IFRS10: Consolidated Financial Statements outlines the requirements for the preparation and presentation of consolidated financial statements, requiring entities to consolidate other entities it controls.
Required:
i) Define control (1 mark)
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Control is identified by IFRS10 Consolidated Financial Statements as the sole basis for consolidation and comprises the following three elements:
a. Power over the investee, where the investor has current ability to direct activities that significantly affect the investee’s returns;
b. Exposure, or right to, variable returns from involvement in the investee; and
c. The ability to use the power over the investee to affect the amount of the investor’s returns.
Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Control is presumed where the acquirer acquires more than one-half of that other entity’s voting rights (unless it can be demonstrated that such ownership does not constitute control).
ii) Indicate FOUR (4) circumstances that an entity may not have gained control in another entity but may be allowed to prepare consolidated financial statements. (4 marks)
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Control may also have been obtained, even when one of the combining entities does not acquire more than one-half of the voting rights of another, if, as a result of the business combination, it obtains:
- Power over more than one-half of the voting rights of the other entity by virtue of an agreement with other investors; o
- Power to govern the financial and operating policies of the other entity under a statue or an agreement; or
- Power to appoint or remove the majority of the members of the board of directors or equivalent governing body of the other entity; or
- Power to cast the majority of votes at meetings of the board of directors or equivalent governing body of the other entity.