Question

It is important to understand the concept of "significant influence" as it relates to ownership and control for investments in common stock. Students are to write a paper clearly explaining their perspective of this concept. Equally important is an understanding of the accounting treatment of the cost and equity methods. Students are to provide a written comparative analysis of the differences between the cost and equity methods.

Answer 1

The word significant influence in relation to subsidiary and associate company is used to know the control of parent over the subsidiary.

In the past it is always consider thet the person having 51% or more share of other company having a control over it. But now the defination of control is changed by IFRS AND INDAS.

As per IFRS the control in any any company can only be acquired of following three conditions are satisfied:

1) Power over investee 2) exposed to/right to variable return arising due to investment with investee. 3) Ability to use such power over investee.

Under first condition i.e. power over investee we need to identify the relevant activities of entity like major sales of product,funding structure, appointment of board of directors etc. And check with whom all the above mentioned Power vested.

Further to check significance influence we have to check whether the entity are run based on majority of voting Power of on the basis of some contract. For example: if any comoany has entered into agreement with person to appoint there directors than it can be said the person who have such contract with company has a significant influence on the entity.

ACCOUNTING TREATMENT OF COST AND EQUITY METHODS

1) COST METHOD: under cost method the minority interest or non controlling interest are measured at praposnate net method (PSNA) and any impairment of goodwill in subsequent year will not effect NCI

2)EQUITY METHOD: Under equity method the NCI is valued at FAIR VALUE and any impairment of goodwill will effect the NCI.