Thursday, 1 March 2012

What makes the influence significant under IFRS & USGAAP?

If an investor normally holds more than 20% of the investment in an associate or is in the position to have significant influence but not control over the investee then a different accounting treatment is used. What other treatment is used is not the subject right now. Normally more than 20% investment is considered to be a significant position in terms of influence but is it always the case? Well no and this can be tricked in the exam. Below are aspects which can provide an evidence of significant control under both IFRS and U.S. GAAP.

· Representation on the board of directors
· Participation in the policy making process.
· Material transactions between the investor and the investee.
· Interchange of managerial personnel.
· Technological dependency.

These are some common examples and availability of any one can hint about the prescence of significant influence. In case the vignette gives an idea about significant control and the investment is not more than 20% then it would be treated as investment in associate.  On the other way round if investment is more than 20% but it is evident that the firm does not influence the associate significantly, then the stake would be considered as financial investment.

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