IFRS 10 Consolidated Financial Statements

In my previous article I introduced the world of group accounts and consolidation to you.

You learned that there about 6 IFRS dealing with this topic.

Here, I’d like to summarize the first “consolidation” standard dealing with the consolidated financial statements: IFRS 10.

What is the objective of IFRS 10?

The objective of IFRS 10 Consolidated Financial Statements is to establish principles for the presentation and preparation of consolidated financial statements when an entity controls another entity.

More specifically, IFRS 10:

• Requires an entity (a parent) that controls one or more other entities (subsidiaries) to present consolidated financial statements;
• Defines the principle of control as the basis for consolidation and sets out how to identify whether the investor controls the investee;
• Sets out the accounting requirements for the preparation of consolidated financial statements, and
• Defines an investment entity and sets out an exception to consolidating particular subsidiaries of an investment entity.

Control as the basis for consolidation

Simply speaking, the basic rule is:

• If an investor controls its investee => investor must consolidate;
• If an investor does NOT control its investee =>; investor does NOT consolidate.

So what is control?

• Is exposed to, or has right to variable returns from its involvement with the investee;
• Has the ability to affect those returns
• Through its power over the investee.

How to assess control

Remember 3 basic elements inherent in control: power, ability to use this power and variable returns.

Power is the existing rights that give the current ability to direct the relevant activities. Let’s break it down a bit:

• The rights must be substantive, not only some minor rights;
• The ability must be current, exercisable in the present time;
• The relevant activities must be significant and related to major activities of investee.

When assessing whether an investor controls an investee, more than one factor need to be considered. IFRS 10 contains guidance in this area.

Accounting requirements of IFRS 10

Consolidation procedures

In order to prepare consolidated financial statements, IFRS 10 prescribes the following consolidation procedures:

1. Combine like items of assets, liabilities, equity, income, expenses and cash flows of the parent with those of its subsidiaries;
2. Offset (eliminate):
   • The carrying amount of the parent’s investment in each subsidiary; and
   • The parent’s portion of equity of each subsidiary;
3. Eliminate in full intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between entities of the group.

If you’d like to learn HOW to actually apply these consolidation procedures and how to prepare the consolidated financial statements on numerical examples, please check out the IFRS Kit.

Other accounting requirements

Except for basic consolidation procedures, IFRS 10 prescribes number of other rules for preparing consolidated financial statements, such as:

• Presentation of non-controlling interests: in equity, but separately from the equity of owners of the parent;
• Uniform accounting policies shall be used by both parent and subsidiary;
• The financial statements of the parent and the subsidiary shall have the same reporting date;
• How to deal when the parent loses its control over subsidiary,

and number of other rules dealing with the specific circumstances.

Exceptions in IFRS 10

As I wrote above, when a parent controls a subsidiary, then it should consolidate.

But not always. IFRS 10 sets the following exceptions from consolidation:

1. A parent does not need to 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 agree;
   • Its debt or equity instruments are not traded in a public market;
   • It did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organization for the purpose of issuing any class of instruments in a public market, and
   • Its ultimate or any intermediate parent of the parent produces consolidated financial statements available for public use that comply with IFRSs.
2. Post-employment benefit plans or other long-term employee benefit plans to which IAS 19 Employee Benefits applies – they don’t need to present consolidated financial statements;
3. Investment entities. This exception applies for the periods starting on or after 1 January 2014 and I have written about this exception in the article “Top 5 2013 and 2014 IFRS Changes“.

Investment entities

Investment entity is an entity that:

1. Obtains funds from one or more investors for the purpose of providing those investor(s) with investment management services;
2. Commits to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both, and
3. Measures and evaluates the performance of substantially all of its investments on a fair value basis.

IFRS 10 sets the guidance and rules about determining whether the entity is an investment entity or not. Typical characteristics of investment entities are:

• 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.

Most investment entities CANNOT present consolidated financial statements and instead, they need to measure an investment in a subsidiary at fair value through profit or loss in line with IFRS 9 Financial Instruments.

Please watch the following video with the summary of IFRS 10:

If you like this summary, please let me know by leaving a comment right below. Thank you!