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[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” fullwidth=”off” specialty=”off”][et_pb_row admin_label=”Row”][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”http://www.frs102.com/members/premium-toolkit/” type=”big” color=”red”] Return to Main Index[/button] [/et_pb_text][/et_pb_column][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”https://uk.frs102.com/members/premium-toolkit/section-14/” type=”big” color=”red”] Return to Section 14 Home[/button] [/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” fullwidth=”off” specialty=”off” transparent_background=”off” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” padding_mobile=”off” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” make_equal=”off” use_custom_gutter=”off” gutter_width=”3″][et_pb_row admin_label=”Row”][et_pb_column type=”4_4″][et_pb_text admin_label=”Main Body Text” background_layout=”light” text_orientation=”justified” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]Section 14-Investments in Associates
Section 14 provides the definition of an associate and the rules in accounting for an associate to include the disclosure requirements in the consolidated and individual financial statements.
Definition of Associate
Extract from FRS102: Section 14.2-14.3
14.2 An associate is an entity, including an unincorporated entity such as a partnership, over which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture.
14.3 Significant influence is the power to participate in the financial and operating policy decisions of the associate but is not control or joint control over those policies.
(a) If an investor holds, directly or indirectly (e.g. through subsidiaries), 20 per cent or more of the voting power of the associate, it is presumed that the investor has significant influence, unless it can be clearly demonstrated that this is not the case.
(b) Conversely, if the investor holds, directly or indirectly (e.g. through subsidiaries), less than 20 per cent of the voting power of the associate, it is presumed that the investor does not have significant influence, unless such influence can be clearly demonstrated.
(c) A substantial or majority ownership by another investor does not preclude an investor from having significant influence
OmniPro comment
An investment will more than likely be an associate where the entity has acquired between 20% and 49.99% of the voting rights
Significant influence
When assessing whether an acquisition is to be accounted for as an associate, the main consideration is whether the entity has a significant influence over the other entity as a result of the acquisition. It is irrelevant whether the entity uses this influence, it is the ability to significantly influence the entity if it had to. A holding of 20% or more of the voting rights is presumed to provide an entity with a significant influence.
In assessing the percentage ownership consideration needs to be given for both ordinary and other categories of shares in determining its voting rights. Voting rights are rights that shareholders have to vote at the general meeting of the company on all, or substantially all matters. When reviewing the voting rights an entity needs to include potential voting rights (e.g. call options, convertible preference shares) that are exercisable or convertible at the time of the acquisition for both themselves and the other shareholders. With regard to this assessment the intention of management and the financial ability to exercise or convert those potential voting rights are ignored.
Example 1: Potential voting rights
Company A acquired 25% of the voting shares of company B. At that date Company B had also issued convertible preference shares to other shareholders who have the right to convert to ordinary shares at that time. In assessing the percentage ownership Company A would have to take these shares into account as the holders of the preference shares can now convert. This may result in Company A having only an 18% interest once these are converted, therefore this would not be accounted for as an associate.
If in this example, the preference share right to convert has not passed at the date of acquisition they would then be ignored in the assessment.
Example 1A: Potential voting rights
Company A purchased a 15% interest in Company B and at the same time acquired an option to purchase an additional 10% for a set price. In assessing whether a significant influence exists, 25% ownership would be looked at, as they can exercise that option at the point of acquisition if they wanted to.
Section 14 gives very little guidance on how significant influence is demonstrated. Therefore regard should be given to IAS 28 of IFRS which states that significant influence can be evidenced in one or more of the following ways:
- Representation on the board of directors or equivalent governing body of the investee;
- Participation in policy-making processes, including participation in decisions about dividends and other distributions;
- Material transactions between the entity and the investee;
- Interchange of managerial personnel; or
- Provision of essential technical information.
The presumption of a significant influence as a result of acquiring 20% or more of the voting rights can be rebutted if:
- The investor has failed to obtain representation on the investee’s board of directors;
- The other shareholders are opposing the investors attempts to exercise significant influence;
- The investor is unable to obtain timely information or cannot obtain more information to allow it to apply equity method accounting thereby inferring the entity may not have a significant influence;
- A group of shareholders who hold the majority of the investees’ shares are taking action without regard to the views of the investor.
Note it would be very rare for a 20% voting share not to equate to a significant influence.
Where an investment is only slightly under 20%, an entity should carefully consider whether they can significantly influence the acquired company. Consideration of the points detailed in IAS 28 as replicated above should be given.
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