The Association of Corporate Treasurers is supportive of the move to IFRS and welcomes the consistency, and transparency that this move will bring. Accordingly we are very supportive of the proposals put forward in your consultation paper to amend Company Law in order to allow for the implementation of IAS and the modernisation directive. The flexibility you are proposing in permitting companies to use IAS individually or as part of a group is most welcome in allowing companies or groups to plan an ordered transition to IAS.
Before covering your list of questions we note that Para 5.19 seeks views on whether the Company Law definition of an associate should remove the need for a participating interest and significant influence to exist and instead simply rely on the requirement for significant influence. This is not a move required by the Modernisation Directive, although this Directive did remove the need for a participating interest in the definition of a subsidiary undertaking and thus the sole requirement became one of control.
Control is a fairly objective test, but we feel that the concept of significant influence is rather more vague. The statutory definition of a participating interest requires there to be an intention to hold both for the long-term and to secure a contribution to the holder’s business.
Thus, it would be unlikely to present a problem in deciding whether, for example, a joint venture company should be treated as an associate and thus equity-accounted. However, there could also be more peripheral situations where a significant influence might exist but it would be bizarre to regard the company in question to be viewed as an associate if the two intentions mentioned above (long term holding and contribution to business) did not exist in relation to the shareholding. For example, a significant influence could be exerted by a strong minded / well respected director who is nominated by a significant institutional shareholder and whose views are often sufficient to carry the board.
Is it sensible for the company to be viewed as an associate of the institution, unless there is clear evidence that the above two intentions are present? If so, what if the relevant director is succeeded by someone far less assertive?
The rebuttable presumption in the Companies Act (Section 260) is that a 20% holding is presumed to be a participating interest. In addition to the linking of the above-mentioned intentions to the shareholding, the prima facie 20% level is a useful guide to the type of interest that should be required. Of course, there are joint ventures and similar business links that involve smaller holdings and which are nevertheless viewed as associates, but the prima facie indicator of 20% is still helpful.
In short, the concept of a participating interest does have the advantages of (a) providing the handle to which to attach the requirements for the long term holding and contribution to business intentions, and (b) being clear and reasonably objective.
We therefore believe that the existing Companies Act position should not be changed.
