Taxation
Topic
With the help of the accounting standard IFRS 10, businesses with numerous entities can consolidate their financials while still complying. While it resembles ASC 810, there are several significant differences. This article discusses four critical points that each company with several companies should consider under the IFRS standards.
When one company—the parent—controls one or more other companies, consolidated financial statements are necessary. A firm that holds more than 50% of the voting stock of another company is said to be the controlling company.
Associating businesses, subsidiaries, and joint ventures are included in this. Consolidated accounts are not necessary if that control is merely momentary, as would be the case if the company is going to enter administration.
The objective of IFRS 10 is to define guidelines for preparing and presenting consolidated financial statements where a business controls one or more other entities, as stated in the standard. To achieve this goal, the following criteria must be met:
· Requires a parent company that oversees one or more subsidiaries to present consolidated financial accounts.
· Defines control as the cornerstone of consolidation by defining the concept of "control."
· Sets out how to use the principle of control to determine whether an investor controls an investee and, as a result, must consolidate the investee.
· Establishes the accounting standards necessary to prepare consolidated financial accounts.
· Defines an investment entity and specifies the exemption for consolidating specific subsidiaries of an investment entity.
A parent is exempt from presenting consolidated financial statements if and only if:
· The parent is a wholly or substantially owned subsidiary of another business, and all of the parent's other owners, including those who are not otherwise allowed to vote, have been informed and do not object to the parent's decision not to present consolidated financial statements.
· There is no public market for the debt or equity instruments of the parent (an over-the-counter market, which includes local and regional markets or domestic or international stock exchange).
· To release any class of instruments in a public market, the parent neither filed its financial accounts with a securities commission nor is in the process of doing so.
· The ultimate parent or any intermediate parent makes IFRS-compliant financial statements that the public can use. In these statements, subsidiaries are consolidated or measured at fair value through profit or loss.
According to IFRS 10, the parent company must be explicit about whether it "controls" the subsidiary, which is defined as:
· Power over the investee: The investor already possesses rights that allow it to control the pertinent activities (the actions that have a substantial impact on the investee's returns).
· Exposure to or rights to fluctuating returns as a result of its relationship with the investee.
· The capacity to influence the investor's returns through its control over the investee.
The parent corporation is deemed to control the subsidiary if these three conditions are met. Therefore, unless otherwise exempt, it must prepare consolidated financial statements.
IFRS10, which replaced IAS 27 at the start of the 2013 fiscal year, was developed in 2011 by the International Financial Reporting Standards board. If a company also accepted IFRS 11 and 12 as part of the consolidation package, it was permitted to adopt IFRS 10 earlier.
Consolidated accounts' goal is to represent a group of companies' financial standing as a single, cohesive entity. Therefore, the earnings that should be reported in a consolidated statement of financial position are those that the group has earned.
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