IFRS 10

International Financial Reporting Standard 10 (IFRS-10) specifies guidelines for the preparation
and presentation of consolidated financial statements when an entity controls one or more other
entities. It is important for parent companies with several subsidiaries and other legal entities to
ensure that they present their complete financial picture of the company. Consolidated financial
statements are required when the parent controls one or more other subsidiaries. The
consolidated financial statements won't always be accurate if all transactions are included in
them because of transfer pricing or intercompany transactions. These intercompany transactions
must be recognized, matched, and removed so that they do not appear on the consolidated
financial statements. And for this IFRS 10 is used here for eliminate manipulation or
misrepresentation of financial information.

Requirements of IFRS 10 for the consolidation of financial statements:

1. Objective

The objective of IFRS 10 is to establish consistent principles for the presentation and preparation

of consolidated financial statements. To meet this objective, it:

> Requires a parent entity (an entity that controls one or more other entities) 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 therefore 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. Scope and exemptions

However, under IFRS standards, not all parent companies need to prepare consolidated financial

statements. According to Paragraph 4 of IFRS 10, these exemption criteria are:
 > The parent company is a wholly owned subsidiary or is a partially owned subsidiary of
another entity and its other owners, including those not entitled to vote, have been
informed about, and do not object to, the parent not presenting consolidated financial
statements
> The parent company’s debt or equity instruments are not traded in a public market (a
domestic or foreign stock exchange or an over-the-counter market, including local and
regional markets
> The parent company did not file, nor is it in the process of filing, its financial
statements with a securities commission or other regulatory organization for the purpose
of issuing any class of instruments in a public market
> The ultimate or any intermediate parent of the parent produces financial statements
available for public use that comply with IFRSs, in which subsidiaries are consolidated or
are measured at fair value through profit and loss in accordance with IFRS 10.
3. Control

Under IFRS 10, the parent company must be very clear about whether it has ‘control’ of the

subsidiary, defined as:

> Power over the investee: the investor has existing rights that give it the ability to direct the

relevant activities (the activities that significantly affect the investee's returns)
> Exposure, or rights, to variable returns from its involvement with the investee
> The ability to use its power over the investee to affect the amount of the investor's returns.

If these three elements are present, then the parent company is considered to control the

subsidiary. It must therefore prepare consolidated financial statements unless otherwise exempt.

4. Preparation of consolidated financial statements

IFRS 10 lays out best practice in preparation of consolidated financial statements. The

framework for this is:

> Intracompany transactions and investments from the parents must be identified and

eliminated from the consolidated financial statement
> Accounting policies should be consistent and clear across the group in order to reduce the
risk of error
> Financial information upon which the consolidated financial statements are based must
have the same reporting date
> Non-controlling interests must be correctly allocated their comprehensive income and
equity
> Changes in ownership interest’s without loss of control must be accounted for, as must
losing control of a subsidiary.