IFRS 10 – Consolidated Financial Statements | Humayun Atif

IFRS 10 – Consolidated Financial Statements

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

Consolidated financial statements are those 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.

This IFRS does not deal with the accounting requirements for business combinations as this is separately deals in IFRS 3.

Please note that IFRS 10 supersedes the requirements relating to consolidated financial statements in IAS 27 and also supersedes SIC‑12 Consolidation—Special Purpose Entities.

The standard

• requires a parent entity to present consolidated financial statements where a parent is an entity that controls one or more entities.
• 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.

Control

An investor determines whether it is a parent by assessing whether it controls one or more investees. 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.
• exposure, or rights, to variable returns from its involvement with the investee.
• the ability to use its power over the investee to affect the number of the investor’s returns, such power can arise from rights through voting rights or with contractual arrangements.

Preparation of consolidated financial statements

IFRS 10 Consolidated Financial Statements requires a parent entity to present consolidated financial statements. A parent is defined as ‘An entity that controls one or more entities. Consolidated financial statements are defined as ‘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’.

Exemptions

1. A parent is not required to prepare consolidated financial statements if it meets all of the following condition:

• 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 organization for the purpose of issuing any class of instruments in a public market, and
• it’s 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.

2. 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.
3. This IFRS does not apply to post-employment benefit plans or other long-term employee benefit plans to which IAS 19 Employee Benefits applies.

Consolidation Procedures

The following procedure has been defined in Para B86 while consolidating financial statements:

• Like items of assets, liabilities, equity, income, expenses, and cash flows of the parent and its subsidiaries are combined.
• The carrying amount of the parent’s investment in each subsidiary and the parent’s portion of its interest in the equity of each subsidiary is eliminated.
• eliminate in full intragroup assets and liabilities, equity, income, expenses, and cash flows relating to transactions between entities of the group.

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.

The parent and subsidiaries are required to have the same reporting dates, or consolidation based on additional financial information prepared by a subsidiary, unless impracticable. Where impracticable, the most recent financial statements of the subsidiary are used and 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 as stated in Para B93.

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.

NCI has been defined as Equity in a subsidiary not attributable, directly or indirectly, to a parent.

When a parent loses control of a subsidiary, the parent should

• derecognizes the assets and liabilities of the former subsidiary from the consolidated statement of financial position.
• recognizes 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.
• recognizes the gain or loss associated with the loss of control attributable to the former controlling interest.

Investment entities consolidation exemption

IFRS 10 contains special accounting requirements for investment entities.

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.

Disclosure

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

Recommended Reading:

IAS 16 – Property, Plant and Equipment | Humayun Atif (CMA, CPA)

 

Humayun Atif | CMA, CPA, CA (FIN), MS-IT, CA Articles from Big 4, Certified Forensic Accountant (USA), Six Sigma & Oracle Certified.

Atif is passionate about Business, Tech, and the written word. He is also a published author of the book ‘IFRS Made Easy’. Atif has worked with some of Canada and Dubai’s largest brands. He is a tax and IFRS coach and the founder of accountingblogger.com