Subsidiaries, Joint ventures and Associates
IFRS 10 defines a subsidiary as “An entity that is controlled by another entity.”
Subsidiary is an entity which is controlled by another entity. The control means that the parent company can govern the financial and operating policies of its subsidiaries to gain benefits from the operations of subsidiary. Control can be gained if more than 50% of the voting rights are acquired by the parent. This is usually done by purchasing more than 50% of the shares of subsidiary. An investor controls an investee if and only if the investor has all the following:
(a) power over the investee;
(b) exposure, or rights, to variable returns from its involvement with the investee; and
(c) the ability to use its power over the investee to affect the amount of the investor’s returns.
International Accounting Standard 28 (IAS 28) defines a joint venture as “A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.”
A joint arrangement is an arrangement of which two or more parties have joint control. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.
Joint arrangement can exist in two different forms as set out by IFRS 11:
- joint operation
- joint venture
International Accounting Standard 28 (IAS 28) defines an associate as “An associate is an entity over which the investor has significant influence.”
Significant influence means the power to participate in the financial and operating policy decisions of the investee but is not control or joint control of those policies. Significant influence is usually acquired by purchasing more than 20% of voting power but less than 50%.