Key Difference – IAS 27 vs IFRS 10
IAS 27- ‘Consolidated and Separate Financial Statements’ and IFRS 10-‘Consolidated Financial Statements’ report accounting guidelines for the recording of financial results of holding companies. The key difference between IAS 27 and IFRS 10 is that IFRS 10 amends IAS 27’s criteria for the parent company to recognise its requirement to prepare consolidated accounts by redefining the concept of control. Following in the implementation of IFRS 10 guidelines to decide whether to consolidate, then the accounting treatment can be completed based on IAS 27 depending on whether the entity is a subsidiary, associate or a joint venture.
Before looking at the difference between IAS 27 and IRFS 10 further, let’s briefly look at what is meant by a holding company and a parent company.
When a company holds a stake in another entity, its (second entity’s) assets, liabilities, equity, incomes and expenses are owned by the company up to the percentage of ownership. In this situation, the company is referred to as the ‘parent’ company. The second company can either be a ‘subsidiary’ or an ‘associate’, depending on the percentage owned by the parent company and is referred to as the ‘holding company’. If the company jointly controls the interest of an entity with a third party (known as a ‘joint venture’), such stakes should also be incorporated into the financial accounts.
CONTENTS
1. Overview and Key Difference
2. What is IAS 27
3. What is IFRS 10
4. Side by Side Comparison – IAS 27 vs IFRS 10
5. Summary
What is IAS 27
IAS 27 states the necessary guidelines as to,
- When a company has to consolidate another entity,
- How to account for a change in ownership interest,
- How to prepare separate financial statements,
- Other related disclosures
Consolidation is decided upon the concept of ‘control’, which is exerted when the parent owns more than 50% of the holding company. In this scenario, the holding company is referred to as the subsidiary. Subsidiary’s portion of assets, liabilities, incomes and expenses should be recorded in the financial statements of the parent company.
As required by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), it is mandatory for all companies holding a controlling stake to prepare consolidated financial statements. In addition to the 50% stake, control may be evidenced by power to,
- To govern the financial and operating policies of the entity under a statute or agreement; or
- To appoint or remove the majority of the members of the board of directors; or
- To cast the majority of votes at a meeting of the board of directors
The parent company can hold varying degree of interest in a holding company other than a controlling stake. They are,
Associates
Associate is an entity in which the company exerts significant influence, but not control. For this, the company should acquire a stake of ownership between 20%-50% of the associate. Accounting for associates are governed by IAS 28- Investments in Associates
Joint Ventures
This is a combined effort by two parties to amalgamate their resources to conduct a business activity. The percentage of ownership by each party will be decided based on the amount of resources contributed. Accounting for joint ventures are governed by IAS 31- Interests in Joint Ventures.
Figure 1: Investment by the parent in holding entities based on percentage of ownership
What is IFRS 10?
IFRS 10 is established to introduce a standardised control model that can be applied to all entities including special purpose entities. The changes require those dealing with the implementation of IFRS 10 to apply significant judgement to define which entities should be controlled and, therefore require consolidation by the parent company.
IFRS 10 redefines the terminology used in IAS 27 and replaces the term ‘parent company’ by ‘investor’ and the ‘holding company’ as the ‘investee’. A change in the method of consolidation is not implemented by this standard; rather this revisits whether the entity should be consolidated by revisiting the concept of ‘control’.
Control is redefined as the right of the investor to receive a variable return and the ability to affect these returns through power over an investee. Thus, the investor must have the following to have control over the investee.
- Power over the investee, i.e., having existing rights that give the current ability to direct the activities of the investee that significantly affect the investee’s returns
- Exposure, or rights, to variable returns from its involvement with the investee
- Ability to use its power over the investee to affect the amount of the investor’s returns
Power results from rights that can be straightforward (through voting rights) or complicated (embedded in contractual arrangements); the returns of the investee will vary due to its performance levels by increasing and decreasing from time to time; thus called ‘variable’ returns.
What is the difference between IAS 27 and IFRS 10?
IAS 27 vs IFRS 10 |
|
| IAS 27 states that a company should prepare consolidated financial statements if it controls (holds a share of more than 50%) another entity. | IFRS 10 redefines control as the right of the investor to receive variable return and the ability to affect those returns through power over an investee. |
| Uniformity | |
| IAS 27’s recognition of different types of holding entities varies according to the percentage of ownership of the investing entity. Thus, the methods are less standardised. | IFRS 10 provides a uniformed structure for recognising for holding shares in other entities. |
| Terminology | |
| In IAS 27, the company that invests in another entity is named as the ‘parent company’ while the latter is referred to as the ‘holding entity.’ | In IFRS 10, the term parent company was changed to ‘investor’, and the holding company was started to be referred to as the ‘investee.’ |
| Effective Date | |
| IAS 27 was reissued in July 2009 (Earlier standard referred to as IAS 27- Separate Financial Statements). | IFRS 10 was effective for accounting periods beginning after January 2013. |
Summary – IAS 27 vs IFRS 10
The difference between IAS 27 and IFRS 10 predominantly depend on the concept of control and the use of terminology. IFRS 10 does not change the accounting treatment requirements, rather provides new guidelines as to how the decision should be made to consolidate. Thus, the criteria of control under IAS 27 had been superseded by IFRS 10.
Reference:
1. “IAS Plus.” IAS 27 – Consolidated and Separate Financial Statements (2008). N.p., n.d. Web. 23 Feb. 2017.
2. “IAS Plus.” IFRS 10 – Consolidated Financial Statements. N.p., n.d. Web. 23 Feb. 2017.
3. “IFRS 10 Consolidated Financial Statements.” IFRS 10 Consolidated Financial Statements | IFRS standards tracker | Financial Reporting | ICAEW. N.p., n.d. Web. 23 Feb. 2017.
4. “IAS 27: Separate financial statements.” IAS 27: Separate financial statements | Accounting standards | Library | ICAEW. N.p., n.d. Web. 23 Feb. 2017.