International Accounting Standard (IAS) 28, Investment in Associates prescribes the use of the equity method of accounting for investments in associates over which the investor has significant influence. Required:

Describe the term “significant influence” in the context of IAS 28.

Where an investor holds directly or indirectly, 20% or more of the voting power of the investee, it is presumed to have significant influences, unless it can be clearly demonstrated otherwise. The existence of significant influence is usually evidenced in one or more of the following ways:

  • Representation on the board of directors.
  • Participation in policy-making process, including participation in decisions about dividends.
  • Material transactions between investor and investee.
  • Interchange of managerial personnel.
  • Provision of essential technical information.


Explain four circumstances under which the investor is exempted from use of the equity method.

  • The investment is classified as held for sale.
  • The parent company is exempted from use of equity method.
  • The investment is a wholly owned subsidiary, or it is a partially owned subsidiary of another entity whose owners do not object to the investor not applying the equity method and the following also apply:
    • The investor’s debt or equity instruments are not traded in a public market.
    • The investor did not file, nor is it in the process of filing its financial statements with the stock exchange for purposes of issuing instruments in a public market.
    • The intermediate or ultimate parent of the investor produces consolidated financial statements which are available for public use and comply with International Finance Reporting Standards.

Differentiate between full consolidation and equity method of accounting for subsidiaries and associate companies.

The main reason for consolidating a subsidiary is because the subsidiary’s assets are controlled by the holding company and meanwhile, the holding company is also liable to the subsidiary’s liability. The substance is that the assets and liabilities of a subsidiary belong s to the holding company.

Equity method 

The investor is able to influence but not control the associate company therefore, it is not proper to report the associate as a mere investments nor consolidate and hence the use of equity method


Briefly explain three circumstances in which a parent company need not present consolidated financial statements in accordance with International Accounting Standard

(IAS ) 27 ,Consolidated and Separate financial Statements 

The parent company is itself a wholly owned  subsidiary or is a partially owned subsidiary  of other entity and its owned ,including those not otherwise entitled to vote have been informed about and do not object to the parent presenting consolidated statements .

The parent company’s debt or equity instrument are not traded in a public market.

The parent company did not file nor is it in the process of filing its financial statements  with a securities  commission or other regulatory organization for the purpose of issuing any class of instruments in a public market

The ultimate or any intermediate parent produces consolidated financial statements available for public use that comply with IFRSs.



Distinguish between the full method and the partial method of determining goodwill arising on acquisition of a subsidiary company.

 Full method

It refers to computation of goodwill of both the holding and the non-controlling interest.

Partial method

It refers to the computation of goodwill of the holding company alone.

Computation of goodwill



 List the circumstances under which a subsidiary should be excluded from the consolidated financial statement

The present itself is of wholly owned subsidiary

The present debts of equity instruments not traded in a stock exchange.

The parent is in a group in which it is a subsidiary and the ultimate parent in that group

prepare consolidated financial statements that supply with IFRSs.

The parent has not filed nor is not in the process of filing its financial statements with of

regulatory organization in the purpose of issuing any class of instruments.



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