Chapter
2:
Consolidation
on
Date
of
Acquisition
By: Mulualem G. AcFn, BDU, 2023

Definition of key terms (IFRS 10)
• Definition of control: an investor controls an investee when the investor is
exposed, or has rights, to variable returns from its involvement with the
investee and has the ability to affect those returns through its power over the
investee.
• Subsidiary: an entity that is controlled by another entity.
• Parent: an entity that controls one or more entities.
• Power: existing rights that give the current ability to direct the relevant activities.
• Non-controlling interest: equity in a subsidiary not attributable, directly or
indirectly, to a parent.
• Group: a parent and its subsidiaries.
• Consolidated financial statements: 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.
By: Mulualem G. AcFn, BDU, 2023

Assessing control
 When assessing control of an investee, an investor shall consider
 The purpose and design of the investee in order to identify the relevant
activities,
 How decisions about the relevant activities are made,
 Who has the current ability to direct those activities and who receives
returns from those activities.
 To determine whether it controls an investee an investor shall assess
whether it has all the following:
a) Power over the investee;
b) Exposure, or rights, to variable returns from its involvement with the
investee; and
c) The ability to use its power over the investee to affect the amount of the
investor’s returns.
By: Mulualem G. AcFn, BDU, 2023

Interaction between IFRS 10,11,12, and IAS 28
By: Mulualem G. AcFn, BDU, 2023

 A parent shall prepare consolidated financial statements using
uniform accounting policies for like transactions and other events
in similar circumstances.
 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.
 A parent shall present non-controlling interests in the consolidated
statement of financial position within equity, separately from the
equity of the owners of the parent.
Accounting requirements
By: Mulualem G. AcFn, BDU, 2023

 If a parent loses control of a subsidiary, the parent:
a) Derecognizes the assets and liabilities of the former subsidiary
from the consolidated statement of financial position.
b) Recognises any investment retained in the former subsidiary and
subsequently accounts for it and for any amounts owed by or to
the former subsidiary in accordance with relevant IFRSs.
c) Recognises the gain or loss associated with the loss of control
attributable to the former controlling interest
Accounting requirements
By: Mulualem G. AcFn, BDU, 2023

Accounting requirements
What is to be consolidated?
• If dissolution takes place,
appropriate account balances are
physically consolidated in the
surviving company’s financial
records.
• If separate incorporation is
maintained, only the financial
statement information (not the
actual records) is consolidated.
When does the consolidation take
place?
• If dissolution takes place, a
permanent consolidation occurs at
the date of the combination.
• If separate incorporation is
maintained, the consolidation
process is carried out at regular
intervals whenever financial
statements are to be prepared.
By: Mulualem G. AcFn, BDU, 2023

Accounting requirements
 How are the accounting records affected?
 If dissolution takes place, the surviving company’s accounts are
adjusted to include appropriate balances of the dissolved company.
The dissolved company’s records are closed out.
 If separate incorporation is maintained, each company continues to
retain its own records. Using worksheets facilitates the periodic
consolidation process without disturbing the individual accounting
systems.
 If a member of the group uses accounting policies other than those
adopted in the consolidated financial statements for like transactions and
events in similar circumstances, appropriate adjustments are made in
preparing the consolidated financial statements.
By: Mulualem G. AcFn, BDU, 2023

Consolidation procedures
 Consolidated financial statements:
a) combine like items of assets, liabilities, equity, income, expenses and
cash flows of the parent with those of its subsidiaries.
b) offset (eliminate) the carrying amount of the parent’s investment in
each subsidiary and the parent’s portion of equity of each subsidiary
c) eliminate in full intragroup assets and liabilities, equity, income,
expenses and cash flows relating to transactions between entities of the
group (profits or losses resulting from intragroup transactions that are
recognised in assets, such as inventory and fixed assets, are eliminated
in full). Intragroup losses may indicate an impairment that requires
recognition in the consolidated financial statements. IAS 12 Income
Taxes applies to temporary differences that arise from the elimination
of profits and losses resulting from intragroup transactions
By: Mulualem G. AcFn, BDU, 2023

Chapter requirements
 Reading materials and comprehensive illustrations
 IFRS 10 Guideline
 Joe Ben Hoyle, Thomas F. Schaefer, Timothy S. Doupnik - Advanced
Accounting 14th Edition-McGraw-Hill (2021), from page 65 to 68,
 Pearl Tan, Chu Yeong Lim, Ee Wen Kuah - Advanced Financial Accounting-
McGraw Hill Education (2019), from page 148 to 153
By: Mulualem G. AcFn, BDU, 2023
End of chapter two