IAS 28 states that the threshold of 20% of voting rights (held directly or indirectly through subsidiaries) generally determines 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 28.6 lists examples of circumstances that can be considered evidence of the existence of significant influence. A partner is an entity over which the investor has significant influence. Significant influence is the power to participate in the financial and operational policy decisions of the investee without having the power to jointly control or control that policy. What happens with the 20-50% random rule, you may be wondering? Since a shareholder with significant influence cannot have a controlling influence, he must hold less than 51% of the outstanding shares. The FASB has decided that 20% is a sufficiently high ownership share to significantly influence the company`s operations and decision-making process. Although a 20% owner does not have a majority stake, he is generally considered a leader and his opinion is valued in the organization. This means that he could convince other owners to accept his decisions. Normally, each of the following situations is considered evidence of significant influence: If an entity holds, directly or indirectly (p. e.g., through subsidiaries) 20% or more of the voting rights of the investee, it is presumed that the entity has significant influence.
A joint venture is a joint agreement in which the parties that have joint control of the agreement have rights to the net assets of the agreement. The 20% rule is the standard percentage that the FASB has created, but even owners with less than 20% can have a significant impact on the business. Look at Bill Gates and Microsoft, for example. In the late 1990s and early 2000s, Bill owned about 7% of Microsoft, but his vision for the company and his decisions were extremely important to other investors and the board of directors as he is one of the founders. Although Bill owned only 7% of the company, he still had a strong influence on operations and the decision-making process. An associated corporation is defined in IAS 28 as an entity over which the shareholder has significant influence. Significant influence is the power to participate in the financial and operational policy decisions of the investee, but is not joint control or control over that policy. The concept of control is addressed in IFRS 10 and joint control in IFRS 11. There is no direct link between the definitions of control and significant influence, as IAS 28 was not revised after the issuance of IFRS 10 and the introduction of a new definition of control.
Definition: Equity securities with significant influence refer to long-term investments in shares or other equity securities in which the shareholder holds between 20% and 50% of the outstanding shares. Shareholders with significant influence cannot control the company as a shareholder with dominant influence, but they are very influential people in the organization. Circumstances in which an investor, although holding more than 20% of the voting rights, does not have significant influence generally revolve around the majority stake of an investee that blocks the participation of the investor in question (e.g. denies a seat on the board of directors). It also depends on local laws and corporate governance codes. It is also useful to examine the audit evaluation criteria in IFRS 10 and apply an analogy when assessing material influence in ambiguous circumstances (e.g., how other shareholders are allocated, the purpose and design of the investee). Significant influence is the power to participate in a company`s operational and financial policy decisions; it is not a control over these policies. This concept is used in international accounting standards.
If an investor holds at least 20 % of the voting rights of an investee, the investor is presumed to have significant influence. The hypothesis of influence can be reversed by a clear demonstration to the contrary. If an investor holds less than 20% of the voting rights, it can also be demonstrated that he is able to exert significant influence, as the 20% threshold is exceeded by other factors. Here, too, majority ownership measures and local law or corporate governance codes will play an important role in this assessment. An investor may not have significant influence, even if they hold a majority stake in an investee. It is possible to lose significant influence over an investee, even if there is no change in ownership. For example, an investee may be under the control of a court, regulator or government, or significant loss of influence may result from a contractual agreement. In May 2011, the Board of Directors issued a revised IAS 28 with a new title – Investments in Associates and Joint Ventures. However, when applying the equity method, the investor`s share is determined on the basis of existing holdings, i.e. potential voting rights are not taken into account unless it is essentially an existing asset (IAS 28.12-13).
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