IAS 28 defines an associate as an entity over which an investor holds significant influence. This significant influence allows the investor to take part in the financial and operating policy decisions of the investee without having control or joint control over those policies. It’s important to differentiate this from the concept of control, which is elaborated upon in IFRS 10, and joint control, which is detailed in IFRS 11. The definitions of control and significant influence are not directly connected, because IAS 28 was not revised following the introduction of a new definition of control in IFRS 10.
According to IAS 28.5, an investor typically possesses significant influence over an investee when they hold 20% or more of the voting power, either directly or indirectly through subsidiaries. However, this is not always the case, and evidence to the contrary can override this presumption. IAS 28.6 elaborates that significant influence can be typically manifested through:
- Representation on the investee’s board of directors or its equivalent governing body.
- Involvement in policy-making processes, including decisions regarding dividends or other distributions.
- Material transactions between the investor and the investee.
- Exchange of managerial personnel.
- Provision of essential technical information.
However, there are instances where, despite owning 20% or more of the voting power, an investor may not exert significant influence. This lack of influence is often due to the investee’s controlling shareholders limiting other investors from active involvement, such as by denying board representation. The dynamics between a majority shareholder and other investors are generally influenced by local corporate laws. It’s also useful to consider the control criteria in IFRS 10, employing it analogously to evaluate significant influence in ambiguous situations.
On the other hand, even if an investor has less than 20% of the voting power, they may still be able to exhibit significant influence. In such assessments, the stance of the controlling parties, local laws, and corporate governance codes are key.
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When determining voting power, it’s crucial to account for potential voting rights held by the investor and other parties (IAS 20.7-8). Though IAS 28 doesn’t explicitly mention this, entities can consult the guidance on potential voting rights in IFRS 10. The IASB chose not to delve deeper into this aspect of equity accounting without a comprehensive review of accounting for associates and joint ventures (IAS 28.BC15-BC16). However, when applying the equity method, an investor’s share is based on their current ownership interest. Thus, potential voting rights aren’t considered unless they, in substance, represent an existing ownership (IAS 28.12-13).
Lastly, IAS 28 mandates the use of the equity method (or ‘equity accounting’) for investments in associates and joint ventures, with exemptions similar to those in IFRS 10.4.