Enquiry:

IAS 28 ‘Investments in Associates and Joint Ventures’ defines an associate as an entity over which the investor has significant influence. Significant influence has also been described as holding, directly or indirectly 20 per cent or more voting power in the investee.

Section 2 (4) of the Companies Act, 2017 gives four situations for a company to be an associated company:

(I)   if a person holds not less 20% of the voting power in two companies, these two companies shall be associates for each other;

(2) if the companies are under common management or control or one is the subsidiary of another;

(3) managed modaraba; and

(4) if a person holds not less than 10% of the voting power in a company, he shall be an associated person of another person who also holds not less than 10% voting power in that company.

Our question is that, why has the situation of directly holding not less than 20% voting power not been mentioned in the law? Does it mean an investor holding 20% voting power in the investee is not an associate? More over the term ‘common management’ has also not been described. Please elaborate.

 

Opinion:

In relation to the accounting of associated companies, a new provision has been incorporated in section 225 of the Companies Act, 2017 through which the associated companies will be accounted for in the financial statements in accordance with the IFRS definition.

It is to be noted that the definition of the ‘Associated Company’ contained in section 2(4) of the Companies Act, 2017 is relevant and applicable to all other regulatory matters under the Companies Act, 2017.

(October 02, 2017)