LET US SUMMARIZE THE LESSON!!!
IFRS 10
Consolidated Financial Instrument
Overview
IFRS 10 Consolidated Financial Statements outlines the requirements for the
preparation and presentation of consolidated financial statements, requiring entities to
consolidate entities it controls. Control requires exposure or rights to variable returns
and the ability to affect those returns through power over an investee.
The Standard:
requires a parent entity (an entity that controls one or more other entities) to
present consolidated financial statements
defines the principle of control, and establishes control as the basis for
consolidation
set out how to apply the principle of control to identify whether an investor
controls an investee and therefore must consolidate the investee
sets out the accounting requirements for the preparation of consolidated financial
statements
defines an investment entity and sets out an exception to consolidating particular
subsidiaries of an investment entity.
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
Investment entity
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.
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
Control
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:
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)
exposure, or rights, to variable returns from its involvement with the investee
the ability to use its power over the investee to affect the amount of the investor's
returns.
Power arises from rights. Such 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.
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.
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
Preparation of consolidated financial statements
A parent prepares consolidated financial statements using uniform accounting policies
for like transactions and other events in similar circumstances.
However, 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 are prohibited from consolidating particular subsidiaries (see further
information below).
Furthermore, post-employment benefit plans or other long-term employee benefit plans
to which IAS 19 Employee Benefits applies are not required to apply the requirements
of IFRS 10.
Consolidation procedures
Consolidated financial statements:
combine like items of assets, liabilities, equity, income, expenses and cash flows
of the parent with those of its subsidiaries
offset (eliminate) the carrying amount of the parent's investment in each
subsidiary and the parent's portion of equity of each subsidiary (IFRS 3 Business
Combinations explains how to account for any related goodwill)
eliminate in full intragroup assets and liabilities, equity, income, expenses and
cash flows relating to transactions between entities of the group (profits or losses
resulting from intragroup transactions that are recognised in assets, such as
inventory and fixed assets, are eliminated in full).
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.
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
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 assessing whether it
is an investment entity, including its purpose and design. 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 or IAS 39
Financial Instruments: Recognition and Measurement.
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.*
* Investment Entities: Applying the Consolidation Exception (Amendments to IFRS 10,
IFRS 12 and IAS 28) clarifies, effective 1 January 2016, that this relates to a subsidiary
that is not itself an investment entity and whose main purpose and activities are
providing services that relate to the investment entity's investment activities.
Because an investment entity is not required to consolidate its subsidiaries, intragroup
related party transactions and outstanding balances are not eliminated.
Special requirements apply where an entity becomes, or ceases to be, an investment
entity.
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.
