Consolidated Financial Statements (IFRS 10)
Last Updated: November 8, 2012
Note: This IFRS applies beginning January 1, 2013. It is examinable on the 2013 CKE and UFE.
This IFRS establishes principles for the presentation and preparation of consolidated financial statements. This IFRS broadly requires that:
- Parent entities with subsidiaries (subs) present consolidated financial statements.
- Control be established as the basis of consolidation.
- How to apply the principle of control to determine whether the parent controls the sub.
- Sets out the accounting requirements for the preparation of consolidated financial statements.
This IFRS is separate from IFRS 3 – Business Combinations which sets up the initial business combination transaction.
A parent shall present consolidated financial statements, unless the following conditions are met:
- It is a wholly or partially owned sub of another entity and all its owners, including those not entitled to vote, do not object to the parent not presenting consolidated financial statements.
- Its debt or equity instruments are not traded in a public market.
- It is filing to issue equity in a public market.
- One of its parents produce consolidated financial statements which are available for public use.
- Post-employee benefit plans or other long-term benefit plans must follow IAS 19 – Employee Benefits.
A parent must determine if it has control over a sub. This is broadly defined as when the parent is exposed to or has the right to variable returns from the sub and has the power to affect those returns.
- Can direct the relevant activities which affect the parent’s return from the sub
- Power arises from rights, for example voting rights but cases may vary
- Even without exercising voting rights, the parent is considered to have the ability to direct relevant activities
- If two parents have different abilities to direct relevant activities, the parent who has the ability that most significantly affects the returns of sub has the control over the sub.
- Even if other entities have significant influence or can participate in relevant activities, the parent is still considered to have power. However, a parent that holds only protective rights does not have power over the sub. Protective rights are activities which apply in exceptional circumstances and prevent a sub from making fundamental changes in its activities. (i.e. sub can’t change it’s business)
- A parent is exposed to variable returns when the returns of the sub to the parent can vary based on performance. No positive, neutral or negative return is guaranteed.
- Only one parent can be considered to have control over a sub.
If more than one parent control the same sub collectively, and they must act together in order to meet these criteria then other IFRSs would be more appropriate to use (IFRS 11 Joint Arrangements, IAS 28 Investments in Associates and Joint Ventures, or IFRS 9 Financial Instruments)
Consolidation begins from the date the parent obtains control and ends when the parent loses control. Uniform accounting policies for like transactions and other events shall be used.
- Combine like items of assets, liabilities, equity, income, expenses and cash flows of the parent with those of the subsidiaries.
- Offset or eliminate the carrying amount of the parent’s investment in each sub and the parent’s portion of equity of each sub.
- Eliminate intercompany transactions. Consider IAS 12 Income Taxes
- Non-controlling interest shall be presented separately on the consolidated statement of financial position within equity. Changes to controlling stake also go to equity.
- Profit or loss both regular and other comprehensive income should be allocated between parent and non-controlling interest proportionately.
Loss of Control
- Assets and liabilities of the former sub including goodwill and non-controlling interest
- Fair value of any consideration received in the loss of control
- Any investment retained at its fair value when control was lost
- Reclassify to profit or loss / or directly to retained earnings (if required by other IFRSs):
- Amounts recognized in other comprehensive income
- Any remaining difference is gain or loss attributable to the parent