Associates

Objective A & B: Associates and Significant Influence

An associate is an entity over which the investor has significant influence but not control. Significant influence is the power to participate in the financial and operating policy decisions of the investee but not to control those policies.

Significant influence is presumed when the investor holds 20% to 50% of the voting power. However, this is a rebuttable presumption — significant influence may exist with less than 20% (e.g., through board representation) or may not exist with more than 20% (e.g., if another shareholder has control).

Indicators of significant influence include:

• Representation on the board of directors
• Participation in policy-making processes
• Material transactions between the investor and investee
• Interchange of managerial personnel
• Provision of essential technical information

Objective C: The Equity Method

The equity method is used to account for associates in the consolidated financial statements. Under this method:

1. The investment is initially recorded at cost
2. The carrying amount is adjusted each year for the investor's share of the associate's profit or loss
3. Dividends received from the associate reduce the carrying amount

In the consolidated SFP:

• The investment in associate is shown as a single line: Cost + Share of post-acquisition retained profits − Dividends received

In the consolidated SPL:

• The investor's share of the associate's profit is shown as a single line: 'Share of profit of associate'

Unlike subsidiaries, associates are NOT consolidated line by line. The equity method shows only the investor's share as single-line items.