IFRS 10 Consolidated Financial Statements

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.

Control – Joint control – Significant influence

This is a discussion on IFRS 10 – IFRS 12 Control, Joint control, Significant influence and the accounting applied. It is added with some other logical IFRS topics: the fair value option and the other investments (no control, no joint control and no significant influence).

ControlControl of an investee Control of an investee

Consolidated subsidiaries – Consolidated structured entities

For an investor to control an investee, the investor must possess all of the following elements:

  • Power over the investee, which is described as having existing rights that give the current ability to direct the activities of the investee that significantly affect the investee’s returns (such activities are referred to as the ‘relevant activities’)
  • Exposure, or rights, to variable returns from
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Control Structured entity with Credit-linked notes

Following is a case on the assessment whether certain stakeholders in a transaction/structure have obtained control over a certain entity in the transaction in line with the requirements of IFRS 10 Consolidated financial statements. Only one stakeholder can be in control! [IFRS 10 B16] Or no stakeholder is in control. Or one stakeholder is in control and has to consolidate the investigated entity  in its consolidated financial statements. Here is the case. Control Structured entity with Credit-linked notes

THE CASE – Assessing control of an issuer of credit-linked notes with limited activities and derivatives that enhance risk

Background and purpose Control Structured entity with Credit-linked notes

A credit-linked note structure may be set up for various … Read more

Control over CMBS issuer – Structured entity

Following is a case on the assessment whether certain stakeholders in a transaction/structure have obtained control over a certain entity in the transaction in line with the requirements of IFRS 10 Consolidated financial statements. Only one stakeholder can be in control! [IFRS 10 B16] Or no stakeholder is in control. Or one stakeholder is in control and has to consolidate the investigated entity  in its consolidated financial statements. Here is the case.

THE CASE – Assessing control of an issuer of commercial mortgage-backed securities managed by a third-party servicer acting on behalf of investors

Background and purpose Control over CMBS issuer – Structured entity

Commercial mortgage-backed securitisations exist for a number of reasons. A bank that Read more

Control in debt restructuring in Structured entity

Following is a case on the assessment whether certain stakeholders in a transaction/structure have obtained control over a certain entity in the transaction in line with the requirements of IFRS 10 Consolidated financial statements. Only one stakeholder can be in control! [IFRS 10 B16] Or no stakeholder is in control. Or one stakeholder is in control and has to consolidate the investigated entity  in its consolidated financial statements. Here is the case. Control in debt restructuring in Structured entity

THE CASE – Assessing control for a debt restructuring structured entity with limited activities 

Background and purpose Control in debt restructuring in Structured entity

A corporate entity (‘the Corporate’) wishes to raise long-term debt with a non-vanilla … Read more

Control by using options

Following is a case on the assessment whether certain stakeholders in a transaction/structure have obtained control over a certain entity in the transaction in line with the requirements of IFRS 10 Consolidated financial statements. Only one stakeholder can be in control! [IFRS 10 B16] Or no stakeholder is in control. Or one stakeholder is in control and has to consolidate the investigated entity  in its consolidated financial statements. Here is the case.

THE CASE – Assessing control with put and call options

Entity G set up entity I, a malt producer. Entity G initially owned 100% of entity I. Thereafter, entity G sold 50% to entity C and at the same time:

  • entered into a put
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Directing relevant activities

Having identified an investee’s relevant activities, the next step is to determine how those activities are directed. IFRS 10 breaks this down into the following two steps (although in practice these steps are normally combined with the identification of relevant activities):

IFRS 10 envisages two types of rights that may confer ability to direct these decisions (ie power):

The control assessment will typically be more straightforward when power is conferred through voting rights. In most … Read more

Power in IFRS-perspective

Power is defined in IFRS 10 as ‘existing rights that give the current ability to direct the relevant activities’.

Just to look at an important term in IFRS from a difference perspective, here are some IFRS / financial reporting topics in which power plays an important role. By reading this you get a quick understanding on all kinds of financial reporting issues.


Power and (Non-) Structured entities

Although there is no distinction between different types of entities in determining whether one entity controls another, there is a ‘gating’ question in the analysis that distinguishes between entities for which:

  1. voting rights are the dominant factor in assessing whether the investor has power over the investee – i.e. the investee is
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Assessing de facto control for an operating entity

Following is a case on the assessment whether certain stakeholders in a transaction/structure have obtained control over a certain entity in the transaction in line with the requirements of IFRS 10 Consolidated financial statements. Only one stakeholder can be in control! [IFRS 10 B16] Or no stakeholder is in control. Or one stakeholder is in control and has to consolidate the investigated entity  in its consolidated financial statements. Here is the case.

THE CASE

An investor  is a large owner of Entity D with other investors holding significantly lower percentages of ownership. The ‘normal’ assessment of control ‘checklist’ is:

The investor that has the ability to direct the activities that most significantly affect the returns of … Read more

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

IFRS 12 provides one comprehensive disclosure standard for equity instruments in Subsidiaries, Joint arrangements (Joint operations and Joint ventures), Associates and Structured entities. Hence, management needs to exercise a certain degree of judgement in determining whether a new investee is controlled and therefore consolidated. For instance, disclosure and internal documentation is required for how voting rights are evaluated and whether it is a principal or an agent etc.

Classifying these equity instruments requires time, effort and the exercise of considerable judgement based on a comprehensive understanding of the business, operations, and legal rights and obligations the investing entity has obtained in the investee. Also these judgements have to be re-assessed during any significant financial close. This is a true … Read more

Joint arrangements rights and obligations

Focus on the nature of the joint arrangements rights and obligations

A joint arrangement can either be a joint operation or a joint venture under IFRS 11. In determining the classification of joint arrangements, the existence of a separate vehicle is a necessary condition, but not sufficient for a joint arrangement to be considered a joint venture. IFRS 11 clarifies that other factors like terms of the contractual arrangement and relevant facts and circumstances are to be considered as well.

Joint arrangements rights and obligations

Jointly-controlled entities, as previously defined in IAS 31 , may be classified as joint ventures and hence accounted for using the equity method in IFRS 11. The choice of using proportionate consolidation has been removed under IFRS 11. The … Read more