Considerations when determining significant influence under IAS 28

Not always a stake of more than 20% means that an entity has significant influence. The whole thing depends on how influence is exercised in closed rooms of the Board.

The ability to participate is what matters…

It is important to note that it is having the power to be able to participate in the policy decisions that matter, and not the actual exercise of that power. An entity might be on the board of the investee but elect to be passive by not actively participating at meetings or abstaining from voting (although, in practice, this might be difficult to demonstrate). It is the power that comes with this board representation that matters, and not the fact that the entity is not participating in the policy-making process.

Active opposition

Significant influence might be called into question if the entity has failed in an attempt to gain board representation or to obtain timely financial information from the investee, or if the investee is actively opposing the entity’s attempts to exercise influence over it.

Thus, next time if the entity fails to get the financial statements of the investee, auditors should give a second thought of whether the significant influence is still there or not?

Participation in the policy-making process

Participation in the policy-making process means being involved in strategic decisions, such as:

a. expansion or contraction of the business;

b. participation in other entities;

c. changes in products, markets, and activities; and

d. determining the balance between dividend and reinvestment.

Such participation will be with a view to gaining economic benefits from the entity’s activities, although the entity will also be exposed to the risk that those activities might be loss-making. For example, this would be accomplished by representation on the board of directors, because a director has the power to participate in decision-making, where voting is often carried out by a show of hands.

A single shareholder with less than 20% of the voting rights has significant influence and the power to participate in policy-making decisions if, for example, it has board representation. A shareholder with the same percentage shareholding and no board representation would not have the equivalent influence or power to participate.

A fund manager too can have SI

A fund manager might have significant influence, regardless of the percentage shareholding, and needs to make an assessment of whether or not it does, based on the specific facts and circumstances.

Secondment of managerial personnel

Where one entity seconds managerial personnel to another entity, it might have the power to participate in the financial and operating policies and practices of that other entity. The entity sending the personnel is in a position to select who is sent, and so it can provide personnel who will promote the sending entity’s interests. Where it can be evidenced that the interchange of managerial personnel has resulted in the management of one entity having significant influence over the other, that entity will be an associate.

[IAS 28 para 6 reference and interpretations]