stock of another company. It is accounted for using the equity method of accounting. It can also be created when two different businesses are both subsidiaries of one larger business called the parent company. To illustrate, assume A Company owns 30% of the voting stock of B Company. Here, B Company and A Company possess the affiliate relationship, and A Company may exercise significant influence excluding control over B Company’s operations.
There is also another relationship called an associate. In accounting, it is termed as investment in associate. An associate is a business entity where the investor can exercise a significant influence over its operations. Hence, the associate here is the investee. Significant influence is the power to take part in the operating and financial policy decisions of a business. In no case shall the investor exercise control or joint control in an associate relationship.
The equity method of accounting is a way of initially recording an equity investment at cost. An adjustment is then made to reflect the share of the investor in the associate’s net assets.
On the other hand, one more type of relationship among business is the subsidiary relationship. In this type, control highly exists. A subsidiary company is the one that is being controlled by a different company. The company who controls is called the parent company. Control is of two categories, namely legal control and economic control.