Learning Objectives:

At the end of the session, students should be able:

1) To define and differentiate significant influence, joint control and control.
2) To determine whether the investor can exert significant influence over an investee.
3) To determine when it is appropriate to use equity method in accounting for investments.
4) To understand the underlying principle of equity method.

Reference: IAS 28: Investments in Associate and Joint Ventures

I. Accounting for equity instruments from the point of view of the investor:

A. Based on management’s intention for acquiring the investment.

1. Passive investment

a. Fair value through profit or loss

b. Available for sale investments:

2. Active investment

Level of influence on investee’s management

|Level of control |Definition |Type of entity |
|Control |Power to govern |Subsidiary |
|Joint control | |Joint venture |
| | |Joint operation |
|Significant influence |Power to participate |Associate |

II. Existence of significant influence. Can the investor exert significant influence over the investee’s operating and financing decisions?

IAS 28.3 Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.

IAS 28.5 There is a presumption that an investor can exert significant influence if he holds 20% or more of the voting power of the investee.

However, paragraph 5 merely states a presumption. It is possible that the 20% rule of thumb is not present and yet