Overview of Consolidation Requirements under IFRS 10IFRS 10 *Consolidated Financial Statements* establishes the principle that a parent entity must present consolidated financial statements that consolidate all subsidiaries — entities over which the parent has control (IFRS 10.19). The standard replaced IAS 27 (consolidated provisions) and SIC-12, unifying the control model across all types of investees.
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The Control Model — Three Elements
IFRS 10 defines control as the foundation for consolidation. An investor controls an investee when it simultaneously satisfies all three elements (IFRS 10.7):
- Power over the investee — the investor has existing rights that give it the current ability to direct the relevant activities (those that significantly affect the investee's returns) (IFRS 10.10–14).
- Exposure, or rights, to variable returns — the investor is exposed to, or has rights to, returns from its involvement that can vary (positive or negative), such as dividends, cost savings, or residual interests (IFRS 10.15).
- Ability to use power to affect returns — the investor can use its power over the investee to influence the amount of those variable returns (IFRS 10.17).
All three elements must be present continuously. If facts and circumstances change, reassessment of control is required (IFRS 10.8).
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Assessing Power
Power typically arises from voting rights, but can also come from contractual arrangements, potential voting rights, or de facto power where an investor holds less than a majority of votes but still directs relevant activities in practice (IFRS 10.B41–B45). Relevant activities are those that most significantly affect the investee's economic returns.
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Consolidation Procedures
Once control is established, the parent must (IFRS 10.19–10.26B):
- Combine like items of assets, liabilities, equity, income, expenses, and cash flows of the parent and subsidiaries on a line-by-line basis.
- Eliminate the carrying amount of the parent's investment in each subsidiary against the parent's portion of equity in that subsidiary.
- Eliminate intragroup transactions, balances, income, and expenses in full (IFRS 10.B86).
- Identify and present non-controlling interests (NCI) separately within equity, not as a liability (IFRS 10.22).
- Use uniform accounting policies across the group; adjustments must be made if a subsidiary uses different policies (IFRS 10.B87).
- Align reporting dates — if a subsidiary's year-end differs by more than three months, adjusted financial statements must be prepared (IFRS 10.B92–B93).
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Exemptions from Preparing Consolidated Financial Statements
A parent need not present consolidated financial statements if it meets all conditions in IFRS 10.4(a):
- It is itself a wholly-owned or partially-owned subsidiary where owners do not object.
- Its debt or equity instruments are not publicly traded.
- It is not in the process of issuing instruments in public markets.
- Its ultimate or intermediate parent produces IFRS-compliant consolidated financial statements available for public use.
Investment entities (as defined in IFRS 10.27) are also exempt from consolidating subsidiaries they control, instead measuring them at fair value through profit or loss (IFRS 9/IFRS 10.31).
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Key Disclosure Requirement
Entities must disclose the judgements and assumptions used in determining control, particularly in complex structures involving structured entities or de facto control (IFRS 12.7–19).
