IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

21 INVESTMENTS IN ASSOCIATES (lAS 28)

1. BACKGROUND AND INTRODUCTION This Standard is to be applied to all accounting for investments in associates but does not apply to investments in associates held by a venture capital orga nization, a mutual fund, a unit trust, and a similar entity, including investme nt-linked insura nce funds, where these investments upon initial recogni tion are designated at fair value through profit or loss or classified as held for trading and accounted for in accordance with lAS 39. 2. DEFINITIONS OF KEY TERMS (in accordance with lAS 28) Associate. An entity in which an investor has significant influence but which is neither a sub– sidiary nor an interest in a joi nt venture. Significant influence. The power to participate in the financial and operating policy decisions of the investee but not to control them; that control include s joint control over those policies. Equity method. A method of accounting by which an investment is initially recognized at cost and adjusted thereafter to reflect the postacquisition change in the investor' s share of the net assets of the investee . The profit or loss attributable to the investment in the assoc iate is included in the investor 's income statement. 3. SIGNIFICANT INFLUENCE 3.1 It is presumed that the investor has significant influence if it holds directly or indirectly 20% or more of the voting power of the associate unless it can be clearly shown that significant influ– ence does not exist. If the holding is less than 20%, the investor will be presumed not to have sig– nificant influence unless such influence can be shown. If a substantial or even a majority ownership is held by another investor, this does not necessarily mean that significant influence cannot arise through a holding of 20% or more. 3.2 Significant influence is normally created in one of these ways:

• Representation on the board of directors • Participation in the policy-making process • Material transactions occurring between the two entities • The changing over of management • The provision of essential technical information

The existence of potential voting rights, for example, through the ownership of share-warrants, share-call options , and the like, must be considered when assessing whether an entity has significant influence. Where these potential voting rights are not currently exercisable, they will not be taken into account. 3.3 Significant influence is lost when the investor loses the power to participate in the financial and operating policy decisions of the investee. This can occur without the loss of voting power or without a change in the ownership levels. It could occur, for example, where the associate is sub– ject to governme nt control or regulation as the result of a contractual agreement.

Case Study 1

Facts X owns 60% of the voting rights of Y, Z owns 19% of the voting rights of Y, and the remainder are dis– persed among the public. Z also is the sole supplier of raw materials to Y and has a contract to supply certain expertise regardi ng the maintenance of Y' s equipment.