IFRS 10 Consolidated Financial Statements: A Practical Guide

The single most important change IFRS 10 made was replacing the old rules-based approach to consolidation with a single principles-based control model. Previously, special purpose entities could be kept off-balance sheet through clever structuring. Under IFRS 10, if you control it, you consolidate it — regardless of legal form.

The Three-Element Control Model

Control exists when an investor has all three elements simultaneously: power over the investee (existing rights that give the current ability to direct relevant activities); exposure to variable returns from involvement with the investee; and the ability to use that power to affect the amount of those returns. All three must be present — having two out of three is not enough.

Relevant Activities

Relevant activities are those that most significantly affect the investee's returns. In most operating businesses these include: decisions about operating and capital expenditure; hiring and firing key management; and determining the financing structure. Identifying relevant activities is often the first — and most important — step in the IFRS 10 assessment.

De Facto Control and Structured Entities

An investor can control an investee without holding a majority of voting rights. Where voting rights are dispersed, de facto control may exist with as little as 20-30% if other shareholders are passive. For structured entities, power typically comes from contractual arrangements rather than formal voting rights — asset-backed vehicles, securitisation SPVs, and similar structures require careful analysis.

Consolidation Procedures

Once control is established: combine assets, liabilities, income and expenses line by line; eliminate the carrying amount of the investment against the subsidiary's equity at acquisition; eliminate intra-group transactions and unrealised profits; and recognise non-controlling interests. NCI can be measured at fair value or at their proportionate share of net identifiable assets at acquisition.

Changes in Ownership Without Loss of Control

Partial disposals and acquisitions of additional interests that do not affect control are accounted for as equity transactions — no gain or loss in profit or loss. On loss of control, a gain or loss is recognised and any retained interest is remeasured to fair value at the date of loss of control.

Further Reading

• IAS 28 Associates and Joint Ventures
• IFRS 3 Business Combinations
• Accounting Standards CPD

Study with Learnsignal: Financial reporting CPD for qualified accountants. Browse CPD.