An Executive Guide to IFRS: Content, Costs and Benefits to Business

Investments in associates

If an investee company is not consolidated, i.e. the investor does not control it, there are currently a number of alternative treatments, some of which will disappear over time. The interest could be accounted for as an associate, or it may be a joint venture, or simply a financial instrument.

Having failed the control test, the next level of involvement recognized by IFRS is that of having ‘significant influence’. IAS 28 Investments in Associates defines this as ‘power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies’. IAS 28 does not, though, apply to venture capital firms, mutual funds and similar professional investment vehicles. It does apply to joint ventures, as discussed below.

The standard suggests (IAS 28.7) several factors that would probably indicate that there is significant influence. One of these is representation on the board of directors of the investee, but others are any other participation in decision-making, the existence of significant transactions between investor and investee, interchange of management personnel and supply of necessary technology. The standard says also that significant influence is presumed to exist where the investor has 20% or more of the voting shares, and presumed not to exist where the shareholding is smaller (a carry through into IFRS of the US ‘bright line’ approach). It notes, however, that whether significant influence ...