1 Groups and consolidation: an overview

 EXAM FOCUS POINT 
You may be asked to work out whether a parent has control over another entity in your exam.
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PART G: PREPARING SIMPLE CONSOLIDATED FINANCIAL STATEMENTS 
 
410
 
Socket should be treated as a 
subsidiary 
on the grounds that Power is able to appoint four out of the five 
directors (criterion (d)). Assuming that the other criteria do not apply, if Power did not have such a 
power, consolidation would not be appropriate because Socket would not be a subsidiary.
 
 
3
Associates and trade investments 
An 
associate
is an entity over which another entity exerts 
significant influence
. Associates are accounted 
for in the consolidated statements of a group using the equity method.
3.1 Investments in associates 
This type of investment is something less than a subsidiary, but more than a simple trade investment. 
The key criterion here is 
significant influence
. This is the 'power to participate', but 
not
 
to 'control' (which 
would make the investment a subsidiary). 

Associate
. 'An entity over which the investor has significant influence'. 

Significant influence
. 'The power to participate in the financial and operating policy decisions of 
the investee but which is not control or joint control of those policies.'
(IAS 28, para. 3)
 
As with control, significant influence can be determined by the holding of voting rights (usually attached 
to ordinary shares) in the entity. IAS 28 states that if an investor holds 
20% or more 
of the voting power 
of the entity, it can be presumed that the investor has significant influence over the entity,