Currently, the standards of IFRS IAS and IFRS are in force in our country. International Financial Reporting Standards is a set of documents governing the rules for financial reporting that external users need to make economic decisions regarding the company.
IFRS, unlike some state reporting rules, are standards that were based on basic principles, but non-aggressively written rules. The goal is to be able to follow the main principles in any practical situation, but not try to find loopholes in correctly written rules that allow you to circumvent 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 Special Purpose Entities.
The standard retains the main principle of defining the group as the aggregate of the parent company and its affiliates, compiling an organized report that presents their assets, liabilities, capital, income, expenses and foreign exchange flows for one financial entity.
Within the framework of this standard, the basic concepts are such as control, parent and subsidiary companies.
A parent company is an organization that exercises control functions over an associate. In this case, the subsidiary takes 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 solve managerial issues regarding areas of activity, hiring and dismissal of staff and other functions.
Standard purpose
The objective of IFRS 10 “Consolidated Financial Statements” is to establish input recommendations for the formation of the required statements 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 the parent organization that controls one or more subsidiaries to submit financial statements.
- Describes the control of the role of the financier-investor (control of the investment object) as a basis for consolidation and prescribes how to determine whether this investor controls the investee.
- Describes accounting requirements for preparing financial statements.
- Describes the investor company system and sets an exception for the consolidation of certain subsidiaries.
Need for application: what?
IFRS 10 “Consolidated Financial Statements”, which was introduced in our country in 2016, discusses issues that relate to the relationship between firms in situations of the need for such statements.
Application of the document is possible when a situation arises of control over the reporting organization (parent company), over another company.
The use of the standard is mandatory for all regulatory organizations, with the exception of those that:
- are dependent;
- have debt instruments that are not distributed in open markets;
- do not send their reports to the securities commission or other similar body;
- participate in financial incentive programs for employees;
- make investments that are measured at fair value or profit.
An investment company is an organization that has the following characteristics:
- receives investment funds from other persons for their management;
- the main goal of management is the investment of funds in various facilities, while having the task of generating income from them;
- assessment of the effectiveness of invested funds at a fair price.
In the event that a subsidiary is part of an investment company, while it is itself engaged in 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:
- in case of investor control of his invested funds, he prepares consolidated financial statements;
- if the investor does not do this, reporting is not compiled.
What is supervision under IFRS 10?
The organization of audit, audit and control activities in the standard paid a lot of attention.
In accordance with paragraph 7 of IFRS 10 "Consolidated Financial Statements", an investor controls an investment object if it has all the rights and opportunities listed below:
- the right to income from own funds in investment objects;
- the ability to influence this income;
- the ability to influence the object of investment.
Consider the three main characteristics inherent in the supervision of an investee. In accordance with paragraph 7 of IFRS 10, the following are allocated: the right to influence, the ability to use these rights and income.
Control is the presence of rights that make it possible to carry out the necessary audit procedures. The following rights and abilities should be with the investor:
- investor rights should be substantial rather than minor minority rights;
- ability must be current, practicable at present;
- audit procedures should be related to the main activities of the company.
Consideration of a number of factors is necessary when assessing the degree of control by an investor of his investment object.
The essence of supervision in accordance with IFRS 10 includes the following components:
- rights / risks in accordance with the variable results of the investment property;
- opportunities and rights over the investee;
- the ability to use power to influence the return on investor investment.
Investor control is present only with a combination of all three components.
An updated concept of supervision and in-depth guidance on its application in IFRS 10 can significantly affect the financial statements:
- previously unconsolidated investment objects (for example, associates) begin to consolidate;
- previously consolidated investment objects may stop doing this.
Necessary adjustments
Consider several adjustment scenarios in accordance with IFRS 10
Scenario 1. Objects were not consolidated earlier, but now they have begun the process of consolidation.
The script execution conditions are presented below.
The first condition. Determining the timing of control procedures in accordance with IFRS 10.
The second condition. The need to adjust the amount of equity in objects on the difference between:
- the calculated amount of assets in the investee;
- previous book value of the share of investors in the investee;
The third condition. Retrospective construction and adjustment of indicators for the previous period.
Scenario 2. Previously consolidated investment properties ceased to be consolidated.
Script execution conditions:
- assess interest in the investee if IFRS 10 was used to account for investments;
- retrospectively adjust values for the year that preceded the date of first use.
Thus, in order to determine whether there is control, it is necessary that the investor simultaneously:
- possessed authority over the investee;
- possessed rights with respect to variable results arising from his relationship with the investee;
- I was able to apply my rights in relation to the investee in order to influence its results.
The management model proposed by the standard requires additional detail and analysis of the consolidated statements to indicate the content of the three conditions above, which together provide the investor with recognition of control over the investment object.
Surveillance Options
The application of control procedures on the part of the company in the dependent company (investment) occurs if:
- she is able to control the actions of the latter and influence him;
- it receives income from investments and, accordingly, to some extent depends on changes in this income;
- may affect the amount of income of the investee through its authority.
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 is not involved) require an assessment of this effect.
If the organization controls not all the capital formed in the subsidiary legal entity, and its share belongs to the subsidiary legal entity, then parts of this capital are shown separately.
The features of such a capital structure in accordance with IFRS 10 “Consolidated Financial Statements” are as follows:
- assignment to the uncontrolled part of the final financial result, regardless of its effect on the final indicator of the total amount for the uncontrolled part;
- Mandatory adjustment to account for changes in the ratio between the controlled and uncontrolled part of the capital with the distribution of this difference.
Investment organizations will need to additionally disclose information such as:
- total investment amount;
- number of investors;
- determination of the type of relations between all investors;
- the composition of capital determining the distribution of investment income.
Consolidation procedure
Consolidation in the accounting plan is the process of combining the financial reporting of the company, which is the parent, and subsidiaries.
When a parent company buys a subsidiary, they remain separate according to legal documents. Each of them continues to prepare 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 the consolidated financial statements of IFRS 10 is characterized by the following procedures:
- a combination of all items of assets, liabilities and financial results between the parent and subsidiary;
- Offsetting certain balance sheet items
- Exclusion of intragroup assets and liabilities for intra-group transactions.
What are the exceptions
In the case when the parent organization controls a controlled organization, it is obliged to organize financial statements. However, this process is not constant. IFRS 10 sets out the exceptions to this rule as presented below:
1. The parent organization is not required to submit reports if it meets all of the following conditions:
- it is itself a subsidiary in another association with full or partial control;
- it is not required to report to the Securities Commission on the issue of instruments on the open market.
2. Remuneration of employees after completion of employment and other payments to staff is not required to be presented in reporting forms.
3. Investing companies.
Data features for information in a single report
The sources required for the consolidated financial statements must:
- be formed on the basis of a unified accounting policy, and if it is different, then before the consolidation of reporting different data should be brought to the necessary requirements
- be connected with the fact of the emergence of grounds for their consolidation or disappearance.
As of the date that the grounds for consolidation appear, the assets that have arisen in the organization are measured at market value, and then all data on income and expenses that are recorded are calculated based on this value.
In case of loss of control, it is necessary:
- stop reporting related assets and liabilities;
- carry out an assessment at market value at the date of loss of control of investments made and funds due from the facility;
- recognize the result with loss of control.
If an organization becomes an investing company, then it must stop consolidating statements from the date its position changes. And if it ceases to be investment, then on the day this status disappears, investments are measured at fair value, financial results from investments are recognized, and financial statements begin to consolidate.
Features of the consolidation process
Preparation of the research reporting involves:
- consolidation of all elements of accounting records between merging companies;
- the exclusion from the consolidated data on the parent’s contribution to the associates, taking into account goodwill that occurred in accordance with the rules of IFRS 3;
- the 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 exclusion of intra-group gains and losses.
All data included in the reporting should be indicated on one reporting date. If these dates do not coincide for the parent company and the associate, 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 presented to the subsidiary closest to the reporting date (but with a difference of no more than three months).
Bad debt
Debt can be called bad, the execution and payment of which by the buyers will no longer be made. Such a category in accounting is highlighted 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 that the definition of accounts receivable in IFRS is as follows: it is the right of one party to receive money at the time interval 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 for accounting for receivables under IFRS depends on which group includes financial assets to which a certain receivable relates.
Most importantly, speaking of the 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, loans issued under ordinary conditions, and so on);
- other assets (for example, investments in government bonds).
The presentation of bad debt provision IFRS 10, that is, bad debts, is related to the concept of reserves.
Bad debt provision
The term debt modification or extinguishment IFRS 10 means a change in obligations or their repayment, as specified in IFRS.
The allowance for doubtful debts represents the amount of deductions from the amount of uncollectible loans in the established amount.
In light of recent changes in Russian financial statements, companies should provide for bad debts if bad debts under IFRS 10 are possible. The requirement for the accrual of reserves is contained in paragraph 70 of the Russian Accounting and Accounting Regulation.
Companies in accounting policies should prescribe the procedure for calculating this reserve, since 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 levy 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:
- the full amount of the debt if the delay in repayment exceeds ninety calendar days;
- , 45 90 .
, , .
, . , : , , , . , .
(allowance for doubtful debts IFRS 10) - . - .
- , . , , , , .
10
IFRS 10 " ", , :
- :
IFRS 10 para b19, , , , .
, .
(IFRS) 10
:
- the ability to manage staff (appoint and dismiss);
- the possibility of forming a company management commission;
- the ability to control and allow (prohibit) transactions;
- the ability to solve other management issues.
The contract does not always allow management rights. An investor may be empowered even if he does not have sufficient voting rights. But when in fact the contributor:
- has the right to appoint and relocate employees;
- may be nominated for election of board members;
- may allow various operations;
- The key personnel of the investing company are parties related to investors.
In this case, we can say that the investor controls significant activities and, therefore, has the authority.
Implementation difficulties
Auditors identify a number of difficulties that may be encountered in the implementation of this standard at Russian enterprises:
- standards are described in English, translation is difficult for the average person, possible only for a professional;
- reporting under national standards when applying IFRS is distorted;
- in Russian and foreign practice, methods for classifying property differ;
- The amount of information disclosed in accordance with IFRS is much higher than in Russian standards;
- different legislative frameworks for standards in Russia and abroad.
Conclusion
The concept of IFRS 10 consolidated financial statements has been discussed in detail in this article. This concept is specified in the standard quite accurately. It means “consolidated financial statements in accordance with IFRS 10.
According to the considered regulatory documents, such reports are required to be compiled by insurance companies, banks, and other companies whose shares are traded.
To compile 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 organizations.
The article presented options for control, features of the consolidation process, etc.