GROUPS AND CONSOLIDATIONS
IFRS 10 Consolidated Financial Statements
The aim of IFRS 10 is to provide principles that govern the presentation and
preparation of consolidated financial statements when one entity (parent)
controls one or more other entities (subsidiaries).
In terms of IFRS 10 paragraph 4, a parent shall present consolidated financial
statements except if:
It is a wholly or partially owned subsidiary and all its owners have been
informed and do not object to the parent not presenting consolidated
financial statements
Its debt or equity instruments are not traded in the public market
It did not file nor is in the process of filing its financial statements with a
securities commission or other regulatory organisation for the purpose
of issuing its securities in a public market
Its ultimate or any intermediate parent produces financial statements
that are in compliance with IFRS in which the subsidiaries are
consolidated or measured at fair value through profit or loss in
accordance with IFRS 10.
Control
An investor determines if it is a parent by assessing whether it controls the
investee.
An investor controls an investee if all of the following are present (IFRS 10.7):
Power over the investee
Exposure or rights to variable returns from its involvement with the
investee
The ability to use its power over the investee to affect the amount of the
investor’s returns
,Power over the investee
An investor has power over the investee if it has existing rights that give it the
current ability to direct the relevant activities (which are those that
significantly affect the investee’s returns). The rights that we look at are
substantive rights and not protective rights. A right is substantive if the holder
has the practical ability to exercise that right. Some of these rights may
include:
Voting rights
Rights to appoint or remove members of an investee’s key management
personnel who direct the relevant activities
Rights to appoint or remove another entity that directs the relevant
activities
Rights to direct the investee to enter into transactions for the benefit of
the investor
Examples of protective rights include:
The right of a lender to seize the assets of a borrower if the borrower
has failed to comply with repayment conditions
The right of a lender to restrict the borrower to engage in activities that
could significantly change the credit risk of the borrower in a way that
negatively affects the lender
Potential voting rights
When assessing control, the investor must consider its potential voting rights
as well as those of other parties to determine whether it has power over the
investee. These are rights to obtain voting rights of an investee such as those
that come from convertible instruments or options.
The terms and conditions of the instrument must be assessed together with
investor’s motives, expectations, and reasons for agreeing with those terms
and conditions.
,Exposure or rights to variable returns from its involvement with the investee
Variable returns are those that are not fixed and have the potential to vary as a
result of the performance of the investee.
Examples of returns include:
Dividends, other distributions of economic benefits from an investee and
changes in the value of the investor’s investment in the investee
Returns that are not available to other interest holders
Remuneration for servicing an investee’s assets or liabilities
Residual interests in investee’s assets and liabilities after liquidation
Link between power and returns
When the investor with decision making rights assess whether it controls the
investee, it shall determine whether it is a principal or agent. The following
factors must be taken into account when determine whether it is an agent:
Scope of its decision-making authority over the investee
Rights held by other parties
Remuneration to which it is entitled to
The decision makers exposure to variability of returns from other
interests that it holds in the investee
, Wholly owned subsidiary
Example 1
Dlamini LTD acquires Sapphire LTD by purchasing all its issued shares from the
current shareholders for R450 000 on 1 January 2021
Statement of financial position as at 1 January 2021
Dlamini Sapphire
R R
Assets
Non-current Assets 1 150 000 150 000
Property, plant, and equipment 700 000 150 000
Investment in subsidiary 450 000
Current Assets 105 000 98 000
Total Assets 1 255 000 248 000
Equity 1 015 000 118 000
Share capital 700 000 80 000
Other Reserves 48 000 8 000
Retained earnings 267 000 30 000
Liabilities 240 000 130 000
Non-current liabilities 140 000 80 000
Current liabilities 100 000 50 000
Total equity and liabilities 1 255 000 248 000
Required: Prepare the consolidated statement of financial position for the
Dlamini LTD Group as at 1 January 2021
Solution
The consolidated statement of financial position must include all assets and
liabilities of both companies.
Consolidation journal entries must also be prepared. These are also called
pro forma journal entries as they do not appear in the books of the business
but are recorded in a separate consolidation file that is used to draw up the
annual financial statements of the group.
IFRS 10 Consolidated Financial Statements
The aim of IFRS 10 is to provide principles that govern the presentation and
preparation of consolidated financial statements when one entity (parent)
controls one or more other entities (subsidiaries).
In terms of IFRS 10 paragraph 4, a parent shall present consolidated financial
statements except if:
It is a wholly or partially owned subsidiary and all its owners have been
informed and do not object to the parent not presenting consolidated
financial statements
Its debt or equity instruments are not traded in the public market
It did not file nor is in the process of filing its financial statements with a
securities commission or other regulatory organisation for the purpose
of issuing its securities in a public market
Its ultimate or any intermediate parent produces financial statements
that are in compliance with IFRS in which the subsidiaries are
consolidated or measured at fair value through profit or loss in
accordance with IFRS 10.
Control
An investor determines if it is a parent by assessing whether it controls the
investee.
An investor controls an investee if all of the following are present (IFRS 10.7):
Power over the investee
Exposure or rights to variable returns from its involvement with the
investee
The ability to use its power over the investee to affect the amount of the
investor’s returns
,Power over the investee
An investor has power over the investee if it has existing rights that give it the
current ability to direct the relevant activities (which are those that
significantly affect the investee’s returns). The rights that we look at are
substantive rights and not protective rights. A right is substantive if the holder
has the practical ability to exercise that right. Some of these rights may
include:
Voting rights
Rights to appoint or remove members of an investee’s key management
personnel who direct the relevant activities
Rights to appoint or remove another entity that directs the relevant
activities
Rights to direct the investee to enter into transactions for the benefit of
the investor
Examples of protective rights include:
The right of a lender to seize the assets of a borrower if the borrower
has failed to comply with repayment conditions
The right of a lender to restrict the borrower to engage in activities that
could significantly change the credit risk of the borrower in a way that
negatively affects the lender
Potential voting rights
When assessing control, the investor must consider its potential voting rights
as well as those of other parties to determine whether it has power over the
investee. These are rights to obtain voting rights of an investee such as those
that come from convertible instruments or options.
The terms and conditions of the instrument must be assessed together with
investor’s motives, expectations, and reasons for agreeing with those terms
and conditions.
,Exposure or rights to variable returns from its involvement with the investee
Variable returns are those that are not fixed and have the potential to vary as a
result of the performance of the investee.
Examples of returns include:
Dividends, other distributions of economic benefits from an investee and
changes in the value of the investor’s investment in the investee
Returns that are not available to other interest holders
Remuneration for servicing an investee’s assets or liabilities
Residual interests in investee’s assets and liabilities after liquidation
Link between power and returns
When the investor with decision making rights assess whether it controls the
investee, it shall determine whether it is a principal or agent. The following
factors must be taken into account when determine whether it is an agent:
Scope of its decision-making authority over the investee
Rights held by other parties
Remuneration to which it is entitled to
The decision makers exposure to variability of returns from other
interests that it holds in the investee
, Wholly owned subsidiary
Example 1
Dlamini LTD acquires Sapphire LTD by purchasing all its issued shares from the
current shareholders for R450 000 on 1 January 2021
Statement of financial position as at 1 January 2021
Dlamini Sapphire
R R
Assets
Non-current Assets 1 150 000 150 000
Property, plant, and equipment 700 000 150 000
Investment in subsidiary 450 000
Current Assets 105 000 98 000
Total Assets 1 255 000 248 000
Equity 1 015 000 118 000
Share capital 700 000 80 000
Other Reserves 48 000 8 000
Retained earnings 267 000 30 000
Liabilities 240 000 130 000
Non-current liabilities 140 000 80 000
Current liabilities 100 000 50 000
Total equity and liabilities 1 255 000 248 000
Required: Prepare the consolidated statement of financial position for the
Dlamini LTD Group as at 1 January 2021
Solution
The consolidated statement of financial position must include all assets and
liabilities of both companies.
Consolidation journal entries must also be prepared. These are also called
pro forma journal entries as they do not appear in the books of the business
but are recorded in a separate consolidation file that is used to draw up the
annual financial statements of the group.
