An Auditor’s Guide to International Financial Reporting Standards (IFRS 10)

Financial statements produced in accordance with International Financial Reporting Standards (IFRS) must identify parent-subsidiary relationships or when one business administers another. A party's reported results, cash flows, and financial position, as well as the operations that are both "on" and "off" the firm's balance sheet, are all impacted by the controlled assessment, which decides which entities are incorporated in a parent's financial statements. This control evaluation is recorded under IFRS in compliance with IFRS 10 "Consolidated financial statements." In May 2011, IFRS 10 was released as a part of a set of revisions regulating various degrees of connection with other businesses. IFRS 10 redefines "control" and offers detailed instructions on how to use the term.

The Scope of IFRS 10:

The applicable standards of both SIC-12 "Consolidation - Special Purpose Entities" and IAS 27 "Consolidated and Separate Financial Statements" (IAS 27) (2008) have been superseded by IFRS 10, which applies to both regular organizations and special purpose (or structured) entities (SIC-12). Of straightforward instances involving control via ownership of a majority of the voting power in an investee, IFRS 10 rarely affects the extent of consolidation. However, more intricate and tenuous control judgments need to be thoroughly checked.

There are some practical concerns that investment managers will have to take care of while implementing IFRS 10's new control definition.

  • Whenever an entity controls one or more other entities, IFRS 10 specifies guidelines for the production and reporting of consolidated financial reports.
  • When an investment administrator is subjected to, or has a claim to, variable returns as a result of its connection with the investee and has the authority to alter those returns due to the investee, then the asset manager is controlling the investee.
  • If the circumstances and facts suggest that one or more of the three criteria of management have changed, an investment manager must re-evaluate if he still manages an investor.
  • Investment managers must decide if the IFRS 10 Investment Entities Amendment's exception to consolidation, which was adopted in October 2012, is applicable.
  • The demand to comprehend the investee's goal and design, as well as its pertinent actions, is implicit in the definition of control.
  • When investment management has existing rights that allow it to currently control the pertinent activities, it has authority over the investee in question.
  • Whenever the investor's earnings from the investment manager's participation have the ability to fluctuate as an outcome of the investee's performance, the investment manager is exposed to or has entitlements to, variable returns from its engagement with the investee.
  • It is up to the investment advisor to decide if they are acting as a principal or an agent.
  • The nature of an investment manager's relationships with other parties and whether those parties are operating on its behalf (i.e., are "de facto agents") must be taken into account.
  • When determining whether to consider a component of an investee as a presumed independent category and, if so, whether to govern the deemed separate company, an asset administrator must take several factors into account.

Investor" and "investee" Terminology

The terms "investor" and "investee" relate to the reporting entity (or potential parent) and a potential subsidiary, respectively. To ascertain if a parent-subsidiary connection exists, an investor evaluates whether it controls an investee.

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Objectives of IFRS 10:

Establishing standards for the preparation and presentation of consolidated financial statements when one business owns one or more additional entities is the goal of IFRS 10.

The standard:

  •    Necessitates the presentation of consolidated financial statements by a parent organization.
  •    Control is defined as a principle, and control is established as the foundation for consolidating.
  •   Describe how to use the rule of control to determine if a shareholder controls an investee and, if so, whether the investee must be consolidated.
  •    Outlines the necessary accounting procedures to prepare consolidated financial statements.
  •    Establishes an exception to the consolidation of specific subsidiaries of an investment company and specifies an investment entity.

Control Definition:

When an investor is subjected to, or has an entitlement to, variable returns as a result of its connection with the investee and has the authority to influence those returns due to that investee, the investor is said to have control over the investee. Control necessitates:

  •   Control of the investor
  •   Rights or exposure to fluctuating returns
  • The capacity to influence returns through power

Scope and Exemptions of IFRS 10:

Except for lengthy employment benefit programs that fall under the purview of IAS 19 "Employee Benefits," IFRS 10 is applicable to all companies (including structured entities). If certain requirements are met, such as that none of its shareholder's object and that its shares or debt instruments are not sold on a public market, an intermediate parent which is itself a subordinate of another entity is exempt from the requirement to present consolidated financial statements.

If a company that is an investment business is forced to measure all of its subsidiaries at fair value through profit or loss, it is not permitted to publish consolidated financial statements. Only consolidated financial statements are subject to IFRS 10. IAS 27 still has criteria for generating separate financial statements.

Preparation of consolidated financial statements:

The consolidation methods under IFRS 10 maintain the previously established criteria, such as:

  • The removal of intra-group transactions and the parent's investment
  • Consistent accounting procedures
  • The requirement that the reporting date of financial statements used in consolidation be the same
  • The distribution of equity and net profit to non-controlling interests
  • Incorporating ownership interest fluctuations without sacrificing control
  • Keeping track of the loss of control over a subsidiary


Although IFRS 10 does not contain any disclosure obligations, any firm implementing IFRS 10 must also follow IFRS 12, which outlines full disclosure principles.

IFRS 10 for Audit Firms in Dubai:

A clear and straightforward corporate accounting system must be in place for firms due to the dynamic nature of the business world. IFRS guidelines are helpful in this circumstance. One can always look for the top Audit firms in Dubai to get the best services for your firm. As an audit firm in Dubai, we provide top-notch services and financial advice. For auditing, taxing, and accounting services, kindly contact us today!

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