Associates and Significant Influence (IAS 28)

An associate is defined in IAS 28 as an entity over which the investor has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control of those policies. The concept of control is covered in IFRS 10 and joint control in IFRS 11. There is no direct link between definitions of control and significant influence, because IAS 28 was not revised after IFRS 10 was issued and introduced a new definition of control.

IAS 28 states that the threshold of 20% of the voting power (held directly or indirectly through subsidiaries) normally decides whether an investor has significant influence over an investee, unless it can be clearly demonstrated that this is not the case (IAS 28.5). Paragraph IAS 28.6 lists examples of circumstances that can be considered as an evidence that significant influence exists.

Circumstances where an investor, despite holding 20%+ of the voting power, does not have significant influence, usually revolve around controlling interest of an investee that blocks the participation of the investor in question (e.g. denies a seat in the board). This will also depend on local law and corporate governance codes. It is also helpful to look at the criteria for assessment of control in IFRS 10 and apply some analogy (e.g. how other shareholders are dispersed, what is the purpose and design of the investee) in assessing significant influence in ambiguous circumstances.

When an investor holds less than 20% of the voting power, it also can be demonstrated that it is able to exercise significant influence as the 20% threshold is overridden by other factors. Again, the actions of controlling interest and local law or corporate governance codes will play important role in this assessment.

When assessing the voting power, potential voting right held by the investor and other entities should be taken into account (IAS 20.7-8). Although IAS 28 does not mention it specifically, entities can refer to IFRS 10 guidance on potential voting rights. IASB did not want to expand this aspect of equity accounting without broader review of accounting for associates and joint ventures (IAS 28.BC15-BC16).

However, investor’s share when applying equity method is determined based on existing ownership interest, i.e. potential voting rights are not taken into account unless they are an existing ownership in substance (IAS 28.12-13).

IAS 28 requires accounting for investments in associates (and joint ventures) using the equity method (‘equity accounting’), unless the exemption similar to IFRS 10.4a applies (IAS 28.17).

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