Groups: Control, IFRS 10, IAS 27 and the Exemption from Consolidating

When a company buys a controlling stake in another, the two stay separate legal entities, each with its own statements. But the people running the parent now direct the subsidiary’s assets as well. The parent’s own statement of financial position would show only one line, “investment in subsidiary”, at cost, and say nothing about the property, inventory and debts that the parent actually controls.

To show the substance, the parent prepares group financial statements, called consolidated financial statements, as if the group were a single economic entity.

This topic covers what a group is, the control test in International Financial Reporting Standard (IFRS) 10 Consolidated Financial Statements, the cases in which control exists without a majority of votes, the exemption from preparing consolidated statements, the rules on reporting dates and accounting policies, and the separate financial statements of the parent under International Accounting Standard (IAS) 27. The next topic covers goodwill and non-controlling interest.

In May Diet, 2023, Question 3(c) asked for four exceptions to the rule that a parent must prepare consolidated financial statements (4 marks), and every group question in the later diets depends on the control test. Read the value added statement and the five-year summary first.

A group as a single economic entity

A group is a parent and its subsidiaries. A parent is an entity that controls one or more entities, and a subsidiary is an entity controlled by another. A parent whose main assets are shares in subsidiaries is sometimes called a holding company. If A Limited, a car maker, buys 100% of B Limited, a parts maker, the business has changed: it now makes cars and parts.

Two legal entities operate as one economic unit under A’s management, and IFRS requires that substance to be reported. In the consolidated statements, the assets, liabilities, income and expenses of parent and subsidiary are combined line by line, and the investment in the subsidiary is replaced by the subsidiary’s net assets.

Share capital and reserves are those of the parent only (plus non-controlling interest), not the sum of the group.

The control test

An investor controls an investee if and only if it has all three of:

1. power over the investee (existing rights that give the current ability to direct the activities that significantly affect its returns);
2. exposure, or rights, to variable returns from its involvement (such as dividends, changes in the value of its investment, or fees); and
3. the ability to use its power over the investee to affect the amount of its returns.

In most cases control comes from owning shares with more than half of the voting rights, directly or through other subsidiaries, and control is assumed unless it can clearly be shown that it does not exist. A company does not need to own all the shares.

Owning 80% of B is a controlling interest and B is a partly owned subsidiary. The other 20% is the non-controlling interest, defined in IFRS 10 as the equity in a subsidiary not attributable, directly or indirectly, to a parent. Owning 100% makes B a wholly owned subsidiary. If A controls B and B controls C, then C is a sub-subsidiary of A, which is outside this syllabus.

Control without a majority of the votes

• Agreements with other investors. A owns 45% of B, and a further 10% is held by A’s bank, which has agreed to vote as A directs. A controls 55% of the votes.
• De facto control. A owns 45% and the rest is held by many unrelated investors, none holding more than 1%. It is unlikely that enough of them would act together to stop A directing the company, so A probably controls B.
• Other contractual rights that give the power to appoint the majority of the board, and potential voting rights (such as options that can be exercised now), are also considered.

The requirement to consolidate and the exemption

With certain exceptions, a parent must present consolidated financial statements in which it consolidates its investments in subsidiaries. All subsidiaries are included, and there are no grounds for excluding one. A parent need not present consolidated financial statements if, and only if, all four of these apply:

1. the parent is itself a wholly owned subsidiary of another entity, or a partially owned subsidiary whose other owners do not object to its not preparing consolidated statements;
2. its debt or equity instruments are not traded in a public market;
3. it does not file its financial statements with a securities commission or other regulatory organisation for the purpose of issuing instruments in a public market; and
4. its own parent, or the ultimate parent, produces consolidated financial statements for public use that comply with IFRS.

An investment entity, which exists to obtain returns from investment and measures its investments at fair value, does not consolidate its subsidiaries but measures them at fair value through profit or loss. That is outside the scope of this syllabus.

Reporting date and uniform policies

• Common reporting date. The statements of the parent and its subsidiaries used for consolidation are prepared as at the same reporting date, unless that is impracticable. If it is, the subsidiary’s statements are adjusted for significant transactions or events between the two dates, and the reporting dates must not differ by more than three months.
• Uniform accounting policies. The group uses the same policies for similar transactions. If a subsidiary uses a different one, its figures are adjusted before consolidation. For example, the group depreciates equipment on cost of ₦100 million at 20% straight line (₦20m), while a subsidiary used a 25% reducing balance charge (₦25m). Consolidation adjusts the subsidiary’s depreciation down by ₦5m, increasing its profit and its net assets by ₦5m.

The parent’s separate financial statements

IAS 27 Separate Financial Statements governs statements presented in addition to the consolidated ones, where investments are not consolidated. The entity carries its investments in subsidiaries, joint ventures and associates at cost, in accordance with IFRS 9 (at fair value), or using the equity method. Dividends from the investments are recognised in profit or loss when the right to receive them is established.

For example, a parent that holds 80% of a subsidiary which pays a dividend of ₦20 million records dividend income of ₦16 million in its own statements. In the consolidated statements that dividend is eliminated, because it is a transfer within the group, and only the 20% paid to outsiders (₦4 million) is shown as a distribution to non-controlling interest.

The ideas in more depth

Why consolidation looks at control, not ownership

A holding of 45% with the rest widely scattered is enough to run a company, while 51% held in a company where another party has the right to direct everything is not. The test follows who can direct the activities that generate returns.

Why uniform policies and dates

Consolidation adds items. Adding depreciation calculated in two ways, or balances at two dates, gives a total that means nothing. Aligning the bases makes the group figures one coherent picture.

Sources and references

• IFRS 10 Consolidated Financial Statements: control, the requirement to consolidate, the exemption, reporting date and uniform policies.
• IAS 27 Separate Financial Statements; IFRS 9 Financial Instruments for fair value measurement.

These points are stated as at 5 November 2026.

Worked examples

1. (a) Control: more than half the votes.
2. (b)
   Control: 45% + 10% directed = 55%.
3. (c) Probably control (de facto).
4. (d) Control through the right to direct the board.
5. (e) No control; probably an associate if it has significant influence.

1. Test. All four conditions are met.
2. Result. X is exempt. If X’s bonds were listed, the second condition would fail and X would have to consolidate.

1. Separate.
   80% × ₦20m = ₦16m dividend income.
2. Consolidated. Eliminated; ₦4m goes to the non-controlling interest.

How to answer in the exam

• Define control with its three parts and say that more than 50% of votes normally gives it.
• List the four exemption conditions in full.
• Apply to the facts. Test each condition against the scenario and state the result.
• Add the sundry rules: all subsidiaries, a common reporting date within three months, uniform policies.

Common mistakes in the exam

• Thinking that control needs more than 50% ownership in every case.
• Excluding a subsidiary because its business is different.
• Giving only two or three of the four exemption conditions.
• Adding the share capital and reserves of the subsidiary into the group’s equity.
• Forgetting that a dividend from a subsidiary is eliminated on consolidation.
• Leaving differing accounting policies unadjusted.

Quick revision

• Control: power, variable returns, ability to use power to affect returns. Usually more than 50% of votes.
• Consolidate all subsidiaries; same reporting date (within three months); uniform policies.
• Exemption: subsidiary of another; not traded; not filing for public issue; ultimate parent produces public IFRS consolidated statements.
• Separate statements: cost, fair value or equity method; dividends in profit or loss.

Practice questions

These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.

Recall check: multiple choice

Section B style: written questions

A further written question

Model answers

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