Resources (This includes links to the latest standards, drafts, PwC interpretations, tools and practice aids for this topic)
In September 2014 the IASB released amendments to IFRS 10, 'Consolidated financial statements' and IAS 28, 'Investments in associates and joint ventures'. These amendments address an inconsistency between the requirements in IFRS 10 and those in IAS 28 in dealing with the sale or contribution of assets between an investor and its associate or joint venture. The main consequence of the amendments is that a full gain or loss is recognised when a transaction involves a business (whether it is housed in a subsidiary or not). A partial gain or loss is recognised when a transaction involves assets that do not constitute a business, even if these assets are housed in a subsidiary. The IASB has decided to postpone the effective date of this amendment (which is also subject to EU endorsement) pending the outcome of the research project on the equity method of accounting. At its meeting in May 2016 the Board decided to defer work on the Equity Method research project until the Post-implementation Reviews (PIR) of IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other Entities are undertaken.
The principles concerning consolidated financial statements under IFRS are set out in IFRS 10, ‘Consolidated financial statements’. IFRS 10 has a single definition of control.
IFRS 10’s objective is to establish principles for presenting and preparing consolidated financial statements when an entity controls one or more entities. IFRS 10 sets out the requirements for when an entity should prepare consolidated financial statements, defines the principles of control, explains how to apply the principles of control and explains the accounting requirements for preparing consolidated financial statements. [IFRS 10 para 2].
The key principle is that control exists, and consolidation is required, only if the investor possesses power over the investee, has exposure to variable returns from its involvement with the investee and has the ability to use its power over the investee to affect its returns.
IFRS 10 provides guidance on the following issues when determining who has control:
- Assessment of the purpose and design of an investee.
- Relevant activities and power to direct those.
- Nature of rights – whether substantive or merely protective in nature.
- Assessment of voting rights and potential voting rights.
- Whether an investor is a principal or an agent when exercising its controlling power.
- Relationships between investors and how they affect control.
- Existence of power over specified assets only.
In difficult situations, the precise facts and circumstances will affect the analysis under IFRS 10. IFRS 10 does not provide ‘bright lines’ and requires consideration of many factors, such as the existence of contractual arrangements and rights held by other parties, in order to assess control.
IFRS 10 does not contain any disclosure requirements; these are included within IFRS 12. Reporting entities should plan for, and implement, the processes and controls that will be required to gather the required information. This may involve a preliminary consideration of IFRS 12 issues such as the level of disaggregation required.