Consolidation package of Standards: IFRS 10 Consolidated Financial Statements

In June 2003, the IASB added a project on Consolidation to its agenda. The goal of the project is to publish a single IFRS on consolidation to replace IAS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidation - Special Purpose Entities. That is to say, the control criteria within a single IFRS should be developed for all entities, including SPEs.

The project was being developed on the basis that consolidated financial statements should report a parent and its subsidiaries as if they were a single economic entity. Identifying whether an entity is a subsidiary should be based on the notion of control. The Board tentatively agreed that a parent entity has a controlling interest in another entity when it has exclusive rights over that entity's assets and liabilities which give it access to the benefits of those assets and liabilities and the ability to increase, maintain or protect the amount of those benefits. In December 2008, the IASB issued ED10 Consolidated Financial Statements, which was intended to replace IAS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidation - Special Purpose Entities. EFRAG issued a final comment letter on ED10 in April 2009 with several significant concerns.

On May 2011 the IASB published IFRS 10 Consolidated Financial Statements. IFRS 10  resulted mainly from the development of the 'consolidation package' of Standards including IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other Entities, IAS 27 Seperate Financial Statements (2011) and IAS 28 Investments in Associates and Joint Ventures. IFRS 10 is effective for annual periods beginning on or after 1 January 2013. Earlier application is permitted so long as IFRS 11, IFRS 12, IAS 27(2011) and IAS 28 (2011) are adopted at the same time.

IFRS 10 states that an investor, regardless of the nature of its involvement with an entity (the investee), shall determine whether it is a parent by assessing whether it controls the investee.

An investor controls an investee if and only if the investor 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.

The new model replaces the current duality of IAS 27 and SIC12. Other key features of IFRS 10 are as follows:

• It defines relevant activities as activities of the investee that significantly affect the investee's returns.

• Power arises from rights. For the purpose of assessing power, only substantive rights are considered.

• Possibility of having power with less than 50% of voting rights.

• Potential voting rights are considered only if they are substantive. This is a change from IAS 27, under which only potential voting rights that are currently exercisable or convertible were relevant to determining control.

• The new standard introduces some factors to identifying whether a party is acting as an agent or a principal.

EFRAG has initiated the assessment of the standard against the technical criteria for the endorsement in the European Union.

EFRAG is currently conducting field-testing of the new requirements introduced by IFRS 10 and IFRS 12 on consolidation. The questionnaire for the field-testing can be accessed below.
 
The IASB has issued an exposure draft on investment entities in August 2011. The ED is proposing an exemption for investment entities from consolidation.

On 9 February 2012, EFRAG issued the Invitation to Comment on its Initial Assessments of: IFRS 10, IFRS 11, IFRS 12, IAS 27 (2011) and IAS 28 (2011). EFRAG's initial assessment is that each of the Standards meets the technical criteria to be adopted in the EU. However, EFRAG does not support the effective date of the Standards as being 1 January 2013. EFRAG's reasons are explained in the proposed letter to the European Commission, which accompany EFRAG's Invitation to Comment. Comments were requested by 11 March 2012. 

On 30 March 2012, EFRAG issued its Endorsement Advice Letter and Effects Study Report relating to the endorsement of IFRS 10 and has concluded that it meets the requirements of endorsement.   EFRAG has also concluded that the benefits to be derived from implementing IFRS 10 are likely to outweigh the costs involved.

Notwithstanding the positive recommendation that IFRS 10 meets the endorsement criteria, EFRAG does not support the mandatory effective date of 1 January 2013, the field-tests it has conducted provided evidence that some financial institutions would need more time to implement IFRS 10, IFRS 11 and IFRS 12 in a manner that brings reliable financial reporting to capital markets. EFRAG recommends the mandatory effective date of the Standards to be 1 January 2014, with early adoption permitted. Given the interaction between the 5 Standards (consolidation package), EFRAG believes that the mandatory effective date should be the same for all the Standards.

On 29 December 2012 IFRS 10 (together with the related Standards) was published in the official journal.