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Accounting for Investments in Subsidiaries and Associates

Principle of Control

This chapter will start to examine the accounting required under IFRS for investments
in subsidiaries. The accounting standard that sets out the requirements for
recognition of an entity as a subsidiary is IFRS 10 Consolidated Financial
Statements. This standard was issued in May 2011, but its basic principles have
been part of IFRS for many years.

First, some relevant definitions taken from the standard

A parent is 'an entity that has one or more subsidiaries' (IFRS 10, appendix A).

A subsidiary is 'an entity which is controlled by another entity' (IFRS
10,appendix A) (known as the parent).

The key concept in determining whether or not an investment constitutes a subsidiary
is that of control.

IFRS 10 Consolidated Financial Statements sets out a new definition of control and
giving guidance on how to identify whether control exists.

'An investor (the parent) controls an investee (the subsidiary) when the
investor is exposed, or has rights, to variable returns from its involvement with
the investee and has the ability to affect those returns through its power over
the investee' (IFRS 10, appendix A).

Power is defined as 'existing rights that give the investor the ability to direct the
relevant activities' (IFRS 10, appendix A).

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