IFRS 10: CONSOLIDATED FINANCIAL STATEMENT

Question 1

When IFRS Consolidated Financial Statement shall be prepared (and when not)?

Answer 1

When an entity (the parent) controls one or more other entities (subsidiaries).

Except if all the following conditions are met:

1. it is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity and all its other
   owners have been informed about, and do not object to, the parent not presenting consolidated financial statements;
2. its debt or equity instruments are not traded in a public market;
3. any intermediate parent produces financial statements that are available for public use
   and comply with IFRSs, in which subsidiaries are consolidated or are measured at fair value through profit or loss in accordance with this IFRS.

Or, if the parent is an investment entity and if its required to measure all of its subsidiaries at fair value through profit or loss.

Question 2

Which are the accounting requirement to consolidate?

Answer 2

• Uniform accounting policies
• Consolidation of an investee shall begin from the date the investor obtains control of the investee and cease when the investor loses control of the investee
• Same reporting date of financial statements of the parent and its subsidiaries
• Non-controlling interest

Question 3

Which are the key principles of control?

Answer 3

Consolidate the investee if control alone.
1. The investor is not an investment entity
(if yes, apply the exemption and not consolidate)
2. The investor control the investee on its own
(if not, apply IFRS 11: joint control, IAS 28: significant influence, or IFRS 9: when neither on of the previous.)

Question 4

Which are the control’s criteria?

Answer 4

1) Power: (Existing rights, Current ability to direct, Relevant activities, Substantive not just protective)

Does investor have current ability to direct the
relevant activities?
Or most significant relevant activities if two or more investors have the current ability

2) Exposure to variable return (Potential to vary with investee’s performance, Substance, Dividends, remuneration, economies of scale etc):

Is the investor exposed to variable return from
involvement?

3) Linkage between power and return

Does the investor (decision maker) have the ability to use its power in order to affect the amount of its returns?

Question 5

What are the “relevant activities”?

Answer 5

Are the activities that most significantly affect returns.

Question 6

What are “substantive rights”?

Answer 6

Are right that give power: voting rights (power arise from rights).
Are rights that must be exercisable when decision are to be made.

Question 7

What are “protective rights”?

Answer 7

Are rights that protect the interest of the holder.
This rights do not result in power control and are apply in exceptional circumstances.

Question 8

If voting rights are relevant, when can we say that the investor has power if he held the majority of the voting rights?

Answer 8

An investor that holds more than 50% of voting rights has power if:
* The relevant activities are directed by a vote of the holder of the majority voting rights, or
* The majority of the members of the governing body that directs are appointed by a vote of the holder of the majority voting rights

• Other investors do not have rights that override voting rights
• The voting rights are substantive

Question 9

If voting rights are relevant, how can the investor have rights that give him sufficient power if he doesn’t held the majority of voting rights?

Answer 9

An investor that holds more less 50% of voting rights has power if:
- Contractual agreement with other vote holders
- Rights from other contractual arrangements
- De facto control

The rights must be substantive

Question 10

What is the “de-facto control”?

Answer 10

An investor with less than a majority of the voting rights has rights that are sufficient to give it power when the investor has the practical ability to direct the relevant activities unilaterally.

Factors to consider include:
* Size of the holding relative to the size and dispersion of other vote holders
* Potential voting rights (e.g. through options)
* Voting patterns at previous shareholders’ meetings
* Special relationships

Question 11

If the “other right are relevant” (and not the voting rights), how can the investor have sufficient power?

Answer 11

By demostrating the pratical ability to direct relevant activities.

• Approve key management personnel
• Veto significant transactions
• Dominate board appointments

The rights can be either substantive or protective, depending on the situation

Question 12

What is meant by ‘variable returns’?

Answer 12

Returns that have the potential to vary as a result of the performance of an investee.

Based on substance (rather than legal form):
- Fixed interest payments
- Fixed performance fees for managing an investee’s assets