International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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Example 6.19:
Power through contractual arrangements ...................................... 407
Example 6.20:
Derivatives that create risk for an investee ..................................... 413
Example 6.21:
Structured entity that enters into foreign currency and
interest rate swaps ................................................................................ 414
Example 6.22:
Structured entity that enters into a total return swap ................... 415
Example 6.23:
Structured entity that enters into a total return swap with
the transferor ......................................................................................... 416
Example 6.24:
Link between power and returns is essential for control ............. 417
Example 6.25:
Illustration of exposure to variability of returns through
other interests ....................................................................................... 425
Example 6.26:
Illustration of exposure to variability of returns through
indirect interests ................................................................................... 427
Example 6.27:
Determining whether a decision-maker is a principal or
agent (1) .................................................................................................. 428
Example 6.28:
Determining whether a decision-maker is a principal or
agent (2) ................................................................................................. 428
Example 6.29:
Determining whether a decision-maker is a principal or
agent (3).................................................................................................. 429
Example 6.30:
Determining whether a decision-maker is a principal or
agent (4) ................................................................................................. 429
362 Chapter
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Example 6.31:
Determining whether a decision-maker is a principal or
agent (5) .................................................................................................. 429
Example 6.32:
Determining whether a decision-maker is a principal or
agent (6) ................................................................................................. 430
Example 6.33:
Determining whether a decision-maker is a principal or
agent (7) ................................................................................................... 431
Example 6.34:
Determining whether a bank is a principal or agent in
relation to a securitisation ................................................................. 432
Example 6.35:
Control evaluation and consolidation with a de facto agent ....... 435
Example 6.36:
Providing seed money for a fund ..................................................... 439
Example 6.37:
Value of option changes from ‘in-the-money’ to ‘out-of-
the-money’ ............................................................................................ 440
Example 6.38:
Structured entity reassessments ....................................................... 440
Example 6.39:
Investee loses money due to change in market conditions ......... 441
Example 6.40:
Bankruptcy filing .................................................................................. 441
Example 6.41:
Troubled debt restructuring ............................................................... 441
Example 6.42:
Control reassessment without being involved .............................. 443
Example 6.43:
A limited partnership that is an investment entity ......................... 453
Example 6.44:
Start-up high technology fund that is not an investment
entity ...................................................................................................... 454
Example 6.45:
Master and feeder funds that are investment entities .................. 454
363
Chapter 6
Consolidated
financial statements
1 INTRODUCTION
1.1 Background
An entity may conduct its business not only directly, but also through strategic
investments in other entities. IFRS broadly distinguishes between three types of such
strategic investments:
• entities controlled by the reporting entity (subsidiaries);
• entities or activities jointly controlled by the reporting entity and one or more third
parties (joint arrangements); and
• entities that, while not controlled or jointly controlled by the reporting entity, are
subject to significant influence by it (associates).
The first type of investment is accounted for in accordance with IFRS 10 – Consolidated
Financial Statements.
IFRS 10 establishes a single control model that applies to all entities, including
‘structured entities’ (‘special purpose entities’ and ‘variable interest entities’ under the
previous IFRS standards and US GAAP, respectively). In addition, IFRS 10 deals with
accounting for subsidiaries by investment entities.
This chapter discusses the requirements of IFRS 10, principally relating to which entities
are controlled by a parent and therefore consolidated into the financial statements
prepared by that parent (except for certain subsidiaries of investment entities). The
requirements of IFRS 10 dealing with consolidation procedures and non-controlling
interests are summarised briefly at 1.3 below and dealt with more fully in Chapter 7.
IFRS 10 contains no disclosure requirements. Instead, all disclosures required in respect
of an entity’s interests in subsidiaries or its interests in structured entities (whether
consolidated or unconsolidated) are contained within IFRS 12 – Disclosure of Interests
in Other Entities. The disclosure requirements in IFRS 12 are discussed in Chapter 13.
When management concludes that an entity does not have control of an investee, the
requirements of IFRS 11 – Joint Arrangements – and IAS 28 – Investments in Associates
364 Chapter
6
and Joint Ventures – must be considered to determine whether it has joint control or
significant influence, respectively, over the investee. The requirements of IFRS 11 and
IAS 28 are dealt with in Chapter 12 and Chapter 11, respectively. The diagram below
summarises the identification and accounting for each type of investment, as well as the
interaction between IFRS 10, IFRS 11, IFRS 12 and IAS 28.
Figure 6.1:
Interaction between IFRS 10, IFRS 11, IFRS 12 and IAS 28
Does the investor
Yes
No
control an entity
by itself?
Does the
Account for
Yes
No
investor have
in accordance
joint control over
with IFRS 10
an arrangement?
Disclosure in
accordance with
IFRS 12
Classify joint
Does the investor
Yes
No
arrangement in
have significant
accordance with
influence over
IFRS 11
an entity?
Joint
Joint
operation
venture
Associate
Account for assets,
Account for
Financial
Other
liabilities, revenue
interest under the
instrument
IFRS†
and expenses
equity method
Disclosures in
Disclosures in
Disclosures in
accordance with
accordance with
accordance with
IFRS 12 and other
IFRS 12 and other
IFRS 12
relevant IFRS
relevant IFRS
†
This would be the case, for example, if an entity has control over (or simply rights to) assets and obligations for liabilities, but not control of an entity. In this case, the entity would account for these assets and obligations in accordance with the relevant IFRS.
1.2
Development of IFRS 10
In June 2003, the IASB added a project on consolidation to its agenda to issue a new IFRS
to replace the consolidation requirements in IAS 27 – Consolidated and Separate Financial
Statements (‘IAS 27 (2012)’) and SIC-12 – Consolidation – Special Purpose Entities.
This project was added to the IASB’s agenda to deal with divergence in practice in applying
the previous standards. In addition, there was a perceived conflict between the definitions
of control IAS 27 (2012) and SIC-12 that led to inconsistent application and which was
further aggravated by a lack of clear guidance as to which investees were within the scope
of IAS 27 (2012) and which were within the scope of SIC-12. [IFRS 10.BC2-3].
Consolidated financial statements 365
In December 2008, the IASB published its proposals in an exposure draft, ED 10 –
Consolidated Financial Statements. ED 10 proposed disclosure requirements for
consolidated and unconsolidated investees. However, in its deliberation of the
responses to those proposals, the IASB decided to combine the disclosure requirements
for interests in subsidiaries, joint arrangements, associates and unconsolidated
structured entities within a single comprehensive standard, IFRS 12. Accordingly,
IFRS 10 does not include disclosure requirements. [IFRS 10.BC7]. The requirements of
IFRS 12 are dealt with in Chapter 13.
IFRS 10 was issued in May 2011, together with an amended version of IAS 27 with a new
title of Separate Financial Statements and IFRS 12. In addition, as a result of its project on
joint ventures, the IASB issued, at the same time, IFRS 11 and an amended IAS 28. These
standards were mandatory for annual periods beginning on or after 1 January 2013.
In October 2012, the IASB issued Investment Entities (Amendments to IFRS 10, IFRS 12
and IAS 27) which introduced an exception to the principle that all subsidiaries shall be
consolidated. The amendments defined an investment entity and required a parent that
is an investment entity to measure its investments in subsidiaries at fair value through
profit or loss, with limited exceptions. This amendment applied for annual periods
beginning on or after 1 January 2014 but could be adopted early. [IFRS 10.C1A-B]. The
investment entity exception is discussed at 10 below.
In December 2014, the IASB issued Investment Entities: Applying the Consolidation
Exception (Amendments to IFRS 10, IFRS 12 and IAS 28) which clarifies two aspects of
the investment entity exception. This amendment applied for annual periods beginning
on or after 1 January 2016 but could be adopted earlier. [IFRS 10.C1D]. This amendment is
discussed at 10 below.
1.3 Consolidation
procedures
When an investor determines that it controls an investee, the investor (the parent)
consolidates the investee (the subsidiary). The requirements of IFRS 10 relating to
consolidation procedures, non-controlling interests and accounting for loss of control
are dealt with in Chapter 7.
A parent consolidates a subsidiary from the date on which the parent first obtains
control, and continues consolidating that subsidiary until the date on which control is
lost. IFRS 3 – Business Combinations – defines the date of acquisition, that is, the date
on which control is first obtained. [IFRS 3.8, Appendix A]. The term ‘date of acquisition’ is
used even if a parent gains control without acquiring an interest, or taking any action,
as discussed at 9.3 below. IFRS 10 deals with consolidation thereafter (see Chapter 7).
When a parent gains control of a group of assets or an entity that is not a business, such
transactions are excluded from the scope of IFRS 3. [IFRS 3.2]. This is often the case when
a parent gains control of a structured entity. Business combinations under common
control are also excluded from the scope of IFRS 3, [IFRS 3.2], which means that if a
parent gains control of a subsidiary (as defined in IFRS 10) that was previously
controlled by an entity under common control, IFRS 3 also does not apply.
A parent consolidates all subsidiaries and recognises non-controlling interests for any
interests held by investors outside of the group.
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6
1.4 Disclosure
requirements
IFRS 10 does not contain any disclosure requirements regarding an entity’s interests in
subsidiaries included in the consolidated financial statements or its interests in
structured entities (whether consolidated or unconsolidated). Such disclosure
requirements are contained within IFRS 12.
IFRS 12 contains all disclosure requirements related to an entity’s interests in
subsidiaries, joint arrangements, associates and structured entities. IFRS 12 requires
disclosure of the judgements that were made in determining whether it controls another
entity. Even if management concludes that it does not control an entity, the information
used to make that judgement will be transparent to users of the financial statements.
The required disclosures should also assist users of the financial statements to make
their own assessment of the financial impact were management to reach a different
conclusion regarding consolidation – by providing information about certain
unconsolidated entities. The requirements of IFRS 12 are dealt with in Chapter 13.
2
OBJECTIVE AND SCOPE OF IFRS 10
2.1 Objective
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.
[IFRS 10.1].
To meet this objective, the standard:
(a) requires an entity (the parent) that controls one or more other entities (subsidiaries)
to present consolidated financial statements;
(b) defines the principle of control, and establishes control as the basis for consolidation;
(c) sets out how to apply the principle of control to identify whether an investor
controls an investee and therefore must consolidate the investee;
(d) establishes the accounting requirements for the preparation of consolidated
&n
bsp; financial statements; and
(e) defines an investment entity and the criteria that must be satisfied for the
investment entity exception to be applied. [IFRS 10.2].
This chapter deals with (a), (b), (c) and (e). The accounting requirements mentioned in
(d) are dealt with in Chapter 7.
IFRS 10 also states that it does not deal with the accounting requirements for business
combinations and their effect on consolidation, including goodwill arising on a business
combination; these are covered by IFRS 3 (see Chapter 9). [IFRS 10.3].
2.2 Scope
IFRS 10 requires that a parent (unless exempt or an investment entity as discussed
below) shall present consolidated financial statements. This means that the financial
statements of the group in which the assets, liabilities, equity, income, expenses and
cash flows of the parent and its subsidiaries are included, should be presented as those
Consolidated financial statements 367
of a single economic entity. A group consists of a parent and its subsidiaries (i.e. entities
that the parent controls). [IFRS 10.4, Appendix A].
Under IFRS 10, an entity must assess whether it controls the other entities in which it
has an interest (the investees) – see 3 below. This applies to all types of investees
including corporations, partnerships, limited liability corporations, trusts, and other
types of entities. However, there is a scope exemption for post-employment benefit
plans or other long-term employee plans to which IAS 19 – Employee Benefits – applies
(see 2.2.2 below). In addition, an investment entity generally does not consolidate its
subsidiaries (see 2.2.3 below).
IFRS 10 also provides an exemption from preparing consolidated financial statements
for entities that are not an ultimate parent, if they meet certain criteria (see 2.2.1 below).
2.2.1
Exemption from preparing consolidated financial statements by an
intermediate parent
A parent that prepares financial statements in accordance with IFRS is exempt from
presenting (i.e. need not present) consolidated financial statements if it meets all of the
following conditions:
(a) it is a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity
and all its other owners, including those not otherwise entitled to vote, have been
informed about, and do not object to, the parent not presenting consolidated