What triggers the 20% significant influence presumption for associates?

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AcadiFi · Accepted Answer

IAS 28 establishes a rebuttable presumption: holding 20% or more of voting rights creates significant influence unless clearly demonstrated otherwise. Below 20%, the presumption flips — no significant influence unless clearly demonstrated. For Wisteria at 17.5%, the burden falls on Wisteria to demonstrate significant influence if it wants (or is required) to apply the equity method. Evidence pointing toward significant influence includes: (1) representation on the board of directors — if Wisteria appoints 2 of Tessaract's 7 directors, that's strong evidence; (2) participation in policy-making, including dividends and distributions; (3) material transactions between Wisteria and Tessaract; (4) interchange of managerial personnel; (5) provision of essential technical information. The presence of just one or two of these may suffice. Potential voting rights (options, convertibles, warrants) currently exercisable are also considered — if Wisteria holds a warrant that would raise its stake to 24%, the test may consider the diluted position. Classification matters because equity method requires recognizing Wisteria's share of Tessaract's net income in the income statement and adjusting the investment carrying amount accordingly. Misclassification as a simple fair-value investment would hide earnings volatility in OCI. Also note that certain venture capital or mutual fund holdings can elect FVTPL even when influence exists — a scope exception that Wisteria may use if its investment is managed on a fair value basis.

What triggers the 20% significant influence presumption for associates?

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