Could Your Investment Be an Associate Under IAS 28?
Many businesses assume that significant influence exists only when they hold a majority stake in another entity. However, under IAS 28 “Investments in Associates and Joint Ventures”, an investment may qualify as an associate even without control.
A holding of 20% or more of the voting rights creates a presumption of significant influence unless clearly demonstrated otherwise.
Significant influence may also be evidenced through:
- Representation on the board of directors or equivalent governing body
- Participation in policy-making decisions, including dividend decisions
- Material transactions between the investor and investee
- Interchange of key management personnel
- Provision of essential technical information
Incorrect assessment of significant influence can result in the wrong accounting treatment, impacting investments, profits, and financial statement disclosures.
Entities should periodically evaluate their investments to ensure compliance with IAS 28 and determine whether the equity method of accounting is required.