IFRS 10 Consolidation Basics

When one entity controls another, IFRS 10 requires it to prepare consolidated financial statements that present the group as if it were a single economic entity. This guide covers the control model, non-controlling interests, goodwill, intercompany eliminations, and when consolidated statements are required at all.

Control: the single basis for consolidation

IFRS 10 uses one control model for every type of investee. An investor controlsan investee when it has all three of the following:

• power over the investee — existing rights that give the current ability to direct the relevant activities (the activities that most significantly affect returns);
• exposure, or rights, to variable returns from its involvement; and
• the ability to use its power to affect those returns.

Control usually follows a majority of voting rights, but not always. It can arise from contractual arrangements, potential voting rights, or de facto control where a large minority holding, combined with a dispersed remainder, gives the practical ability to direct the business. Assessing control is a judgement and one of the disclosures reviewers look for.

The mechanics of consolidation

Consolidation combines the financial statements of the parent and its subsidiaries line by line — adding together like items of assets, liabilities, equity, income, expenses and cash flows. Three adjustments turn that sum into a true group view:

• the parent's investment in each subsidiary is eliminated against the parent's share of the subsidiary's equity, giving rise to goodwill;
• intercompany balances and transactions are eliminated in full; and
• non-controlling interests are presented separately.

Non-controlling interests (NCI)

NCI is the equity in a subsidiary not attributable, directly or indirectly, to the parent. It is presented within equity, separately from the equity of the owners of the parent. Profit or loss and total comprehensive income are attributed between owners of the parent and NCI — even if that drives the NCI balance negative. At acquisition, an entity chooses (transaction by transaction) to measure NCI either at fair value (the "full goodwill" method) or at the NCI's proportionate share of the identifiable net assets; the choice affects how much goodwill is recognised.

Goodwill — recognised once, tested for impairment

Goodwill arises on a business combination under IFRS 3 as the excess of the consideration transferred (plus NCI and, in a step acquisition, the fair value of any previously held interest) over the fair value of the identifiable net assets acquired. Under IFRS, goodwill is not amortised. Instead it is tested for impairment at least annually, and whenever there is an indicator, under IAS 36. If the fair value of net assets exceeds the consideration — a bargain purchase — IFRS 3.34 requires the resulting gain to be recognised in profit or loss, after reassessing that all assets and liabilities have been correctly identified.

Intercompany eliminations

Because the group is one economic entity, transactions between group members are not transactions with the outside world and must be removed:

• intra-group receivables and payables, and loans, are cancelled;
• intra-group sales and purchases, dividends and interest are eliminated from income and expenses;
• unrealised profit in assets still held within the group — for example margin in inventory sold from one member to another and not yet sold on — is eliminated until realised through a sale outside the group.

When are consolidated statements required?

A parent generally must present consolidated financial statements. IFRS 10 provides a narrow exemption for an intermediate parent that is itself a wholly- or partially-owned subsidiary, provided its owners do not object, its securities are not publicly traded, it is not filing for a public issue, and its ultimate or an intermediate parent produces IFRS consolidated statements available for public use. A separate regime applies to qualifying investment entities, which measure most subsidiaries at fair value through profit or loss instead of consolidating them. Subsidiaries are consolidated from the date control is obtained until the date it is lost.

Uniform policies, reporting dates and loss of control

Two mechanics are easy to overlook. Consolidation requires uniform accounting policies across the group, so a subsidiary applying a different policy is adjusted to the group's. It also requires coterminous reporting dates; where a subsidiary's year-end differs, it prepares additional information as at the parent's date, or its statements are adjusted for the effects of significant transactions between the dates, with the gap not exceeding three months.

When a parent loses control of a subsidiary, it derecognises the subsidiary's assets, liabilities and any related non-controlling interest, recognises any retained investment at its fair value, and takes the resulting gain or loss to profit or loss. Amounts previously recognised in other comprehensive income in respect of that subsidiary are reclassified or transferred on the same basis as would apply had the related assets or liabilities been disposed of directly.

How it connects

Consolidation adds the NCI column to the statement of changes in equity and the NCI attribution to the income statement, all within the IAS 1 framework. The control judgement and goodwill impairment assumptions belong in your notes and judgements.