Finance & Accounting

A Guide to the Interpretation of IFRS 10

A Guide to the Interpretation of IFRS 10

The component of IAS 27 on Consolidated and Separate Financial Statements that deals with accounting for subsidiaries on consolidation is replaced by IFRS 10. The accounting approach for subsidiaries, jointly controlled businesses, and associates in their separate financial statements is what remains in IAS 27 following the introduction of IFRS 10.

The goal of IFRS 10 is to provide a unified control model that applies to all businesses, including special purpose corporations. The modifications necessitate extensive judgement on the part of those tasked with implementing IFRS 10 in determining which businesses are regarded to be controlled and hence require consolidation by the parent company.

The objective of IFRS 10

The standard’s stated goal for IFRS 10 is to define guidelines for the reporting and preparation of consolidated financial statements where one business controls one or more other entities. To achieve this goal, the standard requires consolidated financial statements to be presented by a company (the parent) that manages one or more additional businesses (subsidiaries). It also defines “control” as a principle and establishes control as the foundation for consolidation.

IFRS 10 specifies how to use the control principle to determine whether an investor company controls an investee and, as a result, whether it should consolidate the investee. It specifies an investment entity and the exception to consolidating certain subsidiaries of an investment entity, as well as the accounting standards for the production of consolidated financial statements.

The scope of IFRS 10

With a few exceptions, IFRS 10 applies to all entities. A parent is not required to provide consolidated financial statements if all of the following requirements are satisfied.

  • It is a subsidiary of another company, and all of its other shareholders, including those without voting rights, have been informed of (and do not object to) the parent company’s failure to produce consolidated financial statements.
  • Its debt, as well as equity securities, are not publicly traded.
  • It has not filed financial statements for the purpose of issuing instruments on a public market, nor is it in the process of doing so.
  • It’s ultimate or any intermediate parent prepares consolidated financial statements that conform with the International Financial Reporting Standards (IFRSs) and are available to the public.

IFRS 10 does not apply to post-employment or long-term employee benefit programmes, which are governed by IAS 19 Employee Benefits. Furthermore, rather than presenting consolidated financial statements, an investment firm must assess all of its subsidiaries at fair value via profit or loss.

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Determining whether there is control

The stages below outline the reasoning that should be used to determine whether the investor’s rights provide it control over the investee.

  • Identifying the investee, as well as the goal and design of the investment.
  • Identifying the investee’s relevant activity.
  • Identifying the processes that are used to make choices regarding the relevant activities.
  • Determining whether or not the investor has influence over the investee.

Because the term “investee” is not defined in IFRS 10, the investor must evaluate the purpose and design of an investee when determining whether it has control over it. When one investor owns a majority of the voting rights in an investee and is able to exercise those rights to decide the investee’s operational and financing policies, and there are no other arrangements in place that modify this decision-making, the investor is said to control the investee.

When voting rights aren’t the most important criterion in defining control, the investor must assess the investee’s design in terms of the risks it will face, the risk it will pass on to the parties involved, and whether the investor will bear some or all of that risk. If the investee’s risk exposure is substantial, it transfers some of it on to the investor, and the investor is exposed to some of that risk, the investee is most likely put up under the investor’s control.

If a component of an investee is treated as a deemed separate entity, an investor must examine whether or not it controls the deemed separate entity. If and only if the following criterion is met, an investor must regard a portion of an investee as a distinct entity.

The investee’s defined assets are the exclusive source of payment for the investee’s specified obligations or other interests. Other than the parties that have the defined responsibility, no one else has any rights or duties in relation to the specified assets or residual cash flows from those assets. In essence, none of the defined asset returns may be utilized by the existing investee, and none of the recognized separate entity’s obligations can be paid from the remaining investee’s assets.

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Relevant activities are a relatively new idea that helps determine if an investor has control over an investee. Relevant activities are referred to as “investee activities that have a significant impact on the investee’s results.”

Because the notion of “power” necessitates determining whether or not the investor currently has the capacity to command the relevant activities, it’s critical to analyze how such choices are made. Power is derived from rights, either individually or collectively:

  • In the nature of voting rights or the prospect of voting rights
  • Appointing, reassigning, or removing members of an investee company’s key management staff or any other body with the authority to oversee the relevant activities.
  • To instruct the investee to enter into or oppose any modifications to transactions for the interest of the investor, and
  • That provides the holder with the existing power to direct or take care of the relevant activities, even though the rights to direct have not yet been exercised.

Only substantive rights that are not protective will be considered when assessing authority. When the bearer of a right has the practical ability to execute that right, that right is substantial. ‘Protective rights’ are described as ‘rights meant to protect the interests of the person having those rights without conferring power on that party over the entity to whom those rights pertain.’

As a result, an investor who solely has protective rights over an investee has no authority over them, nor can they prevent another party from having power over them. Franchise agreements are regarded to constitute protective rights in most cases.

There will occasionally be indicators that an investor has more than a passive interest. This might imply that the investor has other connected rights that give it authority, or it could provide proof of current influence over an investee. When the investee company’s top management professionals who control important activities are current or former employees of the investor, or when the investee’s area of operations is dependent on the investor, this suggests that the investor has a more than passive interest.

Returns that are not fixed but fluctuate based on the performance of the investee are referred to as exposure or rights to variability in returns. The investor’s evaluation should be based on the substance of the arrangement rather than the legal form of returns when deciding this.

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As a result, an investor with decision-making authority must decide whether it is a principal or an agent. An ‘agent’ is defined as a party that is principally employed to work on behalf of and for the profit of another party or parties (the principal(s)) and hence has no influence over the investee when it exercises its decision-making authority. As a result, an agent may occasionally hold and exercise a principal’s power on behalf of the principal. When an investor acts as an agent, it does not have control over the investee when it exercises the decision-making authority that has been assigned to it.


Unless there are specified exceptions, investment companies should not consolidate their subsidiaries and instead measure an investment in a subsidiary at fair value via profit or loss in line with IFRS 9. If an investment entity has a subsidiary that performs services related to its investment activity, that subsidiary must be consolidated. Furthermore, unless the parent is itself an investment entity, a parent of an investment entity must combine all of its subsidiaries, including the investment entity and any businesses controlled via it.

Loss of control

If a parent company loses control of a subsidiary, the parent must derecognize the former company’s assets and obligations. When control is lost, it must recognize any investment held in the former subsidiary at its fair value and account for it, as well as any liabilities owing by or to the former subsidiary, in line with relevant IFRSs. The fair value must be regarded as the fair value at the time of initial recognition of a financial asset in accordance with IFRS 9[1] or, if applicable, the cost at the time of initial recognition of an investment in an associate or joint venture. Furthermore, it must account for the gain or loss associated with the loss of control in profit or loss.


The IFRS 10 on Consolidated Financial Statements specifies the rules for the production and presentation of consolidated financial statements, requiring companies to consolidate entities they control. Control necessitates exposure to unpredictable returns as well as the capacity to influence those returns through power over an investee.

Read Our Article:Identification of Operating Segments under IFRS 8

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