IAS 28 Significant Influence — Core Rule

Under IAS 28 Significant Influence — 20% Rule, an investor that holds 20% or more of the voting power of an investee is presumed to have significant influence over that entity, unless it can be clearly demonstrated otherwise, requiring accounting for the investment using the equity method (IAS 28.5–28.6).

How IAS 28 Significant Influence Works

• The 20% threshold is a rebuttable presumption, not a bright line. Holding ≥20% of voting rights creates a presumption of significant influence; holding <20% creates the reverse presumption — that no significant influence exists. Both presumptions can be rebutted by evidence (IAS 28.6).

• Qualitative indicators supplement the voting-power test. Even below 20%, significant influence may be evidenced by: representation on the board of directors; participation in policy-making processes; material transactions between investor and investee; interchange of managerial personnel; or provision of essential technical information (IAS 28.6(a)–(e)).

• Potential voting rights must be considered. Currently exercisable or convertible instruments (options, warrants, convertible debt) that would give additional voting rights are factored into the significant-influence assessment, even if not yet exercised (IAS 28.7–28.8).

• Equity method recognition. Once significant influence is established, the investment is initially recognised at cost, then adjusted each period for the investor's share of the investee's post-acquisition profit or loss and other comprehensive income (OCI), with dividends received reducing the carrying amount (IAS 28.10, IAS 28.11).

• Loss of significant influence triggers derecognition. When an investor loses significant influence — whether by disposal, dilution, or contractual change — the equity-method investment is derecognised and any retained interest is remeasured to fair value, with the difference recognised in profit or loss (IAS 28.22).

• Disclosure requirements. An investor must disclose the nature of its relationship with associates, summarised financial information, and any restrictions on the ability of associates to transfer funds (IAS 28.40–28.43). If significant influence is held without reaching 20%, or absent at ≥20%, this judgement must be explicitly disclosed.

IAS 28 Significant Influence — Practical Example

Scenario: Entity A acquires 25% of Entity B's ordinary shares on 1 January 20X1 for €500,000. In 20X1, Entity B reports profit after tax of €200,000 and declares dividends of €40,000. Entity A's 25% share of profit = €50,000; share of dividends received = €10,000.

Initial recognition (1 Jan 20X1)

Share of profit recognised (31 Dec 20X1)

Dividend received (31 Dec 20X1)

Closing carrying amount: €500,000 + €50,000 − €10,000 = €540,000

Note: dividends are not income under the equity method — they are a return of investment, reducing the carrying amount (IAS 28.11).

IAS 28 Significant Influence — Common Pitfalls

• Treating the 20% threshold as absolute. Practitioners sometimes automatically apply the equity method at exactly 20% without assessing whether significant influence actually exists. A 20% stake held passively through a nominee, with no board representation or policy participation, may not confer real influence. Auditors will challenge the substance over form (IAS 28.6).

• Ignoring potential voting rights in the assessment. Options and warrants over additional shares are frequently overlooked when determining whether the 20% threshold is met or breached. Under IAS 28.7, these instruments must be included in the assessment if currently exercisable, even if economically out-of-the-money.

• Misclassifying dividends as income. Under the equity method, dividends received from an associate reduce the carrying amount of the investment, not income. Booking dividend receipts as dividend income (as would be appropriate for an FVOCI or FVTPL financial asset) is a frequent error that overstates both revenue and the investment balance.

IAS 28 Significant Influence — Key Paragraphs

• IAS 28.5 — Definition of significant influence and associates.
• IAS 28.6 — The 20% rebuttable presumption and the five qualitative indicators of significant influence.
• IAS 28.7–28.8 — Requirement to consider potential voting rights (options, warrants, convertibles) in the assessment.
• IAS 28.10–28.11 — Equity method mechanics: initial recognition at cost, subsequent adjustment for share of profit/loss and reduction for dividends.
• IAS 28.22 — Derecognition and fair value remeasurement upon loss of significant influence.