Subsidiaries, Joint ventures and Associates
IFRS 10 defines a subsidiary as “An entity that is controlled by another entity.”
Subsidiary is an entity which is controlled by another entity. The control means that the parent company can govern the financial and operating policies of its subsidiaries to gain benefits from the operations of subsidiary. Control can be gained if more than 50% of the voting rights are acquired by the parent. This is usually done by purchasing more than 50% of the shares of subsidiary. An investor controls an investee if and only if the investor has all the following:
(a) power over the investee;
(b) exposure, or rights, to variable returns from its involvement with the investee; and
(c) the ability to use its power over the investee to affect the amount of the investor’s returns.
International Accounting Standard 28 (IAS 28) defines a joint venture as “A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.”
A joint arrangement is an arrangement of which two or more parties have joint control. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.
Joint arrangement can exist in two different forms as set out by IFRS 11:
- joint operation
- joint venture
International Accounting Standard 28 (IAS 28) defines an associate as “An associate is an entity over which the investor has significant influence.”
Significant influence means the power to participate in the financial and operating policy decisions of the investee but is not control or joint control of those policies. Significant influence is usually acquired by purchasing more than 20% of voting power but less than 50%.
Ssubsidiaries and Joint Ventures According IFRS 10
IFRS 10, "Consolidated Financial Statements," provides guidance on accounting for subsidiaries and joint ventures.
A subsidiary is an entity that is controlled by another entity, known as the parent. Control is defined as the power to govern the financial and operating policies of the entity so as to obtain benefits from its activities. If a parent holds a majority of the voting rights in the subsidiary, it is considered to have control and is required to consolidate the subsidiary's financial statements.
A joint venture is a jointly controlled entity, which is an entity over which two or more parties have joint control. Joint control is defined as the contractually agreed sharing of control of an economic activity. Similar to subsidiaries, if a joint venture is jointly controlled by the venturers, the venturers are required to account for the joint venture using the equity method of accounting.
IFRS 10 requires the parent to prepare consolidated financial statements which include the financial statements of the parent and its subsidiaries. The consolidated financial statements should present the financial information as if the parent and its subsidiaries were a single entity. All inter-company transactions, balances and unrealized gains and losses are eliminated in the consolidation process.
In the case of Joint ventures, the venturers are required to account for their interests in the jointly controlled entity using the equity method. The equity method requires the venturer to recognize its share of the joint venture's profit or loss and other comprehensive income, along with the changes in its share of the joint venture's net assets, in its own financial statements.
Associates are entities over which an entity has significant influence, but not control. Significant influence is defined as the power to participate in the financial and operating policy decisions of the entity, but not the power to control those policies.
IFRS 10 requires an entity to account for its investment in an associate using the equity method. Under the equity method, the investor recognizes its share of the associate's profit or loss and other comprehensive income, as well as changes in its share of the associate's net assets, in its own financial statements.
The equity method of accounting for associates is an alternative to consolidation, which is used for subsidiaries. Under the equity method, the investor recognizes its proportionate share of the associate's results of operations and net assets in its own financial statements. The equity method also requires adjustments to the carrying amount of the investment, to reflect the investor's share of the changes in the net assets of the associate.
It's important to note that an entity must assess on an ongoing basis whether it has significant influence over an associate and, if so, whether that influence has changed. If an entity loses significant influence over an associate, it should derecognise its investment in the associate and all related assets and liabilities.