Key Points
- Control (IFRS 10) leads to full line-by-line consolidation; significant influence (IAS 28) leads to a single-line equity method investment.
- The 20% and 50% thresholds are rebuttable starting points, not determinative bright lines.
- Apply IFRS 10 when the investor directs the investee's relevant activities and bears variable returns; apply IAS 28 when the investor participates in decisions without directing them.
- Misclassifying an associate as a subsidiary (or vice versa) restates every line of the group balance sheet.
What is IFRS 10 Control vs IAS 28 Significant Influence?
The classification question bites hardest when an investor holds between 20% and 50% of voting rights. In that band, either conclusion is possible depending on the substance of the relationship. IFRS 10.B41-B46 requires the auditor to look beyond the percentage and assess whether the investor has the current ability to direct relevant activities. Board appointment rights, shareholder agreements, and the dispersion of remaining holdings all feed that analysis. IAS 28.6 lists qualitative indicators (board seats, policy participation, material transactions, management interchange) that can establish significant influence even below 20%.
Getting it wrong has structural consequences. An investee classified as a subsidiary appears line-by-line in the group accounts, with non-controlling interest (NCI) carved out. The same investee classified as an associate appears as a single line. Group revenue, total assets, total liabilities, and gearing ratios all shift. ISA 600.14 requires the group engagement team to understand the group structure, which starts with verifying this classification for every investee.
Side-by-side comparison
| Dimension | Control (IFRS 10) | Significant influence (IAS 28) |
|---|---|---|
| Core test | Power over the investee, variable returns, and a link between them (IFRS 10.7) | Power to participate in financial and operating policy decisions without controlling the investee (IAS 28.3) |
| Typical ownership band | Often above 40-50%, but no bright line; de facto control possible below 50% | Rebuttable presumption at 20-50% of voting power (IAS 28.5) |
| Accounting result | Full consolidation: line-by-line aggregation of all assets, liabilities, income, and expenses | Equity method: single-line investment on the balance sheet, share of profit in the income statement |
| Goodwill treatment | Recognised separately and tested annually for impairment under IAS 36 | Implicit goodwill embedded in the investment balance, not separately tested (IAS 28.32) |
| Intercompany elimination | All intercompany balances and unrealised profits eliminated in full | Investor eliminates only its share of unrealised profits (IAS 28.28) |
| Loss of status | Deconsolidation with gain or loss at fair value (IFRS 10.B97-B99) | Remeasurement of retained interest at fair value through profit or loss (IAS 28.22A) |
Decision rule: Consolidate when the investor directs the investee's relevant activities and bears variable returns from that power (IFRS 10). Apply the equity method when the investor participates in policy decisions without the ability to direct those activities unilaterally (IAS 28).
Worked example: Groupe Lefevre S.A.
Client: Belgian holding company, FY2025, revenue EUR 185M, IFRS reporter. Groupe Lefevre holds interests in two investees.
Investee A (Dumont Materiaux S.A.): Groupe Lefevre holds 46% of voting shares. Lefevre appoints three of five board members under the shareholder agreement. The remaining 54% is held by approximately 800 retail investors, none exceeding 2%. Dumont has revenue of EUR 31M and net assets of EUR 22M.
Investee B (Moreau Logistique S.A.S.): Groupe Lefevre holds 28% of voting shares. Lefevre has one seat on a seven-member board and purchases approximately 15% of Moreau's trucking capacity under a framework contract. Another shareholder holds 40% and controls the board. Moreau has revenue of EUR 14M and net assets of EUR 9M.
Step 1 — Classify Investee A (Dumont)
Lefevre appoints three of five board members and thereby directs Dumont's relevant activities (capital expenditure, pricing, supplier contracts). The remaining 54% is widely dispersed. IFRS 10.B42 requires consideration of the relative size and dispersion of other holdings. No coordinated block can outvote Lefevre. All three elements of IFRS 10.7 are present: power (board appointment rights), variable returns (dividends from 46% stake plus intercompany management fees of EUR 280,000 per year), and a link between the two. Dumont is a subsidiary.
Documentation note: record the board appointment rights (shareholder agreement clause reference), the shareholder register showing dispersion, the IFRS 10.B38-B46 voting analysis, and the three-element conclusion. Cross-reference to the consolidation adjustments working paper.
Step 2 — Classify Investee B (Moreau)
Lefevre holds 28%, triggering the IAS 28.6 presumption of significant influence. Lefevre has one board seat out of seven and a commercial relationship (framework contract). However, another shareholder holds 40% and appoints four board members. Lefevre cannot direct relevant activities unilaterally. The IFRS 10 control test is not met. Significant influence exists because of the board seat and the material intercompany transaction (IAS 28.6 indicators). Moreau is an associate.
Documentation note: record the voting analysis, the board composition, the existence of the 40% controlling shareholder, and the IAS 28.6 indicators supporting significant influence. Conclude that Lefevre does not control Moreau per IFRS 10 but has significant influence per IAS 28.
Step 3 — Apply the correct accounting
Lefevre consolidates Dumont line-by-line, recognising 100% of Dumont's EUR 31M revenue and EUR 22M net assets in the group accounts, with 54% NCI. Lefevre accounts for Moreau using the equity method: a single-line investment balance (cost plus cumulative share of profits less dividends), with 28% of Moreau's profit recognised in Lefevre's income statement.
Documentation note: record the consolidation entries for Dumont (full elimination of intercompany balances, NCI allocation) and the equity method journal for Moreau (share of profit, dividend deduction from carrying amount). Cross-reference to intercompany elimination schedules for Dumont.
If the practitioner mixed up the two classifications and equity-accounted for Dumont instead of consolidating it, group total assets would be understated by approximately EUR 20M (Dumont's gross assets less the single-line investment balance), group revenue would drop by EUR 31M, and gearing ratios would misrepresent the group's true leverage.
Why it matters in practice
- Teams frequently default to the ownership percentage as the sole determinant. A holding above 50% is labelled "subsidiary" and below 50% is labelled "associate" without performing the IFRS 10.B41-B46 dispersion analysis or the IAS 28.6 qualitative indicator assessment. ISA 600.A38 requires the group engagement team to understand the basis on which each entity is included in or excluded from the group financial statements. Accepting the percentage at face value leaves that requirement unmet.
- The reassessment obligation is often missed between periods. IFRS 10.B80-B85 requires the investor to reassess control whenever facts and circumstances change (board composition shifts, new shareholder agreements, dilution from capital raises). Auditors who verify the classification only in the acquisition year and carry the conclusion forward without annual challenge create a gap that inspection teams flag, particularly when shareholding structures have evolved.
Related terms
Frequently asked questions
What is the difference between control under IFRS 10 and significant influence under IAS 28?
Control requires the investor to direct the investee's relevant activities and bear variable returns from that power, leading to full consolidation. Significant influence requires only the ability to participate in policy decisions without directing them, leading to equity method accounting. IFRS 10.7 sets out the three-element control test; IAS 28.3 defines significant influence as participation without control or joint control.
Can an investor have significant influence over an entity it controls?
No. IAS 28.3 explicitly excludes control and joint control from the definition of significant influence. If all three elements of IFRS 10.7 are present, the entity is a subsidiary and must be consolidated. Significant influence applies only when the investor participates in decisions without the ability to direct relevant activities unilaterally.
When should I reassess whether an investee is a subsidiary or an associate?
IFRS 10.B80 requires reassessment whenever facts and circumstances indicate that one or more of the three control elements may have changed. Common triggers include changes in board composition, new or amended shareholder agreements, share issuances that dilute the investor's holding, and expiry of contractual rights. IAS 28.9 mirrors this by requiring the investor to reassess significant influence when circumstances change.