IFRS 10 is an accounting standard that provides guidance for companies with multiple entities to remain compliant when consolidating their financials. It’s similar to ASC 810 (the US GAAP accounting standard for financial consolidation) but differs in some key areas. Although, it’s important to note that both will usually result in the same conclusions. Companies that need to prepare financial statements under IFRS rules must pay close attention to the guidelines set out under IFRS 10.
This blog covers four key pieces of information that any company with multiple entities should consider under the IFRS guidelines. This is not a comprehensive guide to IFRS 10, rather a primer so your team can clearly understand the complexities introduced by the accounting standard.
1. The objectives of IFRS 10 for consolidated financial statements
When it comes to IFRS 10, it’s best first to understand the objectives set out under the accounting standard. Put simply, IFRS 10 establishes principles for presenting and preparing consolidated financial statements when an entity controls one or more other entities.
Here are the key objectives of IFRS 10
- Requires an entity (the parent) that controls one or more other entities (subsidiaries) to present consolidated financial statements.
- Defines the principle of control, and establishes control as the basis for consolidation;
- Sets out how to apply the principle of control to identify whether an investor controls an investee and must consolidate the investee.
- Sets out the accounting requirements for the preparation of consolidated financial statements.
- Defines an investment entity and sets out an exception to consolidating particular subsidiaries of an investment entity.
2. Financial consolidation is based on identifying control
If you’re consolidating financial statements under IFRS 10, then the model is based on an investor’s control of an investee. Control is defined by the IFRS in the guidelines as follows, “An investor controls an entity when it is exposed, or has rights to variable returns with its involvement with the investee and has the ability to affect those returns through its power over the investee.”
When a company is trying to identify which entities have power or control, they should consider each entity’s rights. Power usually arises from an entity’s rights, such as voting rights, the right to appoint key personnel, the right to appoint key staff, the right to decisions within a management contract, and removal rights. It’s important to note that protective rights do not result in power or control.
It’s also essential to assess the returns of the investor. Often an investor has the right to variable returns based on its involvement with the investee. Returns are not necessarily positive and can be negative, or a mix of both positive and negative. Some examples of returns include remuneration, cost savings, scarce products, proprietary knowledge, dividends, etc.
3. The decision tree for IFRS 10
As there’s only one model, there’s no official decision tree set out under IFRS 10. However, the following decision tree allows you to assess if IFRS 10 is the accounting standard that best suits your needs.
4. Guidance for preparing consolidated financial statements under IFRS 10
We recommend reading the IFRS 10 guidelines in full. Here is a summary of just some of the critical areas the guidelines cover:
- Elimination of intra-group transactions and the parent’s investment.
- Introduction and adherence to uniform accounting principles.
- Financial statements used in the consolidation must all have reports issued with the same date.
- Accounting for losing control of a subsidiary.
- Accounting for changes in ownership interests where control is retained.
- Allocating comprehensive equity and income to subsidiaries.
Choose accounting software built to handle the complexities of IFRS 10
When it comes to compliance for financial consolidation, most companies will face a few challenges. You must invest in software that can appropriately meet the demands of accounting for multiple entities under IFRS regulations. Why not check out Multi-Entity Management, a solution built to help your company simplify processes and streamline financial consolidations.