The document discusses consolidation under IFRS. There are two main methods for consolidation under IFRS - the equity method and proportionate consolidation. The equity method involves initially recognizing investments at cost and subsequently adjusting the carrying amount to reflect the investor's share of profits or losses after acquisition. Proportionate consolidation involves including the venturer's share of assets, liabilities, income and expenses of the jointly controlled entity in its financial statements. IFRS 10 addresses consolidation and defines control as having power over an investee along with exposure or rights to variable returns and the ability to use power to affect returns. Control is the basis for consolidation under IFRS 10.

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Brief note on consolidation under IFRS

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Brief note on consolidation under IFRS
Relevant accounting standards : IFRS 10 Consolidated Financial Statements (which deals with the concept of control), IFRS 11 Joint
Arrangements, IAS 28 Investments in Associates and Joint Ventures.
Consolidation is done through two methods under IFRS - Equity method of accounting and Proportionate consolidation
Equity method of Accounting: Under the equity method, on initial recognition the investment in an
associate or a joint venture is recognised at cost, and the carrying amount is increased or decreased to recognise the investor's share
of the profit or loss of the investee after the date of acquisition. [IAS 28(2011).10]
Proportionate consolidation: Under proportionate consolidation, the balance sheet of the venturer
includes its share of the assets that it controls jointly and its share of the liabilities for which it is jointly responsible. The income
statement of the venturer includes its share of the income and expenses of the jointly controlled entity. [IAS 31.33]
- Equity method of accounting is followed for Investments in Associates and Joint Ventures as per IAS 28. IAS 28 Investments in
Associates and Joint Ventures (as amended in 2011) outlines how to apply, with certain limited exceptions, the equity method
to investments in associates and joint ventures. The standard also defines an associate by reference to the concept of
"significant influence", which requires power to participate in financial and operating policy decisions of an investee (but not
joint control or control of those polices). In other cases, proportionate consolidation is applicable.
As per IFRS 10 which deals in Consolidated Financial Statement an entity needs to prepare a consolidated financial statement if it
controls one or more entities. 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.
The Standard:

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 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
 set 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.
Control
An investor determines whether it is a parent by assessing whether it controls one or more investees. An investor considers all relevant
facts and circumstances when assessing whether it controls an investee. An investor controls an investee when it 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.
power over
the investee
rights to
variable
returns
ability to use
power to
effect returns

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An investor controls an investee if and only if the investor has all of the following elements:
 Power over the investee i.e. the investor has existing rights that give it the ability to direct the relevant activities (the
activities that significantly affect the investee's returns). Power arises from rights. Such rights can be straightforward (e.g.
through voting rights) or be complex (e.g. embedded in contractual arrangements). An investor that holds only protective
rights cannot have power over an investee and so cannot control an investee [IFRS 10:11, IFRS 10:14]. An Investor has
power over an investee when the investor has existing SUBSTANTIVE RIGHTS that give it the current ability to direct the
relevant activities. As per IFRS 10 the relevant activities are those activities of the investee that significantly affect the investee’s
returns.
o Exposure, or rights, to variable returns from its involvement with the investee: An investor must be exposed, or have
rights, to variable returns from its involvement with an investee to control the investee. Such returns must have the
potential to vary as a result of the investee's performance and can be positive, negative, or both. [IFRS 10:15]
o The ability to use its power over the investee to affect the amount of the investor's returns: A parent must not only
have power over an investee and exposure or rights to variable returns from its involvement with the investee, a parent
must also have the ability to use its power over the investee to affect its returns from its involvement with the investee.
[IFRS 10:17].
Framework for assessment of control
- Assess purpose and design
- Assess power
What activities significantly affect the investee’s returns (‘relevant activities’)?
How are decisions about relevant activities made?
Do investor’s rights provide ability to direct relevant activities?

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Assess exposure to variable returns.
Assess ability to use power to influence variable returns
1. Principal/agent assessment
2. De facto agent assessment
IFRS 10 provides the following additional guidance in relation to the determination of control:
 Items to be considered in assessing control (not an exhaustive list):
o Voting rights – in the most straightforward case, the company holding the majority of the voting rights (in the absence of any
other factors) controls the investee
o Potential voting rights
o Rights to appoint, reassign or remove members of an investee’s key management personnel who have the ability to direct the
relevant activities
o Rights to direct the investee to enter into, or veto any changes to, transactions for the benefit of the investor;
o Contractual arrangements – need to determine whether there are contractual arrangements in place that direct the running of
the company’s relevant activities
o Shareholders’ agreements
o Investor shareholdings and what those shareholdings convey
o Board composition and Board responsibilities
o Presence of any put/call options or any other arrangements which might convey additional shareholdings/voting rights
Some of the important consideration for analyzing the control have been considered in detail below :
Substantive or Protective rights
 IFRS 10 requires only substantive rights to be considered in the assessment of power (IFRS 10.B22). Protective rights are not considered.

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 Substantive rights exercisable by other parties can prevent an investor from obtaining control, even if those right-holders are not able to
initiate decisions (IFRS 10.B25).
Potential voting rights
Potential voting rights are defined as ‘rights to obtain voting rights of an investee, such as those within an option or
convertible instrument.’ (IFRS 10.B47)
IFRS 10 specifies 3 issues to consider:
1) Substantive or protective : Only substantive voting rights are considered in assessing power (IFRS 10.B47). Therefore voting rights
should be assessed against the criteria for substantive rights specified by IFRS 10
2) Purpose and design of instrument and other involvement (IFRS 10.B48).
The purpose and design of the potential voting right instrument and the purpose and design of any other involvement the investor has
with the investee should be assessed. This involves both an assessment of terms and conditions and the investor’s apparent
expectations, motives and reasons for agreeing to those terms and conditions.
3) Other voting or decision rights held by the investor (IFRS 10.B49).For example, ownership of a 20% option that is accompanied by a 40%
shareholding may result in control (IFRS 10.B50).

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De Facto Control
An investor with less than a majority of the voting rights may hold the largest block of voting rights with the remaining voting rights widely-
dispersed. The investor may have the power to unilaterally direct the investee unless a sufficient number of the remaining dispersed investors act
in concert to oppose the influential investor. However, such concerted action may be hard to organise if it requires the collective action of a large
number of unrelated investors.
IFRS 10
ref.
Largest
investor’s
holdings
Holdings of
next largest
investors
Holdings of
remaining
investors
Other facts and circumstances stated in example Control by largest
investor?
IFRS 10
example
4
48% – Thousands of
shareholders with
less than 1% each.
None of the shareholders have arrangements to consult
each other or make collective decisions.
Yes.
IFRS 10
example
5
40% – 12 investors
holding 5% each.
A shareholder agreement grants the largest investor the
right to appoint, remove and set the compensation of
management responsible for directing the relevant
activities. A two-thirds majority shareholder vote is
required to change this agreement.
Yes, because of the
agreement.
Not conclusive if
considering only
voting rights.
IFRS 10
example
6
45% Next 2
investors
hold 26%
each.
3 other investors
hold 1%.
– No.
IFRS 10
example
7
45% – 11 shareholders
holding 5% each.
None of the shareholders have arrangements to consult
each other or make collective decisions.
Not conclusive if
considering only
voting rights.
IFRS 10
example
8
35% Next 3
investors
hold 5%
each.
Numerous
shareholders with
less than 1% each.
None of the shareholders have arrangements to consult
each other or make collective decisions. Decisions made
based on majority vote. 75% of votes have been cast at
recent shareholders’ meetings.
No.

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