Significant influence definition
/What is Significant Influence?
Significant influence is the power to participate in the operating and financial policy decisions of an entity; it is not control over those policies. If an investor holds at least 20 percent of the voting power of an investee, the investor is presumed to have significant influence. The assumption of influence can be reversed through a clear demonstration to the contrary.
It is possible for an investor to not have significant influence, even with majority ownership of an investee. It is possible to lose significant influence over an investee even in the absence of a change in ownership. For example, an investee may become subject to the control of a court, regulator, or government, or loss of significant influence may be the result of a contractual agreement.
An investing entity is usually required to use the equity method of accounting for an investment when the investor can exercise significant influence over the financial and operating policies of the investee.
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Evidence of Significant Influence
Normally, any of the following situations are considered to be evidence of significant influence:
Board of directors representation
Management personnel swapping or sharing
Material transactions with the investee
Policy-making participation
Technical information exchanges
Example of Significant Influence
Antares Corporation owns 30% of the voting shares of Bullish Company. While Antares does not control Bullish (it doesn't own a majority of shares or have control over its board), it has the ability to participate in the company’s decision-making processes. The following are indicators of significant influence by Antares over Bullish Company:
Representation on the board of directors. Antares has two representatives on Bullish Company’s board.
Participation in policy decisions. Antares contributes to decisions on policies such as dividend distributions or operational strategies.
Material transactions. There are significant transactions between Antares and Bullish Company.
Interchange of managerial personnel. Employees or executives from Antares frequently take roles in Bullish Company.
Provision of technical information. Antares shares proprietary information or provides strategic guidance to Bullish Company.
Since Antares has significant influence over Bullish Company, it must account for its investment using the equity method of accounting.