by determining the amount relating to that foreign operation that would have arisen if
the entity had used the direct method of consolidation. However, IAS 21 does not
require an entity to make this adjustment. Instead, it is an accounting policy choice that
should be followed consistently for all net investments. [IFRIC 16.17].
IFRIC 16 is discussed in more detail in Chapter 15 at 6.1.5 and 6.6.3 and Chapter 49 at 5.3.
2.4 Intragroup
eliminations
IFRS 10 requires intragroup assets and liabilities, equity, income, expenses and cash
flows relating to transactions between entities of the group to be eliminated. Profits or
losses resulting from intragroup transactions that are recognised in assets, such as
inventory and fixed assets, are eliminated in full as shown in Example 7.2 below.
[IFRS 10.21, B86(c)].
Example 7.2:
Eliminating intragroup transactions
Entity A holds a 75% interest in its subsidiary, Entity B. Entity A sold inventory costing €100,000 to Entity B
for €200,000, giving rise to a profit in Entity A of €100,000. Entity B still held the inventory at the end of
the reporting period. Tax effects are ignored in this example.
Under IFRS 10, as well as the intragroup sale between Entity A and Entity B, the unrealised profit is
eliminated from the group’s point of view in consolidation as follows:
€’000 €’000
DR CR
Revenue in Entity A
200
Cost of sales in Entity A
100
Inventory in Entity B
100
The profit from the sale of inventory of €100,000 is reversed against group profit or loss. As the parent made
the sale, no amount of the eliminated profit is attributed to the non-controlling interest.
472 Chapter
7
If the fact pattern was reversed, such that Entity B sold inventory to Entity A, and Entity A still held the
inventory at the end of the reporting period, the €100,000 of profit would still be reversed in the consolidated
financial statements. However, in this instance, as the subsidiary made the sale, €25,000 of the eliminated
profit (i.e. the non-controlling interest’s 25% share of the €100,000 profit) would be allocated to the non-
controlling interest.
If the inventory held by Entity B had been sold to a third party for €300,000 before the end of the reporting
period (resulting in a profit in Entity A of €100,000 for the sale to Entity B at €200,000 and a profit in Entity B
of €100,000 for the sale to a third party at €300,000), no intragroup elimination of profit is required. The
group has sold an asset with a cost of €100,000 for €300,000 creating a profit to the group of €200,000. In
this case, the intragroup elimination is limited to the sale between Entities A and B as follows:
€’000 €’000
DR CR
Revenue in Entity A
200
Cost of sales in Entity B
200
Even though losses on intragroup transactions are eliminated in full, they may still
indicate an impairment that requires recognition in the consolidated financial
statements. [IFRS 10.21, B86(c)]. For example, if a parent sells a property to a subsidiary at
fair value and this is lower than the carrying amount of the asset, the transfer may
indicate that the property (or the cash-generating unit to which that property belongs)
is impaired in the consolidated financial statements. This will not always be the case as
the asset’s value-in-use may be sufficient to support the higher carrying value. Transfers
between companies under common control involving non-monetary assets are
discussed in Chapter 8 at 4.4.1; impairment is discussed in Chapter 20.
Intragroup transactions may give rise to a current and/or deferred tax expense or
benefit in the consolidated financial statements. IAS 12 applies to temporary differences
that arise from the elimination of profits and losses resulting from intragroup
transactions. [IFRS 10.21, B86]. These issues are discussed in Chapter 29 at 7.2.5 and 8.7.
The application of IAS 12 to intragroup dividends and unpaid intragroup interest,
royalties or management charges is discussed in Chapter 29 at 7.5.4, 7.5.5, 7.5.6 and 8.5.
Where an intragroup balance is denominated in a currency that differs to the functional
currency of a transacting group entity, exchange differences will arise. See Chapter 15
at 6.3 for discussion of the accounting for exchange differences on intragroup balances
in consolidated financial statements.
2.5
Non-coterminous accounting periods
The financial statements of the parent and its subsidiaries used in the preparation of the
consolidated financial statements shall have the same reporting date. If the end of the
reporting period of the parent is different from that of a subsidiary, the subsidiary must
prepare, for consolidation purposes, additional financial information as of the same date
as the financial statements of the parent, unless it is impracticable to do so.
[IFRS 10.21, B92]. ‘Impracticable’ presumably means when the entity cannot apply the
requirement after making every reasonable effort to do so. [IAS 1.7].
If it is impracticable for the subsidiary to prepare such additional financial information,
then the parent consolidates the financial information of the subsidiary using the most
recent financial statements of the subsidiary. These must be adjusted for the effects of
Consolidation procedures and non-controlling interests 473
significant transactions or events that occur between the date of those financial
statements and the date of the consolidated financial statements. The difference
between the date of the subsidiary’s financial statements and that of the consolidated
financial statements must not be more than three months. The length of the reporting
periods and any difference between the dates of the financial statements must be the
same from period to period. [IFRS 10.21, B93]. It is not necessary, as in some national
GAAPs, for the subsidiary’s reporting period to end before that of its parent.
This requirement seems to imply that, where a subsidiary that was previously
consolidated using non-coterminous financial statements is now consolidated using
coterminous financial statements (i.e. the subsidiary changed the end of its reporting
period), comparative information should be restated so that financial information of
the subsidiary is included in the consolidated financial statements for an equivalent
period in each period presented. However, it may be that other approaches not
involving restatement of comparatives would be acceptable, particularly where the
comparative information had already reflected the effects of significant transactions
or events during the period between the date of the subsidiary’s financial statements
and the date of the consolidated financial statements. Where comparatives are not
restated, additional disclosures might be needed about the treatment adopted and
the impact on the current period of including information for the subsidiary for a
period different from that of the parent.
IAS 21 addresses what exchange rate should be used in translating the assets and
liabilities of a foreign operation that is consolidated on t
he basis of financial statements
made up to a different date to the reporting date used for the reporting entity’s financial
statements. This issue is discussed further in Chapter 15 at 6.4.
2.6
Consistent accounting policies
If a member of the group uses accounting policies other than those adopted in the
consolidated financial statements for like transactions and events in similar
circumstances, appropriate adjustments are made to that group member’s financial
statements in preparing the consolidated financial statements to ensure conformity with
the group’s accounting policies. [IFRS 10.21, B87].
IFRS 4 – Insurance Contracts – contains an exception to this general rule, as further
discussed in Chapter 51 at 8.2.1.C.
3
CHANGES IN CONTROL
3.1
Commencement and cessation of consolidation
A parent consolidates a subsidiary from the date on which the parent first obtains
control, and ceases consolidating that subsidiary on the date on which the parent loses
control. [IFRS 10.20]. IFRS 3 defines the acquisition date, which is the date on which the
acquirer obtains control of the acquiree, [IFRS 3.8, Appendix A], (see Chapter 9 at 4.2).
The requirement to continue consolidating (albeit in a modified form) also applies to a
subsidiary held for sale accounted for under IFRS 5 – Non-current Assets Held for Sale
and Discontinued Operations (see Chapter 4).
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7
3.1.1
Acquisition of a subsidiary that is not a business
These basic principles also apply when a parent acquires a controlling interest in an
entity that is not a business. Under IFRS 10, an entity must consolidate all investees that
it controls, not just those that are businesses, and therefore the parent will recognise
any non-controlling interest in the subsidiary (see 5 below). IFRS 3 states that when an
entity acquires a group of assets or net assets that is not a business, the acquirer allocates
the cost of the group between the individual identifiable assets and liabilities in the
group based on their relative fair values at the date of acquisition. Such a transaction or
event does not give rise to goodwill. [IFRS 3.2(b)]. The cost of the group of assets is the
sum of all consideration given and any non-controlling interest recognised. In our view,
if the non-controlling interest has a present ownership interest and is entitled to a
proportionate share of net assets upon liquidation, the acquirer has a choice to
recognise the non-controlling interest at its proportionate share of net assets or its fair
value (measured in accordance with IFRS 13 – Fair Value Measurement). In all other
cases, non-controlling interest is recognised at fair value (measured in accordance with
IFRS 13), unless another measurement basis is required in accordance with IFRS (e.g.
any share-based payment transaction classified as equity is measured in accordance
with IFRS 2 – Share-based Payment).
The acquisition of a subsidiary that is not a business is illustrated in Example 7.3 below.
Example 7.3:
Acquisition of a subsidiary that is not a business
Entity A pays £160,000 to acquire an 80% controlling interest in the equity shares of Entity B, which holds
a single property that is not a business. The fair value of the property is £200,000. An unrelated third party
holds the remaining 20% interest in the equity shares. The fair value of the non-controlling interest is
£40,000. Tax effects and transaction costs, if any, are ignored in this example.
Entity A therefore records the following accounting entry:
£’000
£’000
DR CR
Investment property
200
Non-controlling interest
40
Cash
160
Variation
The facts are the same as above, except that Entity A pays £170,000 to acquire the 80% interest due to the
inclusion of a control premium. In this case, Entity A therefore records the following accounting entry:
£’000
£’000
DR CR
Investment property
210
Non-controlling interest
40
Cash
170
3.2
Accounting for a loss of control
IFRS 10 clarifies that an investor is required to reassess whether it controls an investee
if the facts and circumstances indicate that there are changes to one or more of the
three elements of control. [IFRS 10.8, B80]. The elements of control are: power over the
investee; exposure, or rights, to variable returns from the investor’s involvement with
Consolidation procedures and non-controlling interests 475
the investee; and the investor’s ability to use its power over the investee to affect the
amount of the investor’s returns. [IFRS 10.7]. See Chapter 6 at 9 for further discussion,
including examples of situation where a change in control may arise.
A parent can lose control of a subsidiary because of a transaction that changes its
absolute or relative ownership level. For example, a parent may lose control of a
subsidiary if:
• it sells some or all of the ownership interests; or
• it contributes or distributes some or all of the ownership interests; or
• a subsidiary issues new ownership interests to third parties (therefore a dilution in
the parent’s interests occurs).
Alternatively, a parent can lose control without a change in absolute or relative
ownership levels. For example, a parent may lose control on expiry of a contractual
agreement that previously allowed the parent to control the subsidiary. [IFRS 10.BCZ180].
A parent may also lose control if the subsidiary becomes subject to the control of a
government, court, administrator, receiver, liquidator or regulator. This evaluation may
require the exercise of judgement, based on the facts and circumstances, including the
laws in the relevant jurisdiction (see Chapter 6 at 4.3.2 and 9.2).
If a parent loses control of a subsidiary, it is required to: [IFRS 10.25, 26, B98]
(a) derecognise the assets (including any goodwill) and liabilities of the former
subsidiary at their carrying amounts at the date when control is lost;
(b) derecognise the carrying amount of any non-controlling interests in the former
subsidiary at the date when control is lost. This includes any components of other
comprehensive income attributable to them;
(c) recognise the fair value of the consideration received, if any, from the transaction,
event or circumstances that resulted in the loss of control;
(d) recognise a distribution 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 (see 3.7 below);
(e) recognise any investment retained in the former subsidiary at its fair value at the
date when control is lost (see 3.3 below);
(f) reclassify to profit or loss, or transfer directly to retained earnings if required by
other IFRSs, the amounts recognised in other comprehensive income in relation
to the subsidiary (see 3.5 below);
If a parent loses control of a subsidiary, the parent acco
unts for all amounts
previously recognised 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. [IFRS 10.26, B99]. This is discussed at 3.5
below; and
(g) recognise any resulting difference as a gain or loss in profit or loss attributable to
the parent.
Any amounts owed to or by the former subsidiary (which cease to be eliminated on
consolidation) should be accounted for in accordance with the relevant IFRSs. Such balances
476 Chapter
7
are often financial assets or financial liabilities, which are initially recognised at fair value in
accordance with IFRS 9, at the date of loss of control. [IFRS 9.5.1.1, 5.1.1A, 5.1.2, 5.1.3]. See
Chapter 45 at 3.
Sometimes, the parent may receive contingent consideration on the sale of a subsidiary.
In most cases, the parent will have a contractual right to receive cash or another
financial asset from the purchaser and, therefore, such balances are often financial
assets within the scope of IFRS 9. IFRS 10 requires the contingent consideration
received on loss of control of an entity or business to be measured at fair value, which
is consistent with the treatment required by IFRS 9. [IFRS 10.26, B98(b)(i)].
IFRS 5’s requirements apply to a non-current asset (or disposal group) that is classified
as held for sale. See Chapter 4 at 2. The presentation requirements where the subsidiary
for which the parent loses control meets the definition of a discontinued operation are
discussed in Chapter 4 at 3. Chapter 20 at 8.5 addresses the allocation of goodwill when
an operation is disposed of which forms part of a cash-generating unit to which goodwill
has been allocated.
Where a parent loses control over a subsidiary because it has sold or contributed its interest
in a subsidiary to an associate or joint venture (accounted for using the equity method),
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 94