Company X owns 22% of Company Y and is entitled to appoint two directors to the board, which consists of eight members. The remaining 78% of the voting rights are held by two other companies, each of which is entitled to appoint three directors. The board makes decisions on the basis of a simple majority. Because board meetings are often held at very short notice, Company X does not always have representation on the board. Often the suggestions of the representative of Company X are ignored, and the decisions of the board seem to take little notice of any representations made by the director from Company X.
Required
What is the relationship between Company X and Company Y?
Solution
Company X is unable to exercise significant influence as its directors seem to be ignored at board meetings. Therefore, the equity method should not be used.
If the investor ceases to have significant influence over an associate, then the equity method should not be used and the investment should be accounted for using IAS 39.
