A friend recently asked me how SoftBank can get away with not reporting WeWork's massive losses in its books if it is treated as an associate rather than a subsidiary.
I told him much of the rationale comes from an accounting rule called "equity accounting" and this article briefly explains how this is done.
But what the article didn't expound on is the concept of "de facto" control, which is the principle behind the reason why an entity holding an 80% stake in another entity gets to classify it as an associate rather than a subsidiary.
In this case, majority of the voting power now lies with WeWork's board, and SoftBank says they don't have majority of the board of directors, and therefore, no de facto control.
However, if they have the power to appoint and remove directors from the board, it would be hard to prove that they really don't have "de facto" control.
Having issues grappling with the concept of "de facto control"? Speak with the Echtual Experts today!