IFRS 10 · Free study guide
IFRS 10 Consolidated Financial Statements: Summary, Practice Questions & Decision Tree
Last updated 13 August 2026 · Written by the AccountingTutorAI team · Reviewed by a qualified CPA (Canada)
Quick summary
IFRS 10 decides when one entity must consolidate another — and control is the single test. An investor controls an investee when three elements exist together: power over the relevant activities, exposure to variable returns, and the ability to use that power to affect those returns. Control usually follows majority voting rights, but not always: de facto control, potential voting rights and structured entities can put control somewhere other than the biggest shareholding. Once control exists, consolidation combines parent and subsidiary line by line, eliminates everything intra-group, and presents non-controlling interests within equity.
Control: the three-element test
Control requires all three elements simultaneously (IFRS 10.7). Power: existing rights that give the current ability to direct the relevant activities — the activities that significantly affect the investee's returns, such as setting operating policies, appointing key management, or directing R&D (IFRS 10.10, B11–B13). Exposure to variable returns: dividends, changes in value, fees, synergies — returns that can go up or down with performance (IFRS 10.15). Linkage: the investor can use its power to affect its own returns — it acts as principal, not merely as an agent managing the investee for others (IFRS 10.17–18).
Power normally comes from voting rights: holding more than half the votes gives control in the straightforward case (IFRS 10.B35). But the test is substance-based. De facto control can exist below 50% — an investor holding 45% while the rest is dispersed among thousands of small passive shareholders may have the practical ability to direct the investee (IFRS 10.B41–B45). Potential voting rights — options and convertibles — count when they are substantive: currently exercisable and economically realistic (IFRS 10.B47–B50). Only substantive rights matter; protective rights (a lender's covenant vetoes) never give control (IFRS 10.B26–B28).
Consolidation procedures
Consolidated statements present the group as a single economic entity (IFRS 10.19, B86): combine assets, liabilities, income and expenses line by line; eliminate the parent's investment against its share of the subsidiary's equity (goodwill arises here under IFRS 3 — see the IFRS 3 guide for the acquisition mechanics); and eliminate in full all intra-group balances, transactions, income and expenses — including unrealised profits sitting in assets like inventory and PPE. Uniform accounting policies apply across the group (IFRS 10.B87), and parent and subsidiaries report to the same date, with adjustments where gaps exceed three months (IFRS 10.B92–B93).
Non-controlling interests are presented within equity, separately from the parent's owners' equity, and profit is attributed to both — even if that drives the NCI negative (IFRS 10.22, B94). Changes in ownership that do not lose control — buying from 60% to 80%, selling from 80% to 60% — are equity transactions with no gain or loss and no goodwill remeasurement (IFRS 10.23). Losing control derecognises everything, remeasures any retained stake to fair value, and books the gain or loss in profit or loss (IFRS 10.25).
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Try the AI TutorWhen consolidation is not required
An intermediate parent may skip preparing consolidated statements when four conditions all hold (IFRS 10.4): it is itself a wholly-owned subsidiary (or partially owned with no objection from other owners); its instruments are not publicly traded; it is not filing for a public issue; and its ultimate or intermediate parent produces IFRS-compliant consolidated statements available for public use. Investment entities are a separate carve-out: entities whose business is investing for capital appreciation and investment income measure their subsidiaries at fair value through profit or loss instead of consolidating them (IFRS 10.27, 31) — a fund's stakes are portfolio holdings, not operating arms.
Worked example: eliminating unrealised intra-group profit in inventory
Parent P sells goods to its 100%-owned subsidiary S for CU 60,000, at cost plus 50% (cost to P: CU 40,000, profit: CU 20,000). By the year end S has sold half the goods to external customers; goods that S bought for CU 30,000 remain in its closing inventory. From the group's perspective, the profit on those unsold goods has not yet been earned.
| Item | Amount (CU) |
|---|---|
| Intra-group sale (P to S) | 60,000 |
| Profit margin in the sale (50% on cost = 1/3 of price) | 20,000 |
| Goods still in S's inventory, at transfer price | 30,000 |
| Unrealised profit to eliminate (30,000 × 1/3) | 10,000 |
| Inventory reduction on consolidation | 10,000 |
The margin is one third of the selling price (20,000 ÷ 60,000). Only the profit on goods still inside the group is unrealised — the CU 10,000 sitting in S's unsold inventory.
| Account | Dr (CU) | Cr (CU) |
|---|---|---|
| Dr Revenue | 60,000 | |
| Cr Cost of sales | 50,000 | |
| Cr Inventory | 10,000 |
The full CU 60,000 intra-group sale disappears from consolidated revenue. Cost of sales falls by CU 50,000 — the CU 60,000 recorded by the group's members, less the CU 10,000 needed to restate the unsold inventory to its original group cost (30,000 at transfer price → 20,000 at P's cost). Group profit falls by exactly the CU 10,000 unrealised margin; it will be earned in the period S sells the remaining goods to outsiders. Had S been 80%-owned and the sale gone the other way (upstream, S to P), the CU 10,000 elimination would additionally be shared 80/20 with the non-controlling interest.
Test yourself: 5 IFRS 10 practice questions
1. Which combination establishes control under IFRS 10?
- A. Owning any shares plus receiving dividends
- B. Power over relevant activities, exposure to variable returns, and the ability to use that power to affect those returns
- C. Owning more than 50% of the shares in all cases
- D. Appointing at least one director
Show answer
Correct answer: B
All three elements must exist together (IFRS 10.7). Majority ownership is the usual route to power but neither sufficient in every case (substantive rights held by others may block it) nor necessary (de facto control, potential voting rights). Dividends alone are returns without power.
2. An investor holds 42% of an investee; the remaining 58% is spread across thousands of small shareholders who rarely vote and never coordinate. The investor has consistently directed the investee's key decisions. Under IFRS 10 the investor most likely:
- A. Cannot consolidate — control requires more than 50%
- B. Has de facto control and consolidates
- C. Accounts for the investee as an associate only
- D. Measures the stake at fair value through OCI
Show answer
Correct answer: B
IFRS 10.B41–B45 recognises de facto control: with the remaining votes widely dispersed and passive, 42% can give the practical ability to direct the relevant activities. The size of the holding relative to other holdings, and voting patterns, are exactly the evidence the standard says to weigh.
3. On consolidation, how are intra-group balances and unrealised profits treated?
- A. Eliminated in proportion to the parent's ownership percentage
- B. Eliminated in full
- C. Left in, with disclosure in the notes
- D. Netted against goodwill
Show answer
Correct answer: B
Intra-group balances, transactions and unrealised profits are eliminated in full — 100%, regardless of the ownership percentage (IFRS 10.B86(c)). Ownership share affects only how the elimination's profit effect is attributed between the parent and NCI for upstream transactions.
4. A parent increases its stake in a subsidiary from 60% to 75%. Under IFRS 10 this is accounted for as:
- A. A new business combination with goodwill remeasured
- B. A gain in profit or loss for the change in NCI value
- C. An equity transaction — no gain, no loss, no goodwill change
- D. A partial disposal
Show answer
Correct answer: C
Ownership changes that do not affect control are transactions with owners in their capacity as owners (IFRS 10.23): the difference between consideration paid and the NCI acquired adjusts equity. Goodwill was fixed at the original acquisition date and is not touched.
5. When is a parent exempt from preparing consolidated financial statements?
- A. Whenever its subsidiaries are individually immaterial
- B. When it is itself a (wholly or qualifying partially) owned subsidiary, unlisted, not filing publicly, and a higher parent publishes IFRS-compliant consolidated statements
- C. When consolidation would be too costly
- D. When all subsidiaries operate in different countries
Show answer
Correct answer: B
The exemption requires all four IFRS 10.4(a) conditions together — intermediate parent status, no public trading, no public filing, and publicly available IFRS consolidated statements higher up. Cost, materiality and geography are not criteria.
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Start freeFrequently asked questions
What is control under IFRS 10?
The combination of three elements (IFRS 10.7): power over the investee's relevant activities, exposure or rights to variable returns, and the ability to use the power to affect those returns. It is a substance-based test — voting percentages are evidence, not the definition — and it is reassessed whenever facts and circumstances change.
When is consolidation not required?
An intermediate parent is exempt when it is itself a subsidiary (wholly owned, or partially owned with no owner objecting), its instruments are not publicly traded, it is not in a public filing process, and a parent further up publishes IFRS-compliant consolidated statements (IFRS 10.4). Investment entities do not consolidate at all — they carry subsidiaries at fair value through profit or loss (IFRS 10.31).
How are non-controlling interests presented?
Within equity in the consolidated statement of financial position, separately from the equity of the parent's owners (IFRS 10.22). Profit or loss and each component of OCI are attributed to both the parent's owners and the NCI — and the NCI's share is recognised even where it produces a deficit balance (IFRS 10.B94).
What is de facto control?
Control held with less than half the voting rights, because the remaining votes are widely dispersed among passive holders and the investor's stake gives it the practical ability to direct the relevant activities (IFRS 10.B41–B45). The assessment weighs the relative size of holdings, dispersion of other shareholders, voting patterns and other contractual rights.
How are unrealised profits on intra-group sales handled?
Eliminated in full on consolidation: the selling entity's profit on goods (or other assets) still held inside the group is removed, restating the asset to its original group cost (IFRS 10.B86(c)). The profit re-emerges when the asset is sold outside the group. For upstream sales from a partly-owned subsidiary, the elimination is shared between parent and NCI.
What is the difference between IFRS 10 and IFRS 3?
IFRS 3 accounts for the moment control is obtained — fair values, goodwill, NCI measurement choice. IFRS 10 governs everything around it: whether control exists at all, the ongoing line-by-line consolidation, intra-group eliminations, ownership changes and loss of control. In a group question, IFRS 3 sets up the numbers at acquisition; IFRS 10 runs the consolidation ever after.