How consolidation of subsidiaries is performed under IFRS 10 and ASC 810

Consolidation integrates the financial statements of a parent and its subsidiaries into a single set of financial statements that present the group as one economic entity. IFRS 10 (Consolidated Financial Statements) and US GAAP (ASC 810 – Consolidation) both require consolidation when an entity exercises control, but they differ in defining and applying that concept, particularly in variable interest entities (VIEs) and potential voting rights.

Both frameworks aim to reflect the parent’s power, exposure to variable returns, and ability to use that power to affect those returns through the subsidiaries it controls.

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How control is defined.

IFRS 10:An investor controls an investee when it has:

1. Power over the investee (current ability to direct relevant activities).

2. Exposure or rights to variable returns from involvement.

3. Ability to use power to affect returns.

All three must exist simultaneously. Control is reassessed continuously if facts or circumstances change.

ASC 810:US GAAP distinguishes between:

• Voting interest entities (VOEs): control through ownership of voting rights (>50%).

• Variable interest entities (VIEs): control through economic power and exposure, even without majority voting interest.

Under VIE guidance, consolidation is required if the reporting entity is the primary beneficiary—it has both power to direct significant activities and obligation to absorb or right to receive the majority of expected losses or benefits.

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How consolidation is performed under IFRS.

1) Full consolidation method.Combine assets, liabilities, income, and expenses of the parent and all subsidiaries line-by-line. Eliminate:

• Parent’s investment in subsidiary vs. subsidiary’s equity.

• Intercompany balances, transactions, and unrealized profits.

Example — acquisition at cost:Parent acquires 80% of Subsidiary A for 4,000,000.Subsidiary’s identifiable net assets = 4,500,000.

Goodwill (IFRS 3):= Consideration 4,000,000 + NCI (20% × 4,500,000 = 900,000) − Net Assets 4,500,000 = 400,000.

Entry at consolidation:

• Debit: Net Assets 4,500,000

• Debit: Goodwill 400,000

• Credit: Investment in Subsidiary 4,000,000

• Credit: Non-Controlling Interest 900,000

2) Non-controlling interest (NCI).Measured at acquisition either at fair value or at proportionate share of identifiable net assets (policy choice per transaction).

3) Intragroup elimination.Eliminate all intragroup sales, dividends, and receivables/payables.Example:Parent receivable from Subsidiary 250,000:

• Debit: Payables – Subsidiary 250,000

• Credit: Receivables – Parent 250,000

4) Post-acquisition profits.Split between parent and NCI based on ownership percentage.

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How consolidation is performed under US GAAP.

1) Voting interest entities.If parent owns >50% voting rights, consolidate using line-by-line combination similar to IFRS.

2) Variable interest entities (VIEs).If control exists through contractual or economic rights, consolidate even without majority voting power. Examples: securitization vehicles, partnerships, structured finance entities.

3) Non-controlling interests (NCI).Shown in equity, separately from parent’s equity (same as IFRS). No fair value/proportionate option; NCI always measured at fair value at acquisition.

4) Elimination procedures.Same as IFRS—remove intercompany balances, transactions, and unrealized profits.

5) Step acquisitions and deconsolidations.Revalue previously held interests to fair value through P&L at acquisition date.Deconsolidate when control is lost and recognize any retained interest at fair value.

Example – deconsolidation:Carrying amount of net assets 8,000,000; sale proceeds 3,500,000; retained 20% FV 2,000,000.Gain = 3,500,000 + 2,000,000 − 8,000,000 = (2,500,000).

• Debit: Cash 3,500,000

• Debit: Investment 2,000,000

• Credit: Net Assets 8,000,000

• Credit: Gain on Deconsolidation 2,500,000

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Comparative table: IFRS 10 vs ASC 810.

Aspect	IFRS 10	US GAAP (ASC 810)
Control principle	Unified definition (power + returns + linkage)	Dual model: voting interest entities vs VIEs
Reassessment of control	Required continuously	Required for reconsideration events
NCI measurement	Choice: fair value or proportionate share	Fair value only
Structured entities	Consolidate if control criteria met (no separate model)	VIE model with “primary beneficiary”
Potential voting rights	Considered if substantive	Considered only if substantive
Deconsolidation gain/loss	Recognize in P&L at loss of control	Same
Disclosure focus	Nature of interests, risks of unconsolidated entities	Detailed VIE disclosures for exposure and involvement

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Step-by-step consolidation example (IFRS or GAAP).

Scenario:Parent owns 80% of Subsidiary B.

• Investment in Subsidiary: 2,000,000

• Subsidiary equity: 2,000,000

• Year-end profit: 400,000

Consolidation worksheet entries:

1. Eliminate investment:

   • Debit: Share Capital (Subsidiary) 2,000,000

   • Credit: Investment in Subsidiary 2,000,000

2. Recognize NCI:

   • Debit: Retained Earnings (Parent’s share) 320,000

   • Credit: NCI 80,000

3. Eliminate intercompany sales:

   • Debit: Sales 500,000

   • Credit: Cost of Sales 500,000

4. Eliminate intercompany profit in inventory:

   • Debit: Retained Earnings 20,000

   • Credit: Inventory 20,000

Consolidated results:

Item	Parent (USD)	Subsidiary (USD)	Adjustments (USD)	Consolidated (USD)
Revenue	4,000,000	1,000,000	(500,000)	4,500,000
COGS	(2,000,000)	(600,000)	500,000	(2,100,000)
Profit before tax	2,000,000	400,000	(20,000)	2,380,000

NCI share (20%) = 80,000; parent’s share = 320,000.

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Disclosures under IFRS 12 and ASC 810.

IFRS 12 (Disclosure of Interests in Other Entities):

• Composition of the group and percentage ownership.

• Significant restrictions on control or access to assets.

• Risks associated with unconsolidated structured entities.

• Summarized financial data of material NCI subsidiaries.

ASC 810 disclosures:

• Judgment applied in determining consolidation of VIEs.

• Carrying amounts and classification of VIE assets and liabilities.

• Maximum exposure to loss.

• NCI presentation and changes.

Example disclosure table:

Subsidiary	Ownership	NCI (USD)	Total Assets (USD)	Total Liabilities (USD)
Alpha Ltd	80%	400,000	5,200,000	1,600,000
Beta LLC	60%	600,000	3,000,000	1,200,000

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Journal entries summary.

1) Acquisition (IFRS or GAAP):

• Debit: Identifiable Net Assets xx

• Debit: Goodwill xx

• Credit: Investment / Cash xx

• Credit: NCI xx

2) Intercompany elimination:

• Debit: Revenue xx

• Credit: COGS xx

3) Intragroup dividend:

• Debit: Dividend Income xx

• Credit: Dividend Payable xx

4) Post-acquisition profit allocation:

• Debit: Profit and Loss xx

• Credit: NCI xx

• Credit: Parent Retained Earnings xx

5) Loss of control:

• Debit: Cash/Investment xx

• Credit: Net Assets xx

• Credit: Gain/Loss on Disposal xx

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Impact on financial performance and ratios.

Consolidation increases the scale of reported assets, liabilities, and revenue, affecting:

• Leverage ratios (higher total assets and debt).

• Equity structure (addition of NCI).

• Profitability ratios (group-level margins reflect elimination of intra-group profits).

• EPS (based on parent’s share of profit).

Consolidation provides a holistic view of group performance but requires consistent policies and currency translations across entities.

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Operational considerations.

Finance teams must maintain:

• Uniform accounting policies across subsidiaries.

• Accurate ownership tracking for NCI and intra-group eliminations.

• Automation of consolidation adjustments through ERP or dedicated consolidation software.

• Consistent foreign currency translation (IAS 21 / ASC 830).

• Periodic reassessment of control, especially for VIEs, JVs, and structured entities.

A structured consolidation process ensures transparency and reliable group-level reporting compliant with both IFRS 10 and ASC 810.

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