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Critical Takeaways for Audit Firms IFRS 10 Consolidated Financial Statements

IFRS 10 Consolidated Financial Statements aims to establish principles for audit firms to prepare and present consolidated statements when an entity in Dubai & UAE controls another organization.

Specifically, IFRS 10 :

  • Requires a parent entity in Dubai & UAE that controls various organizations to report consolidated financial statements.
  • Stipulates the principle of control as the pillar and spells out recognizing if investors control the investee.
  • Highlights the accounting needs for the preparation of consolidated financial statements.
  • Describe an investment entity and highlights an exception to consolidating specifically subsidiaries of an investment entity in Dubai & UAE.

Objectives of IFRS 10:

Control is the foundation of consolidation. Precisely speaking, the basic rule states that:

  • If an investor doesn't control their investee, they cannot consolidate.
  • If an investor controls their investee, then they must consolidate.

Understanding Control 

Investors control the investee in various way:

  • Has the right or exposed to variable return from its association with the investee.
  • Can influence the returns.
  • Through their power over investees.

Assessing Control

These three fundamentals are inherent to control: variable returns, power, and the ability to use power.

Read also: Audit for Profit and Loss Statements in UAE: Why It Is Needed

Power gives a Dubai entity ability to direct a several activities. Here is a breakdown:

  • The rights should be considered, not minor.
  • The power must be current and be exercised in the present period.
  • The associated activities should be massive and linked to the significant activities of the investee.

When evaluating whether an investor has power over the investee, audit services on behalf of Dubai companies consider various factors, in line with IFRS 10.

Accounting Requirements for Audit Firms in Dubai & UAE According to IFRS 10

Consolidation Procedures

To prepare consolidated financial statements, company audit experts must note the following consolidation procedures: Combine equity, liabilities, assets, expenses, cash flows, and expenses of the parent entity with the associated subsidiaries.

Eliminate (Offset)

  • The carrying amount of the investment of the mother entity in the subsidiaries.
  • The equity of the parent entity of each subsidiary.
  • Offset in total intragroup liabilities and assets, expenses and cash flow, income, equity associated with transactions between the Dubai entity groups.

Consolidation Procedures Under IFRS

There are some extra rules for consolidation procedures highlight on IFRS 10 on preparing consolidated financial statements:

  • In equity, but separate from the equity of the owners of the parent, non-controlling interests are represented.
  • Both the parent and subsidiary shall use the same accounting processes and policy.
  • The parent company's financial statements and the subsidiary's financial statements should have same date of reporting.
  • Dealing with the parent's loss of control of a subsidiary and other guidelines associated with certain circumstances.

IFRS 10 Exceptions

As we noted earlier, when a parent entity controls a subsidiary, that subsidiary must be consolidated. However, this is not always true. According to IFRS 10, there are some exceptions to consolidation:

If the parent entity meets all of the following conditions, it is not required to present consolidated financial statements:

  • Controls a wholly-owned subsidiary or a subsidiary that owns a partial stake in another entity with its other owners in agreement.
  • There is no public market for its debt or equity instruments.
  • To issue any instrument on a public market, it has not filed, nor is it in the process of filing its financial statements with any securities commissions or other regulatory agencies.
  • Parental company or their ultimate or intermediate parents produce public consolidated financial statements compliant with IFRSs.
  • The Financial Statements do not have to be consolidated when presenting long-term employee benefit plans under IAS 19 Employee Benefits.

Investment Entities

Investment entities are Dubai & UAE entities that:

  • Provides investment management services to a client or clients, and obtains funds from those clients or clients;
  • Investors know that the company invests funds for only capital appreciation, investment income, or both. This is its sole purpose when investing.
  • Approximately all of its investments are valued and evaluated based on fair value.

Under IFRS 10, the entity must determine whether it is an investment entity or not. Investment entities generally have the following characteristics:

  • There are multiple investments in the company;
  • Several investors are involved;
  • It has investors who do not belong to the company;
  • It owns equity or similar interests in the company.

Investment Entities under IFRS 10

According to IFRS 9 Financial Instruments, most investment entities do not need consolidated financial statements. Instead, they must measure investments in subsidiaries at fair value via profit or loss.

Are you looking for more information or assistance on IFRS 10 consolidation of financial statements from leading audit firms in Dubai? If you need to talk to our internal auditors or external auditors, you can send us an email or give us a call.

Read also: Audit Firms in Dubai Guide on Accounting for Spare Parts under IFRS

Ervee is a CPA with international experience in Tax and Accounting. He has over 12 years of experience in accounting and bookkeeping and over a year in VAT implementation, registration, and accounting in UAE. He regularly drives out inefficiencies in company operations and loves the challenge of helping clients find additional ways for an easier and improved compliance and verification of transactions.