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Why is understanding the extent to which one company influences another company important for accounting purposes? What impac

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The extent of influence of one company over another determines how the investment is accounted for. If the influence is sufficient that the entity makes the important decisions for the investee (control), that company is called a subsidiary and the financial statements of both entities are aggregated to produce consolidated financial statements. When a company has significant influence over another company equity accounting is used. When little or no influence can be exerted, the investment is passive and is accounted for (according to IFRS) at amortized cost, fair value through other comprehensive income, or fair value through profit or loss. The classification affects how the investment is valued on the balance sheet and how gains and losses are accounted for. If the investor can influence decisions but not control them (significant influence), equity accounting is used.

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