Based on the information provided, ABC Ltd.'s investment in XYZ Ltd. would be classified as an associate. An associate is an entity over which the investor has significant influence, typically defined as the ability to participate in the financial and operating policy decisions made by the investee. In this case, since ABC Ltd. has a 15% holding in XYZ Ltd. and also holds an option to acquire an additional 15%, even though it doesn't intend or have the financial ability to exercise that option, the combination of the current ownership and the potential future ownership through the option gives ABC Ltd. significant influence over XYZ Ltd. Therefore, the investment would meet the criteria for associate classification under the principles of related-party relationships and the concept of significant influence in accounting standards.
Investment Classification: When Does a Holding Qualify as an 'Associate' in Accounting?
ABC Ltd. has a 15% holding in the shares of XYZ Ltd. In addition, ABC has, through one of its subsidiaries, a currently exercisable option to buy 15% more shares in XYZ. Although the exercise price is in the money, ABC does not have the intention and the financial ability to exercise this option. How should this investment be classified?
A subsidiary
An investment
A joint arrangement
An associate