Question

What is the difference between significant influence and control, and what are the implications of establishing either?

Answer 1

Significant influence is the power to participate in the operating and financial policy decisions of an entity; it is not control over those policies. The concept is used in international financial reporting standards. If an investor holds at least 20 percent of the voting power of an investee, the investor is presumed to have significant influence. The assumption of influence can be reversed through a clear demonstration to the contrary.

It is possible for an investor to not have significant influence, even with majority ownership of an investee. It is possible to lose significant influence over an investee even in the absence of a change in ownership. For example, an investee may become subject to the control of a court, regulator, or government, or loss of significant influence may be the result of a contractual agreement.

Normally, any of the following are considered to be evidence of significant influence:

• Board of directors representation
• Management personnel swapping or sharing
• Material transactions with the investee
• Policy-making participation
• Technical information exchanges

Under the equity method, on initial recognition the investment in an associate or a joint venture is recognised at cost, and the carrying amount is increased or decreased to recognise the investor's share of the profit or loss of the investee after the date of acquisition.