IFRS 10 Consolidated Financial Statements
IFRS 10 'Consolidated Financial Statements' requires an entity which controls one or more entities to present consolidated financial statements. The standard provides guidance on the concept of control, sets out accounting requirements for consolidated financial statements, and outlines criteria for exemptions available to investment entities.
IFRS 10 does not apply to employee benefit plans to which IAS 19 applies.
An entity which controls another entity (i.e. the parent) must prepare the consolidated financial statements except where:
- It is a wholly-owned subsidiary or a partially-owned subsidiary, and all its owners have been informed about but do not object to the parent not preparing the consolidated financial statements.
- Its debt or equity instruments are not traded in a public market (a public exchange or an over-the-counter market).
- It is not in the process of filing its financial statements with the relevant securities regulator for the purpose of issuing debt or equity securities to general public.
- Its ultimate or any intermediate parent prepares publicly-available financial statements in which the subsidiaries are either consolidated or presented at fair value through profit or loss.
Concept of control
Regardless of its legal relationship with an investee, an investor has control if it has:
- Power over the investee;
- Exposure or rights to variable returns from the investee;
- The ability to use its power over the investee to influence investment returns.
If two or more investors are equally-placed to control an investee, they account for such investment in accordance with IFRS 11, IAS 28 and/or IFRS 9.
An investor has power over an investee if it has a current ability arising from existing rights to direct the relevant activities (activities which are expected to affect the investment returns) of the investee. Examples of rights include voting rights, right to appoint/remove key management personnel, right to decide regarding major new transactions, etc. However, the right must be substantive in nature (i.e. they must be exercisable, and no major conditions/impediments should exist) and not just protective (for example, a lender’s right to restrict further borrowing by the borrower is protective in nature).
If two or more entities have the power to direct relevant activities, control rests with the entity whose rights have the most significant impact on the returns.
An understanding of the purpose and design (capital structure, decision-making authority, participation in return, etc.) of the investee and the relevant activities is important in reaching an assessment regarding existence of control.
The standard contains detailed guidance which helps in determining whether rights exist, whether they are substantive or preventive, whether (existing or potential) voting rights confer control, whether a party is exposed to variable returns and whether there is a link between power held and returns earned, etc.
A parent must prepare consolidated financial statements using uniform accounting policies. Consolidated financial statements club together like items of assets and liabilities, eliminate the carrying amount of the parent’s investments and any intra-group balances and transactions. In any case the difference between the date of consolidated financial statements and the subsidiary financial statements should not be greater than three (03) months.
An investor preparing consolidated financial statements must present any non-controlling interest as part of equity but separately for equity attributable to the parent. Similarly, a consolidated statement of comprehensive income must also separately show the total comprehensive income attributable to non-controlling interest. Such attribution should be based on existing ownership rights (excluding any potential voting rights). Any change in ownership is accounted for in equity as transactions with owners in their capacity as owners.
When a parent loses control, it derecognizes the assets and liabilities of the subsidiaries, recognizes consideration received, recognizes any gain or loss in profit or loss, and recognizes any retained interest in accordance with other relevant IFRS standards.
Investment entity exemption
IFRS 10 exempts an investment entity from preparing consolidated financial statements.
An investment entity is an entity which:
- Obtains funds from investors for the purpose of investment management,
- Commits to the investors that its sole business model is to invest those funds to earn returns from investment income, capital appreciation or both, and
- Measures substantially all its investments on fair value basis.
Characteristics which indicate that an entity might be an investment entity include:
- More than one investor,
- More than one investment,
- No related-party relationship with investors, and
- Ownership interest mainly in the form of equity or other similar instruments.
However, an investment entity must consolidate its subsidiaries which provide it services provided those are not investment entities in their own right. Similarly, a parent of an investment entity (which is not an investment entity itself) must consolidate the investment entity.