United Kingdom

Consolidated financial statements 

IFRS 10 Consolidated Financial Statements introduces a new control model for determining whether an investee should be consolidated. This new approach should be applied to all investees, including special purpose entities currently in the scope of SIC-12.

“IFRS 10 is judgemental and likely to be difficult to apply across all sectors: the banking and funds sectors are likely to be affected the most."

 Mike Metcalf, Technical Partner


Overview of standard

  • The standard introduces a single control model to assess whether to consolidate all types of investee.
  • 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.
  • In assessing whether it has power over an investee, the investor should consider:
      • substantive potential voting rights as opposed to currently exercisable potential voting rights under IAS 27; and
    • whether it has de facto control.
  • The standard introduces the concept of delegated power. A number of indicators are provided to analyse whether the decision maker is acting as a principal or as an agent on behalf of other investors when directing the activities of an investee.
  • IFRS 10, IFRS 11, IFRS 12, IAS 27 (2011) and IAS 28 (2011) are endorsed for use in the EU for financial years starting on or after 1 January 2014. Early adoption is permitted.
  • After the publication of the investment entities amendments in November 2012, the standard exempts investment entities (as defined by the standard) from the requirement to consolidate the investments that they control. The amendments have been endorsed for use in the EU and are effective from 1 January 2014: they may be adopted early.
  • In June 2012, the IASB issued Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guidance (Amendments to IFRS 10, IFRS 11 and IFRS 12), which simplifies the transition to these new standards by:
            • requiring the consolidation conclusion to be tested at the start of the year in which IFRS 10 is adopted;
            • removing the requirement to disclose the impact of the change in accounting policy for the year in which the standard is adopted; and
            • requiring disclosures in respect of unconsolidated structured entities to be provided only prospectively.
  • In April 2013, these amendments were endorsed for use in the EU for financial years starting on or after 1 January 2014. Early adoption is permitted.
  • On 18 December 2014 the IASB issued amendments Investment entities - applying the consolidation exception. These amendments clarify issues that have been identified in applying the investment entity amendments to IFRS 10. In particular, the amendments make changes in relation to the requirement for investment entities to consolidate certain subsidiaries rather than measure them at fair value. The amendments apply for periods beginning on or after 1 January 2016 (subject to EU endorsement) but may be applied early.

Practical issues

  • The single control model could change the control conclusion, particularly for SPEs which were previously assessed using a risks and rewards type approach under SIC-12. Significant analysis and judgement will often be required.  
  • Assessing control, based on substantive potential voting rights, is likely to change the control conclusion in some cases: currently exercisable potential voting rights might not be considered substantive and vice versa.
  • More investees could be consolidated under the de facto control model if an entity currently assesses the ability to control on a legal or contractual basis under IAS 27.
  • Variability in returns is a much broader concept than the ownership type benefits that were typically taken into account in an IAS 27 analysis.  As a result, more entities may find that they are exposed to variable returns from an investee.
  • Entities in the funds sector, as well as asset managers, are likely to be particularly impacted by the agent versus principal guidance.