IFRS 10 Consolidated Financial Statements decides when an entity is a parent that must prepare consolidated financial statements, and how to prepare them. Its objective is to establish principles for presenting and preparing consolidated financial statements when an entity controls one or more other entities (IFRS 10.1). Everything turns on one concept: control. As a rule, if control exists the investee is consolidated and if not it is not, subject to the specific exceptions covered below.
What are consolidated financial statements?
They present the assets, liabilities, equity, income, expenses and cash flows of a parent and its subsidiaries as those of a single economic entity. Balances and transactions between group members drop out; only the group's dealings with outside parties remain (IFRS 10, Appendix A definition, and B86(c)).
To meet its objective, the Standard (IFRS 10.2):
- requires a parent that controls one or more entities to present consolidated financial statements;
- defines the principle of control and makes it the basis for consolidation;
- sets out how to apply that principle to decide whether an investor controls an investee and therefore must consolidate it;
- sets the accounting requirements for preparing consolidated statements; and
- defines an investment entity and sets out an exception to consolidating particular subsidiaries of an investment entity.
Control: the three elements
An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee (IFRS 10.6). Control exists only if all three elements are present (IFRS 10.7):
| Element | What it means | Paragraphs |
|---|---|---|
| Power over the investee | Existing rights that give the current ability to direct the relevant activities — the activities that significantly affect the investee's returns | 10–14 |
| Exposure to variable returns | Returns that can vary with the investee's performance: only positive, only negative, or both | 15–16 |
| Link between power and returns | The ability to use that power to affect the amount of the investor's own returns | 17–18 |
Three practical points from the text:
- Power arises from rights. It may come straight from the voting rights attached to shares, or need a more complex assessment when it comes from contractual arrangements (IFRS 10.11).
- Ability is enough. An investor with the current ability to direct the relevant activities has power even if it has not yet exercised its rights (IFRS 10.12).
- Only one controller. Only one investor can control an investee, although others — such as holders of non-controlling interests — can share in its returns (IFRS 10.16).
Control without a majority of votes
An investor holding less than a majority of the voting rights can still have power when it has the practical ability to direct the relevant activities unilaterally (IFRS 10.B41). The assessment considers, among other facts, the size of the investor's holding relative to the size and dispersion of the other holdings (IFRS 10.B42).
Example: an investor holds 45% of the votes and the rest is spread across thousands of shareholders, none holding more than 1%. The investor may well have power, because its holding is far larger than any other and the rest are widely dispersed (IFRS 10.B43). If instead two other holders own 26% each, it most likely does not have power on its own: those two would only need to cooperate to stop it directing the relevant activities (IFRS 10.B44).
Potential voting rights
The assessment includes potential voting rights held by the investor and by others — options and convertible instruments, for example — but only if those rights are substantive, meaning the holder has the practical ability to exercise them (IFRS 10.B22, B47).
Principal or agent
A decision-maker must determine whether it is a principal or an agent. An agent does not control an investee when it exercises decision-making rights delegated to it for the benefit of others (IFRS 10.18). The investor also considers the rights and returns of its de facto agents together with its own. A de facto agent is a party the investor can direct to act on its behalf, with or without a contract (IFRS 10.B74).
Reassessment
Control is not a one-off judgement. The investor reassesses it whenever facts and circumstances indicate a change in one or more of the three elements (IFRS 10.8).
When is a parent exempt from consolidating?
Every parent presents consolidated financial statements (IFRS 10.4). It need not do so if it meets all four of these conditions (IFRS 10.4(a)):
- It is a wholly-owned subsidiary, or a partially-owned subsidiary whose other owners — including those not otherwise entitled to vote — have been informed and do not object.
- Its debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets).
- It has not filed, and is not filing, its financial statements with a securities commission or other regulator in order to issue any class of instruments in a public market.
- Its ultimate or any intermediate parent produces IFRS-compliant financial statements available for public use, in which subsidiaries are consolidated or measured at fair value through profit or loss.
In one other case no consolidated statements are presented at all: a parent that is an investment entity and must measure all of its subsidiaries at fair value through profit or loss (IFRS 10.4B). The investment-entities section below explains it.
How to prepare consolidated statements
Consolidation follows three steps (IFRS 10.B86):
- Combine like items of assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries.
- Offset the carrying amount of the parent's investment in each subsidiary against the parent's portion of that subsidiary's equity. IFRS 3 Business Combinations governs any resulting goodwill.
- Eliminate intragroup items in full — balances, income, expenses and cash flows from transactions within the group, including unrealised profits recognised in assets such as inventory and fixed assets.
Three requirements go with these steps:
- Uniform accounting policies. Consolidated statements use uniform accounting policies for like transactions (IFRS 10.19). If a group member uses different policies, its figures are adjusted on consolidation (IFRS 10.B87).
- From gaining control to losing it. Consolidation starts on the date the investor obtains control and stops when it loses control (IFRS 10.20).
- One reporting date. The financial statements of the parent and its subsidiaries used in consolidation must have the same reporting date. If they differ, the subsidiary prepares additional financial information as of the parent's date (IFRS 10.B92). If that is impracticable, the subsidiary's most recent statements are used, adjusted for significant transactions and events in between. Either way, the gap may not exceed three months and must be consistent from period to period (IFRS 10.B93).
Non-controlling interests
A non-controlling interest is the equity in a subsidiary not attributable, directly or indirectly, to the parent (IFRS 10, Appendix A). Three rules apply:
- Presentation. Non-controlling interests sit within equity in the consolidated statement of financial position, separately from the equity of the parent's owners (IFRS 10.22).
- Attribution. Profit or loss and each component of other comprehensive income are attributed to the parent's owners and to the non-controlling interests. Total comprehensive income is attributed too, even if this leaves the non-controlling interests in deficit (IFRS 10.B94).
- Changes in ownership without losing control are equity transactions — transactions with owners in their capacity as owners — so no gain or loss arises in profit or loss (IFRS 10.23, B96).
Loss of control
When a parent loses control of a subsidiary, it (IFRS 10.25, B98):
- derecognises the former subsidiary's assets (including goodwill) and liabilities, and the carrying amount of any non-controlling interests;
- recognises the fair value of any consideration received, and any investment retained in the former subsidiary at fair value on the date control is lost;
- reclassifies amounts previously recognised in other comprehensive income on the same basis as if the related assets or liabilities had been disposed of directly (IFRS 10.B99); and
- recognises the resulting difference as a gain or loss attributable to the parent.
Investment entities: an exception to consolidation
An investment entity obtains funds from investors to provide them with investment management services. It commits to its investors that its business purpose is to invest funds solely for capital appreciation, investment income or both, and it measures and evaluates the performance of substantially all of its investments on a fair value basis (IFRS 10.27).
Such an entity does not consolidate its subsidiaries. It measures them at fair value through profit or loss instead (IFRS 10.31). The exception: a subsidiary that is not itself an investment entity and mainly provides services relating to the investment entity's investment activities is consolidated (IFRS 10.32).
A short worked example
Company A owns 80% of Company B and controls it. During the year:
- B's profit was 500,000.
- A sold goods to B for 300,000 (cost 200,000); all of them were still in B's inventory at year-end.
On consolidation:
-
Eliminate the intragroup sale. Revenue (300,000) and its cost (200,000) are eliminated, and inventory is reduced by the unrealised profit (100,000). The group cannot show a profit from "selling" to itself (IFRS 10.B86(c)).
Line item Debit Credit Revenue 300,000 Cost of sales 200,000 Inventory 100,000 -
Non-controlling interests' share of profit: 20% × 500,000 = 100,000, shown in the attribution of the year's profit (IFRS 10.B94). Here the unrealised profit sits with the seller, A, not with B, so it does not change the non-controlling interests' share of B's profit.
The example is illustrative. Actual figures follow the group's policies and IFRS 3's requirements on measuring goodwill and non-controlling interests at acquisition.
What has changed in IFRS 10?
- Origin and scope. The IASB issued IFRS 10 in May 2011 to replace the consolidation requirements of IAS 27; IFRS 12, issued at the same time, took over the disclosure requirements (IFRS Foundation: IFRS 10).
- De facto agents. In July 2024 the IASB issued Annual Improvements to IFRS Accounting Standards—Volume 11, which amended paragraph B74 (IFRS Foundation: project page). As the exposure draft explained (IFRS Foundation), the aim was to remove an inconsistency with paragraph B73, which makes the identification of de facto agents a matter of judgement (IFRS 10.B73). When those who direct the investor's activities can direct another party, that party now might be a de facto agent — an indicator, not a conclusion (IFRS 10.B74). The amendment applies to annual reporting periods beginning on or after 1 January 2026 (IFRS 10.C1E; IFRS Foundation: changes in the 2026 edition).
- Sale or contribution of assets between an investor and its associate or joint venture. An amendment issued in September 2014 had its effective date deferred indefinitely in December 2015 (IFRS Foundation: IFRS 10).
- Presentation. IFRS 18 Presentation and Disclosure in Financial Statements replaces IAS 1 for annual reporting periods beginning on or after 1 January 2027, with earlier application permitted, and changes how the statement of profit or loss is presented, including in consolidated statements (IFRS Foundation: IFRS 18).
How it fits with other Standards
- IFRS 3 Business Combinations governs the acquisition itself: goodwill, measurement of the assets acquired and liabilities assumed, and measurement of non-controlling interests at acquisition.
- IFRS 11 Joint Arrangements and IAS 28 Investments in Associates and Joint Ventures apply when control is joint, or when the investor has significant influence rather than control.
- IFRS 12 Disclosure of Interests in Other Entities sets the disclosures about subsidiaries, joint arrangements and associates.
For how acquisitions change the numbers in the statements, see Assessing the impact of acquisitions and mergers on financial statements.
A practical consolidation tool
If you prepare consolidated statements for several companies, the Consolidated Financial Statements and Group Trial Balance Merging workbook organises the combine-and-eliminate steps in one file.
Sources
- IFRS Foundation: IFRS 10 Consolidated Financial Statements. References in brackets are to paragraphs of the Standard and its appendices.
- IFRS Foundation: Changes in this edition (2026) — amendments effective from 1 January 2026.
- IFRS Foundation: Completed project, Determination of a 'De Facto Agent' (Annual Improvements—Volume 11).
- IFRS Foundation: Exposure Draft, Annual Improvements to IFRS Accounting Standards—Volume 11, which explains the reason for the B74 change.
- IFRS Foundation: IFRS 18 Presentation and Disclosure in Financial Statements.