IFRS 10

IFRS 10: Consolidated financial statements

IFRS 10 Consolidated Financial Statements establishes principles for the presentations and preparation of consolidated financial statements when an entity controls one or more other entities.

Control

IFRS 10 uses control as the single basis for consolidation, and requires that all three of the following conditions are in place, before it can consider itself to have control:

• Power over the investee: Power is the ability to direct those activities which significantly affect the investee’s returns. It arises from rights, which may be straightforward (eg, through voting rights) or complex (e.g., through one or more contractual arrangements)

• Exposure, or rights, to variable returns from involvement with the investee: Returns must have the potential to vary as a result of the investee’s performance and can be positive, negative or both

• The ability to use power over the investee to affect the amount of the investor’s returns.: A parent must not only have power over an investee and exposure or rights to variable returns from its involvement with the investee, a parent must also have the ability to use its power over the investee to affect its returns from its involvement with the investee

When assessing whether control exists, an investor with decision making rights should establish whether it is acting as a principal or agent of other parties. A number of factors are considered in making this assessment. For instance, the remuneration of the decision-maker is considered in determining whether it is an agent.

An investor that is an agent does not control an investee when it exercises decision-making rights delegated to it.

As shown below, IFRS 10 applies only when an entity has Control, not when it has just Significant Influence, or Joint Control.

Full consolidation

Where an investee is controlled, it is consolidated. This means that:

• The parent company should prepare consolidated financial statements using uniform accounting policies, and co-terminus year ends.
• Like items of the parent’s and subsidiaries’ assets, liabilities, equity, income and expenses are combined.
• The carrying amount of the parent’s investment in each subsidiary and the parent’s portion of equity of each subsidiary is offset, with any related goodwill accounted for in accordance with IFRS 3.
• Intra-group assets, liabilities, equity, income, expenses and cash flows are eliminated in full, as are any unrealised profits.
• Non-controlling interests are presented within equity;
• Changes in a parent’s ownership interest in a subsidiary that do not result in the parent losing control of the subsidiary are accounted for within equity.
• Where control is lost, a gain or loss on disposal arises, and the carrying value of any remaining investment is revalued in accordance with other relevant IFRSs.

Consolidation exemptions

A parent need not present consolidated financial statements if it meets all of the following conditions:

• it is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity, and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the parent not presenting consolidated financial statements
• its debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets)
• it did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market, and
• its ultimate or any intermediate parent of the parent produces financial statements available for public use that comply with IFRSs, in which subsidiaries are consolidated or are measured at fair value through profit or loss in accordance with IFRS 10

Investment entities

Where an entity meets the definition of an investment entity, it does not consolidate its subsidiaries, or apply IFRS 3 Business Combinations when it obtains control of another entity.

IFRS 10 provides that an investment entity should have the following typical characteristics:

• It has more than one investment
• It has more than one investor
• It has investors that are not related parties of the entity
• It has ownership interests in the form of equity or similar interests

The absence of any of these typical characteristics does not necessarily disqualify an entity from being classified as an investment entity.

An investment entity is required to measure an investment in a subsidiary at fair value through profit or loss in accordance with IFRS 9 Financial Instruments. However, it is still required to consolidate a subsidiary where that subsidiary provides services that relate to the investment entity’s investment activities.

Because an investment entity is not required to consolidate its subsidiaries (aside from the above exception to the rule), intragroup related party transactions and outstanding balances are not eliminated.

The exemption from consolidation only applies to the investment entity itself. Accordingly, a parent of an investment entity is required to consolidate all entities that it controls, including those controlled through an investment entity subsidiary, unless the parent itself is an investment entity.

Changes in ownership interests

Changes in a parent’s ownership interest in a subsidiary that do not result in the parent losing control of the subsidiary are equity transactions (that is: transactions with owners in their capacity as owners).

When the proportion of the equity held changes, the carrying amounts of the controlling and non-controlling interests area adjusted to reflect the changes in their relative interests in the subsidiary.

Any difference between the amount by which the non-controlling interests are adjusted, and the fair value of the consideration paid or received, is recognised directly in equity and attributed to the owners of the parent.

The diagram below shows how control could be maintained or lost when there is a change in ownership.

Non-controlling interests (NCIs)

A parent presents non-controlling interests in its consolidated statement of financial position within equity, separately from the equity of the owners of the parent.

A reporting entity attributes the profit or loss and each component of other comprehensive income to the owners of the parent and to the non-controlling interests. The proportion allocated to the parent and non-controlling interests are determined on the basis of present ownership interests.

The reporting entity also attributes total comprehensive income to the owners of the parent and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance.

Disclosure

There are no disclosures specified in IFRS 10. Instead, IFRS 12 Disclosure of Interests in Other Entities outlines the disclosures required.

Further Information