Under Control IFRS 10 Main Requirements – FAQ | IFRS

Under control IFRS 10 Main requirements

Under control IFRS 10 Main requirements provides the explanations on all aspects of IFRS 10 Consolidated Financial Statements in this website. And the related IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interest in Other Entities, IAS 28 Investments in Associates and Joint ventures and IAS 27 Separate Financial Statements.

IFRS 10 Consolidated Financial Statements

IFRS 10 provides guidance on applying the control model with a view to addressing some of the more complex areas that led to diversity in the past. This includes: when holding a significant but less than a majority of voting rights can give power (i.e. “de facto power”), when potential voting rights should be considered in the assessment of control, what factors should be considered in assessing control for entities not controlled by voting rights (i.e. special purpose entities or structured entities), when an entity is acting as an agent on behalf of others and how this impacts the assessment of control.

Effective date

IFRS 10 is effective for annual periods beginning on or after January 1, 2013 and is applicable retrospectively.

Under control IFRS 10 Main requirements Under control IFRS 10 Main requirements Under control IFRS 10 Main requirements

Control model

The control model under IFRS 10 is based on the existence of three elements of control. When all of these three elements of control are present then an investor is considered to control an investee and consolidation is required. When one or more of the elements is not present, an investor will not consolidate but instead be required to determine the nature of its relationship with the investee (e.g. significant influence, joint control) and the appropriate accounting under the requisite IFRS.

The three elements of control which are the basis for consolidation under IFRS 10 are depicted below:

Under control IFRS 10 Main requirements

Under control IFRS 10 Main requirements Under control IFRS 10 Main requirements Under control IFRS 10 Main requirements

In order to apply the control model, several initial steps are necessary before the assessment of whether each of the three elements of control are present. These steps are:

  • Identify the investee
  • Understand the purpose and design of the investee
  • Identify the relevant activities of the investee and how decisions about these relevant activities are made

Elements of control

Once the initial steps have been performed, the next step is determining whether the investor has all three elements of control. Each of these three elements is addressed at a high-level below and supplementary guidance (with links) in the summary below.

Power

Under control IFRS 10 Main requirements

Under control IFRS 10 Main requirements Under control IFRS 10 Main requirements Under control IFRS 10 Main requirements.

Key considerations:

  • Whether rights are substantive or protective rights
  • When an investor holds a majority of votes, focus on rights that could take power away
  • When an investor holds a minority of votes, focus on rights that could give it power
  • When the investee is not directed by votes, place greater focus on the purpose and design of the investee and other factors to determine whether power exists

————   Variable returns    —————————————   Agent versus principal   —————

Under control IFRS 10 Main requirements

Under control IFRS 10 Main requirements Under control IFRS 10 Main requirements Under control IFRS 10 Main requirements

Key considerations

  • Concept of variable returns is broad
  • Determine if returns are variable and how variable they are based on substance of the return and not its legal form (e.g., fixed interest payments on a bond are variable as they won’t be paid in the event of a credit default)
  • If the reporting entity issues an instrument to another entity and in doing so transfers risk to another entity vs. absorbing risk from the other entity, it generally is not exposed to variability of returns from the other entity.
Key considerations

  • Whether rights are substantive or protective rights
  • An investor’s own decision-making rights: Consider whether the investor is using its decision-making rights for its own benefit (i.e. as a principal) or for the benefit of others (i.e. as an agent)
  • Rights delegated to others: Consider all of the investor’s decision making rights whether held by the investor directly or dispersed among parties under its influence

Summary of IFRS 10 Consolidated Financial Statements’ main requirements with links to content on this website.

But as a starter:

Objective

IFRS 10 establishes principles for the presentation and preparation of consolidated financial statements. To meet this objective it:

  • requires an entity (a parent) that controls another entity (a subsidiary) to present consolidated financial statements (subject to limited exemptions – see below)
  • defines ‘control’, and confirms control as the basis for consolidation
  • provides guidance on how to apply the definition
  • provides guidance on preparing consolidated financial statements.
Scope and exemptions

IFRS 10 applies to all entities (including structured entities) except long-term employment benefit plans within the scope of IAS 19 ‘Employee Benefits’.

A parent that is itself a subsidiary of another entity (an intermediate parent) need not present consolidated financial statements if it meets strict conditions, including that:

  • none of its owners object
  • its shares/debt instruments are not traded in a public market
  • a higher-level parent produces publicly-available IFRS consolidated financial statements.

A parent that is an investment entity must not present consolidated financial statements if it is required to measure all of it subsidiaries at fair value through profit or loss.

IFRS 10 applies only to consolidated financial statements.

Requirements on preparing separate financial statements are retained in IAS 27.

Control definition
At the heart of IFRS 10 is the requirement that in order for an investor to have control over an investee, the investor must have all three of the following:

  1. Power over the investee;
  2. Exposure or rights to variable returns from its involvement with the investee; and
  3. The ability to use its power over the investee to affect the amount of the investor’s returns.
Applying the control definition

IFRS 10 includes additional guidance on the elements of the control definition and their interaction, including:

IFRS 10 includes guidance on more difficult control assessments including:

Preparing consolidated financial statements

IFRS 10 retains established principles on consolidation procedures, including

IFRS 11 Joint Arrangements

IFRS 11 Joint Arrangements outlines the accounting by entities that jointly control an arrangement. Joint control involves the contractually agreed sharing of control and arrangements subject to joint control are classified as either a joint venture (representing a share of net assets and equity accounted) or a joint operation (representing rights to assets and obligations for liabilities, accounted for accordingly).

Effective date

IFRS 11 was issued in May 2011 and applies to annual reporting periods beginning on or after 1 January 2013.

Objective – Scope

Joint Arrangements

Consolidated subsidiaries, joint operations and other entities || Investments in joint ventures, associates and structured entities

Joint control

Types of joint arrangements

Financial statements of parties to a joint arrangement

Joint arrangements rights and obligations

Joint operations

Joint ventures

Joint arrangements rights and obligations

Separate financial statements

IFRS 12 Disclosure of Interest in Other Entities

IFRS 12 Disclosure of Interests in Other Entities is a consolidated disclosure standard requiring a wide range of disclosures about an entity’s interests in subsidiaries, joint arrangements, associates and unconsolidated ‘structured entities’. Disclosures are presented as a series of objectives, with detailed guidance on satisfying those objectives.

Effective date

IFRS 12 was issued in May 2011 and applies to annual periods beginning on or after 1 January 2013.

Objective – Scope

IFRS 12 Disclosure of Interest in Other Entities

Consolidated subsidiaries, joint operations and other entities || Investments in joint ventures, associates and structured entities

Significant judgements and assumptions

– Investment entity status

Interest in subsidiaries

– The interest that non-controlling interests have in the group’s activities and cash flows

Disclosures subsidiaries and NCI

– The nature and extent of significant restrictions

– Nature of the risks associated with an entity’s interests in consolidated structured entities

– Consequences of changes in a parent’s ownership interest in a subsidiary that do not result in a loss of control

– Consequences of losing control of a subsidiary during the reporting period

Interests in unconsolidated subsidiaries (Investment entities)

Interest in joint arrangements and associates

– Nature, extent and financial effects of an entity’s interests in joint arrangements and associates

Disclosures immaterial associates and joint ventures

Disclosures material joint operations

– Risks associated with an entity’s interests in joint ventures and associates

Interests in unconsolidated structured entities

Control in debt restructuring in Structured entity

Nature of interests

– Nature of risks

IAS 28 Investments in Associates and Joint ventures

IAS 28 Investments in Associates and Joint Ventures (as amended in 2011) outlines how to apply, with certain limited exceptions, the equity method to investments in associates and joint ventures. The standard also defines an associate by reference to the concept of “significant influence”, which requires power to participate in financial and operating policy decisions of an investee (but not joint control or control of those polices).

Effective date

IAS 28 was reissued in May 2011 and applies to annual periods beginning on or after 1 January 2013.

Objective – Scope

Consolidated subsidiaries, joint operations and other entities || Investments in joint ventures, associates and structured entities

Investments in Joint Ventures

So, what exactly is a joint venture?

Significant influence

Equity method / Application of the equity method

– Exemptions from applying the equity method

– Classification as held for sale

– Discontinuing the use of the equity method

– Changes in ownership interest

– Equity method procedures

– Impairment losses

Separate financial statements

IAS 27 Separate Financial Statements

IAS 27 Separate Financial Statements (as amended in 2011) outlines the accounting and disclosure requirements for ‘separate financial statements’, which are financial statements prepared by a parent, or an investor in a joint venture or associate, where those investments are accounted for either at cost or in accordance with IAS 39 Financial Instruments: Recognition and Measurement or IFRS 9 Financial Instruments. The standard also outlines the accounting requirements for dividends and contains numerous disclosure requirements.

Effective date

IAS 27 was reissued in May 2011 and applies to annual periods beginning on or after 1 January 2013, superseding IAS 27 Consolidated and Separate Financial Statements from that date.

Objective – Scope

Preparation of separate financial statements

Disclosure

See also: The IFRS Foundation