Significant influence

Significant influence is a term used in IFRS regarding investments in joint ventures and associates as well as related parties.

Significant influence (relating to interests in joint ventures)

The power to participate in the financial and operating policy decisions of an activity but is not control or joint control over those policies.

Significant influence (relating to investments in associates)

The power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.

Significant influence (relating to related party transactions)

The power to participate in the financial and operating policy decisions of an entity, but not control those policies. Significant influence may be exercised in several ways, usually by representation on the board of directors or equivalent governing body but also by, for example, participation in:

  1. the policy making process,
  2. material transactions between entities within an economic entity,
  3. interchange of managerial personnel, or
  4. dependence on technical information.

Significant influence may be gained by an ownership interest, statute, or agreement.

Here is a decision tree putting significant influence in perspective:

Consolidated subsidiaries, joint operations and other entities || Investments in joint ventures, associates and structured entitiesThe power

The power to participate in the financial and operating policy decisions of the investee but it is not control or joint control over those policies.

A holding of 20% or more of the voting power (directly or through subsidiaries) will indicate significant influence unless it can be clearly demonstrated otherwise. If the holding is less than 20%, the investor will be presumed not to have significant influence unless such influence can be clearly demonstrated. Both these threshold descriptions are more or less open ended, if objectively documented the substance of an investment relationship can be accounted for.

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Evidence of significant influence

The existence of significant influence by an investor is usually evidenced in one or more of the following ways:

  • representation on the board of directors or equivalent governing body of the investee;
  • participation in the policy-making process;
  • material transactions between the investor and the investee;Upgrade
  • interchange of managerial personnel;
  • provision of essential technical information.

Potential voting rights are a factor to be considered in deciding whether significant-influence exists.

A substantial or majority ownership by another investor does not necessarily preclude an investor from having significant-influence.

Significant influence ceases once an entity loses its power to participate in the financial and operating policy decisions.

In form significant influence exists, but practically not and in form no significant influence exists but practically it does

Because of the fact that these situations are against the logical application of the concept of significant-influence as determined  in IFRS, IFRS 12 9(d)-(e)) requires disclosure of  significant judgements and assumptions made in instances where the entity determines that:

  • Significant-influence does not exist, even though more than 20% of the voting rights are held
  • Significant-influence does exist, even though less than 20% of the voting rights are held.

Example disclosure Aluminium Corporation of China (FS 31 December 2018)

Note – Significant influence over an entity in which the Group holds less than 20% of voting rights

At 31 December 2018, the Group owned a 6.68% equity interest in Chalco Mineral Resources Co.,Ltd.* (“Chalco Resources”). The Group considers that it has Significant-influence over Chalco Resources even though it owns less than 20% of the voting rights, on the grounds that the Group can appoint one out of the five directors of the board of directors of Chalco Resources.

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At 31 December 2018, the Group owned a 14.62% equity interest in China Rare Earth Co., Ltd. * (“China Rare Earth”). The Group considers that it has Significant-influence over China Rare Earth even though it owns less than 20% of the voting rights, on the grounds that the Group can appoint one out of the seven directors of the board of directors of China Rare Earth.

At 31 December 2018, the Group owned 17.7% of the voting right of Chinalco Capital Holdings Co., Ltd.* (“Chinalco Capital”). The Group considers that it has Significant-influence over Chinalco Capital since it can appoint one out of three directors of the board of directors of Chinalco Capital.

At 31 December 2018, the Group owned a 16% equity interest in Baise New Aluminum Power Co., Ltd. * (“New Aluminum Power”). The Group considers that the Group has Significant-influence over New Aluminum Power even though it owns less than 20% of the voting rights, on the grounds that the Group can appoint one out of the nine directors of the board of directors of New Aluminum Power.

At 31 December 2018, the Group owned a 14.29% equity interest in Inner Mongolia Geliugou Co., Ltd.* (“Inner Mongolia Qiliugou”). The Group considers that it has Significant-influence over Inner Mongolia Qiliugou even though it owns less than 20% of the voting rights, on the grounds that the Group can appoint one out of the seven directors of the board of directors of Inner Mongolia Qiliugou.

Note: Because of the particular nature of the judiciary system in China one can imagine that such extreme situations actually are the true kind of having Significant-influence in or even control over an investee. And here is something similar regarding control over an subsidiary for the same entity’s financial statements:

Note: Consolidation of entities in which the Group holds less than a majority of voting rights

At 31 December 2018, the Group owned a 40.23% equity interest in Ningxia Yinxing Energy Co., Ltd. * (“Yinxing Energy”). Since the remaining 59.77% of the equity shares in Yinxing Energy are held by a large number of individual shareholders, in opinion of the directors of the Company, the Group has control over Yinxing Energy, and Yinxing Energy continues to be included in the consolidation scope.

Something else -   Joint control

As disclosed in note 38, the Company holds a 40% equity interest in Guizhou Huaren New Materials Co., Ltd.* (“Guizhou Huaren”). In accordance with the acting-in-concert agreement signed between the Company and Hangzhou Jinjiang Group Co., Ltd.* (“Hangzhou Jinjiang”), Hangzhou Jinjiang would exercise the shareholders’ and board of directors’ votes in concert with the Group. Therefore, the directors of the Company believe that the Company has control over Guizhou Huaren and consolidated Guizhou Huaren’s financial statements from the date the Group obtained control.

Significant influence

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