IAS 28 Investments in Associates and Joint Ventures defines associates. For an investment to be classified as an investment in an associate, the investor must have ‘significant influence’ over the investee. Significant influence is presumed to exist with a holding of 20% or more of the voting power unless the investor can clearly demonstrate that this is not the case. Conversely, a holding of less than 20% is presumed not to be an associate unless it can be clearly demonstrated that the investor can exercise significant influence. The voting rights can be held directly or through subsidiaries.

IAS 28 says that a majority holding by one investor does not preclude another investor from having significant influence. An investing company owning a majority holding in another company normally has control over the investee and would thus class it as a subsidiary. In normal circumstances, it is difficult to see how a company could be controlled by one entity and be significantly influenced by a different entity unless ‘control’ was passive. The 20% test is not definitive, and the following other evidence should be considered.

Does the investing company:

• Have representation on the Board of the investee?
• Participate in the policy-making processes (operational and financial)?
• Have material transactions with the investee?
• Interchange managerial personnel with the investee?
• Provide technical expertise to the investee?