Question

Can anyone explain to me the difference between insignificant influence, significant influence, and control? Need to have a more solid understanding of this as well as the accounting method that is used with each of these.

Answer 1

Insignificant Influence is generally where holding of shares are less than 20 %. They don’t have much impact on the decision making of management. It is treated like investment in books of accounts. If the investor holds, directly or indirectly through subsidiaries, less than 20 per cent of the voting power of the investee, it is presumed that the investor does not have significant influence, unless such influence can be clearly demonstrated.
We have to check Indicator whether there is indirect significant influence/control or not. The followings are indicator

1. Representation on the board of directors or equivalent governing body of the investee

2. Participation in policy-making processes, including participation in decisions about dividends or other distributions

3. Material transactions between the investor and the investee

4. Interchange of managerial personnel

5. Provision of essential technical information

Significant is the influence exerted (or presumed to be exerted) by a firm over a second firm whose 20 to 50 percent of shares are owned by the first firm. Significant influence usually translates into participation in the financial and operating policies without necessarily having full control over them. Firms holding such equity stakes are required to declare and account for them in their financial statements. Accounting treatment for the significant influence is partially consolidation.

Where more than 50% shareholding exists it is called control. Proper consolidation is done in books of accounts of holding company. In this case holding company has power over investee. Holding company is exposed to/ right to variables return arising due to involvement with investee. It has ability to use such power over investee to affect returns. The above mention indicator should also be checked for control as well.