IFRS 10 Consolidated Financial Statements

Background

IFRS 10 ‘’Consolidated Financial Statements’’ establishes principles for presenting and preparing consolidated financial statements when an entity controls one or more other entities. It provides detail guidance on term control. Control requires exposure or rights to variable returns and the ability to affect those returns through power over an investee.

IFRS 10 superseded SIC-12 Consolidation – Special Purpose Entities. It was issued in May 2011 and applies to annual periods beginning on or after 1 January 2013.

 

Overview

The objective of this IFRS 10 is to establish principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities.

Meeting the objective

To meet the above-mentioned objective, IFRS 10 states:

(a) requires an entity (the parent) that controls one or more other entities (subsidiaries) to present consolidated financial statements;

(b) defines the principle of control, and establishes control as the basis for consolidation;

(c) sets out how to apply the principle of control to identify whether an investor controls an investee and therefore must consolidate the investee;

(d) sets out the accounting requirements for the preparation of consolidated financial statements; and

(e) defines an investment entity and sets out an exception to consolidating particular subsidiaries of an investment entity.

 

This IFRS does not deal with the accounting requirements for business combinations and their effect on consolidation, including goodwill arising on a business combination (see IFRS 3 Business Combinations).

 

Scope

An entity that is a parent shall present consolidated financial statements. This IFRS applies to all entities, except as follows:

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

(i) it is a wholly‑owned subsidiary or is a partially‑owned subsidiary of another entity and all 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;

(ii) 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);

(iii) 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

(iv) its ultimate or any intermediate parent produces financial statements that are available for public use and comply with IFRSs, in which subsidiaries are consolidated or are measured at fair value through profit or loss in accordance with this IFRS.

 

IFRS 10 does not apply to post-employment benefit plans or other long-term employee benefit plans to which IAS 19 Employee Benefits applies. A parent that is an investment entity shall not present consolidated financial statements if it is required, in accordance with paragraph 31 of this IFRS, to measure all of its subsidiaries at fair value through profit or loss.

 

Key definitions

Consolidated financial statements

The financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity.

Control of an investee

An investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.

Parent

An entity that controls one or more entities.

Power

Existing rights that give the current ability to direct the relevant activities.

Protective rights

Rights designed to protect the interest of the party holding those rights without giving that party power over the entity to which those rights relate.

Relevant activities

Activities of the investee that significantly affect the investee's returns.

 

What is Control and how to access it?

An investor determines whether it is a parent by assessing whether it controls one or more investees. An investor considers all relevant facts and circumstances when assessing whether it controls an investee. An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.

 

An investor controls an investee if and only if the investor has all of the following elements:

ü  power over the investee, i.e. the investor has existing rights that give it the ability to direct the relevant activities (the activities that significantly affect the investee's returns)

ü  exposure, or rights, to variable returns from its involvement with the investee

ü  the ability to use its power over the investee to affect the amount of the investor's returns.

 How to define Power?

Power arises from rights. An investor has power over an investee when the investor has existing rights that give it the current ability to direct the relevant activities, ie the activities that significantly affect the investee’s returns. Rights can be straightforward (e.g. through voting rights) or be complex (e.g. embedded in contractual arrangements). An investor that holds only protective rights cannot have power over an investee and so cannot control an investee.

 

Investors relation with returns

An investor must be exposed, or have rights, to variable returns from its involvement with an investee to control the investee. Such returns must have the potential to vary as a result of the investee's performance and can be positive, negative, or both. 

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.

 

Principal or agent relation - When assessing whether an investor controls an investee an investor with decision-making rights determines whether it acts as principal or as an 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.

 

Accounting requirements

A parent shall prepare consolidated financial statements using uniform accounting policies for like transactions and other events in similar circumstances. Standard states detailed consolidation procedure and before moving into that refer following accounting requirements (and number of other rules dealing with the specific circumstances) for preparing consolidated financial statement :-

·       Consolidation of an investee shall begin from the date the investor obtains control of the investee and cease when the investor loses control of the investee.

·       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

 

Consolidation procedures

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

 A reporting entity includes the income and expenses of a subsidiary in the consolidated financial statements from the date it gains control until the date when the reporting entity ceases to control the subsidiary. Income and expenses of the subsidiary are based on the amounts of the assets and liabilities recognised in the consolidated financial statements at the acquisition date.

The parent and subsidiaries are required to have the same reporting dates, or consolidation based on additional financial information prepared by subsidiary, unless impracticable. Where impracticable, the most recent financial statements of the subsidiary are used, adjusted for the effects of significant transactions or events between the reporting dates of the subsidiary and consolidated financial statements. The difference between the date of the subsidiary's financial statements and that of the consolidated financial statements shall be no more than three months.

 

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.

 

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 (i.e. transactions with owners in their capacity as owners). When the proportion of the equity held by non-controlling interests 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.

 

Loss of control

If a parent loses control of a subsidiary, the parent:

§  derecognises the assets and liabilities of the former subsidiary from the consolidated statement of financial position;

§  recognises any investment retained in the former subsidiary when control is lost and subsequently accounts for it and for any amounts owed by or to the former subsidiary in accordance with relevant IFRSs. That retained interest is remeasured and the remeasured value is regarded as the fair value on initial recognition of a financial asset in accordance with IFRS 9 Financial Instruments or, when appropriate, the cost on initial recognition of an investment in an associate or joint venture;

§  recognises the gain or loss associated with the loss of control attributable to the former controlling interest.

 

If a parent loses control of a subsidiary that does not contain a business in a transaction with an associate or a joint venture gains or losses resulting from those transactions are recognised in the parent's profit or loss only to the extent of the unrelated investors' interests in that associate or joint venture.

 

Investment entities consolidation exemption

How to determine whether an entity is investment entity?

An investment entity is an entity that: 

o   obtains funds from one or more investors for the purpose of providing those investor(s) with investment management services

o   commits to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both, and

o   measures and evaluates the performance of substantially all of its investments on a fair value basis.

 

IFRS 10 contains special accounting requirements for 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.

An entity is required to consider all facts and circumstances when determining whether it is an investment entity, including its purpose and design.  In assessing whether it meets the definition as described above, an entity shall consider whether it has the following typical characteristics of an investment entity:

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 (FVTPL) in accordance with IFRS 9 Financial Instruments. However, an investment entity is still required to consolidate a subsidiary where that subsidiary provides services that relate to the investment entity’s investment activities.   

Status Changes of an investment entity - If facts and circumstances indicate that there are changes to one or more of the three elements that make up the definition of an investment entity or the typical characteristics of an investment entity, a parent shall reassess whether it is an investment entity.

A parent that either ceases to be an investment entity or becomes an investment entity shall account for the change in its status prospectively from the date at which the change in status occurred.

 

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.

 

Disclosure

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