IFRS 10, Consolidated Financial Statements, is a standard issued by the International Accounting Standards Board (IASB) that provides guidance on how to prepare and present consolidated financial statements for a group of entities under the control of a parent company. The standard aims to ensure that the financial statements of the parent and its subsidiaries are presented as a single economic entity, providing users with a complete picture of the group’s financial performance and position.
Under IFRS 10, a parent company is defined as an entity that has control over one or more other entities, known as subsidiaries. Control is defined as the power to govern the financial and operating policies of an entity, with the ability to direct the activities that significantly affect its returns. Control can be achieved through ownership of voting rights, contracts, or other arrangements.
The standard requires a parent company to consolidate the financial statements of all its subsidiaries, except in certain limited circumstances, such as when the subsidiary is held for sale or operates under severe long-term restrictions that significantly impair its ability to transfer funds to the parent company.
When preparing consolidated financial statements, the parent company is required to combine the financial statements of its subsidiaries using uniform accounting policies. Any intra-group transactions, balances, and unrealized gains and losses are eliminated. The parent company must also disclose the nature of its relationship with its subsidiaries, including any non-controlling interests.
Here are a few examples to illustrate the application of IFRS 10:
Company A owns 100% of Company B, which in turn owns 60% of Company C. Company C also has a 40% non-controlling interest held by an external party. Company A is required to consolidate the financial statements of both Company B and Company C. The non-controlling interest in Company C is shown separately in the consolidated financial statements.
Company A owns 80% of Company B and 60% of Company C. Company B and Company C have no other shareholders. In this case, Company A is required to consolidate the financial statements of Company B and Company C, but the consolidated financial statements will reflect only 100% of Company B and 60% of Company C. The remaining 40% of Company C’s equity will be shown as a non-controlling interest.
IFRS 10 has been subject to several developments and updates since its initial issuance, including amendments related to the definition of a business, the treatment of investment entities, and the disclosure of interests in other entities. One notable development is the IASB’s ongoing project to replace IFRS 10 with a new standard on business combinations, which is expected to be completed in the next few years.
In conclusion, IFRS 10 is an important standard for preparing consolidated financial statements, providing guidance on the definition of a parent company, the treatment of subsidiaries, and the elimination of intra-group transactions. Examples and case studies can help illustrate the application of the standard in various scenarios, while ongoing developments and updates demonstrate the continued evolution of accounting standards in response to changing business practices and stakeholder needs