IFRS 10 — Consolidated Financial Statements
IFRS 10 Consolidated Financial Statements outlines the requirements for the preparation and presentation of consolidated financial statements, requiring entities to consolidate entities it controls. Control requires exposure or rights to variable returns and the ability to affect those returns through power over an investee.
IFRS 10 was issued in May 2011 and applies to annual periods beginning on or after 1 January 2013.
History of IFRS 10
|April 2002||Project on consolidation added to the IASB's agenda (project history)|
|18 December 2008||ED 10 Consolidated Financial Statements published||Comment deadline 20 March 2009|
|29 September 2010||Staff draft of IFRS X Consolidated Financial Statements published|
|12 May 2011||IFRS 10 Consolidated Financial Statements published||Effective for annual periods beginning on or after 1 January 2013|
|28 June 2012||Amended by Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guidance (project history)||Effective for annual periods beginning on or after 1 January 2013|
|31 October 2012||Amended by Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) (project history)||Effective for annual periods beginning on or after 1 January 2014|
|11 September 2014||Amended by Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28)||Effective for annual periods beginning on or after 1 January 2016|
|18 December 2014||
Amended by Investment Entities: Applying the Consolidation Exception (Amendments to IFRS 10, IFRS 12 and IAS 28) (project history)
Effective for annual periods beginning on or after 1 January 2016
- IFRS 10 superseded SIC-12 Consolidation – Special Purpose Entities
Amendments under consideration by the IASB
In addition, the IASB has signalled an intention to conduct a post-implementation review, commencing in 2016.
Publications and resources
- IFRS in Focus Newsletter IASB issues new standard on consolidation summarising the requirements of IFRS 10 (PDF 82k, May 2011)
- Deloitte IFRS Podcast (May 2011, 12 minutes, 8mb)
- Effect analysis for IFRS 10 and IFRS 12 (link to IASB website)
Summary of IFRS 10
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. [IFRS 10:1]
The Standard: [IFRS 10:1]
- requires a parent entity (an entity that controls one or more other entities) to present consolidated financial statements
- 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*.
* Added by Investment Entities amendments, effective 1 January 2014.
[IFRS 10:Appendix A]
- Consolidated financial statements
- 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
- Control of an investee
- An investor controls an investee when the investor 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
- Investment entity*
- An entity that:
- 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, and
- measures and evaluates the performance of substantially all of its investments on a fair value basis.
- An entity that controls one or more entities
- Existing rights that give the current ability to direct the relevant activities
- Protective rights
- Rights designed to protect the interest of the party holding those rights without giving that party power over the entity to which those rights relate
- Relevant activities
- Activities of the investee that significantly affect the investee's returns
* Added by Investment Entities amendments, effective 1 January 2014.
An investor determines whether it is a parent by assessing whether it controls one or more investees. An investor considers all relevant facts and circumstances when assessing whether it controls an investee. 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. [IFRS 10:5-6; IFRS 10:8]
An investor controls an investee if and only if the investor has all of the following elements: [IFRS 10:7]
- power over the investee, i.e. the investor has existing rights that give it the ability to direct the relevant activities (the activities that significantly affect the investee's returns)
- 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.
Power arises from rights. Such rights can be straightforward (e.g. through voting rights) or be complex (e.g. embedded in contractual arrangements). An investor that holds only protective rights cannot have power over an investee and so cannot control an investee [IFRS 10:11, IFRS 10:14].
An investor must be exposed, or have rights, to variable returns from its involvement with an investee to control the investee. Such returns must have the potential to vary as a result of the investee's performance and can be positive, negative, or both. [IFRS 10:15]
A parent must not only have power over an investee and exposure or rights to variable returns from its involvement with the investee, a parent must also have the ability to use its power over the investee to affect its returns from its involvement with the investee. [IFRS 10:17].
When assessing whether an investor controls an investee an investor with decision-making rights determines whether it acts as principal or as an agent of other parties. A number of factors are considered in making this assessment. For instance, the remuneration of the decision-maker is considered in determining whether it is an agent. [IFRS 10:B58, IFRS 10:B60]
Preparation of consolidated financial statements
A parent prepares consolidated financial statements using uniform accounting policies for like transactions and other events in similar circumstances. [IFRS 10:19]
However, a parent need not present consolidated financial statements if it meets all of the following conditions: [IFRS 10:4(a)]
- 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 organisation for the purpose of issuing any class of instruments in a public market, and
- its 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.*
* Fair value measurement clause added by Investment Entities: Applying the Consolidation Exception (Amendments to IFRS 10, IFRS 12 and IAS 28) amendments, effective 1 January 2016.
Investment entities are prohibited from consolidating particular subsidiaries (see further information below).
Furthermore, post-employment benefit plans or other long-term employee benefit plans to which IAS 19 Employee Benefits applies are not required to apply the requirements of IFRS 10. [IFRS 10:4B]
Consolidated financial statements: [IFRS 10:B86]
- combine like items of assets, liabilities, equity, income, expenses and cash flows of the parent with those of its subsidiaries
- offset (eliminate) the carrying amount of the parent's investment in each subsidiary and the parent's portion of equity of each subsidiary (IFRS 3 Business Combinations explains how to account for any related goodwill)
- eliminate in full intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between entities of the group (profits or losses resulting from intragroup transactions that are recognised in assets, such as inventory and fixed assets, are eliminated in full).
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. Income and expenses of the subsidiary are based on the amounts of the assets and liabilities recognised in the consolidated financial statements at the acquisition date. [IFRS 10:B88]
The parent and subsidiaries are required to have the same reporting dates, or consolidation based on additional financial information prepared by subsidiary, unless impracticable. Where impracticable, the most recent financial statements of the subsidiary are used, 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 [IFRS 10:B92, IFRS 10: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. [IFRS 10:22]
A reporting entity attributes the profit or loss and each component of other comprehensive income to the owners of the parent and to the non-controlling interests. The proportion allocated to the parent and non-controlling interests are determined on the basis of present ownership interests. [IFRS 10:B94, IFRS 10:B89]
The reporting entity also attributes total comprehensive income to the owners of the parent and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. [IFRS 10:B94]
Changes in ownership interests
Changes in a parent's ownership interest in a subsidiary that do not result in the parent losing control of the subsidiary are equity transactions (i.e. transactions with owners in their capacity as owners). When the proportion of the equity held by non-controlling interests changes, the carrying amounts of the controlling and non-controlling interests area adjusted to reflect the changes in their relative interests in the subsidiary. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to the owners of the parent.[IFRS 10:23, IFRS 10:B96]
If a parent loses control of a subsidiary, the parent [IFRS 10:25]:
- derecognises the assets and liabilities of the former subsidiary from the consolidated statement of financial position
- recognises 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
- recognises the gain or loss associated with the loss of control attributable to the former controlling interest.
If a parent loses control of a subsidiary that does not contain a business in a transaction with an associate or a joint venture gains or losses resulting from those transactions are recognised in the parent's profit or loss only to the extent of the unrelated investors' interests in that associate or joint venture.*
* Added by Sale or Contribution of Assets between an Investor and its Associate or Joint Venture amendments, effective 1 January 2016.
Investment entities consolidation exemption
[Note: The investment entity consolidation exemption was introduced by Investment Entities, issued on 31 October 2012 and effective for annual periods beginning on or after 1 January 2014.]
IFRS 10 contains special accounting requirements for investment entities. Where an entity meets the definition of an 'investment entity' (see above), it does not consolidate its subsidiaries, or apply IFRS 3 Business Combinations when it obtains control of another entity. [IFRS 10:31]
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 [IFRS 10:28]:
- 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.
An investment entity is required to measure an investment in a subsidiary at fair value through profit or loss in accordance with IFRS 9 Financial Instruments or IAS 39 Financial Instruments: Recognition and Measurement. [IFRS 10:31]
However, an investment entity is still required to consolidate a subsidiary where that subsidiary provides services that relate to the investment entity’s investment activities. [IFRS 10:32]*
* Investment Entities: Applying the Consolidation Exception (Amendments to IFRS 10, IFRS 12 and IAS 28) clarifies, effective 1 January 2016, that this relates to a subsidiary that is not itself an investment entity and whose main purpose and activities are providing services that relate to the investment entity's investment activities.
Because an investment entity is not required to consolidate its subsidiaries, intragroup related party transactions and outstanding balances are not eliminated [IAS 24.4, IAS 39.80].
Special requirements apply where an entity becomes, or ceases to be, an investment entity. [IFRS 10:B100-B101]
The exemption from consolidation only applies to the investment entity itself. Accordingly, a parent of an investment entity is required to consolidate all entities that it controls, including those controlled through an investment entity subsidiary, unless the parent itself is an investment entity. [IFRS 10:33]
There are no disclosures specified in IFRS 10. Instead, IFRS 12 Disclosure of Interests in Other Entities outlines the disclosures required.
Applicability and early adoption
Note: This section has been updated to reflect the amendments to IFRS 10 made in June 2012 and October 2012.
IFRS 10 is applicable to annual reporting periods beginning on or after 1 January 2013 [IFRS 10:C1].
Retrospective application is generally required in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors [IFRS 10:C2]. However, an entity is not required to make adjustments to the accounting for its involvement with entities that were previously consolidated and continue to be consolidated, or entities that were previously unconsolidated and continue not to be consolidated at the date of initial application of the IFRS [IFRS 10:C3].
Furthermore, an entity is not required to present the quantitative information required by paragraph 28(f) of IAS 8 for the annual period immediately preceding the date of initial application of the standard (the beginning of the annual reporting period for which IFRS 10 is first applied) [IFRS 10:C2A-C2B]. However, an entity may choose to present adjusted comparative information for earlier reporting periods, any must clearly identify any unadjusted comparative information and explain the basis on which the comparative information has been prepared [IFRS 10.C6A-C6B].
IFRS 10 prescribes modified accounting on its first application in the following circumstances:
- an entity consolidates an entity not previously consolidated [IFRS 10:C4-C4C]
- an entity no longer consolidates an entity that was previously consolidated [IFRS 10:C5-C5A]
- in relation to certain amendments to IAS 27 made in 2008 that have been carried forward into IFRS 10 [IFRS 10:C6].
An entity may apply IFRS 10 to an earlier accounting period, but if doing so it must disclose the fact that is has early adopted the standard and also apply:
- IFRS 11 Joint Arrangements
- IFRS 12 Disclosure of Interests in Other Entities
- IAS 27 Separate Financial Statements (as amended in 2011)
- IAS 28 Investments in Associates and Joint Ventures (as amended in 2011).
The amendments made by Investment Entities are applicable to annual reporting periods beginning on or after 1 January 2014 [IFRS 10:C1B]. At the date of initial application of the amendments, an entity assesses whether it is an investment entity on the basis of the facts and circumstances that exist at that date and additional transitional provisions apply [IFRS 10:C3B–C3F].