Consolidated Financial Statements

1. IFRS 10 / Ind AS 110: Consolidated financial statements
 Dhiraj Gadiyani
 dhirajgadiyani1@gmail.com
Table of Contents
Objective of IFRS 10....................................................................................................................................2
Scope ..........................................................................................................................................................2
Identification of parents & subsidiaries......................................................................................................4
Assessment of control ................................................................................................................................5
Power over an investee..............................................................................................................................6
Substantive rights.....................................................................................................................................10
Protective rights .......................................................................................................................................12
Exposure, or rights, to variable returns from an investee........................................................................15
Link between power & returns.................................................................................................................16
Continuous assessment of control ...........................................................................................................20
Accounting requirement...........................................................................................................................22
Non-controlling interest ...........................................................................................................................25
Accounting for loss of control of subsidiary .............................................................................................26
Investment entities...................................................................................................................................27

2. Objective of IFRS 10
 The objective of IFRS 10 is to establish principles for the presentation and preparation of
consolidated financial statements when an entity controls one or more other entities.
 A reporting entity prepares consolidated financial statements where it meets the definition of a
group, subject to certain exemptions.
 The consolidation process involves the parent and its subsidiaries being combined, using uniform
accounting policies for similar transactions and by adding together like items of assets, liabilities,
equity, income and expenses.
Scope
 IFRS 10 requires that a parent (i.e. an entity that controls one or more entities) should present
consolidated financial statements.
 Consolidated financial statements are defined as "the financial statements of a group in which the
assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are
presented as those of a single economic entity".
 IFRS 10 does not apply to post-employment benefit plans or other long-term employee benefit plans
to which IAS 19 applies.
 Employers are required to apply IAS 19 in accounting for employee benefit plans, and it appears that
the exclusion in IFRS 10 is intended to apply to such employers and to exempt them from having to
consider whether benefit plans of the nature described meet the definition of a subsidiary (which
would result in a requirement to consolidate them).
 Employee share trusts (ESOPs) or employee share plans) are designed to acquire an entity’s shares
and distribute the shares to employees under remuneration schemes.

3.  An entity that has subsidiaries need not present consolidated financial statements if it meets all of
the following conditions:
 the entity is itself either (1) a wholly-owned subsidiary, or (2) a partially-owned subsidiary and all
its other owners (including those not otherwise entitled to vote) have been informed about, and
do not object to, the entity not presenting consolidated financial statements;
 the entity’s debt or equity instruments are not traded in a public market (i.e. a domestic or
foreign stock exchange or an over-the-counter market, including local and regional markets);
 the entity did not file, nor is it in the process of filing, its financial statements with a securities
commission or other regulatory organisation for the purpose of issuing any class of instruments
in a public market; and
 The ultimate or any intermediate parent of the entity produces financial statements available for
public use that comply with IFRS Standards, in which subsidiaries are consolidated or are
measured at fair value through profit or loss in accordance with IFRS 10.
 Parent has no subsidiary at the end of the reporting period
 IFRS 10 requires that the income and expenses of a subsidiary should be included in the
consolidated financial statements until the date on which the parent loses control of the
subsidiary.
 No basis for exclusion of subsidiaries from consolidation (other than for investment entities)
 A subsidiary is not excluded from consolidation on the basis that control is temporary. If, on
acquisition, a subsidiary meets the criteria to be classified as held for sale in accordance with
IFRS 5, it is included in the consolidation but is accounted for under that standard.
 The Board has concluded that a parent, when assessing its ability to control a subsidiary, should
consider restrictions on the transfer of funds from the subsidiary to the parent but that, in
themselves, such restrictions do not preclude control; and
 a subsidiary is not excluded from consolidation on the grounds that its activities are substantially
different from those of the parent and/or the rest of the group.

4. Identification of parents & subsidiaries
 Definitions – parent & subsidiary
 A parent is "an entity that controls one or more entities".
 A subsidiary is "an entity that is controlled by another entity".
 A group consists of a parent and its subsidiaries.
 a subsidiary need not be a corporate entity (e.g. it can be a partnership or a trust).
 Determining whether a portion of an investee is a deemed separate entity (often referred to as ‘silos’
or ‘cells’)
 Whether the portion of the investee is 'ring-fenced' from the overall investee.
 In substance, none of the returns from the specified assets can be used by the remaining
investee and none of the liabilities of the deemed separate entity are payable from the assets of
the remaining investee.
 If an investor controls a deemed separate entity, the investor should consolidate that deemed
separate entity. In such circumstances, other parties should exclude that portion of the investee
when assessing control of, and in consolidating, the investee.
 An entity will exist if there is some mechanism by which members of the entity can come
together and make decisions over relevant activities that bind all of the members. This could
include the ability to appoint and remove a managing agent or similar persons. If there is no
mechanism to allow this, a member will simply have an interest in assets (for example, a pro rata
share of a property or of investments) rather than there being an entity.

5. Assessment of control
 Control definition:
An investor controls an investee if and only if the investor has all of the following elements:
 power over the investee;
 exposure, or rights, to variable returns from its involvement with the investee; and
 the ability to use its power over the investee to affect the amount of the investor's returns.
 Power is defined as "existing rights that give the current ability to direct the relevant activities"
 The assessment of control should focus on which party, if any, is able to exercise voting rights
sufficient to determine the investee’s operating and financing policies.
 Purpose and design of the investee
When assessing control, the investor should first consider the purpose and design of the investee in
order to identify:
 the relevant activities (i.e. the activities of the investee that significantly affect the investee’s
returns).
 how decisions about the relevant activities are made?
 who has the current ability to direct those activities?
 who receives returns from those activities?
Power
Ability to use
power to
affect returns
Control
Variable
returns

6.  The investee might be on ‘auto-pilot’, such that relevant activities are pre-defined via contract. In
such a case, following should be considered:
 Downside risks and upside potential that the investee was designed to create.
 Downside risks and upside potential that the investee was designed to pass on to other parties in
the transaction.
 Whether the investor is exposed to those risks and upside potential.
 Only one party can control an investee
The Basis for Conclusions on IFRS 10 states that:
 only one party (if any) can control an investee; and
 the fact that other entities have protective rights relating to the activities of an investee does not
prevent an investor from having control of an investee.
 It might be difficult to conclude which investor most significantly affects returns, because this is
judgemental and will depend on the individual facts and circumstances. The answer could be
affected by the investee’s strategy and the party which has most influence over it.
 Example: consider a low-cost manufacturer of a commoditised product and a manufacturer of a
high-end branded product. Low-cost manufacturing could be the critical process for the first
manufacturer, while effective marketing could be the critical process in the second
manufacturer.
Power over an investee
 Power over an investee – definition
Key steps in the determination as to whether an entity has power over an investee are:
 identifying the relevant activities
 understanding how decisions about relevant activities are made
 determining whether the investor’s rights give it the current ability to direct the relevant
activities
 The greater an investor’s exposure, or rights, to variability of returns from its involvement with an
investee, the greater is the incentive for the investor to obtain rights sufficient to give it power.
Therefore, having a large exposure to variability of returns is an indicator that the investor may have
power.

7.  Identifying relevant activities
IFRS 10 does not provide a definitive list of which activities should be considered to be relevant
activities but rather observes that, for many investees, various operating and financing activities
significantly affect their returns.
 Examples of activities that, depending on the circumstances, can be relevant activities include,
but are not limited to:
 selling and purchasing of goods or services;
 managing financial assets during their life (including upon default);
 selecting, acquiring or disposing of assets;
 researching and developing new products or processes; and
 determining a funding structure or obtaining funding.
 Appointing/terminating and remunerating key management personnel.
 Having identified the relevant activities of an investee, the next key step in understanding who has
power over an investee is to understand the mechanisms for making decisions about those relevant
activities.
Examples of decisions about relevant activities include, but are not limited to:
 establishing operating and capital decisions of the investee, including budgets; and
 appointing and remunerating an investee's key management personnel or service providers and
terminating their services or employment.
 Accordingly, it will often be appropriate to focus on the purpose and design of the investee and how
decisions are made in relation to, for example:
 changes of strategic direction, including acquisitions and disposals of subsidiaries;
 major capital purchases and disposals;
 appointment and remuneration of directors and other key management personnel;
 approval of the annual plan and budget; and
 dividend policy

8.  Structured entities with predetermined activities
 A structured entity operating in a largely predetermined way will most commonly be established
to invest in assets that are expected to provide a predictable level of return with little or no
ongoing input from investors.
 The fact that the right to make decisions is contingent on particular circumstances arising or an
event occurring does not in itself affect the assessment as to whether an investor has power over
the structured entity.
 The more significant an investor’s (1) interest, and (2) involvement in the design of the investee,
the more indicative it is that the investor had the ability and incentive to make decisions for its
own benefit and, therefore, that it has power over the investee.
 The particular circumstances or events need not have occurred for an investor with the ability to
make those decisions to have power over the structured entity.
 Examples of those decisions may include:
 for a portfolio of high quality receivables, the decision on how to pursue recovery in the
event of default
 the decision to change the criteria for investment to permit investment in, say, AA-rated
securities in the event that the population of AAA-rated issuers diminishes;
 for a portfolio of equity investments, the decision to sell or hold an investment in the
event of a significant, unexpected fall in value;
 for a portfolio of property interests, the course of action to take in the event of default
by a blue-chip tenant or significant physical damage to a property.
 Majority of directors are independent
 If the majority of an entity’s directors are independent, it should not be automatically assumed
that none of the shareholders has power over decisions made by the directors.
 In the circumstances under consideration, this would involve analysing both the process for
decision making at a director level and the extent to which decisions over relevant activities are
taken by the directors rather than via a shareholder vote.

9.  In circumstances such as these, it may be that an investor can exercise power over decisions
made by an entity’s directors through power over a majority of an entity’s non-independent
directors.
 Powers to appoint and remove independent directors should also be considered.
 When it is difficult to determine whether an investor’s rights are sufficient to give it power over an
investee, consideration is given to whether:
 Investor can appoint or approve the investee’s KMP who have the ability to direct the relevant
activities;
 Investor can direct the investee to enter into, or can veto any changes to, significant transactions
for the benefit of the investor;
 the investee’s key management personnel are related parties of the investor
 the majority of the members of the investee’s governing body are related parties of the investor.
 The following suggests that the investor has more than a passive interest in the investee and, in
combination with other rights, may indicate that the investor has power over the investee:
 the investee’s key management personnel who have the ability to direct the relevant activities
are current or previous employees of the investor;
 a significant portion of the investee’s activities either involve or are conducted on behalf of the
investor;
 the investee’s operations are dependent on the investor, such as in the following situations:
 the investee depends on the investor to fund a significant portion of its operations;
 the investor guarantees a significant portion of the investee’s obligations;
 the investee depends on the investor for critical services, technology, supplies or raw
materials;
 the investor controls assets such as licences or trademarks that are critical to the
investee’s operations;

10. Substantive rights
 IFRS 10 sets out a number of factors that an investor should consider in assessing whether rights are
substantive (the list is not exhaustive):
 whether there are any barriers (economic or otherwise) that prevent the holder from exercising
the rights;
 Financial penalties and incentives that prevent or deter the exercise of rights.
 An inability to obtain information needed to exercise rights.
 Operational barriers, such as lack of expertise to replace existing management after
gaining control.
 whether the party or parties that hold the rights would benefit from the exercise of those rights;
 The ability to appoint and remove the investee’s key management personnel who have the
ability to direct the relevant activities and affect the investee’s returns;
 The ability to direct the investee to enter into significant transactions that affect an investor’s
returns, or to veto such transactions.
 In addition, for a right to be substantive, it should be exercisable when decisions about the direction
of the relevant activities need to be made.
 Assessing whether approval rights over budgets are substantive
 The level of detail of the budget that is required to be approved. The greater the level of detail,
the more likely it is that such rights are substantive.
 Whether previous budgets have been challenged and, if so, the practical method of resolution.
Previous evidence of substantive challenge, with resolution of such challenge prior to budget
approval being required, would indicate such rights being more substantive in nature.
 Consequences when budgets are not achieved. If such a scenario would result in the
operator/manager being removed, this would suggest that the rights are more substantive in
nature.

11.  The nature of the counterparty and its practical involvement in the business. Where the entity
operates in a specialised industry and the operator/manager has the relevant specialised
knowledge, this indicates that the operator/manager is providing critical services and so might
have power over the investee.
 Mechanism in place to allow the exercise of collective rights
 When the exercise of rights requires the agreement of more than one party, or when the rights
are held by more than one party, it will generally be necessary to have a mechanism in place that
provides those parties with the practical ability to exercise their rights collectively if they choose
to do so.
 The more parties that are required to agree to exercise the rights, the less likely it is that those
rights are substantive.
 Whether holders would benefit from the exercise of the rights
 Rights that result in an entity having the ability to direct the relevant activities of an investee will
generally result in benefits for the entity.
 Those benefits may be monetary (e.g. cash dividends from ownership of ordinary shares of an
investee) or non-monetary (e.g. by realising synergies between the investor and the investee).
 where an investor has an incentive to exercise its rights, because it will obtain some benefit from
doing so, it is more likely that it will have power over the investee.
 Economic dependence of one company on another is not uncommon. However, in the absence
of any other rights, economic dependence does not lead to an investor having power over an
investee.

12.  Whether the rights are exercisable when decisions about the relevant activities of an investee need
to be made
 Generally, to be substantive, the rights need to be currently exercisable. However, sometimes
rights can be substantive even though the rights are not currently exercisable.
 In the Board’s view, a holder of substantive potential rights is, in effect, in the same position as a
passive majority shareholder or a holder of substantive 'kick-out' rights.
 The control model would provide that, in the absence of other factors, a majority shareholder
controls an investee even though it can take time for the shareholder to organise a meeting and
exercise its voting rights.
Protective rights
 Protective rights are defined as "rights designed to protect the interest of the party holding those
rights without giving that party power over the entity to which those rights relate".
 IFRS 10 states that protective rights relate to fundamental changes to the activities of an investee or
apply in exceptional circumstances.
 Examples of protective rights:
 a lender's right to restrict a borrower from undertaking activities that could significantly change
the credit risk of the borrower to the detriment of the lender;
 Collateral rights over an entity’s single asset
 the right of a party holding a non-controlling interest in an investee to approve capital
expenditure greater than that required in the ordinary course of business, or to approve the
issue of equity or debt instruments;
 Assessment of protective rights – franchises
 The rights of the franchisor in franchise agreements do not necessarily give the franchisor the
current ability to direct the activities that significantly affect the franchisee’s returns.
 By entering into the franchise agreement, the franchisee has made a unilateral decision to
operate its business in accordance with the terms of the franchise agreement, but for its own
account;

13.  The lower the level of financial support provided by the franchisor and the lower the franchisor’s
exposure to variability of returns from the franchisee, the more likely it is that the franchisor has
only protective rights.
 Passive majority shareholder
 The passive shareholder has the power to outvote other shareholder at any shareholder
meeting.
 In the absence of compelling evidence to the contrary, it is assumed that the passive shareholder
would prevent other shareholder from acting against its interests.
 The passive shareholder has actual control, because it has the ability to direct entity relevant
activities through its voting rights, even if it chooses not to do so. Entity should be consolidated
by the passive majority shareholder if that shareholder is an entity which prepares consolidated
financial statements.
 Majority of the voting rights but no power
 When another entity has existing rights that provide it with the right to direct the relevant
activities of the investee and that entity is not an agent of the investor, the investor does not
have power over the investee.
 When the relevant activities of the investee are subject to direction by a government, court,
administrator, receiver, liquidator or regulator. In such circumstances, the holder of the majority
voting rights cannot have power.
 It is necessary to consider the powers held by the administrator, receiver or liquidator,
and whether they are sufficient to prevent the investor from directing the relevant
activities of the investee.
 It should not be assumed that the appointment of an administrator, receiver or
liquidator necessarily prevents a holder of the majority of voting rights from having
power. Rather, it is necessary to consider the powers held by the administrator, receiver
or liquidator, and whether they are sufficient to prevent the investor from directing the
relevant activities of the investee.

14.  Power achieved with less than a majority
 Contractual arrangement with other holders: A contractual arrangement entered into between
an investor and other vote holders can give the investor the right to exercise voting rights
sufficient to give the investor power, even if the investor itself does not have voting rights
sufficient to give it power without the contractual arrangement.
 ‘de facto control’: IFRS 10 includes specific guidance on how to determine whether an investor
that does not hold a majority of voting rights has de facto power over an investee. In making this
determination, the investor is required to consider all facts and circumstances. A two-step
approach is adopted. If the analysis in Step 1 is inconclusive, the investor should move on to Step
2.
 Step 1:
 the size of the investor's holding of voting rights relative to the size and
dispersion of holdings of the other vote holders;
 potential voting rights held by the investor, other vote holders or other parties;
and
 rights arising from other contractual arrangement.
 Potential voting rights: an investor should consider potential voting rights that it holds and
potential voting rights held by other parties; however, the investor should only consider voting
rights if they are substantive.
 One investor holds the majority of the voting rights while another investor has minority
voting rights and an option to acquire further voting rights.
 Investors have equal voting rights in an investee but one investor has substantive
potential voting rights in addition to the existing voting rights.

15. Exposure, or rights, to variable returns from an investee
 Variable returns are defined as returns that are not fixed and have the potential to vary as a result of
the investee’s performance. Such returns can be positive, negative or both, and do not have to be
financial.
 The Board has confirmed its intention that the term 'returns' should be interpreted broadly and that
it encompasses synergistic returns as well as more direct returns.
 Examples of some variable returns:
 The fixed interest payments are variable returns for the purposes of IFRS 10 because they are
subject to default risk and they expose the investor to the credit risk of the issuer of the bond.
 The fixed performance fees for managing the assets are variable returns because they expose
the investor to the performance risk of the investee. The amount of variability will depend on the
investee's ability to generate sufficient income to pay the fee.
 In the asset management industry, fund managers almost always have some exposure to
variable returns, but the level of exposure might not be sufficient for them to have control.
 Economies of scale, cost savings, gaining proprietary knowledge, access to future liquidity, tax
benefits, etc.
 Determining whether a derivative instrument exposes its holder to variable returns
 When returns from derivative instruments are not affected by the investee’s performance, such
derivatives do not expose the counterparty to variable returns from the investee.
 CDS: The counterparty does not have an interest that exposes it to variability of returns because
the returns earned by the counterparty of the CDS are affected primarily by changes in credit
risk, rather than changes in performance.

16. Link between power & returns
 The third and final element of control is that, the investor must have the ability to use its power to
affect the it's returns from its involvement with the investee.
 In this context, an investor with decision-making rights is required to determine whether it is acting
as a principal or as an agent.
 Determining whether a decision maker is a principal or an agent
 A decision maker is an agent when it is primarily engaged to act on behalf and for the benefit of
another party or parties.
 A decision maker is not an agent simply because other parties can benefit from the decisions that
it makes.
 An investor may delegate its decision-making authority to an agent on some specific issues or on
all relevant activities.
 IFRS 10 states that, when a single party holds a substantive right to remove the decision maker
and can remove the decision maker without cause, this, in isolation, is sufficient to conclude that
the decision maker is an agent.
 Scope of the decision-making authority
 the activities that are permitted according to the decision-making agreement & specified
by law; and
 the discretion that the decision maker has when making decisions about those activities.
 Rights held by other parties
 These requirements focus on how difficult it is for other parties to remove the decision
maker. The more difficult it is for a decision maker to be removed by other parties via
their removal rights, the less likely it is that the decision maker is an agent.
 Substantive rights held by other parties that place restrictions on a decision maker's
discretion to make decisions should be considered in a similar manner to removal rights.
 For example, when a decision maker is required to obtain approval from a small number
of other parties for its actions, the decision maker is generally an agent.

17.  Remuneration to which the decision maker is entitled
 The greater the magnitude of, and variability associated with, the decision maker's
remuneration relative to the returns expected from the activities of the investee, the
more likely the decision maker is a principal.
 In determining whether it is a principal or an agent, the decision maker should also
consider whether the following conditions exist:
 the remuneration of the decision maker is commensurate with the services
provided; and
 the remuneration agreement includes only terms, conditions or amounts that
are customarily present in arrangements for similar services and level of skills
negotiated on an arm's length basis.
 Decision maker’s exposure to variability of returns from other interests, the decision maker
should consider the following:
 the greater the magnitude of, and variability associated with, its economic interests
(considering its remuneration and other interests in aggregate), the more likely the
decision maker is a principal; and
 whether its exposure to variability of returns is different from that of the other investors
and, if so, whether this might influence its actions. For example, this might be the case
when a decision maker holds subordinated interests in, or provides other forms of credit
enhancement to, an investee.
 Reputational risk
 Exposures to variability of returns may sometimes arise even when there is no legal or
contractual arrangement.
 The weight given to the exposure arising from reputational risk depends on the
likelihood of the decision maker being economically compelled to step in to support the
investee if that investee experiences financial difficulties, despite not being contractually
obliged to do so, in order to mitigate the reputational damage that would otherwise
occur.
 Another relevant factor to consider may be evidence that the investor has previously
stepped in to maintain its reputation.
 Similarly, if history shows a trend of other sponsors stepping in to mitigate reputational
damage in similar scenarios, this may indicate that the sponsor is more likely to do the
same in the case of difficulties occurring.

18.  Assessing whether a fund manager is a principal or an agent
 when a fund manager has decision-making power, and exposure or rights to variable
returns, the fund manager should determine if it controls the fund based on an
assessment as to whether it uses its power over the fund for its own benefit (i.e. as a
principal) or for the benefit of others (i.e. as an agent).
 The factors in IFRS 10 should be mainly answering two key questions:
 How much discretion does the fund manager have to make decisions without
intervention by other parties?
 What is the extent and variability of the fund manager’s economic interest in
the outcome of those decisions?
 The Board decided that a decision maker can have power over an investee if it has
discretion in directing the relevant activities, even if those activities are restricted when
the investee is established.
 Therefore, the fact that a fund manager is required to abide by a fund’s investment
policies does not indicate that the fund manager is acting as an agent; although such
policies define the fund’s relevant activities, the fund manager may still have full
discretion to make decisions regarding those relevant activities.
 Right to remove a fund manager only for breach of contract is considered to be a
protective right, which would not prevent the fund manager acting as a principal.
 A kick-out right may be enforceable only following a majority vote of investors; for a
fund with hundreds or thousands of investors, each of whom holds only a single vote,
such a right would not be a strong indicator that the fund manager is acting as an agent
of those investors. Conversely, a kick-out right exercisable by a few investors would be
considered to be much more significant.

19.  The remuneration of the fund manager
 IFRS 10 notes that fixed performance fees for managing an investee’s assets are
variable returns because they expose the fund manager to the performance risk
of the fund. The amount of variability depends on the investee’s ability to
generate sufficient income to pay the fee.
 IFRS 10 is clear that, in assessing whether it is acting as a principal or an agent,
the fund manager would need to consider the magnitude of, and variability
associated with, its remuneration in aggregate with any other interests (e.g. a
direct investment) in the fund.
 The more variability that is absorbed by the instruments held by the fund manager, the
more likely it is that the fund manager is acting as a principal.
 De-facto agents
 A party is a de facto agent when the investor has, or those that direct the activities of the
investor have, the ability to direct that party to act on the investor’s behalf.
 When an investor has a de facto agent, the investor should consider its de facto agent's decision-
making rights and its indirect exposure, or rights, to variable returns through the de facto agent
together with its own when assessing control of an investee.
 IFRS 10 gives examples of parties that might act as de facto agents for an investor by virtue of
their relationships with the investor:
 the investor's related parties as defined in IAS 24
 a party that received its interest in the investee as a contribution or loan from the
investor;
 a party that has agreed not to sell, transfer or encumber its interests in the investee
without the investor's prior approval;
 a party that cannot finance its operations without subordinated financial support from
the investor;
 an investee for which the majority of the members of its governing body or for which its
key management personnel are the same as those of the investor;

20. Continuous assessment of control
 The Board has confirmed that (1) the requirement for reassessment of control is not restricted to
reporting dates, and (2) it is not automatically necessary to reassess all control or potential control
relationships at each reporting date.
 Reassessment of lender’s rights on default or breach of a loan covenant:
 A loan agreement will commonly confer upon the lender rights that can be exercised in the
event of the borrower breaching a loan covenant and/or defaulting on payments due under
the loan agreement.
 When the rights give the lender power over the borrower in the event of a default or breach,
if the other two elements of control exist (i.e. the exposure or rights to variable returns and
the ability to use the power to affect the investor's returns), the lender has control over that
entity.
 Examples:
 right to seize collateral exercised upon breach of covenant – Protective right
 Power over significant management decisions upon breach of covenant – controlling right
 Voting rights for pledged shares
 An investor might sometimes pledge shares to another entity as collateral.
 Where the voting rights on those shares (except on default by the investor) are exercisable
only in accordance with the instructions of the investor that pledged them, they are treated
as held by that investor.
 Hence, an investor retains control of the voting rights in subsidiary (unless and until it
defaults), even though the shares are held as security by bank.

21.  When should the restructuring of loan result in consolidation by the lender
 In some cases, the debt might have been fully or partially replaced with equity instruments,
preferred shares or convertible instruments, and the lender has taken a more active role in
the monitoring of the underlying business activities of the borrower.
 Although the bank’s involvement might be intended to protect it from further loss, if the
bank has the power to make decisions over relevant activities and is considered to have
sufficient exposure to variability, it has control.
 Further evidence of control is likely to be given by the bank’s level of exposure to variability
of returns from its involvement with the borrower. The greater the exposure, the more
incentive for the bank to obtain rights sufficient to provide it with power.
 The management team is acting in the capacity of an agent for the bank.
 Although the bank does not have a majority of the seats on the board, board decisions are
subsequently submitted to the bank for consent. If the bank does not support or concur with
a decision, the management team must propose an alternative that is satisfactory to the
bank.
 Although the bank does not often have a long-term objective of investing in these
businesses, and might seek a short-term exit, there is no scope exception from consolidation
for ‘temporary control’.
 If the bank does not have control but has an equity interest in the borrower, it should
consider whether it has significant influence. Where the bank has significant influence and
an equity interest, the equity method of accounting would be applied

22. Accounting requirement
 Reciprocal interest
 Reciprocal interests represent situations in which two entities hold equity interests in each
other.
 In its consolidated financial statements, reciprocal interests should be presented by a parent
as a reduction of both its investment in the subsidiary and its equity in the earnings of the
subsidiary.
 Elimination of intra-group transactions
 Liabilities due by one group entity to another should be set off against the corresponding asset in
the other group entity’s financial statements; sales made by one group entity to another should
be excluded both from revenue and from cost of sales or the appropriate expense heading in
consolidated profit or loss; dividends received from a subsidiary should be excluded from
consolidated profit or loss and set off against the corresponding movement in equity.
 Above adjustments re not required to be made for transactions between group entities and
investments that are accounted for using the equity method in the consolidated financial
statements (e.g. associates, JVs).
 For transactions between group entities, unrealised profits resulting from intragroup
transactions that are included in the carrying amount of assets, such as inventories and property,
plant and equipment, are eliminated in full. The requirement to eliminate such profits in full
applies to the transactions of all subsidiaries that are consolidated – even those in which the
group’s interest is less than 100 per cent.
 Unrealised profits are generally eliminated to the extent of the investor’s interest in the entities
accounted for using the equity method (e.g. associates, JVs).

23.  Unrealised profit in inventories – non-wholly owned subsidiary to Parent
 Method 1: allocate to NCI their proportionate share of the elimination of the unrealised
profit. This approach eliminates the profit in the selling entity.
 Method 2: no part of the elimination of the unrealised profit is allocated to the non-
controlling interests, acknowledging that they are still entitled to their full share of profit
arising on intragroup sales. Under this approach, the amount attributed to the non-
controlling interests reflects their entitlement to the share capital and reserves of the
subsidiary.
 Unrealised losses
Losses arising on an intragroup transaction may indicate an impairment that requires recognition
in the consolidated financial statements.
 Uniform accounting policies
When such group accounting policies are not adopted in the financial statements of a member of
the group, appropriate adjustments should be made in preparing the consolidated financial
statements to ensure conformity with the group’s accounting policies.
 Commencement and cessation of consolidation
Consolidation of a subsidiary should begin from the date the investor obtains control and cease
when the investor loses control. Therefore, income and expenses of a subsidiary should be
included in the consolidated financial statements from the date the parent gains control of the
subsidiary until the date when the parent ceases to have control of the subsidiary.
 Potential voting rights – impact on consolidation
When potential voting rights, or other derivatives containing potential voting rights, exist, the
proportion of profit or loss and changes in equity of a subsidiary allocated to the parent and non-
controlling interests in preparing consolidated financial statements is determined solely on the
basis of existing ownership interests and does not reflect the possible exercise or conversion of
potential voting rights and other derivatives.

24.  Derivatives over own equity
Derivatives over own equity in the consolidated financial statements include those derivatives
over the equity instruments of the parent as well as derivatives over the equity instruments of
the group’s subsidiaries and should be classified as a financial asset, a financial liability or equity
in accordance with IAS 32.
 When a parent & a subsidiary have different reporting dates
 If it is impracticable to prepare additional financial statements, the parent should
consolidate the financial information of the subsidiary using the most recent financial
statements of the subsidiary adjusted for the effects of significant transactions or events that
occur between the date of those financial statements and the date of the consolidated
financial statements.
 The difference between the date of the subsidiary's financial statements and that of the
parent's financial statements should be no more than three months.
 The appropriate classification as current or non-current should be determined by reference
to the year end of the parent.
 Change in reporting period of a subsidiary
 The change in Subsidiary’s reporting date will result in a revision of the parent’s previous
estimate of Subsidiary’s financial statements. Therefore, the adjustments required in
preparing the consolidated financial statements should be recognised as a change in
estimate (i.e. it is not a change in accounting policy).
 In accordance with paragraph 36 of IAS 8, the impact of the change in estimate should be
recognized prospectively in consolidated profit or loss account.

25. Non-controlling interest
 The profit or loss and each component of OCI of the subsidiary are required to be allocated between
the owners of the parent and the NCI. Amounts should be attributed to the non-controlling interests
even if this results in the NCI having a deficit balance.
 Where the subsidiary has paid a dividend during the period, the dividend paid to a non-controlling
interest results in a reduction of cash on consolidation, representing the part of the dividend paid by
the subsidiary that was not received by the parent and a corresponding decrease in the carrying
amount of the non-controlling interest.
 Any difference between the amount by which the non-controlling interest is adjusted and the fair
value of the consideration paid or received is recognised in equity and attributed to the parent’s
equity holders.
 Part of an interest in a subsidiary held indirectly through an associate
 Parent’s determination of the NCIs in subsidiary for the purposes of its consolidated financial
statements will depend on whether it views the equity method of accounting as a one-line
consolidation or as a valuation methodology.
 Equity method as a one-line consolidation
 It should include in its percentage of ownership in Subsidiary the interest held indirectly
through Associate; that is, it should determine the NCIs using the indirect method.
 Equity method as a valuation methodology
 This is often referred to as a 'closed box' approach to the equity method.
 It should not include the interest in Subsidiary held by Associate in determining its
percentage of ownership in Subsidiary; that is, it should determine the NCIs using the
direct method.
 Changes in the proportion held by non-controlling interests
 When a parent increases or decreases its stake in an existing subsidiary without losing
control, no adjustment is made to goodwill or any other assets or liabilities, and no gain or
loss is reported. It is accounted for as an equity transaction.
 One approach would be to recognise any difference between the fair value of the
consideration paid and the non-controlling interest’s proportionate share of the carrying
amount of the identifiable net assets directly in equity attributable to the owners of the
parent.
 No gain or loss shall be recognised in profit or loss on the purchase, sale, issue or
cancellation of an entity’s own equity instruments.

26. Accounting for loss of control of subsidiary
 Circumstances when a loss of control can occur without a change in absolute or relative ownership
interests
 It could occur, for example, when a subsidiary becomes subject to the control of a government,
court, administrator or regulator.
 A common is when a subsidiary becomes subject to insolvency proceedings involving the
appointment of a receiver or liquidator, if the effect is that the shareholders cease to have
control.
 Accounting implications of a loss of control
 The assets (including any goodwill) and liabilities of the subsidiary are de-recognised at their
carrying amounts at the date when control is lost.
 The carrying amount of any NCI in the former subsidiary at the date when control is lost is de-
recognised.
 The parent recognises the fair value of the consideration received, if any, from the transaction,
event or circumstances that resulted in the loss of control.
 If the transaction that resulted in the loss of control involves a distribution of shares of the
subsidiary to owners in their capacity as owners, that distribution is recognised.
 Any investment retained in the subsidiary is recognised at its fair value at the date when control
is lost.
 The amounts recognised in other comprehensive income in relation to the former subsidiary are
reclassified to profit or loss, or transferred directly to retained earnings if required by other IFRS
Standards.
 if a subsidiary has debt instruments measured at FVTOCI under IFRS 9 and the parent
loses control, all of the gain or loss recognized in OCI & accumulated in equity is
reclassified to profit or loss.
 Gain on account of revaluation of PPE is transferred directly to retained earnings.
 Any resulting difference is recognised as a gain or loss in profit or loss attributable to the parent.

27.  Parent disposes of its controlling interest to an existing associate
There is a conflict between the requirements of IFRS 10 and those of IAS 28 in these
circumstances and Entity has, in effect, an accounting policy choice of applying the requirements
of either Standard.
 Approach 1: Apply the requirements of IFRS 10 and recognises the profit on disposal in full
 Approach 2: Apply the requirements of IAS 28 and recognises the profit on disposal only to
the extent of unrelated investors’ interests in the associate
 Deemed disposal
 A deemed disposal of an interest in a subsidiary, joint venture or associate may arise through
the parent not taking up its full entitlement in a rights issue, a payment of scrip dividends
not taken up by the parent, the issue of shares to other shareholders, or the exercise of
options or warrants granted to another party.
 Any gain or loss arising as a result of a deemed disposal (which can occur only when control
is lost as a result of the deemed disposal) should be recognised in profit or loss.
Investment entities
 Determining whether an entity is an investment entity
 IFRS 10 sets out three criteria that differentiate investment entities from other entities and that
must be met in order for an entity to qualify as an investment entity.
 In addition, IFRS 10 lists four 'typical characteristics' of an investment entity. An entity is not
required to display all of these characteristics in order to qualify as an investment entity, but the
absence of one or more of these characteristics indicates that additional judgement is needed in
determining whether it meets the definition.
 Investment entity – definition
 Obtains funds from one or more investors for the purpose of providing those investors with
investment management services.
 Commits to its investors that its business purpose is to invest funds solely for returns from capital
appreciation, investment income, or both.

28.  measures and evaluates the performance of substantially all of its investments on a fair value
basis
 An investment entity may also participate in the following investment-related activities, either
directly or through a subsidiary, in limited circumstances:
 providing management services and strategic advice to an investee; and
 providing financial support to an investee (e.g. a loan, capital commitment or guarantee).
 Evaluating a parent’s involvement in the activities of its subsidiaries
 When evaluating an entity’s involvement in the activities of its subsidiaries, it is more important
to focus on why the parent is so involved than the extent of its involvement.
 When a parent is actively involved in the management of a subsidiary and, as a result, receives
operational information on the subsidiary’s activities, an assessment should be made as to
whether key management personnel are using this information rather than fair value data as the
primary basis for evaluating performance.
 Subsidiary providing investment-related services
 If an investment entity has a subsidiary that is not itself an investment entity and whose main
purpose and activities are providing investment-related services or activities that relate to the
investment entity’s investment activities to the investment entity or other parties, that
subsidiary should be consolidated.
 If the subsidiary that provides the investment-related services or activities is itself an investment
entity, the investment entity parent should measure that subsidiary at fair value through profit
or loss.

29.  Investment plans (exit strategies)
 One feature that differentiates an investment entity from other entities is that an investment
entity does not plan to hold its investments indefinitely; it holds them for a limited period.
 The Standard sets the following requirements in respect of exit strategies.
 An investment entity is required to document exit strategies for how it plans to realise
capital appreciation from substantially all of its equity investments and non-financial asset
investments.
 It is also required to have an exit strategy for any debt instruments that have the potential to
be held indefinitely (e.g. perpetual debt investments).
 The entity is not required to document specific exit strategies for each individual investment
but it is required to identify different potential strategies for different types or portfolios of
investments, including a substantive time frame for exiting the investments.
 Exit mechanisms that are only put in place for default events (e.g. a breach of contract or
nonperformance) are not considered exit strategies for the purpose of this assessment.
 Earnings from investment
 If the entity, or another member of the group containing the entity (i.e. the group that is
controlled by the investment entity’s ultimate parent) obtains, or has the objective of
obtaining, additional benefits from the entity’s investments that are not available to other
parties that are not related to the investee, this means that the entity is not investing solely
for capital appreciation, investment income, or both, as is required under IFRS.
 Investing in more than one investment in the same industry, market or geographical area in
order to benefit from synergies that increase the capital appreciation of those investments is
a common investment strategy in the private equity industry. Accordingly, the Board decided
that such transactions or synergies that arise between the investments of an investment
entity should not be prohibited because their existence does not necessarily mean that the
investment entity is receiving any returns beyond solely capital appreciation, investment
income, or both.

30.  Features identified as typical characteristics of an investment entity
 It has more than one investment;
 An investment entity typically holds several investments to diversify its risk and
maximise its returns. An entity may hold a portfolio of investments directly or indirectly
(e.g. holding a single investment in another investment entity that itself holds several
investments).
 It has more than one investor;
 If an entity has several investors, this makes it less likely that the entity, or other
members of the group containing the entity, obtains benefits other than capital
appreciation or investment income.
 Alternatively, an investment entity may be formed by, or for, a single investor that
represents or supports the interests of a wider group of investors (e.g. a pension fund,
government investment fund or family trust).
 It has investors that are not related parties of the entity;
 If an entity has unrelated investors, this makes it less likely that the entity, or other
members of the group containing the entity, obtains benefits other than capital
appreciation or investment income.
 It has ownership interests in the form of equity or similar interests.
 The Board does not believe that an entity that provides its investors only a return of
their investment plus interest should qualify as an investment entity.
 Entity ceasing to be an investment entity
 The change in status is accounted for as a 'deemed acquisition' of the entity’s subsidiaries, as
follows:
 the entity applies IFRS 3 to any subsidiary that was previously measured at fair value through
profit or loss;
 the date of the change of status is the deemed acquisition date for such subsidiaries;
 the fair value of a subsidiary at the date of change in status is the deemed consideration for
the purpose of measuring any goodwill or gain from a bargain purchase; and
 all subsidiaries of the entity are consolidated in accordance with the general requirements of
IFRS 10 from the date of change of status.

31.  Entity becoming an investment entity
 The change in status should be accounted for as a 'deemed disposal' or 'loss of control' of the
entity's subsidiaries:
 The entity ceases to consolidate its subsidiaries at the date of the change in status, except
for any subsidiary that is not itself an investment entity and that provides investment-related
services or activities that continues to be consolidated in accordance with IFRS 10; and
 The fair value of a subsidiary at the date the entity ceases to be an investment entity should
be used as the consideration received. Any gain or loss arising on the deemed disposal
should be recognised in profit or loss.