Significant Influence

appropriate regardless of the

 An entity may purchase enough shares of
another entity in order to exert significant
influence.
 Significant Influence is the power to
participate in the financial and operating
policy decisions of the investee but not
control or joint control over those policies.
 If the investor holds, directly or indirectly
through subsidiaries, 20% or more of the
voting power of the investee, it is presumed
that the investor significant influence, unless
it is not clearly demonstrated
 Conversely, if the investor holds, directly or
indirectly through subsidiaries, less than 20%
of the voting power of the investee, it is
presumed that the investor does not have
significant influence, unless such influence
can be clearly demonstrated.
percentage because the preference
share is nonvoting equity.
 Investment in preference shares may
be accounted for as at fair value
through profit or loss or at fair value
through other comprehensive income
or at cost.
e. Technically, if the investor has significant
influence over the investee, the investee is
said to be an associate.
 Under equity method, the investment
in ordinary shares should be
appropriately described as
investment in associate.
f. The investment in associate accounted for
using the equity method shall be classified as
noncurrent asset.

Equity Method

 Equity method is based on the economic

relationship between the investor and
investee.
 Investor and investee are viewed as a
single economic unit.
 Equity method is applicable when the
investor has a significant influence over
the investee.

Accounting procedures

a. Investment is initially recognized at cost.

b. The carrying amount is increased by the
investor’s share of the profit of the investee
and decreased by the investor’s share of the
loss of the investee.
 Investor’s share of the profit or loss of
the investee is recognized as
investment income.
c. Distributions or dividends received from an
equity investee reduce the carrying amount of
the investment.
d. Note that the investment must be in ordinary
shares.
 If the investment is in preference
shares, the equity method is not