Overview
Definition
Significant Influence allows one company to influence the financial and operating policies of another company in which it holds an interest, without the level of control required to dictate these policies outright. This can include influence over dividend policy, strategic decisions, and other key financial and operational aspects.
Examples
- Minority Shareholding: Acme Corp holds a 20% stake in Beta Inc. Though Acme does not control Beta, it has a significant influence over Beta’s policy decisions because of its substantial shareholding.
- Equity Method Accounting: If Gamma Limited has enough influence over Delta Inc., it must record its share of Delta’s profit or loss in its financial statements using equity method accounting.
Frequently Asked Questions
What typically signifies significant influence?
Holding 20% or more of the voting stock of a company is usually indicative of significant influence, though other factors like board representation or technological dependence can also be relevant.
Does significant influence mean control?
No, significant influence does not equate to control. Control implies a greater ability to direct company’s policies and operations, typically through a majority voting stake.
How is significant influence accounted for?
Significant influence is typically accounted for using the equity method, where the investment is initially recorded at cost and subsequently adjusted for the investor’s share of the investee’s profits or losses.
Does significant influence require active participation?
Not necessarily. While active participation can indicate significant influence, passive ownership with sufficient voting rights or ties to the company can also establish significant influence.
Can significant influence change over time?
Yes, it can change if the influencing factors such as ownership stakes, management relationships, or strategic ties change over time.
Associate
An associate is a company (investee) in which the investor has significant influence but does not control or jointly control.
Equity Method
An accounting method used for investments in associates, where the investor’s share of the investee’s profit or loss is recognized in the investor’s income statement.
Participating Interest
This is an interest in a business arrangement where the investor shares the results of an investment or project without having full control over the decisions.
Online Resources
Suggested Books for Further Studies
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
- “Financial Accounting: An Integrated Approach” by Ken Trotman
- “Accounting Principles” by Jerry J. Weygandt, Paul D. Kimmel, and Donald E. Kieso
Accounting Basics: “Significant Influence” Fundamentals Quiz
### What percentage of voting stock typically signifies significant influence?
- [ ] Less than 10%
- [ ] 50% or more
- [x] 20% or more
- [ ] Less than 5%
> **Explanation:** Holding 20% or more of the voting stock of another company is generally considered indicative of significant influence.
### Which accounting method is used for investments where significant influence exists?
- [ ] Consolidation method
- [ ] Cost method
- [ ] Fair value method
- [x] Equity method
> **Explanation:** The equity method is used to account for investments over which the investor has significant influence, reflecting the investor's share of the investee’s profit or loss.
### Does significant influence mean the investor has control over the investee?
- [ ] Yes
- [x] No
- [ ] Only in certain cases
- [ ] Always
> **Explanation:** Significant influence does not imply control. Control typically means having a majority voting stake or having the power to govern the financial and operating policies of an entity.
### What is an example of significant influence?
- [ ] Owning 5% of shares with no other ties
- [ ] Holding a non-voting preference share position
- [x] Holding 25% of shares and having representation on the board
- [ ] Having a large contract with the company
> **Explanation:** Holding a substantial percentage of shares along with board representation indicates significant influence over the company's policies.
### Can significant influence apply without owning shares?
- [ ] Yes, always
- [x] Yes, sometimes
- [ ] No, never
- [ ] Only in specific industries
> **Explanation:** Significant influence can sometimes apply without owning shares if there are strategic partnerships, joint ventures, or other close business relationships.
### Significant influence involves decision-making in which areas?
- [ ] Only marketing decisions
- [ ] Personal staffing decisions
- [x] Financial and operational policies
- [ ] Social media strategy
> **Explanation:** Significant influence typically involves impact over key financial and operational policies, including strategic decisions and dividend policies.
### Can significant influence change over time?
- [x] Yes
- [ ] No
- [ ] Rarely
- [ ] Only in distress situations
> **Explanation:** Significant influence can fluctuate based on changes in investment stakes, strategic alignments, management relationships, and other factors.
### What is an indicator of significant influence?
- [ ] Lack of technological dependence
- [x] Owning more than 20% of voting stock
- [ ] Absence of any formal agreements
- [ ] Low trading volume of shares
> **Explanation:** Owning more than 20% of the voting stock is a common indicator of significant influence over another company’s policies.
### What type of dividend policy influence falls under significant influence?
- [x] Influencing the decision but not dictating it
- [ ] Deciding the dividend policy unilaterally
- [ ] Only suggesting dividends without influence
- [ ] No involvement in dividends
> **Explanation:** Significant influence allows a company to influence dividends without having the ability to unilaterally decide on them.
### In accounting, what does significant influence typically exclude?
- [ ] Strategic decisions
- [ ] Financial policy influence
- [ ] Operating policy influence
- [x] Complete control over decisions
> **Explanation:** Significant influence involves impact over financial and operational decisions but does not equate to complete control.
Thank you for reading about the “Significant Influence” term and engaging with our accounting fundamentals quiz. Keep honing your expertise in financial nuances!
