IFRS 10: concept, definition, international standards, single concept, rules and conditions for financial reporting

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Currently, IFRS IAS and IFRS standards are in force on the territory of our state. International Financial Reporting Standards is a set of financial reporting rules that external users need to make economic decisions about a company.

IFRS, unlike some government reporting rules, are benchmarks that have been based on basic principles but non-aggressively written rules. The goal is that in any practical situation one can follow the main principles, but not try to find loopholes in well-written rules that allow you to get around any main provisions of IFRS.

Concept

IFRS 10 Consolidated Financial Statements establishes new requirements for the recognition of control and consolidation procedures, replacing the requirements of IAS 27 Consolidated and Separate Financial Statements and PKI-12 Consolidation of a Special Purpose Entity.

The standard keeps the mainthe principle of defining a group as a combination of a parent company and its affiliates, producing an organized report that presents their assets, liabilities, capital, income, expenses and foreign exchange flows as for one financial entity.

Within the framework of this standard, the main concepts are such as control, parent and subsidiary firms.

The parent company is an organization that exercises control functions over a dependent company. At the same time, the subsidiary accepts this supervision and submits to it.

Under the control itself should be understood the ability to manage not only financial processes within the company, but also to resolve management issues related to areas of activity, hiring and firing staff and other functions.

The purpose of the standard

The objective of IFRS 10 "Consolidated financial statements" is to establish the introduction of recommendations for the formation of the required reporting in a situation where one firm controls another company. The main tasks are fixed in the normative act. Namely, IFRS 10. The document defines the following:

• Requires a parent organization that controls one or more subsidiaries to provide financial statements.
• Describes the control of the role of the financier-investor (control of the investee) as the basis for consolidation and prescribes how it can be determined whether this investor controls the investee.
• Describes the accounting requirements for preparing cashreporting.
• Describes the investor company's system and establishes an exception for the consolidation of certain subsidiaries.

Need to use: what?

IFRS 10 "Consolidated Financial Statements", which was introduced in our country in 2016, discusses issues that relate to the relationship between firms in a situation where such reporting is necessary.

The application of the document is possible when there is a situation of control over the reporting organization (parent company) over another company.

The use of the standard is mandatory for all regulatory organizations, except for those that:

• are dependent;
• have debt instruments that are not traded on open markets;
• do not file their reports with the SEC or other similar body;
• participate in financial incentive programs for employees;
• make investments that have been measured at fair value or earnings.

An investment company is an organization that has the following characteristics:

• receives investment funds from others to manage them;
• the main purpose of management is the investment of funds in various objects, while having the task of generating income from them;
• assessment of the effectiveness of invested funds at a fair price.

In the case where the subsidiary is part of an investment company, whenif it is itself investing, then the rule on non-preparation of consolidated financial statements does not apply to this situation. Reporting here should be combined in accordance with the general rules for its consolidation.

General Conditions and Specifications

Control is the main core of consolidation processes if the following conditions are met:

• if the investor controls his invested funds, he prepares consolidated financial statements;
• if the investor does not do this, no reporting is done.

What is supervision under IFRS 10?

A lot of attention is paid to the organization of revision, audit and control activities in the standard.

In accordance with paragraph 7 of IFRS 10 Consolidated Financial Statements, an investor controls an investment property if it has all the rights and options listed below:

• the right to income from their funds in investment objects;
• the ability to influence this income;
• the ability to influence the investee.

Let's consider the three main characteristics inherent in the supervision of an investee. In accordance with paragraph 7 of IFRS 10, highlighted: the right to influence, the ability to exercise these rights and income.

Control is the presence of rights that make it possible to carry out the necessary audit procedures. The investor must have the following rights and abilities:

• rightsinvestors should have substantial, not minor minority rights;
• the ability must be current, practically implemented at the present time;
• audit procedures should be related to the core business of the company.

Taking into account a number of factors is necessary in the case of assessing the degree of control by an investor of his investment object.

The essence of supervision under IFRS 10 includes the following components:

• rights/risks in accordance with the variable results of the activity of the investment object;
• opportunities and rights over the investment object;
• the ability to use power to influence an investor's return on investment.

Investor control is present only when all three components are combined.

The updated concept of supervision and in-depth guidance on its application in IFRS 10 could significantly affect financial statements:

• previously unconsolidated investees (eg associates) begin to consolidate;
• previously consolidated investees may no longer do so.

Necessary adjustments

Let's consider several scenarios for IFRS 10 adjustments

Scenario 1. Objects have not been consolidated before, but have now started the merging process.

The scenario execution conditions are shown below.

The first condition. Determining the timing of the implementation of control procedures inin accordance with IFRS 10.

Second condition. The need to correct the equity value of objects for the difference between:

• calculated amount of assets in the investment object;
• previous book value of the share of investors in the investee;

Third condition. Retrospective construction and adjustment of indicators for the previous period.

Scenario 2. Previously consolidated investment objects are no longer consolidated.

Script execution conditions:

• assess interest in an investee if IFRS 10 was used to account for investments;
• retrospectively adjust values for the year before the date of first use.

Thus, to determine whether there is control, it is necessary that the investor simultaneously:

• had power over the investee;
• had rights to variable outcomes arising from its relationship with the investee;
• was able to exercise his rights in relation to the investee to influence its results.

The management model proposed by the standard requires additional detailing and analysis of the consolidated financial statements in order to indicate the content of the three conditions above, which together ensure that the investor recognizes control over the investment object.

Surveillance options

Application of control procedures by the firm in the associated company (investee)happens if:

• she is able to control the actions of the latter and influence him;
• she earns her investment income and is therefore somewhat affected by changes in that income;
• can influence the amount of income of the investee through its powers.

Dynamics in the circumstances of control can lead to its loss. Therefore, any changes in the facts related to the impact on the investee (including those in which the investor of the organization does not participate) require an assessment of this effect.

If an entity does not control all of the capital formed in a subsidiary legal entity, and its share belongs to a subsidiary legal entity, then parts of this capital are shown separately.

Features of such a capital structure in accordance with IFRS 10 Consolidated Financial Statements are as follows:

• attribution to the uncontrolled part of the final financial result, regardless of its impact on the final figure of the total amount for the uncontrolled part;
• mandatory adjustment in accounting for changes in the ratio between controlled and non-controlled equity with the distribution of this difference.

Investment entities will be required to further disclose information such as:

• total investment amounts;
• number of investors;
• determining the type of links between all investors;
• composition of capital that determines the distribution of investment income.

Consolidation procedure

Accounting consolidation is the process of combining the financial statements of a parent company and subsidiaries.

When a parent company buys a subsidiary, they remain legally separate. Each of them continues to produce separate financial statements. However, economically they are a single organism. And in order to understand what this organism is, consolidated financial statements are prepared in accordance with certain rules. Certain regulations govern this procedure.

The preparation of IFRS 10 consolidated financial statements is characterized by the following procedures:

• combination of all items of assets, liabilities and financial results between parent and subsidiary firms;
• offsetting certain balance sheet items;
• eliminate intragroup assets and intragroup liabilities.

What are the exceptions

In the case when the parent organization controls the controlled organization, it is obliged to organize financial reporting. However, this process is not permanent. IFRS 10 sets out the exceptions to this rule, which are listed below:

1. A parent organization is not required to report if it meets all of the following conditions:

• it is itself a subsidiary of another association with full or partial control;
• not required to report to the Securities Commission on open market releases.

2. Post-employment benefits and other employee benefits are not required to be reported on the reporting forms.

3. Investor companies.

Features of data to be consolidated into a single report

Sources required for consolidated financial statements must:

• to be formed on the basis of a consolidated accounting policy, and if it differs, then before the consolidation of reporting, different data must be brought to the necessary requirements;
• be associated with the fact that grounds arise for their consolidation or disappearance.

At the date when the grounds for consolidation arise, the assets that have arisen in the organization are measured at market value, and then all data on income and expenses that are taken into account are calculated based on this cost.

In case of loss of control, you must:

• stop reporting associated assets and liabilities;
• assess at market value at the date of loss of control of investments made and funds due from the property;
• accept the result with loss of control.

If an entity becomes an investor company, it must stop consolidating claims from the date its position changes. And if it ceases to be an investment, then on the day this status disappears, investments are measured at fair value,the return on investment is recognized and the financial statements begin to be consolidated.

Features of the consolidation process

Preparation of researched reporting implies:

• combining all elements of accounting records between the merging companies;
• exclusion from the consolidated data on the contribution of the parent company to associates, taking into account goodwill that occurred in accordance with the rules of IFRS 3;
• exclusion from the consolidated data of information about all intra-group transactions made with reference to temporary differences under the rules of IAS 12, which is the result of the elimination of intra-group profits and losses.

All data included in the reporting must be indicated on one reporting date. If these dates do not match for the parent company and the dependent company, the subsidiary creates additional reports in which it reflects the necessary information about the desired date. If such a procedure is not possible, the conversion, taking into account all significant events for the reporting period, is submitted to the subsidiary closest to the reporting date (but with a difference of no more than three months).

Bad debt

A bad debt can be called a debt, the execution and payment of which by the buyers will no longer be made. Such a category in accounting is singled out separately and requires special explanations.

The concept of bad debt provision IFRS 10 means the presentation of bad debts.

First of all, it should be noted thatthe definition in IFRS of receivables is as follows: this is the right of one party to receive, at a time interval, funds from the other party, arising from an agreement concluded by the parties. In particular, it could be:

• IFRS 10 debt equity swap, which means the consolidated debt of one party for trading, loans and bonds;
• bills receivable.

In particular, the choice of a specific method of accounting for receivables under IFRS depends on which group includes the financial assets to which a particular receivable belongs.

Most importantly, speaking of receivables, introduced in IFRS 9, it can be noted that it represents a new approach to classifying a financial asset in a group.

Compilers did not identify receivables in a separate group.

Instead, all financial assets in IFRS are divided into the following groups:

• assets carried at amortized cost (standard trade receivables, ordinary loans, etc.);
• other assets (eg investments in government bonds).

The presentation of bad debt provision IFRS 10 is related to the concept of reserves.

Provision for doubtful debts

The concept of debt modification or extinguishment IFRS 10 means the change of obligations or their repayment, which is stipulated in IFRS.

The reserve for doubtful debts is the amount of deductions from the amounthopeless DZ in the prescribed amount.

In light of recent changes in Russian reporting, companies must provide provisions for doubtful debts if it is possible to provide bad debts under IFRS 10. The requirement to accrue provisions is contained in paragraph 70 of the Accounting Regulations in the Russian Federation.

Companies should prescribe in their accounting policies the procedure for accruing this provision, as the law does not contain a detailed methodology. Thus, it is necessary to approach the formation of a reserve for doubtful debts, analyzing each counterparty, and charge a reserve depending on the assessment of the degree of debt repayment.

Given that the practice of creating a reserve for Russian accounting is quite new, some companies, in order to combine accounting and tax accounting, establish in their accounting policies the methodology adopted by the Tax Code of the Russian Federation:

• for the full amount of the debt, if the delay in its repayment exceeds ninety calendar days;
• fifty percent of the amount of the debt, if the delay in its repayment is from 45 to 90 calendar days inclusive.

The delay is calculated from the date when the counterparty must fulfill its obligation, that is, from the date of payment under the contract.

Accounts receivable, according to IFRS logic, is a financial asset and belongs to the group of financial assets carried at amortized cost. This conclusion is based on an analysis of IFRS rules, which, in order to reflect this category of asset reporting, divide all financial assets into two largegroups: those measured at fair value and those measured at amortized cost. Since receivables are not included in the company's trading and investment portfolio, they belong to the second group.

In international standards, the creation of a provision for doubtful debts (allowance for doubtful debts IFRS 10) is still within the scope of their regulation. The economic purpose of this provision is to depreciate receivables when there are signs of hopelessness.

The recoverable amount under IFRS is the present value of the future expected flows of a financial asset, discounted at the original effective rate. Because total receivables are short-term, future payments are not discounted, but the nominal amount a company could receive from an unreliable counterparty is simply estimated.

The concept of investment companies in IFRS 10

In accordance with IFRS 10 Consolidated Reporting, an investment company is understood to be an entity that:

• acquires funds from investors to provide investment management services to these investors;
• Investors may not be allowed to invest solely for capital gains;
• assesses the profitability of all deposits.

The characteristics of the investor company are as follows:

• company has more than one investment;
• company has many contributors.

Investor rights

According to IFRS 10 para b19, in some cases there are indications that the investor has a special relationship with the investee, which suggests that the investor's interest in the investee is not limited to passive participation.

All this may indicate that the investor has other related rights.

IFRS 10 and contractual relationships

The following points are stipulated in the contract:

• ability to manage staff (appoint and dismiss);
• opportunity to form a company management commission;
• the ability to control and allow (prohibit) transactions;
• opportunity to address other management issues.

The contract does not always allow for management rights. An investor may have powers even if they do not have sufficient voting rights. But when in fact the contributor:

• has the right to appoint and move employees;
• may be nominated to elect board members;
• may allow different operations;
• The key personnel of the investor company are parties related to investors.

In this case, we can say that the investor controls significant activity and therefore has the power.

Difficulties in implementation

Auditors identify a number of difficulties that may be encountered when implementing this standard at Russian enterprises:

• standards are described in English, translation happensdifficult for the layman, possible only for the professional;
• reporting according to national standards when applying IFRS is distorted;
• in Russian and foreign practice methods of property classification differ;
• disclosures under IFRS are much higher than in Russian standards;
• different legal bases for standards in Russia and abroad.

Conclusion

As part of this article, the concept of IFRS 10 consolidated financial statements was considered in detail. This concept is specified in the standard quite precisely. It means consolidated financial statements in accordance with IFRS 10.

According to the reviewed regulatory documents, insurance companies, banks, and other firms whose shares are traded are required to make such reports.

For the preparation of consolidated reports, following certain rules for this, organizations need to control the activities of other companies. There are a number of exceptions to this rule, the most significant of which are investment entities.

The article presented control options, features of the consolidation process, etc.