IFRS-10 (IndAS-110) Consolidated Financial Statements

1. Objective

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

To meet the above objective this accounting standard:

(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

2. Scope

An entity that is a parent shall present Consolidated Financial Statements

Following Parents may be exempted from preparing Consolidated Financial Statements

a) A parent need not present Consolidated Financial Statements if it meets all the following
conditions:

It is a wholly-owned subsidiary; or a partially-owned subsidiary whose owners have been

informed and they have not objected for not presenting consolidated financial statements
Unlisted Entity
It did not file, nor is it in the process of listing or issuing any instrument to raise fund
from public; and
Its ultimate or any intermediate parent produces Consolidated Financial Statements that
are available for public use and comply with accounting standard

b)An investment entity need not present consolidated financial statements if it is required, in
accordance to this standard, to measure all of its subsidiaries at fair value through profit or loss.
Except if an investment entity has a subsidiary that provides services that relate to the investment
entity’s investment activities.
3. 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.

Decision maker: An entity with decision-making rights that is either a principal or an agent for
other parties.

Group: A parent and its subsidiaries.

Investment entity: An entity that:

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

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

(c) measures and evaluates the performance of substantially all of its investments on a
fair value basis

Non-controlling interest:Equity in a subsidiary not attributable, directly or indirectly, to a parent.

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: For the purpose of this accounting standard, relevant activities are activities
of the investee that significantly affect the investee’s returns.

Removal rights: Rights to deprive the decision maker of its decision-making authority

Subsidiary: An entity that is controlled by another entity

4. Control

As per this accounting standard, an investor needs to determine whether it controls an investee
and if yes then the investor would be treated as a parentand investee would be treated as a
subsidiary of the parent

Investor controls the investee if and only if investor has all the fallowing facrors:

A. Power over the investee;

B. Exposure, or rights, to variable returns from its involvement with the investee; and
C. The ability to use its power over the investee to affect the amount of the investor’s
returns.

A.Power over the investee:An investor has power over an investee if it has existing rights that
give it the current ability to direct the relevant activities. An investor only needs to have the
ability to control relevant activities, and it is not relevant whether the investor actually exercises
this ability.

Because of the way in which ‘power’ is analyzed in accordance with this accounting standard,
the distinction between substantive and protective rights is important.

Protective rights- Protective rights are ‘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.
An investor that only holds protective rights, which meet this definition, has no power over an
investee and consequently does not control the investee. The standard follows the logic that
protective rights are designed to protect interests of the holder without giving it power over the
investee, and cannot prevent another party from having power over an investee. Examples: A
lenders right to restrict borrowers activities, a lenders right to seize the assets of a borrower in the
event of default.

Substantive rights: Only substantive rights are considered when power is assessed. In order for a
right to be substantive, the holder must have the practical ability to exercise the right. Sometimes
assessing power is straightforward, such as when power over an investee is obtained directly and
solely from the voting rights granted by equity instruments such as shares, and can be assessed
by considering the voting rights from those shareholdings. In other cases, the assessment will be
more complex and require more than one factor to be considered, for example when power
results from one or more contractual arrangements.

Potential voting rights: Potential voting rights are rights to obtain voting rights of an investee
(e.g. convertible instruments, options and forward contracts).
B. Exposure, or rights, to variable returns from its involvement with the investee;

The second criterion an investor has to meet to have control over an investee is to be exposed to
variable returns from the investee. Returns are variable if they are not fixed and have the
potential to vary as a result of the performance of an investee. These returns can be positive,
negative or both positive and negative. Examples of returns are:

Dividends
Interest from debt securities
Changes in the value of the investee
Fees for servicing an investee’s assets or liabilities
Fees and exposure to loss from providing credit or liquidity support
Residual interests in the investee’s assets and liabilities on liquidation
Tax benefits
Access to future liquidity

C. The ability to use its power over the investee to affect the amount of the investor’s returns.

An investor controls an investee if the investor not only has power over the investee and
exposure or rights to variable returns from its involvement with the investee, but also has the
ability to use its power to affect the investor’s returns from its involvement with the
investee.Thus, an investor with decision-making rights shall determine whether it is a principal
or an agent. An investor shall also determine whether another entity with decision making rights
is acting as an agent for the investor. “An agent is a primarily engaged to act on behalf and for
the benefit of another party or parties (the principals).” An investor that is an agent does not
control an investee when it exercises decision making rights delegated to it.

5. Whether franchise to be consolidated?

In a franchise agreement, the investee i.e. the franchisee usually gives the franchisor the rights
that are related to protect the franchise brand. Franchise agreements typically give franchisors
some decision-making rights with respect to the operations of the franchisee. This accounting
standard has introduced specific guidance on franchise, which aims to provide more clarity on
whether franchisors should consolidate their franchisees. In determining whether a franchisor
controls a franchisee, judgment it required to determine whether the franchisor’s rights over its
franchisee are substantive or protective in nature. This accounting standard distinguishes
decision making rights held by the franchisor that protect the franchise brand from decision
making rights that significantly affect the franchise’s returns, for example, the franchisee’s
funding structure. The franchisor does not have power over the franchisee if other parties have
the current ability to direct the franchisee’s relevant activities. The lower financial support
provided by the franchisor and the lower the franchisor’s exposure to variability of returns from
the franchisee, the more likely it is that the franchisor only holds protective rights and have no
control over the franchisee, hence not to be consolidated.

6. Accounting requirements

a) A parent shall prepare consolidated financial statements using uniform accounting

policies for like transactions and other events in similar circumstances.
b) 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.

7. Consolidation procedure

Consolidated financial statements:

(a) Combine like items of assets, liabilities, equity, income, expenses and cash flows of
the parent with those of its subsidiaries.
(b) Offset (eliminate) the carrying amount of the parent’s investment in each subsidiary
and the parent’s portion of equity of each subsidiary
(c) The acquirer shall recognize goodwill as of the acquisition date measured as the
excess of (A) over (B) below
(A) The aggregate of:
i) The consolidation transferred measured in accordance with Ind AS 103
(IFRS-3), which generally requires acquisition-date fair value
ii) The amount of any non-controlling interest in the acquiree measured in
accordance with IndAS-103
iii) In a business combination achieved in stages, the acquisition-date fair
value of the acquirer’s previously held equity in the acquiree
(B) The net of the acquisition-date amounts of the identifiable assets acquired and the
liabilities assumed measured in accordance with IndAS-103 which is generally at
fair value.
(d) 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).
(e) Intragroup losses may indicate an impairment that requires recognition in the
consolidated financial statements. IAS 12, Income Taxes, applies to temporary
differences that arise from the elimination of profits and losses resulting from
intragroup transactions

7.1 Uniform accounting policies

 a) The consolidated financial statements are required to be prepared with uniform
accounting policies.

b) If a member of the group uses accounting policies other than those adopted in the
consolidated financial statements adjustments are required to that member’s financial
statements to ensure the conformity with the group’s accounting policies.

7.2 Reporting date

The financial statements of the parent and its subsidiaries used in the preparation of the
consolidated financial statements shall have the same reporting date. When the end of the
reporting period of the parent is different from that of a subsidiary, the subsidiary should
make adjustments to its financial statements to match the parents reporting date unless it
is impracticable

If it is impracticable to do so, the parent shall consolidate the financial information of the
subsidiary using the most recent financial statements of the subsidiary adjusted for the
effects of significant transactions or events that occur between the date of those financial
statements and the date of the consolidated financial statements. In any case, 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, and the length of
the reporting periods and any difference between the dates of the financial statements
shall be the same from period to period.

7.3 Non-controlling interests

a) A parent is required to present its non-controlling interests in the consolidated balance

sheet within equity but separately from the equity of the owners of the parent
b) Profit or loss, and each component of other comprehensive income, is required to be
attributed to the owners of the parent and to non-controlling interests.
c) If a subsidiary has outstanding cumulative preference shares that are classified as equity
and are held by non-controlling interests, the entity shall compute its share of profit or
loss after adjusting for the dividends on such shares, whether or not such dividends have
been declared.
d) When the proportion of the equity held by non-controlling interests changes, an entity
shall adjust the carrying amounts of the controlling and non-controlling interests to
reflect the changes in their relative interests in the subsidiary. The entity shall recognise
directly in equity any difference between the amount by which the non-controlling
interests are adjusted and the fair value of the consideration paid or received, and
attribute it to the owners of the parent.

7.4 Loss of control

 If a parent loses control of a subsidiary, it shall;

a. derecognize:
i. the assets (including any goodwill) and liabilities of the subsidiary at their
carrying amounts at the date when control is lost; and
ii. the carrying amount of any non-controlling interests in the former
subsidiary at the date when control is lost (including any components of
other comprehensive income attributable to them)
b. recognize:
i. the fair value of the consideration received, if any, from the transaction,
event or circumstances that resulted in the loss of control;
ii. if the transaction, event or circumstances that resulted in the loss of
control involves a distribution of shares of the subsidiary to owners in
their capacity as owners, that distribution; and
iii. any investment retained in the former subsidiary at its fair value at the date
when control is lost.

Numerical examples:

1. A ltd. Acquire 80% of B ltd by paying cash consideration of Rs.120Cr. the fair value
of non-controlling interest on the date of acquisition is Rs.300Cr. the value of
subsidiary’s identifiable net assets is Rs.130Cr. determine the amount of goodwill
and pass journal entries.

Soln:

Non-controlling interest can be measured as per (a) Fair value method or

(b) Proportionate share method (i.e. proportionate share in the net identifiable
assets of the acquire)
The value of goodwill will be different under both the methods.

a. Value of goodwill as per Fair value method

Fair value of consideration transferred Rs.120Cr

Fair value of non-controlling interest Rs. 30Cr
-------------
Rs. 150Cr
Value of subsidiaries identifiable net assets (Rs.130Cr)
--------------
Amount of goodwill Rs. 20Cr

Journal Entry:
 Identifiable net assets A/c Dr Rs.130Cr
Goodwill A/c Dr Rs. 20Cr

To Non-controlling interest A/c Rs.30Cr

To Cash A/c Rs.120Cr

b. Value of goodwill under proportionate share method

Fair value of consideration transferred Rs.120Cr

Proportionate share of the non-controlling interest
In the identifiable net assets of the acquire Rs. 26Cr
(Rs.130Cr X 20%) ________
Rs.146Cr

Less: Value of subsidiaries identifiable net assets Rs.130Cr

________
Value of goodwill Rs. 16Cr

Journal Entry:

Identifiable net assets A/c Dr Rs.130Cr

Goodwill A/c Dr Rs.16Cr

To Non-controlling interest A/c Rs. 26Cr

To Cash A/c Rs.120Cr

2. Ram ltd acquires 60% of raja ltd by paying cash consideration of Rs.750 lakhs
(including control premium). The fair value of non-controlling interests on the date
of acquisition is Rs.480 lakhs. The of subsidiaries identifiable net assets is Rs.100
lakh determine the value of goodwill

Soln:
a. Goodwill as per fair value method

Fair value of consideration transferred Rs.750 lakh

Fair value of non-controlling interest Rs.480 lakh

 __________
Rs.1230 lakh
Less: Value of subsidiaries identifiable net assets Rs.1000 lakh
__________
Value of goodwill Rs. 230 lakh

Note: in some of the cases premium amount will be paid by the parent to
purchase.

Here,

Fair value of non-controlling interests @40% = Rs.480

lakh
Therefore, fair value of Ram ltd.’s holding (480/40% X 60%) = Rs.720 lakh

But Ram ltd. Has paid Rs.750 lakhs to acquire Raja ltd. Therefore, premium
paid to Raja ltd. = Rs.30 lakh (Rs.750lakh – Rs.720 lakh)

3. RS ltd holds 30% stake in PQ ltd is accounted as an investment in association and

carrying value of such investment is Rs.100 lakh. RS ltd purchases the remaining
70% stake of cash consideration of Rs.700 lakh. The fair value of previously held
30% stake is measured to be Rs.300 lakh on the date of acquisition of 70% stake.
The value of PQ ltd identifiable net assets on that date is Rs.800 lakh. How should
RS ltd account for business combination?

Soln:

Calculation of goodwill

Fair value of consideration transferred Rs.700 lakh

Fair value of previously held interest Rs.300 lakh
__________
Rs.1000 lakh

Less: Value of subsidiary net assets Rs. 800 lakh

__________
Value of goodwill Rs. 200 lakh
RS ltd should record the difference between the fair value of previously held equity
interest in the subsidiary and the carrying value of that interest in the P/L a/c i.e.
200 lakh

(300 lakh – 200 lakh) should be recognized in P/L A/c

Here RS itself is non-controlling interest and later acquires PQ ltd by derecognizing

its previously held interest.

Journal entry:
Identifiable net assets A/c Dr Rs.800 lakh
Goodwill A/c Dr Rs.200 lakh

To cash A/c Rs.700 lakh

To P/L A/c Rs.200 lakh
To non-controlling interest(10%) Rs.100 lakh
 IAS 27 — Separate Financial Statements
Overview

IAS 27 Separate Financial Statements (as amended in 2011) outlines the accounting and disclo-
sure requirements for 'separate financial statements', which are financial statements prepared by a
parent, or an investor in a joint venture or associate, where those investments are accounted for
either at cost or in accordance with IAS 39 Financial Instruments: Recognition and Measure-
ment or IFRS 9 Financial Instruments. The standard also outlines the accounting requirements
for dividends and contains numerous disclosure requirements.

IAS 27 was reissued in May 2011 and applies to annual periods beginning on or after 1 January
2013, superseding IAS 27 Consolidated and Separate Financial Statements from that date.

Objectives

IAS 27 has the objective of setting standards to be applied in accounting for investments in sub-
sidiaries, jointly ventures, and associates when an entity elects, or is required by local regula-
tions, to present separate (non-consolidated) financial statements.

Definitions

Consolidated Financial statements of a group in which the assets, liabilities, equity,

financial state- income, expenses and cash flows of the parent and its subsidiaries are
ments presented as those of a single economic entity

Separate Financial statements presented by a parent (i.e. an investor with control of a

financial state- subsidiary), an investor with joint control of, or significant influence over, an
ments investee, in which the investments are accounted for at cost or in accordance
with IFRS 9 Financial Instruments

Requirement for separate financial statements

IAS 27 does not mandate which entities produce separate financial statements available for
public use. It applies when an entity prepares separate financial statements that comply with
International Financial Reporting Standards.
Financial statements in which the equity method is applied are not separate financial statements.
Similarly, the financial statements of an entity that does not have a subsidiary, associate or joint
venturer's interest in a joint venture are not separate financial statements.

An investment entity that is required, throughout the current period and all comparative periods
presented, to apply the exception to consolidation for all of its subsidiaries in accordance with
of IFRS 10 Consolidated Financial Statements presents separate financial statements as its only
financial statements

The investment entity consolidation exemption was introduced into IFRS 10 by Investment
Entities, issued on 31 October 2012 and effective for annual periods beginning on or after 1
January 2014.]

Choice of accounting method

When an entity prepares separate financial statements, investments in subsidiaries, associates,

and jointly controlled entities are accounted for either:

at cost, or
in accordance with IFRS 9 Financial Instruments (or IAS 39 Financial Instruments:
Recognition and Measurement for entities that have not yet adopted IFRS 9), or
using the equity method as decribed in IAS 28 Investments in Associates and Joint
Ventures. [See the amendment information below.]

The entity applies the same accounting for each category of investments. Investments that are
accounted for at cost and classified as held for sale in accordance with IFRS 5 Non-current
Assets Held for Sale and Discontinued Operations are accounted for in accordance with that
IFRS. Investments carried at cost should be measured at the lower of their carrying amount and
fair value less costs to sell. The measurement of investments accounted for in accordance with
IFRS 9 is not changed in such circumstances.

If an entity elects, in accordance with IAS 28 (as amended in 2011), to measure its investments
in associates or joint ventures at fair value through profit or loss in accordance with IFRS 9, it
shall also account for those investments in the same way in its separate financial statements.

Investment entities

If a parent investment entity is required, in accordance with IFRS 10, to measure its investment
in a subsidiary at fair value through profit or loss in accordance with IFRS 9 or IAS 39, it is
required to also account for its investment in a subsidiary in the same way in its separate
financial statements.

When a parent ceases to be an investment entity, the entity can account for an investment in a
subsidiary at cost (based on fair value at the date of change or status) or in accordance with IFRS
9. When an entity becomes an investment entity, it accounts for an investment in a subsidiary at
fair value through profit or loss in accordance with IFRS 9.

Recognition of dividends

An entity recognises a dividend from a subsidiary, joint venture or associate in profit or loss in
its separate financial statements when its right to receive the dividend in established.

(Accounting for dividends where the equity method is applied to investments in joint ventures
and associates is specified in IAS 28 Investments in Associates and Joint Ventures.)

Group reorganisations

Specified accounting applies in separate financial statements when a parent reorganises the
structure of its group by establishing a new entity as its parent in a manner satisfying the
following criteria

the new parent obtains control of the original parent by issuing equity instruments in
exchange for existing equity instruments of the original parent
the assets and liabilities of the new group and the original group are the same imme-
diately before and after the reorganisation, and
the owners of the original parent before the reorganisation have the same absolute and
relative interests in the net assets of the original group and the new group immedi-
ately before and after the reorganisation.

Where these criteria are met, and the new parent accounts for its investment in the original parent
at cost, the new parent measures the carrying amount of its share of the equity items shown in the
separate financial statements of the original parent at the date of the reorganisation. [IAS
27(2011).13]

The above requirements:

apply to the establishment of an intermediate parent within a group, as well as estab-

lishment of a new ultimate parent of a group
apply to an entity that is not a parent entity and establishes a parent in a manner that
satisfies the above criteria
apply only where the criteria above are satisfied and do not apply to other types of re-
organisations or for common control transactions more broadly.

Disclosure

When a parent, in accordance with paragraph 4(a) of IFRS 10, elects not to prepare consolidated
financial statements and instead prepares separate financial statements, it shall disclose in those
separate financial statements:
 the fact that the financial statements are separate financial statements; that the
exemption from consolidation has been used; the name and principal place of
business (and country of incorporation if different) of the entity whose consolidated
financial statements that comply with IFRS have been produced for public use; and
the address where those consolidated financial statements are obtainable,
a list of significant investments in subsidiaries, jointly controlled entities, and associ-
ates, including the name, principal place of business (and country of incorporation if
different), proportion of ownership interest and, if different, proportion of voting
rights, and
a description of the method used to account for the foregoing investments.

When an investment entity that is a parent prepares separate financial statements as its only
financial statements, it shall disclose that fact. The investment entity shall also present the disclo-
sures relating to investment entities required by IFRS 12.

[Note: The investment entity consolidation exemption was introduced into IFRS 10 by Invest-
ment Entities, issued on 31 October 2012 and effective for annual periods beginning on or after 1
January 2014.]

When a parent (other than a parent covered by the above circumstances) or an investor with joint
control of, or significant influence over, an investee prepares separate financial statements, the
parent or investor shall identify the financial statements prepared in accordance
with IFRS 10, IFRS 11 or IAS 28 (as amended in 2011) to which they relate. The parent or
investor shall also disclose in its separate financial statements: [IAS 27(2011).17]

o the fact that the statements are separate financial statements and the reasons why those
statements are prepared if not required by law,

o a list of significant investments in subsidiaries, jointly controlled entities, and associates,

including the name, principal place of business (and country of incorporation if different),
proportion of ownership interest and, if different, proportion of voting rights, and

o a description of the method used to account for the foregoing investments.

Applicability and early adoption

IAS 27 (as amended in 2011) is applicable to annual reporting periods beginning on or after 1
January 2013.

An entity may apply IAS 27 (as amended in 2011) to an earlier accounting period, but if doing so
it must disclose the fact that is has early adopted the standard and also apply:

IFRS 10 Consolidated Financial Statements

IFRS 11 Joint Arrangements
 IFRS 12 Disclosure of Interests in Other Entities
IAS 28 Investments in Associates and Joint Ventures (as amended in 2011).

The amendments to IAS 27 (2011) made by Investment Entities are applicable to annual
reporting periods beginning on or after 1 January 2014 and special transitional provisions apply.

Equity Method in Separate Financial Statements (Amendments to IAS 27), issued in August
2014, amended paragraphs 4–7, 10, 11B and 12. An entity shall apply those amendments for
annual periods beginning on or after 1 January 2016 retrospectively in accordance with IAS
8 Accounting Policies, Changes in Accounting Estimates and Errors. Earlier application is
permitted. If an entity applies those amendments for an earlier period, it shall disclose that fact.

BUSINESS COMBINATIONS IFRS 3

IFRS 3 Business Combinations outlines the accounting when an acquirer obtains control of a
business (e.g. an acquisition or merger) . Such business combinations are accounted for using the
‘acquisition method’., which generally requires assets acquired and liabilities assumed to be
measured at their fair values at the acquisition date.

A revised version of IFRS 3 was issued in January 2008 and applies to business
combinations occurring in an entity’s first annual period beginning on or after 1st July 2009.

SUMMARY OF IFRS 3

BACK GROUND:

IFRS 3 (2008) seeks to enhance the relevance, reliability and comparability of information
provided about business combinations (e.g., acquisitions and mergers) and their effects. It sets
out the principles on the recognition and measurement of acquired assets and liabilities, the
determination of goodwill and the necessary disclosures

KEY DEFINITIONS:

BUSINESS COMBINATION:

A transaction or other event in which an acquirer obtains control of one or more business.
Transactions sometimes referred to as ‘true mergers’ or ‘mergers of equals’ are also business
combinations as that term is used in (IFRS 3)

BUSINESS:
 An integrated set of activities and assets that is capable of being conducted and managed
for the purpose of providing goods or services to customers, generating investment income (
such as dividends or interest) or generating other income from ordinary activities.

ACQUSITION DATE:

The date on which the acquirer obtains control of the acquire.

ACQUIRER:

The entity that obtains control of the acquire.

ACQUIREE:

The business or businesses that the acquirer obtains control of in a business combinations

SCOPE:

IFRS 3 must be applied when accounting for business combinations, but does not apply to:

The formation of joint venture [IFRS 3.2(a)]

The acquisition of an asset or group of assets that is not a business, although general
guidance is provided on how such transactions should be accounted for [IFRS(b)]
Combinations of entities or business under common control (the IASB has a separate
agenda project on common control transactions.
Acquisitions by a investment entity of a subsidiary that is required to be measured at fair
value through profit or loss under IFRS 10 consolidated financial statements.

METHODS OF ACCOUNTING FOR BUSINESS COMBINATIONS:

ACQUISITION METHOD:

The acquisition method ( called the purchase method in the 2004 version of IFRS 3) is
used for all business combinations IFRS 3.4

IDENTIFYING AN ACQUIRER

The guidance in IFRS 10 Consolidated Financial Statements is used to identify a acquirer

in a business combination, i.e., the entity that obtains control of the acquire. IFRS 7

ACQUISITION DATE:

An acquirer considers all pertinent facts and circumstances when determining the
acquisition date, i.e., the date on which it obtains control of the acquire. The acquisition date may
be a date that is earlier or later than the closing date. IFRS 3.8-9
Note- Numerical Problems will be updated Shortly