Consolidated Investments in Egyptian Financial Statements
In today’s business environment, consolidated investments in subsidiaries, associates, joint ventures, and marketable investment portfolios form a large part of companies’ investments and contribute to shaping the company’s financial performance and value.
Companies with diversified holdings in other firms require optimal valuation that takes into account the specifics of the relationship between the two companies in terms of control, representation on boards of directors, the size of the stake, and their impact on the financial statements and valuation approaches.
Investment Classification under IFRS and Accounting Treatment Impact on Financial Statements
When a company holds some cash during periods of profit growth and aims to maintain strong liquidity management, investment portfolios are formed in financial assets at different proportions according to the strategy the company desires, the level of risk, and the diversification required. According to IFRS 9, cash should be invested in multiple assets instead of remaining idle in the treasury.
The way these investments are handled in the financial statements; whether classified under FVPL or FVOCI or otherwise varies, and the valuation differs depending on the nature of the relationship with these securities.
According to standards, holdings of less than 20% are considered marketable securities portfolios and are recorded differently; either in the income statement, on the balance sheet, or with no effect if held to maturity. Companies also invest in stakes ranging between 20% and 50% of the voting rights in another company, which usually represents significant influence without full control.
These investments are recorded using the equity method, where the company’s share of the associate’s profits and losses is recognized in net income, adjusted for any dividends received.
In the Egyptian context, investments by major banks such as Commercial International Bank (CIB) and Banque Misr in fintech companies, emerging banks, or other stakes in unlisted companies across various industries are accounted for proportionally in revenues and net assets, according to IFRS 9 when applying the financial asset classification. On the other hand, when a company has control, usually at a level exceeding 50% of voting rights , the principles of full consolidation of financial statements are applied. In Egypt, large companies such as Orascom Construction and Ezz Steel adopt full consolidation to present the assets, liabilities, and revenues of their subsidiaries fully in the consolidated financial statements.
Consolidation provides a clearer picture of business size and assets, but it may also lead to higher apparent leverage ratios and make profitability analyses, such as Earnings Before Interest and Taxes (EBIT), appear stronger due to the aggregation of substantial subsidiary revenues.
Valuation Implications of Joint Ventures
Joint ventures represent a significant part of the business world and have specific impacts on the generated cash, which is allocated in the valuation. In Egypt, partnerships are currently emerging in sectors such as renewable energy and financial technology, and they are often owned equally between two parties, making the equity method the best approach to recognize investors’ shares. This method ensures that risks and rewards are shared evenly and provides an accurate reflection of the parent company’s financial performance without exaggerating results.
In Egypt when major Egyptian construction companies, such as Arab Contractors Company and Talaat Moustafa Group, invest in reconstruction and infrastructure projects; such as building smart cities with other contractors, they record only their share of the profits. They also take into account performance fluctuations related to client payments and regulatory changes, instead of fully consolidating all revenues and expenses, which could distort financial performance in the consolidated financial statement.
The Role of the Valuation Analyst in Determining a Company’s Stake Fair Value
In the context of different forms of company investments and mergers and acquisitions, the shape of financial valuation varies depending on the type of control. If the stake is less than 50%, meaning it represents only significant influence, the revenues and assets transferred to the parent company are recognized proportionally according to the company’s share. The opposite applies with the acquisition method, which involves full transfer.
Therefore, the valuation analyst must consider the extent of the company’s influence over the subsidiary or associate to perform normalization when valuing a company that holds stakes without influence in sister companies, as well as estimate the control premium under the GCM methods when valuing the parent company’s stake in the subsidiary at different levels depending on the degree of control, whether it is only significant influence or full control, as metrics such as P/S and others will differ.
Moreover, when valuing a bank or company stake representing a minority interest using DCF, which benefits the majority, the financial appraiser must consider whether the bank’s stake represents significant influence or control in order to determine the appropriate lack-of-control or control discount, and the appraiser should take this into account. On another level, the risk profile will also change, leading to a different discount rate, as the company indirectly bears the risks of the industries it is involved in.
Investments in companies also cause variations in the treatment of the Goodwill item, which currently requires specific valuation techniques. Differences in accounting treatments between partial and full goodwill at the time of investment or acquisition affect how goodwill is calculated, and this goodwill will represent a component of the final valuation.
The second area the valuation analyst must examine is how accounting treatments affect two key inputs: discounted cash flow (DCF) and market multiples. Differences in revenues and shifts in leverage ratios which affect WACC and represent risk impact the cost of capital and the terminal value.
Conclusion
Ultimately, financial valuation is a tool that reflects intrinsic value, and it is a report that should also reflect the economic control relevant to the audience, rather than merely an accounting presentation of figures. The valuation analyst must isolate operating performance, and distinguish between companies in which there is a high degree of control, allowing their inclusion in terminal value calculations and those in which the ownership does not provide significant influence or only partial control, which does not allow for full forecasting of their cash flows in the terminal value.
Frequently Asked Questions
How does ownership percentage affect accounting treatment?
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Ownership below 20% is usually treated as a financial asset (marketable securities) under IFRS 9, measured at fair value through profit or loss (FVPL) or fair value through other comprehensive income (FVOCI) depending on the business model. Between 20% and 50%, the investor typically has significant influence and uses the equity method. Above 50%, the investor generally has control and applies full consolidation, bringing 100% of the subsidiary’s assets, liabilities, revenues and expenses into the consolidated financial statements.
What is the equity method and when is it used?
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The equity method is used when a company has significant influence but not full control, usually with 20%–50% of voting rights. Instead of consolidating all assets and revenues, the investor recognizes its share of the associate’s or joint venture’s net income and adjusts the carrying amount of the investment accordingly. Dividends received reduce the investment balance rather than being recognized as ordinary revenue, which avoids double counting income.
How do joint ventures impact company valuation?
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Joint ventures are typically accounted for using the equity method, so only the investor’s share of profits and net assets appears in the financial statements. In valuation, the analyst focuses on the cash flows and risks attributable to that share rather than the full joint venture. This approach avoids overstating size or profitability and better reflects how risks and rewards are shared between partners, especially in sectors like infrastructure, renewable energy and large construction projects.
How does IFRS 9 affect valuation of financial investments?
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IFRS 9 classification (FVPL, FVOCI or amortized cost) determines where gains, losses and fair value changes appear in the financial statements. These classifications affect reported earnings, equity and leverage ratios, all of which feed into valuation models such as discounted cash flow (DCF) and market multiples. A valuation analyst must “look through” the accounting treatment to understand the underlying cash flows and risk profile of each investment and adjust the valuation inputs accordingly.
How should control premiums and discounts be applied in valuation?
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When valuing a controlling stake, a control premium is often added because the buyer can influence strategy, capital structure, dividends and management. For minority stakes without control, a discount for lack of control may be applied, especially if the valuation is based on cash flows or multiples that implicitly assume majority control. The degree of influence—no influence, significant influence or full control—guides how large the control premium or discount for lack of control should be.
How does goodwill treatment affect company valuation?
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Goodwill arises when the purchase price of a stake exceeds the fair value of identifiable net assets at acquisition. Under different accounting approaches (partial or full goodwill), the recorded amount can vary, which in turn affects equity, return ratios and impairment risk. In valuation, the analyst must understand how goodwill was recognized and tested for impairment and decide whether it represents sustainable future cash flows, synergies and strategic value, or simply reflects past overpayment that may need to be written down.
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