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Transcript of IFRS 10
Consolidated Financial Statements
Let us assume a company by name A Inc. has invested in company called B Inc and bought 100% of the capital. A Inc. just shows B Inc. as an investment in its balance sheet. However, A Inc. is actually transacting in name of B Inc. and results of B Inc. are that of A Inc.'s....
When is investor company called a parent?
An Investor can consolidate an investee only when investee satisfies three conditions
Power over investee
Exposure to Profits
Ability to use power
Loss of Control
Power = Substantive Rights + Such substantive rights are on relevant activities of the investee
Examples for relevant activities of investee are establishing operating and capital decisions of the investee (including budgets), appointing and remunerating an investee’s key management personnel or service providers and terminating their services or employment.
An investor acquires 48 per cent of the voting rights of an investee. The remaining voting rights are held by thousands of shareholders, none individually holding more than 1 per cent of the voting rights. None of the shareholders has any arrangements to consult any of the others or make collective decisions. He is said to have substantive rights even though he holds less than 50% shares
Test your Knowledge
Investor A and two other investors each hold a third (33%) of the voting rights of an investee. The investee’s business activity is closely related to investor A. In addition to its equity instruments, investor A also holds debt instruments that are convertible into ordinary shares of the investee at any time for a fixed price that is out of the money (but not deeply out of the money).
If the debt were converted, investor A would hold 60 per cent of the voting rights of the investee.
Investor A would benefit from realizing synergies if the debt instruments were converted into ordinary shares.
Does Investor A have Power over the investee?
: Investor A has power over the investee since it holds voting rights of the investee and substantive potential voting rights that give it the current ability to direct the relevant activities.
Lack of Power
There cannot be substantive power if there are barriers (economic or otherwise) that prevent exercise of power like:
Penalties that may prevent/deter exercise of power
Absence of an explicit mechanism
Inability to obtain the information
Legal or regulatory constraints
Other constraints making it unlikely that the rights will be exercised
Investor having Protective Rights
Barriers to Power
Protective rights relate to fundamental changes to the activities of an investee
a lender’s right to restrict a borrower from undertaking activities that could significantly change the credit risk of the borrower to the detriment of the lender.
the right of a party holding a non-controlling interest in an investee to approve capital expenditure greater than that required in the ordinary course of business, or to approve the issue of equity or debt instruments.
the right of a lender to seize the assets of a borrower if the borrower fails to meet specified loan repayment conditions.
Investor A has power over the investee since it holds voting rights of the investee and substantive potential voting rights that give it the current ability to direct the relevant activities.
Lack of Power
Example: If the investor is situated in China and Investee is in India and a war commenced between India and China. Obviously the investor cannot exercise any right over Investee because it is situated in an alien enemy country. There is no power vested with the investor and hence the investee need not be consolidated.
Exposure to Variable Returns
Variable returns are returns that are not fixed and have the potential to vary as a result of the performance of an investee.
An investor can hold a bond with fixed interest payments. The fixed interest payments are variable returns for the purpose of this IFRS because they are subject to default risk and they expose the investor to the credit risk of the issuer of the bond
Fixed performance fees for managing an investee’s assets are variable returns because they expose the investor to the performance risk of the investee. The amount of variability depends on the investee’s ability to generate sufficient income to pay the fee
Ability to Exercise Power
An investor should consider whether it has the capability to excise its power over the investee.
An investor will assess whether it’s a principal to the investee (i.e., whether the investee acts on the orders of the investor).
Decision Tree – To decide on whether the investor is a principal or not
The financial statements of the parent and its subsidiaries used in the preparation of the consolidated financial statements shall have the same reporting date.
Uniform Accounting Policies
If the investee has a different accounting policy than that of the investor, appropriate adjustments are made to ensure conformity with the group’s accounting policies
An entity includes the income and expenses of a subsidiary in the consolidated financial statements from the date it gains control until the date when the entity ceases to control the subsidiary.
: Depreciation expense recognized in the consolidated statement of comprehensive income after the acquisition date is based on the fair values of the related depreciable assets recognized in the consolidated financial statements at the acquisition date
the assets (including any goodwill) and liabilities of the subsidiary at their carrying amounts at the date when control is lost; and
the carrying amount of any non-controlling interests in the former subsidiary at the date when control is lost (including any components of other comprehensive income attributable to them)
the fair value of the consideration received, if any, from the transaction, event or circumstances that resulted in the loss of control;
if the transaction, event or circumstances that resulted in the loss of control involves a distribution of shares of the subsidiary to owners in their capacity as owners, that distribution; and
any investment retained in the former subsidiary at its fair value at the date when control is lost.
account for all amounts previously recognized in other comprehensive income in relation to that subsidiary on the same basis as would be required if the parent had directly disposed of the related assets or liabilities
recognize any resulting difference as a gain or loss in profit or loss attributable to the parent
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