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

Omega's finance director proposes to avoid equity accounting for a 28% investee, Sigma, by classifying it as a simple financial asset. This would avoid recognising Sigma's expected losses. Omega has two board seats at Sigma and supplies key technology to it. What is the most appropriate response under IFRS Accounting Standards and professional ethics?

The proposal should be rejected. Omega's 28% holding, two board seats and technology supply show significant influence, so Sigma must be equity accounted as an associate. Choosing another classification to avoid recognising losses would be misleading and contrary to the ethical duties of integrity and objectivity.

  1. AReject the proposal, because significant influence exists, the equity method is required, and avoiding losses would be misleadingCorrect
  2. BAccept the proposal, because the choice of classification is a matter of management judgement
  3. CAccept the proposal if the auditors do not object
  4. DAccept the proposal but disclose that Sigma may be an associate

Explanation

Holding 28%, board seats and supply of essential technology all indicate significant influence under IAS 28, so the equity method is mandatory. Classification chosen to hide losses is biased reporting and breaches the accountant's duty of integrity and objectivity. Disclosure or auditor silence does not make a non-compliant treatment acceptable.

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