Question

Linx Ltd has acquired 70% of shares of Digital Ltd, and 35% of the shares of Innex Ltd. In terms of the 35% interest in Innex Ltd, discuss the criteria and factors Linx Ltd would need to consider in determining whether Innex Ltd is a subsidiary or an associate. The reason Linx Ltd invested in Innex Ltd was solely for cash flow of future dividends.

Answer 1

IFRS 10 categorizes entities as subsidiaries or associates based on the control that the parent company has on the other entities. Control can be gained if more than 50% of the voting rights are acquired by the parent.

A parent company controls an investee if and only if the parent company has all the following:

(a) power over the investee;

(b) exposure, or rights, to variable returns from its involvement with the investee; and

(c) the ability to use its power over the investee to affect the amount of the parent’s returns.

An associate is an entity over which the investor has significant influence.Significant influence is usually acquired by purchasing more than 20% of voting power but less than 50%.

Since Linx Ltd holds 35% in Innex Ltd, it will be treated as an associate and will be accounted under the equity method in the financials of Linx Ltd.