financial statements;
(b) its debt or equity instruments are not traded in a public market (a domestic or foreign
stock exchange or an over-the-counter market, including local and regional markets);
(c) it did not file, nor is it in the process of filing, its financial statements with a
securities commission or other regulatory organisation for the purpose of issuing
any class of instruments in a public market; and
(d) its ultimate or any intermediate parent produces financial statements that are available
for public use and comply with IFRSs, in which subsidiaries are consolidated or are
measured at fair value through profit or loss in accordance with IFRS 10. [IFRS 10.4(a)].
Where an entity uses this exemption, it may, but is not required to, prepare separate
financial statements (see Chapter 8) as its only financial statements. [IAS 27.8]. However,
if separate financial statements are prepared, they must comply with IAS 27. [IAS 27.2].
The conditions for exemption from preparing consolidated financial statements raise
the following interpretation issues.
2.2.1.A Condition
(a)
– consent of non-controlling shareholders
It is not clear whether a parent is required to obtain explicit consent that the owners of
a reporting entity do not object to the use of the exemption.
IFRS 10 requires that, where the parent is itself a partly-owned subsidiary, any non-
controlling shareholders must be informed of the parent’s intention not to prepare
consolidated financial statements. The non-controlling shareholders do not have to give
explicit consent – the absence of dissent is sufficient. However, parents that are partly-
owned subsidiaries and wish to use the exemption from preparing consolidated
368 Chapter
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financial statements are advised to obtain explicit written consent from non-controlling
shareholders in advance.
This is because IFRS 10 sets no time limit on when the non-controlling shareholders
can register any objection. Thus, it is possible for the non-controlling shareholders to
object to a parent’s proposed use of the exemption just before the separate financial
statements are printed and even after they have been issued.
IFRS 10 also requires all non-controlling owners ‘including those not otherwise entitled
to vote’ to be informed of the parent’s intention not to prepare consolidated financial
statements. [IFRS 10.4(a)]. Thus, for example, the holders of any voting or non-voting
preference shares must be notified of, and consent (or not object) to, the entity’s
intention to use the exemption.
In our view, the requirement to inform the non-controlling shareholders where the
parent ‘is a partially-owned subsidiary of another entity’ is ambiguous, as illustrated by
Examples 6.1 and 6.2 below.
Example 6.1:
Consent for not preparing consolidated financial statements (1)
A parent wishing to use the exemption (P) is owned 60% by entity A and 40% by entity B. Entity A and entity
B are both wholly-owned by entity C. In this case, P is not obliged to inform its non-controlling shareholder
B of its intention not to prepare consolidated financial statements since, although it is a partly-owned
subsidiary of A, it is a wholly-owned subsidiary of C (and therefore satisfies condition (a) without regard to
its immediate owners).
Example 6.2:
Consent for not preparing consolidated financial statements (2)
The facts are the same as in Example 6.1 above, except that A and B are both owned by an individual
(Mr X). P is not a wholly-owned subsidiary of any other entity, and therefore the rules applicable to
partly-owned subsidiaries apply. Thus, P is required to inform B of any intention not to prepare
consolidated financial statements.
2.2.1.B
Condition (b) – securities not traded in a public market
It is not clear exactly what constitutes a ‘public market’. It is clear that, where quoted
prices are available for any of the parent’s securities on a generally recognised share
exchange, the parent is required to prepare consolidated financial statements, and cannot
use the exemption. However, when there are no quoted prices but the parent’s shares are
occasionally traded, for example, on a matched bargain basis through an exchange (as
opposed to by private treaty between individual buyers and sellers), it is not clear whether
this would meet the definition of a ‘public market’ for this condition.
In our view, any security that is traded in circumstances where it is necessary to have
filed financial statements with a securities commission or regulator is regarded as ‘traded
in a public market’ for condition (b). It is clear that the IASB regarded conditions (b) and
(c) above as linked; in other words, that an entity would fall within (c) before falling
within (b). [IFRS 10.BCZ18]. Condition (c) refers to the filing of financial statements with a
securities commission or regulator as a precursor to public listing of securities, and this
forms the basis for our view.
2.2.1.C
Condition (c) – not filing financial statements for listing securities
It is not clear whether the ‘financial statements’ referred to are only those prepared
under IFRS, or include those prepared under local GAAP.
Consolidated financial statements 369
In our view, the test is whether the entity currently has, or shortly will have, an ongoing
obligation to file financial statements with a regulator in connection with the public
trading of any of its securities – whether under IFRS or local GAAP. This conclusion is
based on our view that the phrase ‘financial statements’ means any financial statements
filed in connection with the public trading of securities. The IASB’s view is that the
information needs of users of financial statements of entities whose debt or equity
instruments are traded in a public market are best served when investments in
subsidiaries, associates, and jointly controlled entities are accounted for in accordance
with IFRS 10, IAS 28, and IFRS 11 respectively. The Board therefore decided that the
exemption from preparing such consolidated financial statements is not available to such
entities or to entities in the process of issuing instruments in a public market. [IFRS 10.BCZ18].
2.2.1.D Condition
(d)
– parent’s IFRS financial statements are publicly available
and include subsidiaries that are consolidated or measured at fair value
through profit or loss in accordance with IFRS 10
The first part of this condition means that the exemption can be used either where a
parent of the reporting entity prepares financial statements under IFRS that are publicly
available through a regulatory filing requirement, or where those financial statements
are available on request. An entity that uses the exemption from preparing consolidated
financial statements must disclose the source for obtaining the financial statements of
the relevant parent of the reporting entity (see Chapter 8 at 3.1). [IAS 27.16(a)]. For
example, this information can be provided by providing:
• contact details of a person or an e-mail address from which a hard copy of the
document can be obtained; or
&nb
sp; • a website address where the financial statements can be found and downloaded.
This condition requires that the parent’s financial statements comply with IFRS. There
are a number of jurisdictions that have a national GAAP which is virtually identical to
IFRS. However, differences between these national GAAPs and IFRS often exist
regarding the scope, transitional provisions, effective dates and actual wording of
standards. In addition, some national GAAPs contain accounting alternatives not
permitted by IFRS. The question arises as to whether a reporting entity, that is a parent
entity preparing IFRS financial statements, can claim exemption for the requirement to
prepare consolidated accounts on the grounds that it has an ultimate or intermediate
parent that produces consolidated financial statements under a national GAAP which is
similar to IFRS (e.g. EU-adopted IFRS). In our view, if the ultimate or intermediate parent:
• reports under a national GAAP that is identical with IFRS in all respects;
• applied the national GAAP equivalent of IFRS 1 – First-time Adoption of
International Financial Reporting Standards – when it adopted that national GAAP;
• makes an explicit and unreserved statement of compliance with that national
GAAP in its most recent consolidated financial statements; and
• could have made an explicit and unreserved statement of compliance with IFRS in
those consolidated financial statements, if required,
then the exemption from preparing consolidated financial statements is permitted for
the reporting entity.
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The second part of condition (d) above confirms that the exemption from preparing
consolidated financial statements set out in (a) to (d) above is available to an
intermediate parent entity that is a subsidiary of an investment entity. The exemption is
available even though the investment entity parent may not prepare consolidated
financial statements or consolidate the intermediate parent entity subsidiary.
[IFRS 10.BC28A-B]. This condition was added by an amendment applicable for accounting
periods beginning on or after 1 January 2016. [IFRS 10.C1D].
In making its decision, the IASB observed that, when an investment entity measures its
interest in a subsidiary at fair value, the disclosures required by IFRS 12 are
supplemented by those required by IFRS 7 – Financial Instruments: Disclosures – and
IFRS 13 – Fair Value Measurement. Accordingly, the IASB decided that this
combination of information was sufficient to support the decision to retain an
exemption from presenting consolidated financial statements for a subsidiary of an
investment entity that is itself a parent entity. The IASB further noted that requiring an
intermediate parent that is a subsidiary of an investment entity to prepare consolidated
financial statements could result in significant additional costs, without commensurate
benefit and this would be contrary to its intention in requiring investment entities to
measure investments at fair value, which was to provide more relevant information at a
reduced cost. [IFRS 10.BC28D].
However, local law or regulations may conflict with this exemption if it is required that
an entity has to be included within the consolidated financial statements of a parent by
full consolidation in order to obtain the exemption.
2.2.2
Employee benefit plans and employee share trusts
IFRS 10 exempts post-employment benefit plans or other long-term employee benefit
plans to which IAS 19 applies. [IFRS 10.4A]. However, it is not clear whether this means
that an employee benefit plan that controls an investee is not required to consolidate
that investee in its financial statements, or whether an investor that controls an
employee benefit plan need not consolidate the plan itself.
It seems that the latter was intended: a sponsor of an employee benefit plan need not
evaluate whether it controls that employee benefit plan, and, therefore, need not
consolidate it. However, the employee benefit plan would need to apply IFRS 10 if it is
preparing financial statements under IAS 26 – Accounting and Reporting by Retirement
Benefit Plans.
In contrast, employee benefit trusts (or similar entities) established for employee share
option plans, employee share purchase plans and other share-based payment
programmes are not excluded from the scope of IFRS 10. This is because these are
outside the scope of IAS 19. The sponsoring entity of these trusts needs to evaluate
whether it controls (and therefore consolidates) the trusts. If the trust is treated as an
extension of the employer or sponsoring entity (see Chapter 30 at 12.3) its assets and
liabilities will already be included in the financial statements of the employer entity that
are used for preparing the consolidated financial statements of the group. If the trust is
not accounted for as an extension of the employer or sponsoring entity, the parent will
need to assess whether the trust, as a separate vehicle, needs to be consolidated
according to the control criteria of IFRS 10.
Consolidated financial statements 371
The diagram below illustrates what is in scope and out of scope of IFRS 10.
Figure 6.2:
Understanding scope in employee benefit plans and employee
share option plans
Relationship between
Relationship between
plan sponsor and EBP
Ultimate parent of
plan sponsor and
trust is outside the
operating subsidiary
ESOP trust is within
scope of IFRS 10
the scope of IFRS 10
(not considered for
Plan sponsor
(consider for control)
control)
Employee stock
Employee benefit
Operating
ownership plan
plan (EBP) trust
subsidiary
(ESOP) trust
Investments held
Operating
Operating
Investments held
by EBP trust
subsidiary
subsidiary
by ESOP trust
Relationships inside dashed boxes are also within
the scope of IFRS 10 (considered for control) for
the entity at the top of the relevant dashed box
2.2.3
Investment entity exception
As an exception to the consolidation rule, a parent that is an investment entity shall not
present consolidated financial statements if it is required to measure all of its
subsidiaries at fair value through profit or loss. [IFRS 10.4B]. This is discussed at 10.3 below.
2.2.4
Entity no longer a parent at the end of the reporting period
It is not clear whether IFRS 10 requires an entity to prepare consolidated financial
statements only if it is a parent at the end of the reporting period or also if it was a parent
at any time during the reporting period.
In our view, consolidated financial statements must be prepared by an entity that was a
parent during the reporting period, even if that entity is no longer a parent at the end of
the reporting period (e.g. because it disposed of all its subsidiaries). IFRS 10 requires a
parent to consolidate a
subsidiary until the date on which the parent ceases to control
the subsidiary. [IFRS 10.20]. This means that if a parent does not prepare consolidated
financial statements pursuant to a concession in local law (see 2.2.5 below), the parent
may not present separate financial statements in compliance with IFRS.
Likewise, we believe that an entity that had an associate, or an interest in a joint venture,
during the reporting period but no longer does so at end of the reporting period, must
apply IAS 28 and/or IFRS 11 to those investments in its financial statements for the
reporting period, if not otherwise exempt from doing so.
372 Chapter
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2.2.5
Interaction of IFRS 10 and EU law
For entities incorporated in the EU there may, in some cases, be a subtle interaction
between the requirements to prepare consolidated financial statements in accordance
with IFRS as issued by IASB and IFRS as adopted by the EU. The determination of
whether or not consolidated financial statements are required is made under the
relevant national legislation based on the EU Accounting Directive and not IFRS 10.1 In
the majority of cases this is a technicality with little practical effect. In some cases,
however, there will be differences because IAS 27 states that an entity may present
separate financial statements as its sole financial statements only if it is exempt from
preparing consolidated financial statements under paragraph 4(a) of IFRS 10. [IAS 27.8].
When an entity is therefore not explicitly required to prepare consolidated financial
statements under national legislation based on the EU Accounting Directive, even
though IFRS 10 would oblige it to do so, it will not meet the criterion for exemption
under paragraph 4(a) of IFRS 10. Consequently, that entity could not present separate
financial statements in purported compliance with IFRS as issued by the IASB. An
example of this situation would be an entity that has an investment in an entity that is
not a subsidiary undertaking under national legislation based on the EU Accounting
Directive, but is a subsidiary under IFRS 10.
However, in November 2006 the European Commission stated that in its opinion ‘a
parent company always has to prepare annual accounts as defined by the 4th Directive.
Where, under the 7th Company Law Directive, a parent company is exempted from
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 74
