An investment firm acquires 30% of the voting shares of another entity. It has representation on the board of directors and participates in policy-making processes, but does not have control or joint control. How should this investment be classified and accounted for in the consolidated financial statements?

Answer options:

As a subsidiary, using full consolidation.

As a simple investment, held at fair value.

As an associate, using the equity method.

As a joint venture, using proportionate consolidation.

How to approach this question

Assess the level of influence. 30% + board representation = Significant Influence. Significant Influence = Associate. Associate = Equity Method.

Full Answer

C.As an associate, using the equity method.✓ Correct

Under IAS 28, an investment where the investor holds between 20% and 50% of the voting power and has significant influence (evidenced by board representation and policy participation) is classified as an associate. Associates are accounted for using the equity method in the consolidated financial statements.

Common mistakes

Assuming any investment under 50% is just a simple financial asset, ignoring the 'significant influence' criteria.

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