Madrid Ltd. has a 49% holding in King Holding Company (KHC), which is located in a foreign country. KHC’s business is to import goods from Madrid Ltd. and sell them locally. Local laws do not permit foreign investors to hold a majority stake or to have a majority of board members on companies in that country. Thirty percent is held by a local investor, and the investment is funded by Madrid. A local entrepreneur, who is also the CEO, holds the remaining 21%. Madrid has a casting vote on decisions about the relevant activities. How should this investment be classified?
A joint venture
An investment
An associate
A subsidiary
Based on the facts provided, Madrid Ltd.'s investment in King Holding Company (KHC) should be classified as an associate. This is because Madrid Ltd. holds 49% of KHC, which is less than a controlling interest but more than a simple minority stake. The presence of a local entrepreneur holding 21% and having a casting vote on decisions about relevant activities indicates that Madrid Ltd. has significant influence over KHC, but not control. Therefore, under the principles of accounting standards, this would typically fall under the definition of an "associate."
So, the correct classification for this investment is: C. An associate
