Significant influence is the power to participate in an investee's financial and operating policy decisions without controlling them.
Significant influence is the power to participate in an investee’s financial and operating policy decisions without controlling or jointly controlling those policies. Under IFRS Accounting Standards, an investee over which an investor has significant influence is an associate, and the investment is generally accounted for using the equity method subject to the applicable scope and exceptions.
Significant influence is a facts-and-circumstances assessment. A voting percentage can create a presumption, but it does not replace analysis of governance rights, actual participation, other shareholders, contractual arrangements, and potential voting rights.
IAS 28 presumes significant influence when an investor holds, directly or indirectly, 20% or more of the investee’s voting power, unless the investor can clearly demonstrate otherwise. Below 20%, the presumption reverses, but significant influence can still be demonstrated.
This is not a bright-line rule. A 25% investor whose governance rights are severely restricted may need to rebut the presumption. An 18% investor with a board seat, active policy participation, dispersed other shareholders, and material commercial relationships may have evidence supporting significant influence.
Percentage analysis must use the relevant voting power and consider indirect holdings and currently exercisable or convertible potential voting rights under the applicable framework. A percentage of economic returns is not always the same as a percentage of votes.
IAS 28 identifies evidence that commonly includes:
No single indicator always decides the issue. A nominal board seat may provide little practical participation, while contractual veto or consultation rights require analysis of whether they are substantive, protective, controlling, or shared.
| Relationship | Decision power | Typical accounting direction | Main evidence |
|---|---|---|---|
| Passive or no significant influence | No meaningful policy participation | Applicable financial-instrument measurement | Voting rights, contracts, governance access |
| Significant influence | Participation without control | Equity method, subject to framework scope and exceptions | Board role, policy participation, transactions, personnel, technical dependency |
| Joint control | Relevant decisions require unanimous consent of parties sharing control | Joint-arrangement classification and accounting | Contractual unanimous-consent rights |
| Control | Current ability to direct relevant activities and affect returns | Consolidation, subject to applicable guidance | Power, exposure to returns, ability to use power |
The accounting result is framework-specific. Legal control, economic dependence, board influence, and accounting control are related but not interchangeable conclusions.
flowchart TD
A["Identify shares, votes, contracts, and governance rights"] --> B{"Does the investor control the investee?"}
B -->|"Yes"| C["Assess consolidation requirements"]
B -->|"No"| D{"Do parties share control by contractual unanimous consent?"}
D -->|"Yes"| E["Assess joint-arrangement accounting"]
D -->|"No"| F{"Can the investor participate in financial and operating policy decisions?"}
F -->|"Yes"| G["Significant influence: assess equity-method scope"]
F -->|"No"| H["Assess financial-instrument accounting"]
This flow is an orientation tool, not a substitute for the detailed standards. The order, definitions, exceptions, and accounting consequences differ by framework and fact pattern.
Investor A acquires 18% of Investee B’s voting shares. The remaining shares are widely dispersed. Investor A appoints one of five directors, participates in annual budget and financing-policy discussions, supplies technology essential to B’s operations, and has recurring material transactions with B.
The 18% interest is below the IAS 28 presumption threshold, but the combined evidence may demonstrate significant influence. The conclusion should not rest on the board seat alone. The investor should document the substance of its participation, the rights of other shareholders, potential voting rights, contracts, and any barriers to exercising influence.
If Investor A concludes that it has significant influence and IAS 28 applies, it generally begins equity-method accounting from the date influence is obtained. If the evidence does not support influence, the investment remains within the applicable financial-instrument guidance.
Investor C owns 25% of Investee D’s voting shares, but a binding agreement prevents C from appointing directors, receiving policy information, participating in decisions, or providing management. Another shareholder controls D and C’s rights are limited to ordinary protective shareholder rights.
The ownership level creates an IAS 28 presumption, but C may be able to clearly demonstrate that it lacks significant influence. The conclusion requires stronger evidence than management’s statement that the investment is passive.
When significant influence brings an investment within the equity-method requirements, the investor initially records the investment at cost and subsequently adjusts it for its share of the investee’s profit or loss and other relevant changes. Distributions generally reduce the investment’s carrying amount rather than create dividend income in the same way as a passive investment.
See Equity Method of Accounting for the carrying-amount rollforward, worked entries, losses, impairment, and framework differences.
Significant influence can also affect related-party disclosures, segment or investment disclosures, impairment analysis, and how analysts interpret reported earnings. Equity-method income is not the same as cash received from the associate.
An investor reassesses when facts change, including:
The accounting transition date matters. Gaining control, gaining joint control, obtaining significant influence, or losing influence can require different measurement and presentation under the applicable standards.
Document the conclusion with evidence such as:
Evidence should show actual rights and participation, not just labels such as strategic investor, affiliate, or partner.
U.S. GAAP has related but not identical scope, presumption, and application guidance. FASB also has an active targeted-improvements project concerning equity-method accounting. Preparers should check the effective version of ASC 323 and transition requirements rather than relying on a static percentage shortcut.
This material is educational and does not provide an accounting, audit, legal, tax, or investment conclusion for a particular holding.