Example 7.1:
Potential voting rights ......................................................................... 469
Example 7.2:
Eliminating intragroup transactions .................................................. 471
Example 7.3:
Acquisition of a subsidiary that is not a business ........................... 474
Example 7.4:
Disposal of a subsidiary ....................................................................... 477
Example 7.5:
Loss of control of a subsidiary that does not contain a
business as a result of a transaction involving an associate ........ 483
Example 7.6:
Sale of a subsidiary to an existing associate ................................... 484
Example 7.7:
Step-disposal of a subsidiary (1) ......................................................... 487
Example 7.8:
Step-disposal of a subsidiary (2) ....................................................... 488
Example 7.9:
Reclassification of other comprehensive income ......................... 490
Example 7.10:
Deemed disposal through share issue by subsidiary .................... 492
Example 7.11:
Reattribution of other comprehensive income upon a
decrease in ownership interest that does not result in a
loss of control ....................................................................................... 496
Example 7.12:
Reattribution of other comprehensive income upon an
increase in ownership interest ........................................................... 497
Example 7.13:
Reclassification of reattributed exchange differences upon
subsequent loss of control .................................................................. 497
Example 7.14:
Reallocation of goodwill to non-controlling interests ................. 498
Example 7.15:
Initial measurement of non-controlling interests in a
business combination (1) .................................................................... 504
Example 7.16:
Initial measurement of non-controlling interests in a
business combination (2) .................................................................... 505
Example 7.17:
Initial measurement of non-controlling interests in a
business combination by a partly owned subsidiary .................... 505
Example 7.18:
Measurement of non-controlling interest where an associate
accounted using the equity method holds an interest in a
subsidiary ............................................................................................... 506
Example 7.19:
Put option and gaining control accounted for as a single
transaction ............................................................................................. 522
467
Chapter 7
Consolidation
procedures and
non-controlling interests
1 INTRODUCTION
Chapter 6 discusses the requirements of IFRS 10 – Consolidated Financial Statements –
relating to the concepts underlying control of an entity (a subsidiary), the requirement to
prepare consolidated financial statements and what subsidiaries are to be consolidated
within a set of consolidated financial statements. The development, objective and scope
of IFRS 10 are dealt with in Chapter 6 at 1.2 and 2.
This chapter deals with the accounting requirements of IFRS 10 relating to the
preparation of consolidated financial statements.
2 CONSOLIDATION
PROCEDURES
2.1 Basic
principles
Consolidated financial statements represent the financial statements of a group (i.e. the
parent and its subsidiaries) in which the assets, liabilities, equity, income, expenses and
cash flows of the parent and its subsidiaries are presented as those of a single economic
entity. [IFRS 10 Appendix A]. This approach is referred to as ‘the entity concept’. As noted in
Chapter 6 at 10, an investment entity generally measures its investments in subsidiaries at
fair value through profit or loss in accordance with IFRS 9 – Financial Instruments – with
limited exceptions. [IFRS 10.31-33].
When preparing consolidated financial statements, an entity first combines the financial
statements of the parent and its consolidated subsidiaries on a ‘line-by-line’ basis by
adding together like items of assets, liabilities, equity, income, expenses and cash flows.
IFRS 10 requires a parent to prepare consolidated financial statements using uniform
accounting policies for like transactions and other events in similar circumstances
(see 2.6 below). [IFRS 10.19, 21, B87]. Consolidation of an investee begins from the date the
investor obtains control of the investee and ceases when the investor loses control of
the investee. [IFRS 10.20, 21, B88].
468 Chapter
7
In order to present financial information about the group as that of a single economic
entity, the entity must: [IFRS 10.21, B86]
(a) combine like items of assets, liabilities, equity, income, expenses and cash flows of
the parent with those of its subsidiaries;
(b) offset (eliminate) the carrying amount of the parent’s investment in each subsidiary
and the parent’s portion of equity of each subsidiary (IFRS 3 – Business
Combinations – explains how to account for any related goodwill, [IFRS 3.B63(a)], –
see Chapter 9 at 13); and
(c) eliminate in full intragroup assets and liabilities, equity, income, expenses and cash
flows relating to transactions between entities of the group (profits or losses resulting
from intragroup transactions that are recognised in assets, such as inventory and
fixed assets, are eliminated in full). Intragroup losses may indicate an impairment
that requires recognition in the consolidated financial statements. IAS 12 – Income
Taxes – applies to temporary differences that arise from the elimination of profits
and losses resulting from intragroup transactions. See 2.4 below.
Income and expenses of a subsidiary are based on the amounts of the assets and
liabilities recognised in the consolidated financial statements at the acquisition date.
IFRS 10 gives the example of depreciation expense, which will be based on the fair
values of the related depreciable assets recognised in the consolidated financial
statements at the acquisition date, [IFRS 10.21, B88], but many items will have a fair value
on acquisition that will affect subsequent recognition of income and expense.
Point (b) above refers to the elimination of the parent’s investment and the parent’s
portion of equity. The equity in a subsidiary not attributable, directly or indirectly, to
the parent, represents a non-controlling interest. [IFRS 10 Appendix A]. The profit or loss
and each component of other comprehensive income of a subsidiary are attributed to
the owners of the parent and to the non-controlling interests. [IFRS 10.24, B94]. Non-
controlling interests in subsidiaries are presented within equity, separately from the
equity of the owners of the parent, [IFRS 10.22], and changes in a parent’s ownership
interest in a subsidiary that do not result in the parent losin
g control of the subsidiary
are accounted for as equity transactions. [IFRS 10.23]. Accounting for non-controlling
interests is discussed in more detail at 2.2 and 5 below.
2.2 Proportion
consolidated
The basic procedures described above effectively mean that 100% of the assets,
liabilities, income, expenses and cash flows of a subsidiary are consolidated with those
of the parent, irrespective of the parent’s ownership interest in the subsidiary.
However, the profit or loss and each component of other comprehensive income of the
subsidiary, and the equity of the subsidiary, are attributed to the parent and the non-
controlling interest (if the subsidiary is not wholly owned).
As discussed in Chapter 6 at 4.3.4, when assessing control, an investor considers any
potential voting rights that it holds as well as those held by others. Common examples
of potential voting rights include options, forward contracts, and conversion features of
a convertible instrument.
Consolidation procedures and non-controlling interests 469
If there are potential voting rights, or other derivatives containing potential voting
rights, the proportion of profit or loss, other comprehensive income and changes in
equity allocated to the parent and non-controlling interests (see 5.5 below) in preparing
consolidated financial statements is generally determined solely on the basis of existing
ownership interests. It does not reflect the possible exercise or conversion of potential
voting rights and other derivatives. [IFRS 10.21, 24, B89, B94].
Usually, there is no difference between the existing ownership interests and the present
legal ownership interests in the underlying shares. However, allocating the proportions
of profit or loss, other comprehensive income, and changes in equity based on present
legal ownership interests is not always appropriate. For example, there may be
situations where the terms and conditions of the potential voting rights mean that the
existing ownership interest does not correspond to the legal ownership of the shares.
IFRS 10 recognises that, in some circumstances, an entity has, in substance, an existing
ownership interest as a result of a transaction that currently gives it access to the returns
associated with an ownership interest. In such circumstances, the proportion allocated
to the parent and non-controlling interests is determined by taking into account the
eventual exercise of those potential voting rights and other derivatives that currently
give the entity access to the returns. [IFRS 10.21, B90].
Where this is the case, such instruments are not within the scope of IFRS 9 (since IFRS 9
does not apply to subsidiaries that are consolidated). [IFRS 9.2.1(a)]. This scope exclusion
prevents double counting of the changes in the fair value of such a derivative under
IFRS 9, and of the effective interest created by the derivative in the underlying
investment. In all other cases, instruments containing potential voting rights in a
subsidiary are accounted for in accordance with IFRS 9. [IFRS 10.21, B91].
Example 7.1 below illustrates this principle.
Example 7.1:
Potential voting rights
Entities A and B hold 40% and 60%, respectively, of the equity of Entity C. Entity A also holds a currently
exercisable option over one third of Entity B’s holding (of shares in Entity C) which, if exercised, would give
Entity A a 60% interest in Entity C. The terms of the option are such that it leads to the conclusion that Entity C
is controlled by and therefore is a subsidiary of Entity A, but do not give Entity A present access to the returns
of the underlying shares. Therefore, in preparing its consolidated financial statements, Entity A attributes 60%
of profit or loss, other comprehensive income and changes in equity of Entity C to the non-controlling interest.
Whether potential voting rights and other derivatives, in substance, already provide
existing ownership interests in a subsidiary that currently give an entity access to the
returns associated with that ownership interest will be a matter of judgement. Issues
raised by put and call options over non-controlling interests, including whether or not
such options give an entity present access to returns associated with an ownership
interest (generally in connection with a business combination) are discussed further at 6
below. This chapter uses the term ‘present ownership interest’ to include existing legal
ownership interests together with potential voting rights and other derivatives that, in
substance, already provide existing ownership interests in a subsidiary.
The proportion allocated between the parent and a subsidiary might differ when a non-
controlling interest holds cumulative preference shares (see 5.5 below).
470 Chapter
7
2.2.1 Attribution
when
non-controlling
interests change in an accounting
period
Non-controlling interests may change during the accounting period. For example, a
parent may purchase shares in a subsidiary held by non-controlling interests.
By acquiring some (or all) of the non-controlling interest, the parent will be allocated a
greater proportion of the profits or losses of the subsidiary in periods after the
additional interest is acquired. [IFRS 10.BCZ175].
Therefore, the profit or loss and other comprehensive income of the subsidiary for
the part of the reporting period prior to the transaction are attributed to the owners
of the parent and the non-controlling interest based on their ownership interests
prior to the transaction. Following the transaction, the profit or loss and other
comprehensive income of the subsidiary are attributed to the owners of the parent
and the non-controlling interest based on their new ownership interests following
the transaction.
2.3
Consolidating foreign operations
IFRS 10 does not specifically address how to consolidate subsidiaries that are foreign
operations. As explained in IAS 21 – The Effects of Changes in Foreign Exchange Rates,
an entity may present its financial statements in any currency (or currencies). If the
presentation currency differs from the entity’s functional currency, it needs to translate
its results and financial position into the presentation currency. Therefore, when a
group contains individual entities with different functional currencies, the results and
financial position of each entity are translated into the presentation currency of the
consolidated financial statements. [IAS 21.38]. The requirements of IAS 21 in respect of
this translation process are explained in Chapter 15 at 6.
A reporting entity comprising a group with intermediate holding companies may adopt
either the direct method or the step-by-step method of consolidation. IFRIC 16 –
Hedges of a Net Investment in a Foreign Operation – refers to these methods as follows:
[IFRIC 16.17]
• direct method – The financial statements of the foreign operation are translated
directly into the functional currency of the ultimate parent.
• step-by-step method – The financial statements of the foreign operation are first
translated into the functional currency of any intermediate parent(s) and then
translated into the functional currency of the ultimate parent (or the presentation
currency, if different).
An entity has an accounting policy choice of which method to use, which it must apply
consistently for all net investments in foreign operations. [IFRIC 16.17]. It is asserted that
both methods produce the same amounts in the presentation currency. [IAS 21.BC18]. We
agree that both methods will result in the same amounts in the presentation currency
for the statement of financial position. However, this does not necessarily hold true for
income and expense items particularly if an indirectly held foreign operation is disposed
of (as acknowledged in IFRIC 16, and discussed below). Differences will also arise
between the two methods if an average rate is used, although these are likely to be
insignificant. See Chapter 15 at 6.1.1, 6.1.5 and 6.6.3.
Consolidation procedures and non-controlling interests 471
IFRIC 16 explains:
‘The difference becomes apparent in the determination of the amount of the
foreign currency translation reserve that is subsequently reclassified to profit or
loss. An ultimate parent entity using the direct method of consolidation would
reclassify the cumulative foreign currency translation reserve that arose between
its functional currency and that of the foreign operation. An ultimate parent entity
using the step-by-step method of consolidation might reclassify the cumulative
foreign currency translation reserve reflected in the financial statements of the
intermediate parent, i.e. the amount that arose between the functional currency of
the foreign operation and that of the intermediate parent, translated into the
functional currency of the ultimate parent.’ [IFRIC 16.BC36].
IFRIC 16 also provides guidance on what does and does not constitute a valid hedge of
a net investment in a foreign operation, and on how an entity should determine the
amounts to be reclassified from equity to profit or loss for both the hedging instrument
and the hedged item, where the foreign operation is disposed of. It notes that in a
disposal of a subsidiary by an intermediate parent, the use of the step-by-step method
of consolidation may result in the reclassification to profit or loss of a different amount
from that used to determine hedge effectiveness. An entity can eliminate this difference
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 93
