Unit
- Control definition: Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Under IFRS 10, an investor controls an investee when it is exposed to variable returns and has the ability to affect those returns through its power over the investee.
- Power element: Power arises from rights that give the current ability to direct relevant activities. These rights can be voting rights, contractual arrangements, or potential voting rights. Relevant activities include decisions about the entity's operations, financing, and investing.
- Returns element: Returns are variable based on the investee's performance. They include dividends, interest, economies of scale, cost savings, and synergies. The parent must be exposed or entitled to variable returns from its involvement with the investee.
- Linkage element: The ability to use power to affect returns requires a connection between the power and the returns. If power is held but cannot be used to influence returns, control does not exist. This linkage is assessed continuously.
- Scope of consolidation: All subsidiaries must be consolidated unless the parent is itself a wholly-owned subsidiary or meets specific exemptions. Special purpose entities and structured entities are included if control criteria are met.
- Control assessment indicators: Factors such as majority voting rights, board representation, management agreements, and veto powers are considered. De facto control exists when an investor holds less than a majority but has practical ability to control due to dispersed shareholding.
- Reporting date consistency: Financial statements of the parent and subsidiaries should be prepared as of the same reporting date. If different, adjustments are made for significant transactions between dates. The parent may require the subsidiary to align its reporting period.
- Uniform accounting policies: The consolidated financial statements must apply uniform accounting policies for like transactions. If a subsidiary uses different policies, adjustments are made during consolidation. This ensures comparability across the group.
- Non-controlling interest: When a parent does not own 100% of a subsidiary, the portion not owned is reported as non-controlling interest within equity. It is measured at fair value or proportionate share of net assets. The consolidated income statement includes the full revenue and expenses, with NCI's share deducted to arrive at net income attributable to parent.
- Consolidation adjustments: Intercompany transactions and balances are eliminated in full. This includes sales, purchases, dividends, loans, and unrealized profits on intra-group transfers. Elimination entries ensure that the consolidated financial statements reflect only transactions with external parties and the group's financial position as a single economic entity.
Decision Logic
Q: Does the investor have power over the investee's relevant activities?
If yes: Proceed to assess exposure to variable returns.
If no: No consolidation required; apply equity method or fair value.
Quick Revision
- Control has three elements: power over investee, exposure to variable returns, and ability to use power to affect returns.
- All subsidiaries meeting control definition must be consolidated, including structured entities.
- Assessment is continuous and considers both voting rights and contractual arrangements.
- Uniform accounting policies and aligned reporting dates are required for consolidation.