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Explain “significant influence” criteria used by IFRS standards to classify equity investments. What is the relationship...

Explain “significant influence” criteria used by IFRS standards to classify equity investments. What is the relationship between ownership percentage and “significant influence”? Which criterion do you believe is more important in classifying equity investments and determining their appropriate accounting method, ownership percentage or significant influence? Explain your answer.

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Answer #1

Significant influece is considered when we have invested in 20% or more of the equity of the other company. As per IFRS, it means that the investor has the power to participate in the financial and operating policy decisions but not control them.

Although, signifacnt influence is dependent on the ownership percentage, but in few cases, it is possible for an investor to not have significant influence, even with majority ownership of an investee. For example, the investor may become subject to the control of a court order or due to a contractual agreement.

Ownership percentage would be a better method as it shows the intention/purpose of the investor for investing in the equity, and leads to a better presentation of financial statements.

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