Objective: IFRS 10 establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities.
- Applies to all entities that control other entities
- Replaces IAS 27 and SIC-12 consolidation requirements
- Single control model for all entities
Control: An investor controls an investee when it 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.
1. Power over the investee
2. Exposure to variable returns
3. Ability to use power to affect returns
→ All three must be present for control
| Element | Description | Examples |
|---|---|---|
| Power | Existing rights that give ability to direct relevant activities | Voting rights, appointment rights, decision-making rights |
| Returns | Variable returns that can be positive, negative, or both | Dividends, interest, fees, synergies, tax benefits |
| Linkage | Ability to use power to affect returns | Strategic decisions, operational policies |
Power: Existing rights that give the current ability to direct the relevant activities of the investee.
- Relevant Activities: Activities that significantly affect returns
- Selling and purchasing goods/services
- Managing financial assets
- Selecting/acquisition/disposing of assets
- Researching/developing new products
- Substantive Rights: Rights that holder has practical ability to exercise
- Protective Rights: Rights designed to protect interest without giving power
De facto Control: Control achieved without having majority of voting rights, but through other means that give practical ability to direct relevant activities.
| Situation | Assessment |
|---|---|
| Widely dispersed ownership | Entity with largest holding may have control |
| Potential voting rights | Consider if substantive and currently exercisable |
| Contractual arrangements | Power through management contracts, leases |
| Special relationships | Family relationships, close business associates |
Consolidation Principles: Combine like items of assets, liabilities, equity, income, expenses, and cash flows.
| Procedure | Description |
|---|---|
| Line-by-line addition | Combine parent and subsidiary financial statements |
| Eliminate investment | Parent's investment against subsidiary's equity |
| Eliminate intra-group | Balances, transactions, income, expenses |
| Fair value adjustments | Adjust assets/liabilities to fair value at acquisition |
| NCI recognition | Portion of equity not attributable to parent |
Parent acquires 80% of Subsidiary for $8 million
Subsidiary net assets fair value: $10 million
Goodwill Calculation:
• Consideration: $8 million
• NCI (20% of $10M): $2 million
• Net assets: $10 million
• Goodwill: $0 (No goodwill - bargain purchase)
Non-controlling Interest: Equity in a subsidiary not attributable, directly or indirectly, to a parent.
Measurement of NCI at fair value: This results in the recognition of full goodwill. Any impairment loss is allocated between the parent and the NCI on a pro-rata basis, unless otherwise required by IAS 36.
Measurement of NCI at its proportionate share of the acquiree's identifiable net assets: This results in the recognition of partial goodwill (attributable only to the parent). Any goodwill impairment loss is recognized in full by the parent.
- Measurement: At fair value or proportionate share of net assets
- Presentation: Presented within equity, separately from parent equity
- Profit Attribution: NCI share of profit/loss presented separately
- Changes in Ownership: Accounted for as equity transactions
| Situation | Accounting Treatment |
|---|---|
| Acquisition of control | Apply acquisition method from acquisition date |
| Loss of control | Derecognize assets/liabilities, recognize gain/loss |
| Changes without loss of control | Accounted for as equity transactions |
| Step acquisition | Remasure previously held interest at fair value |
SPE Assessment: Apply same control principles to determine if SPE should be consolidated.
- Indicators of Control:
- SPE activities predetermined to benefit reporting entity
- Reporting entity has decision-making rights
- Reporting entity exposed to majority of risks/rewards
- Reporting entity has residual interest in SPE
- Substance over Form: Consider all facts and circumstances
- Continuous Assessment: Reassess control at each reporting date
- Basis of Consolidation: Basis for concluding control exists
- Subsidiaries: List of significant subsidiaries
- Non-controlling Interests: Reconciliation of opening/closing balances
- Changes in Ownership: Effects of changes in ownership interest
- Restrictions: Nature and extent of significant restrictions
- Loss of Control: Gain/loss calculation and components
- SPEs: Nature, purpose, size, activities of SPEs
| Aspect | IAS 27 | IFRS 10 |
|---|---|---|
| Control Definition | Power to govern financial/operating policies | Power + Returns + Linkage |
| SPE Consolidation | Separate guidance (SIC-12) | Single control model for all entities |
| De facto Control | Limited guidance | Comprehensive guidance |
| Potential Voting Rights | Consider if currently exercisable | Consider if substantive |