IAS 27 (reformatted 1994), Consolidated Financial Statements and Accounting for Investments in Subsidiaries, utilizes the concept of control as a determinant of the scope of subsidiaries. Control is defined as an authority to make a decision on the other entity’s financial and management policy, from which the entity receives economic benefits.
The BADC’s Accounting Standard for Consolidated Financial Statements was revised in 1997, which adopts the concept of control as a determinant of subsidiaries as well. It states that all controlled entities are defined as subsidiaries, which must be consolidated for the parent’s reporting purposes. The BADC issued additional implementation guidance to determination of the scope of subsidiaries, which requires that if more than 40 percent of outstanding shares of an entity is purchased by the investing entity, such entity is deemed as a subsidiary unless other counter evidence exists.
Associates are defined as entities significantly influenced in their financial and management policy by the investing entity. Both standards require the investing company to account for their investments in associates by the equity method on consolidated financial statements. Japanese GAAP requires that investments in unconsolidated subsidiaries must be accounted for by the equity method as well, while IAS 27 requires that such investments should be accounted for as an available-for-sale investments in accordance with IAS 39.