Key Points
- A holding of 20% or more of voting power creates a rebuttable presumption of significant influence under IAS 28.
- An investor can have significant influence with less than 20% if other factors (board representation, policy participation, material transactions, shared management) are present.
- Misclassifying an investment as a financial asset instead of an associate understates the investor's share of profit or loss and omits equity method disclosures.
- Loss of significant influence triggers derecognition of the associate and remeasurement of any retained interest at fair value through profit or loss.
What is Significant Influence?
IAS 28.5 defines significant influence as the power to participate in (not control) the financial and operating policy decisions of the investee. The standard distinguishes this from control (which triggers consolidation under IFRS 10) and from joint control (which leads to IFRS 11 treatment). When significant influence exists, the investor accounts for the investment using the equity method.
The 20% threshold in IAS 28.6 is a starting point, not a rule. It can be rebutted in either direction. An investor holding 25% may lack significant influence if another shareholder holds 70% and actively excludes the investor from decisions. Conversely, IAS 28.6 lists indicators that can establish significant influence below 20%: representation on the board, participation in policy-making, material intercompany transactions, interchange of managerial personnel, and provision of essential technical information.
Worked example: Rossi Alimentari S.p.A.
Client: Italian food production company, FY2025, revenue EUR 67M, IFRS reporter. Rossi holds 22% of the ordinary shares of a Sicilian olive oil producer, Ferrante Oleifici S.r.l. (revenue EUR 9M). Rossi acquired the stake in March 2022 for EUR 4.8M. At 31 December 2025, Ferrante's net assets are EUR 18.6M and its profit for the year is EUR 2.1M. Ferrante declared dividends of EUR 700,000 during 2025.
Step 1 — Assess whether significant influence exists
Rossi holds 22% of voting power, triggering the IAS 28.6 presumption. Rossi also has one representative on Ferrante's five-member board and purchases approximately 35% of Ferrante's annual output under a long-term supply agreement. Both indicators reinforce the presumption. No other shareholder holds a blocking majority. The presumption is not rebutted.
Step 2 — Apply the equity method at acquisition
At acquisition in March 2022, the cost of the investment was EUR 4.8M. Rossi's share of Ferrante's identifiable net assets at acquisition was EUR 3.6M (22% of EUR 16.4M). The excess of EUR 1.2M represents goodwill implicit in the investment. Under IAS 28.32, this goodwill is not separately recognised but is included in the carrying amount.
Step 3 — Recognise the share of profit and dividends for FY2025
Rossi's share of Ferrante's profit is EUR 462,000 (22% of EUR 2.1M). Rossi's share of dividends received is EUR 154,000 (22% of EUR 700,000). Under IAS 28.10, the dividends reduce the carrying amount rather than flowing through profit or loss. The investment carrying amount increases by EUR 462,000 (share of profit) and decreases by EUR 154,000 (dividends), a net increase of EUR 308,000.
Step 4 — Test for impairment indicators
IAS 28.40 requires the investor to apply IAS 36 impairment indicators to the carrying amount of the associate (including implicit goodwill). Ferrante is profitable, has no going concern issues, and its net asset backing per Rossi's share (22% of EUR 18.6M = EUR 4.09M) exceeds the original cost. No impairment indicators exist.
Conclusion: The equity method carrying amount of EUR 5.1M (original EUR 4.8M plus cumulative net adjustments) is defensible because the significant influence assessment rests on both the quantitative threshold and qualitative indicators, and the share of profit ties to Ferrante's audited results.
Why it matters in practice
- Teams frequently accept the 20% threshold as determinative without assessing qualitative indicators. IAS 28.6 lists five indicators that can establish or negate significant influence regardless of the percentage held. An investor with 24% but no board seat, no policy input, and no material transactions with the investee may lack significant influence entirely. The auditor must evaluate the substance of the relationship under ISA 540.13(a), not just the shareholding arithmetic.
- Dividends from associates are sometimes recognised as income in the investor's profit or loss rather than as a reduction of the carrying amount. IAS 28.10 is explicit: distributions from an associate reduce the carrying amount of the investment. Recording them as income double-counts the return (once as the share of profit, again as dividend income) and overstates both revenue and the investment balance.
Significant influence vs. control (IFRS 10)
| Dimension | Significant influence (IAS 28) | Control (IFRS 10) |
|---|---|---|
| Definition | Power to participate in policy decisions without controlling or jointly controlling the investee | Power over the investee, exposure to variable returns, and the ability to use power to affect those returns |
| Typical threshold | 20% or more of voting power (rebuttable) | Majority of voting rights, or de facto control through other mechanisms |
| Accounting treatment | Equity method: single-line investment on the balance sheet, share of profit in the income statement | Full consolidation: line-by-line aggregation of all assets, liabilities, income, and expenses |
| Loss of status | Triggers derecognition of associate and fair value remeasurement of any retained interest | Triggers deconsolidation and fair value remeasurement of any retained interest |
| Audit focus | Whether the classification reflects substance; whether equity method adjustments are correctly applied | Whether the investor has power, returns exposure, and the link between the two; whether all subsidiaries are consolidated |
Related terms
Frequently asked questions
What happens when significant influence is lost?
The investor discontinues the equity method from the date significant influence ceases. IAS 28.22(a) requires the entity to measure any retained interest at fair value at that date. The difference between the carrying amount of the associate (including any related items in other comprehensive income) and the fair value of the retained interest plus any proceeds from the partial disposal is recognised in profit or loss.
Can significant influence exist without any voting rights?
Yes. IAS 28.6 contemplates situations where potential voting rights (convertible instruments, warrants, share options) are substantive and currently exercisable. IAS 28.7 requires the entity to consider the existence and effect of potential voting rights when assessing whether significant influence exists. The auditor evaluates whether the potential rights are genuinely exercisable or merely theoretical.
How do I document the significant influence assessment in the audit file?
Record the percentage of voting power held, the shareholder register confirming ownership, all qualitative indicators from IAS 28.6 (board representation, policy participation, material transactions, management interchange, technical information), and the conclusion on classification. ISA 500.7 requires sufficient appropriate evidence to support the auditor's conclusion. For borderline cases, include a memorandum explaining why the indicators do or do not establish significant influence.