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IFRS 10, Consolidated Financial Statements [Completed]

Effective date: Fiscal years beginning on or after January 1, 2013 with early adoption permitted

Transitional provisions:

IFRS 10 is effective for fiscal years beginning on or after January 1, 2013. Earlier application is permitted, provided IFRS 11IFRS 12 and the related amendments to IAS 27 and 28 are adopted at the same time.

Last updated:

January 2012

Overview

IFRS 10 replaces the consolidation requirements in IAS 27, Consolidated and Separate Financial Statements, and SIC-12 Consolidation - Special Purpose Entities.

Key Features

  • The objective of IFRS 10 is to have a single basis of consolidation for all entities, regardless of the nature of the investee, and that basis is control.
  • The definition of control includes 3 elements; power over an investee; exposure or rights to variable returns of the investee; and the ability to use power over the investee to affect the investor’s returns.
  • IFRS 10 provides detailed guidance on how to apply the control principle in a number of situations, including agency relationships and holdings of potential voting rights.
  • An investor would reassess whether it controls an investee if there is a change in facts and circumstances.
  • IFRS 10 replaces those parts of IAS 27 that address when and how an investor should prepare consolidated financial statements, and replaces SIC-12 in its entirety.
  • The effective date is for annual periods beginning on or after January 1, 2013. Earlier application is permitted, provided IFRS 11IFRS 12 and the related amendments to IAS 27 and 28 are adopted at the same time (the “package of five”).

Details of Significant Requirements

  • IFRS 10 uses control as the single basis for consolidation irrespective of the nature of the risks and rewards approach previously included in SIC-12.
  • IFRS 10 identifies the following 3 elements of control: (i) power over the investee; (ii) exposure, or rights, to variable returns from involvement with the investee; and (iii) the ability to use power over the investee to affect the investor’s returns.  An investor must possess all three elements to conclude it controls an investee.  The assessment of control is based on all facts and circumstances and the conclusion is reassessed if there is an indication that there are changes to at least one to at least one of the elements of control.
  • Element of control: power. “Power” exists when the investor has existing rights that give it the current ability to direct the activities that significantly affect the investee’s returns (the “relevant activities”). Power most commonly arises through voting rights granted by equity instruments but can also arise through other contractual arrangements. Rights to direct the relevant activities do not need to be exercised for them to provide an investor power. If two or more investors have rights to direct different relevant activities, the investors must decide which of the relevant activities most significantly affects the returns of the investee.
  • Element of control: exposure, or rights, to variable returns. The second criterion in the consolidation assessment is that the investor has exposure, or rights, to variable returns from involvement with the investee. IFRS 10 uses the term “returns” rather than “benefits” to clarify that the economic exposure to an investee may be positive, negative or both. Examples of returns from involvement with an investee could include changes in the value of the investment in the investee, residual interests in cash flows of structured entities, dividends, interest, management or service fee arrangements, guarantees, tax benefits, or any other returns that may not be available to other interest holders. While only one investor will control an entity, many investors may share in the returns of the investee.  IFRS 10 clarifies that although certain economic interests may be fixed (e.g., a fixed coupon debt instrument or a fixed asset management fee based on assets under management) they still might result in variable returns as they expose the investor to variability such as credit risk from the debt instrument and performance risk from the asset management arrangement.
  • Element of control: the ability to use power over the investee to affect the investor’s returns. The third criterion in the consolidation assessment considers the interaction between the first two control components. To have control over an investee, an investor must not only have power over an investee and exposure or rights to variable returns from its involvement with the investee, but it also must have the ability to use its power over the investee to affect its returns from involvement with the investee. 

IFRS 10 requires continuous assessment of control of an investee. The continuous reassessment would consider both changes in an investor’s power over the investee and changes in the investor’s exposure or rights to variable returns.  This reassessment will be made based on changes in facts and circumstances but would be visited at least once in each reporting period.

Recent activities

January 2012

On January 25-27, 2012, the IASB considered a request from EFRAG to defer the effective dates of IFRS 10, IFRS 11 and IFRS 12. The Board decided to retain the mandatory January 1, 2013 effective date of these new standards.

September 2011

On September 8, 2011, the IASB issued its Effect Analysis of IFRS 10 and IFRS 12. The effect analysis provides detailed insights into the potential impacts of the new requirements using case studies and other quantitative and qualitative material, as appropriate.

May 2011

On May 12, 2011, the IASB issued IFRS 10, Consolidated Financial StatementsIFRS 10 establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. A Basis for Conclusions has also been issued by the IASB.

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