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ACCA Strategic Professional · Strategic Business Reporting (International) · Associates and joint arrangements

Alpha plc holds 25% of the voting rights of Beta Ltd and has the right to appoint one of the seven directors on Beta's board. Beta's other shares are widely held, and Alpha takes part in Beta's policy-making decisions on dividends. Which is the correct accounting treatment in Alpha's consolidated financial statements under IFRS Accounting Standards?

Beta is an associate and is equity accounted. A 25% voting holding presumes significant influence, and board representation and participation in dividend policy confirm it. Control is absent, so it is not a subsidiary, and IAS 28 does not permit proportionate consolidation or simple fair value treatment for this investment.

  1. AAccount for Beta as an associate using the equity method, because significant influence is presumed and evidencedCorrect
  2. BAccount for Beta as a subsidiary and consolidate line by line, because Alpha holds more than 20%
  3. CAccount for Beta as a financial asset at fair value, because Alpha holds less than 50%
  4. DProportionately consolidate Alpha's 25% share of Beta's assets and liabilities

Explanation

A holding of 20% or more of voting power presumes significant influence, and board representation and policy participation confirm it. IAS 28 therefore requires the equity method. Consolidation requires control, which 25% does not give. Proportionate consolidation is not permitted for associates.

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