IFRS 10 is the International Financial Reporting Standard (IFRS) that gives rules on the presentation and preparation of consolidated financial statements. It makes the principle of control the foundation of understanding which entities are to be consolidated by a parent company in its consolidated financial reports. International Financial Reporting Standard 10 control framework supersedes IAS 27 Consolidated and Separate Financial Statements and SIC-12 Special Purpose Entities (SPEs). This article discusses the major principles of IFRS, its consolidation process, implementation factors, and differences between IAS 27 and IFRS 10.
What is IFRS 10?
IFRS 10 consolidated financial statements is a standard issued by the International Accounting Standards Board (IASB) that specifies how a parent entity should prepare consolidated financial statements. It gives an investor a single control model for determining whether it controls an investee.
Scope of IFRS 10
IFRS 10 applies to all parent companies with control over their subsidiaries, with exemptions applicable to investment entities and special purpose entities (SPEs) where a parent has control. However, it does not apply to a parent entity’s separate financial statements, which falls in the domain of IAS 27. This standard also provides guidelines for the proper consolidation of financial statements.
The Control Principle in IFRS 10
A parent is required to consolidate a subsidiary when that parent has control. International Financial Reporting Standard 10 provides a definition of control along 3 elements:
- Power Over the Investee: A parent has power when it has rights that can direct the relevant activities of an investee. That can be through voting rights, its control of the board or contractual terms. Being the parent: Where the parent makes key decisions that impact the operations and financial performance of the subsidiary.
- Exposure to Variable Returns: The parent should be exposed by the parent to the returns (profit or loss) from the investment in the subsidiary. Return is the term used to describe an investment’s financial (dividends, capital gains, etc.) or non-financial (synergies, strategic benefits, etc.) outcome. Higher exposure to variable returns means a stronger financial relationship between the parent and the subsidiary.
- Ability to Influence Returns: A parent has restrictive power if it has the power to inhibit its financial returns. Guiding operational policies, financial strategies, or major business decisions. The parent can guide corporate objectives and maximize total profits by maintaining good control over the subsidiary.
IFRS 10 Control Examples
IFRS 10 defines control in terms of voting rights, management influence, and decision-making power. An entity is not required to present the quantitative information required by paragraph 28(f) of IAS 8 for the annual period immediately preceding the date of initial application of the standard (the beginning of the annual reporting period for which IFRS 10 is first applied) [IFRS 10:C2A-C2B]. However, an entity may choose to present adjusted comparative information for earlier reporting periods, any must clearly identify any unadjusted comparative information and explain the basis on which the comparative information has been prepared [IFRS 10.C6A-C6B].
| Scenario | Control Exists? | Explanation |
| The parent holds 60% voting rights in Subsidiary A. | Yes | The parent controls the majority of votes. |
| The parent owns 40% of Subsidiary B but has management control. | Yes | Power over decision-making even with minority ownership. |
| The parent owns 30% of Subsidiary C but has no voting rights. | No | No power over financial and operating policies. |
| The parent holds 50% of Subsidiary D, with joint control. | No | Joint control leads to equity accounting under IFRS 11. |
Consolidation Procedures Under IFRS 10
A reporting entity includes the income and expenses of a subsidiary in the consolidated financial statements from the date it gains control until the date when the reporting entity ceases to control the subsidiary. Income and expenses of the subsidiary are based on the amounts of the assets and liabilities recognised in the consolidated financial statements at the acquisition date. [IFRS 10:B88]
Identifying the Parent and Subsidiaries
Under International Financial Reporting Standard 10, a parent is defined as an entity that controls one or more subsidiaries. The parent has a right to direct relevant activities, the parent is subject to variable returns, and the parental right is directed at materially influencing those returns. The parent shall consolidate all of its subsidiaries, including special purpose entities (SPEs), that meet the criteria in IFRS. This guarantees the group’s financial position and performance are clearly and accurately represented.
Combining Financial Statements
The parent must consolidate all of its subsidiaries’ assets, liabilities, income, and expenses. This includes consolidating financial statements from all group entities. Intercompany, intra-group sales, loans, and transfers of goods and services need elimination to avoid double counting. Excluding these transactions will prevent the consolidated financial statement from providing a true and fair view of the financial position of any group.
Non-Controlling Interests (NCI)
Non-controlling interests (NCI) reflect the stakes other stakeholders own in a not-wholly-owned subsidiary by the parent company. The parent would have to disclose NCI separately in the equity component of the balance sheet. The proportionate share of the profit or loss relating to NCI must also be reported separately in the income statement. Transparency, and therefore, the appraisal of financial performance by stakeholders owing to the financial effect of the minority stakeholders, is ensured if NCI is disclosed accordingly.
Goodwill Recognition
The parent company will recognize goodwill in acquiring the subsidiary as the difference between the purchase price and the fair value of the identifiable net assets acquired. Goodwill reflects the expected future economic benefits from the purchase. Goodwill is not amortized, unlike other assets, and is subject to an annual impairment test under IAS 36. If impairment, the company writes down the value of goodwill to enable the financial statements to crop up with the group’s assets.
Reporting the Consolidated Financial Statements
The parent company must consolidate the financial statements to show the financial position and performance of the entire group. The balance sheet consolidates the collective assets and liabilities of all subsidiaries, representing the overall financial power of the group.
The income statement contains the revenues and expenses of both the parent and its subsidiaries, giving you a full snapshot of profitability. The cash flow statement captures cash movements throughout the group, providing stakeholders insight into liquidity and cash management strategies.
IAS 27 vs IFRS 10: Key Differences in Consolidation
IAS 27 versus IFRS 10 — control definition and application are most widely differing under IAS 27 and IFRS 10 based on the notion of consolidation? In contrast to IAS 27’s emphasis on percentage ownership, the International Financial Reporting Standard 10 retains principle-based consideration of power, exposure and influence. Companies transitioning to this IFRS should be also aware of accounting differences for proper financial reporting purposes.
| Feature | IFRS 10 | IAS 27 |
| Control Definition | Principle-based (power, exposure, influence). | Based on ownership percentage. |
| Scope | Applies to all types of entities. | Focuses on legal subsidiaries only. |
| Consolidation of SPEs | Requires consolidation if control exists. | No clear guidance. |
| Investment Entities | Exempt from consolidation. | No exemption is provided. |
Considerations in Implementing IFRS 10
IFRS 10 compliance requires organizations to adapt consolidated reporting methodologies and their financial reporting approach. These issues need to be resolved to get companies in line with IFRS.
- Assessing Control Over Subsidiaries: Businesses need to tentative control over investees, for instance, joint ventures and structured entities. Or entities falling under International Financial Reporting Standard 10 special purpose entities (SPEs) that needs special consideration in determining control. As a result, indeed, an accurate evaluation guarantees the right consolidation of each subsidiary in the financial reports, which in turn improves transparency and compliance with the IFRS.
- Data and System Updates: Financial systems must be updated to automate consolidation processes. Organizations must connect their financial, operational, and risk management data. Cutting-edge technology and automation enable greater efficiency in consolidation processes, with a marked reduction in errors, leading to increased efficiency in financial reporting.
- Aligning Accounting Policies: The Parent and subsidiary financial statements must agree on the reporting dates and any accounting policies. International Financial Reporting Standard 10 mandates consistency of accounting treatments among every group of entities. A continuing application of accounting policies will allow accurate financial comparability, maintain consistency between entities, and avoid differences in consolidated financial statements.
- Enhancing Financial Disclosures: The ability to control IFRS 10 better should be disclosed in the financial statements. This will help companies better understand what control assessments require detailed justifications. Transparent disclosures provide investors and regulators with a clear understanding of the basis of consolidation, assuring them that its reporting adheres to accepted standards.
- Conformance with International Standards: For the companies conducting businesses in different jurisdictions, Implementation of International Financial Reporting Standard 10 must be in sync with the national regulations Regulatory authorities might demand enhanced disclosures and more comprehensive commentary. By adhering to the requirements of different jurisdictions, IFRS has successfully established its identity as a commercial standard for reporting, preventing companies from having to bear significant financial costs.
Relevance to ACCA Syllabus
IFRS 10 Matters to ACCA students as it specifies rules for showing consolidated financial statements It sets out control principles that help determine which parties are to be consolidated. International Financial Reporting Standard 10 is a core area of study for Financial Reporting (FR) and Strategic Business Reporting (SBR) exams, under which candidates need to apply consolidation techniques and assess their impact on a group structure.
IFRS 10 ACCA Questions
Q1: At what point should an entity recognize share-based payments under IFRS 10?
A) When shares are granted
B) When shares are vested
C) When services are received
If the company purchases the shares for cashD)
Ans: C) when service is rendered
Q2. How Pertain to IFRS 10 for equity settled share based payments?
B) In case of fair value of goods or services received
B) Fair value of granted equity instruments
C) The book value of the stock shares issued
D) At fair value of equity instrument
Ans: B) At fair value of the equity instruments granted
Q3: If the share-based payment is cash settled what is the accounting treatment?
A) Identity as equity transaction
B) Fair value at grant date, does not remeasure
C) Somewhat of a liability and remeasured to fair value each reporting period until settled
D) Expense but not a liability
Ans: C) Liability and then remeasured at fair value until extinguished
Q4: All of the following are the key features of IFRS 10 except
A) reporting share based transaction at fair value
To account for share-based payments as expenses.
D) Not accounted for in the statements = share based payments
D) Required disclosure of share transactions and share-based transactions in the notes to financial statements
Ans: C) Not included in financial statements for share based payments
Q5: What is a share-based payment with non-market vesting conditions?
A) It is disregarded in determining the grant-date fair value
B) It adjusts the expectation of vesting shares
C) It is remeasured in every reporting period
Financial statements under a basis of the financial statements it will only be disclosed in the notes but not recognized.
Ans: B) It gives an effect on number of underlying shares on vesting
Relevance to US CMA Syllabus
This is why IFRS 10 plays an essential role in the financial decision-making of US CMA candidates; it plays a key role in the evaluation of control, financial performance, and risk management in organizations that operate with multiple entities. The key to this is that CMAs are qualified with the principles of consolidation to scrutinize the financial statements for internal decision making and strategic planning.
IFRS 10 US CMA Questions
Q1: What is marginal revenue and how do we calculate it?
A) dTR/dQ
B) TR/TQ
C) total revenue minus total cost
D) Rents ratio over quantity
Ans: A) Change in revenue over change in quantity sold
Q2: Which pricing strategy as described in this blog, is factored into the decision process of marginal revenue?
A) Full-cost pricing
B) Cost-plus pricing
C) Marginal-cost pricing
D) Competitive pricing
Ans: C) Marginal-cost pricing
Q3: A company is producing at a point where marginal cost equals marginal revenue. What does it have to do to make a profit?
A) Increase output
B) Decrease output
C) Maintain establishment level output
D) Lower the price to sell more
Ans : C) Maintain the same level of output
Q4: When is marginal revenue most useful in decision-making?
A) Long-run investment decisions
B) Short run pricing and production decisions
C) Regulation compliance decisions
D) Dividend distribution decisions
Ans: B) Pricing and production decisions in the short run
Q5: Is the firm under monopolistic competition: How is its marginal revenue?
A) P = MR
B) D as marginal revenue is always more than price
C) Marginal Revenue marginal cost Produce more if marginal revenue marginal cost, make more
D) Making financial decisions without considering marginal revenue
Ans: C) Marginal Revenue marginal cost Produce more if marginal revenue marginal cost, make more
Relevance to US CPA Syllabus
Thus, IFRS 10 is required if a US CPA Exam candidate needs to take the FAR exam (which are the consolidated financial reporting standards in US GAAP that are consistent with IFRS 10). These topics encompass IFRS’s role in CPAs determining control, preparing group financial statements and understanding parent-subsidiary relationships in financial reporting.
IFRS 10 US CPA Questions
Q1: What is the impact of All this pension liabilities under IFRS 10 on financial statement
A) balance sheet (statement of financial position)
B) Statement of cash flows
C) Statement of retained earnings.
D) the statement of stockholders equity
Ans: A) (Statement of financial position (Balance sheet)
Q2: Why do analysts adjust the pensions cost when looking to analyze financial statements?
Q11: (B) Circle cash produced by pension plans
B) To remove actuarial assumptions from the financial statement
C) Thus pension costs mirror revenue
D) Treat existing shareholder pension promises as neither debt nor equity
Ans: A) Align entitles pension cash flows with the numbers.
Q3: Hedge in the form of a risk transfer will assist in stabilizing earnings and fulfilling performance contracts.
A) By earning it through net income in the statement of intrinsic returns
B) Through other comprehensive income (OCI)
C) In a financing activities
D) Deferred until retirement
Ans: B) OCI
Q4: What happens to a defined benefit obligation if the discount rate falls?
A) An increase of present value of Constiotes on what you will have to pay in future
(b) Reduce the reported pension expense
C) Decreases the employer’s contribution
D) It liberates them from actuarial assumptions
Ans: A) It lowers the PV of future liabilities
Q5: The company’s obligation to pay the pension in accordance with IFRS 10 is best described as:
A) future benefit payments discounted to their present value
B) Future value of employer contributions
C) 5 years All pension cost
D) The forecast for public pension fund performance
Ans: A) Present value of future expected benefits payments
Relevance to CFA Syllabus
For financial statement analysis, CFA candidates must know IFRS 10. This knowledge allows them to compare financial statements, assess corporate structures and understand how subsidiaries and joint ventures impact finances when evaluating investment options.
IFRS 10 CFA Questions
Q1: What is the role of International Financial Reporting Standard 10 in financial statement analysis?
A) It aligns the financial statements to the economic substance of transactions rather than their legal form.
B) You don’t have to make financial disclosures
C) It renders financial analysis more complex
D: It prohibits companies from using financial ratios
Ans: A) It provides that financial statements that reflect economic substance are reported, not merely the legal form
Q2: Why is IFRS 10 consolidation important for investors?
A) It paints a clearer picture of an entity’s financial health
B) It bloats a company’s balance sheet
C) It makes the financial statements easier to read
D) No financial statement analysis required
Ans: A) It gives a truer view of an entity’s financial income
Q3: Which leverage ratios will be impacted by IFRS 10 in financial analysis?
A) Leverage ratios can move higher or lower, depending on the degree of consolidation impact
B) No debt — it doesn’t count against your ratios
D) It saves you from calculating leverage ratios
D) It impacts only cash flow statements
Ans: A) It can either increase or decrease leverage ratios depending on the effect of consolidation
Q4: How is International Financial Reporting Standard 10 affecting the audit procedures?
A) It mandates auditors to evaluate control over an investee
B) No more financial audits
C) It prevents auditing of financial statements
D) It requires audit for only subsidiaries
Ans: A) The extent to which control exists must be considered by auditors in regards to an investee
Q5: What should a parent company do under International Financial Reporting Standard 10 when it has lost control of a subsidiary?
A) Keep consolidating the subsidiary’s result
Recognize the subsidiary’s gain or loss (B) Derecognize the subsidiary’s assets and liabilities and recognize a gain or loss
C) Ignore the transaction
D) Transfer Everything or’s all liabilities to the new controlling party
Ans: (ii) B) Derecognise the subsidiary’s assets and liabilities and recognise a gain or loss
