MFRS 10

Its impact on consolidation

 Consolidated Financial Statements
Consolidation: process of preparing single set of financial
statements for group of entities under control of one of those
entities

Involves combining financial statements of individual entities

to show financial position and performance of group as if it
were single entity
Group a parent and its subsidiaries

Parent an entity that controls one or more entities

Subsidiary an entity that is controlled by another entity

Consolidated Financial Statements

Consolidated financial statements are prepared by:

(i) Aggregating line by line, like items of assets,

liabilities, equity, income and expenses

(ii) Adjusting these combined figures for inter-

group transactions between entities within the
group
A Group of Entities
Control as the Criterion for
Consolidation
Under MFRS 10, the criterion for consolidation is control

Judgement is often required in determining whether

control exists

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

(MFRS 10, Appendix A)

 Control
The following three elements are required in order for an
investor to have control:

1. Power over the investee

2. Exposure or rights to variable returns from its involvement
with the investee
3. The ability to use its power over the investee to affect the
amount of the investors returns

. All three elements must be present for control to exist

 Power
Power is defined as existing rights that give the
current ability to direct the relevant activities

Power arises from rights which generally arise

from a legal contract. These include:
Voting rights
Rights to appoint, reassign or remove members of the
investees key management personnel
Rights to appoint or remove another entity that
participates in management decisions
Rights to direct the investee to enter into, or veto any
changes to, transactions that affect the investees
returns
 Power
Rights must be substantive
The holder must have the practical ability to
exercise the rights
Judgment is required in determining whether
rights are substantive. Factors to consider
include:
Whether the party that holds the rights would
benefit from exercising the rights
Whether there are any barriers that prevent a
holder from exercising rights
Where multiple parties are involved, whether
there is a mechanism in place to enable those
parties to practically exercise the rights
 Powe
r
If a right is protective then the holder does
not have power
Protective rights are designed to protect the
interest of the party holding those rights
without giving the party power over the
entity to which the rights relate
Example of protective rights include the
following:
A lenders right to restrict a borrower from
undertaking certain activities
The right of a party holding a non-controlling
interest to approve various transactions
The rights of a lender to seize the assets of a
borrower in the event of default.
 Power
Requires the to direct rather than
ability actually
This ability must be current
directing

It must be relevant activities that are being

directed, that is activities of the investee that
significantly affect the investees returns

Power is presumed to exist where an investor

owns more than 50% of the voting rights of an
entity unless there is evidence to the contrary
 Power
Voting rights of less than 50% can result in
an investor having power over an investee

The following factors need to be considered

when assessing whether there is power in
this case:
Dispersion of other shareholders
Attendance at AGMs
Existence of contracts
Exposure or Rights to
Variable Returns
The second element of the control definition requires that the
investor has the rights to variable returns from the investee

Examples of returns include:

Dividends
Economies of scale
Cost savings
Sourcing scarce products
Gaining access to proprietary knowledge
Remuneration for servicing an investees assets or
liabilities
 Ability to use Power to Affect Returns

The third element requires that the parent have

the ability to increase its benefits and limit its
losses from the subsidiarys activities.

All three elements must be present for

control to exist

No control = no parent subsidiary

relationship
= no consolidation
 Preparation of Consolidated
Financial Statements
MFRS 10 para 4 applies to all parents unless they meet all of the
following conditions:

i.It is a wholly-owned subsidiary or is a partially-owned subsidiary of

another entity and all its other owners do not object to the parent not
presenting consolidated financial statements

ii.Its debt or equity instruments are not traded in a public market

iii.It is not required to file financial statements with a securities

commission or other organisation for the purpose of issuing
instruments
in a public market

iv.Its ultimate or any intermediate parent produces consolidated financial

statements available for public use and comply with MFRSs
Business Combinations & Consolidation
An acquirer is the combining entity that obtains
control of the other combining entities in a
business combination

In most cases the parent will be the acquirer

Exceptions arise when:

A new entity is formed, which acquires all the
shares of previously existing entities
A reverse acquisition occurs
Business Combinations &
Consolidation
Business Combinations &
Consolidation
Disclosures
MFRS 10 specifies no disclosures

The disclosures required in consolidated financial

statements are addressed in MFRS 12 Disclosure of
Interests in Other Entities
Key objective to evaluate risks

MFRS 127 Separate Financial Statements

Key para 16-17