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Examples In Ifrs 10Edit

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IFRS 10, Consolidated Financial Statements, provides the framework for when an investor controls another entity and must present the investee’s financial results in its own consolidated statements. The standard centers on the concept of control—the ability to direct the relevant activities of an investee and to affect its returns. This article offers practical examples to illustrate how control is established and how consolidation, derecognition, and related concepts are applied in common scenarios. Throughout, key terms link to related topics to aid deeper understanding.

Core concepts

  • control: The ability to direct the relevant activities of an investee, which typically drives consolidation. Control is established when the investor has power over the investee, exposure or rights to variable returns from its involvement, and the ability to use power to influence returns.
  • consolidation: The process of presenting the assets, liabilities, income, and expenses of a subsidiary in the parent’s financial statements.
  • subsidiary: An entity that is controlled by another entity (the parent). Consolidation applies to subsidiaries that are under the parent’s control.
  • returns: The investor’s exposure to variable returns from its involvement with the investee, which may derive from dividends, appreciating assets, fees, or other sources.
  • non-controlling interest: The portion of equity in a subsidiary not attributable to the parent, recognized in the consolidated financial statements.
  • structured entity / special purpose entity: Entities created to accomplish a narrow objective, often with decision rights distributed in particular ways, potentially requiring consolidation if control exists.
  • derecognition: The process of removing a subsidiary from the consolidated group when control is lost or when the entity ceases to meet the criteria for consolidation.
  • protective rights: Rights that are intended to protect an investor’s interests without giving power to direct the relevant activities of the investee; such rights do not create control.
  • fair value: A measurement used in various consolidation steps, including initial recognition and adjustments for non-controlling interests.
  • intercompany transactions: Transactions between the parent and its subsidiaries that must be eliminated in consolidation to avoid overstating both assets and income.

Practical examples

Example 1: Majority voting rights grant control

A parent holds 75% of the voting rights of a subsidiary and has the practical ability to direct the relevant activities through its board appointments and decision-making rights. The subsidiary’s performance directly affects the parent’s returns. In this scenario, the parent consolidates the subsidiary’s financial statements, and the non-controlling interest reflects the 25% not owned by the parent.

Example 2: Control despite minority voting rights

A parent owns 35% of the voting rights but has a contractual arrangement with other shareholders that gives it the practical ability to direct the relevant activities (e.g., through a board majority or a de facto management role). If the investor can direct activities and is exposed to variable returns, consolidation is required. The presence of protective rights that do not grant power remains important in assessing whether consolidation is appropriate.

Example 3: Protective rights that do not confer control

An investor holds protective rights (e.g., vetoes on specific actions) but has no ability to direct the relevant activities or influence returns. In IFRS 10, such protective rights do not create control, so consolidation is not required solely because protective rights exist. However, if the protective rights come with additional powers, reassessment is necessary.

Example 4: Structured entities and SPVs

A parent forms a structured entity to hold assets and enters into arrangements giving another party power over the entity’s activities. If that other party, not the parent, has the ability to direct the relevant activities and receive a majority of the entity’s returns, consolidation depends on who controls those activities. If the parent has control, consolidation is required even if the parent’s direct ownership is limited.

Example 5: Step acquisitions and remeasurement

During a sequence of acquisitions, an investor may increase its ownership stake in a subsidiary, moving from non-controlling to controlling ownership. IFRS 10 requires reassessment of control at each step, with potential retrospective adjustments to consolidation and the carrying amounts of any non-controlling interest. When control is attained, consolidated financial statements replace prior reporting, and any existing non-controlling interest is remeasured appropriately.

Example 6: Loss of control and derecognition

If a parent loses control over a subsidiary (e.g., by selling the controlling stake or renegotiating governance), the subsidiary is deconsolidated from the parent’s financial statements. The parent may recognize any retained interest at fair value and recognize a gain or loss on disposal, with any previously held equity interests measured under applicable standards.

Example 7: Non-controlling interest measurement

When consolidation is required, the parent must present NCI within equity, either at its proportionate share of the subsidiary’s net identifiable assets or at fair value, depending on the chosen accounting policy. Changes in ownership and the allocation of profits or losses between the parent and NCI are part of consolidated earnings per share and equity presentation.

Example 8: Intercompany eliminations

Consolidated financial statements require the elimination of intercompany transactions and balances (e.g., intercompany sales, dividends, and profits) to avoid double counting. This ensures that the consolidated statements reflect only external relationships with third parties.

Practical considerations and common pitfalls

  • Substance over form: The assessment of control focuses on the actual powers and rights that enable decision-making, not merely on legal ownership or the title of an agreement.
  • Continuous reassessment: Control is not static; events such as new contractual arrangements, changes in governance, or sale of shares require ongoing review.
  • Consistency of policy: The choice of how to measure NCI and how to present consolidation should be applied consistently across reporting periods.
  • Disclosure: IFRS 10 requires disclosures about the composition of the group, the nature of relationships, and significant judgments used in determining control.

See also