IFRS 10

Definition

IFRS 10 is an International Financial Reporting Standard that establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. This standard provides a framework to determine whether an investor controls an investee and therefore should consolidate that investee’s financial statements into their own, focusing on the concept of control rather than just ownership.

5 Must Know Facts For Your Next Test

1. IFRS 10 was issued in May 2011 and replaces the previous guidance on consolidation found in IAS 27 and SIC-12.
2. The standard emphasizes that control is the basis for consolidation and defines control as having power over an investee, exposure or rights to variable returns from involvement with the investee, and the ability to use power to affect those returns.
3. Entities must reassess whether they control an investee whenever facts and circumstances indicate that there may be a change in one or more of the elements of control.
4. IFRS 10 applies to all entities, including investment entities that are exempt from consolidating their subsidiaries if they meet specific criteria.
5. A parent is required to prepare consolidated financial statements unless it meets certain criteria to qualify for an exemption under IFRS 10.

Review Questions

• How does IFRS 10 define control and what are the key components that must be present for consolidation?
  • IFRS 10 defines control as the ability to govern the financial and operating policies of an investee to obtain benefits from its activities. The key components include having power over the investee, being exposed or having rights to variable returns from involvement with the investee, and the ability to use that power to affect those returns. This definition moves beyond just ownership percentages and focuses on actual decision-making power.
• Discuss the impact of IFRS 10 on how companies assess their investments in subsidiaries compared to previous standards.
  • With IFRS 10 replacing previous standards like IAS 27, companies now place a greater emphasis on control rather than just ownership when determining whether to consolidate an investment. This means that entities must carefully analyze their relationships with investees and consider various factors that may indicate control. As a result, more entities may find themselves consolidating subsidiaries they previously wouldn't have under older standards due to changes in how control is assessed.
• Evaluate how IFRS 10 affects financial reporting practices for diverse entities including investment companies and private equity firms.
  • IFRS 10 significantly influences financial reporting practices by requiring entities like investment companies and private equity firms to analyze their level of control over subsidiaries closely. While these types of entities may often seek to avoid consolidation for operational simplicity or investment clarity, IFRS 10 sets clear guidelines on when control exists. The standard allows investment entities certain exemptions but requires them to meet strict criteria. This dual approach ensures that while investment-focused entities can operate efficiently, transparency in financial reporting is maintained across all sectors.

Related terms

Control: The power to govern the financial and operating policies of an entity to obtain benefits from its activities.

Consolidated Financial Statements: Financial statements that present the assets, liabilities, equity, income, expenses, and cash flows of a parent and its subsidiaries as a single entity.

Subsidiary: An entity that is controlled by another entity, known as the parent, and is included in the consolidated financial statements.