To define the principle of control.
To establish requirements for the preparation and presentation of consolidated financial statements when an entity (a parent) controls one or more other entities (subsidiaries).
Aims to present the group as a single economic entity, providing relevant information to users.
Applies To:
All parent entities that control one or more subsidiaries, requiring them to present consolidated financial statements.
Exceptions to consolidation requirement for a parent:
An investment entity is not required to consolidate its subsidiaries (instead measures them at fair value through profit or loss under IFRS 9). See Investment Entities Exception section.
A parent that meets all of the following conditions (as per IFRS 10 para 4(a)):
It is a wholly-owned subsidiary or a partially-owned subsidiary of another entity and its other owners (NCI) have been informed about, and do not object to, the parent not presenting consolidated statements.
Its debt or equity instruments are not traded in a public market.
It did not file, nor is it in the process of filing, its financial statements with a securities commission for public issuance.
Its ultimate or any intermediate parent produces IFRS-compliant consolidated financial statements available for public use.
Power over the investee (existing rights that give it the current 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 amount of the investor's returns.
Components of Control:
| Component | Meaning & Key Aspects |
| Power |
Existing rights that give the current ability to direct the relevant activities of the investee. Relevant activities are those that significantly affect the investee's returns (e.g., operating and financing policies). Power often arises from voting rights but can also arise from contractual arrangements or other rights. |
| Returns |
Returns must be variable and can be positive, negative, or both. Examples include dividends, changes in the value of the investment, fees for servicing assets/liabilities, synergies, economies of scale, access to proprietary technology. |
| Link (Power & Returns) |
The investor must not only have power and exposure to variable returns but also the ability to use its power to affect its own returns from its involvement with the investee. This links power to the investor's ability to influence the returns it receives. An agent acting for others does not control. |
Power Arises From Rights, such as:
Voting rights (majority voting rights usually indicate power, but not always conclusive if rights are not substantive).
Rights to appoint, reassign or remove members of key management personnel who can direct relevant activities.
Rights to appoint or remove another entity that directs relevant activities.
Rights to direct the investee to enter into, or veto changes to, transactions for the benefit of the investor.
Other rights (such as those specified in a contractual arrangement).
Potential voting rights (e.g., from options or convertible instruments) are considered if they are substantive.
Key Considerations in Assessing Power:
Distinguishing between substantive rights (which confer power) and protective rights (which do not).
Assessing de facto control (e.g., investor holds a significant minority of voting rights, but other shareholdings are widely dispersed, giving the investor practical ability to direct activities).
Purpose and design of special purpose entities (SPEs) / structured entities ā€“ control may exist even with little or no equity interest if the investor designed and directs the SPE's activities for its benefit.
Examples of Variable Returns:
Dividends, other distributions of economic benefits from an investee.
Changes in the value of the investor's investment in the investee.
Remuneration for servicing an investeeā€™s assets or liabilities, fees and exposure to loss from providing credit or liquidity support.
Returns that are not available to other interest holders (e.g., synergies from combining operations, economies of scale, access to proprietary technology, cost savings).
The variability of returns is key; fixed returns (like fixed interest on a simple loan) typically do not, on their own, indicate control.
Steps in Preparing Consolidated Financial Statements:
Combine like items of assets, liabilities, equity, income, expenses, and cash flows of the parent with those of its subsidiaries on a line-by-line basis.
Eliminate in full intra-group assets and liabilities, equity, income, expenses, and cash flows relating to transactions between entities of the group (profits or losses resulting from intra-group transactions are eliminated in full).
Apply uniform accounting policies for like transactions and other events in similar circumstances. If a group member uses different policies, appropriate adjustments are made.
The financial statements of the parent and its subsidiaries used for consolidation should have the same reporting date. If not, and impracticable to prepare co-terminus statements, subsidiary may prepare additional statements as of parent's date. If still impracticable, statements with a difference of no more than three months can be used, with adjustments for significant transactions/events between dates.
Non-controlling Interests (NCI):
Present NCI in the consolidated statement of financial position within equity, but separately from the equity of the owners of the parent.
Attribute the profit or loss and each component of other comprehensive income to the owners of the parent and to the NCI, even if this results in the NCI having a deficit balance.
When Parent Loses Control of a Subsidiary:
Derecognize the assets and liabilities of the former subsidiary from the consolidated statement of financial position.
Derecognize the carrying amount of any non-controlling interests in the former subsidiary at the date control is lost (including any components of OCI attributable to them).
Recognize any investment retained in the former subsidiary at its fair value at the date control is lost.
Recognize the gain or loss associated with the loss of control attributable to the former controlling interest in profit or loss.
Reclassify to profit or loss (or transfer directly to retained earnings if required by other IFRSs) amounts previously recognized in OCI in relation to the subsidiary.
Accounting for Retained Interest:
If the retained interest is an associate or joint venture, apply IAS 28.
If the retained interest is a financial asset, apply IFRS 9. The fair value at date of loss of control is its initial fair value for subsequent accounting under IFRS 9.
Exemption from Consolidation if ALL Criteria Met:
Obtains funds from one or more investors for the purpose of providing those investor(s) with investment management services.
Commits to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both.
Measures and evaluates the performance of substantially all of its investments on a fair value basis.
Additional characteristics are considered, such as having more than one investment, more than one investor, investors not being related parties, and ownership interests in the form of equity or similar interests.
Accounting by Investment Entity:
An investment entity shall measure its investments in subsidiaries at fair value through profit or loss (FVTPL) in accordance with IFRS 9.
It does not consolidate these subsidiaries.
Exception: If a subsidiary provides investment-related services or activities to the investment entity (and is not itself an investment entity), the investment entity shall consolidate that subsidiary.
Transition Requirements:
IFRS 10 is generally applied retrospectively in accordance with IAS 8, subject to certain relief provisions.
An entity must reassess control for all its investees at the date of initial application of IFRS 10.
If the control conclusion is different under IFRS 10 compared to previous GAAP, adjust comparative information accordingly (consolidate or deconsolidate).
IFRS 1 *First-time Adoption* provides specific guidance for entities adopting IFRS for the first time.
Determining whether the investor has power over the investee (assessing substantive rights vs. protective rights, potential voting rights, de facto control).
Assessing the link between power and variable returns, especially in principal-agent relationships (e.g., fund managers, franchisors).
Evaluating the purpose and design of structured entities (SPEs) to determine if control exists even without majority equity.
Identifying the relevant activities of an investee and who has the power to direct them.
Determining if an entity meets the definition of an investment entity.
