IFRS 10 Explained: Who Really Controls Your Business?

IFRS 10 Consolidated Financial Statements answers one question that shapes every group's accounts: which companies do you control? If you control a company, its assets, liabilities, income and expenses go into your group accounts line by line, as if the two were one business.

The answer is not always about who owns more than half the shares. A 48% holder can control a company. A majority owner sometimes does not. For UAE groups the answer matters well beyond the audit file: group accounts drive bank lending and investor reporting, and the consolidated financial statements are the starting point for the global minimum tax rules that now apply to large groups.

The control test: three boxes, all ticked

Paragraph 7 of IFRS 10 says an investor controls an investee only if it has all three of the following at the same time. Miss one, and there is no control.

1. Power. Existing rights that give the current ability to direct the relevant activities, the ones that most affect the investee's returns: budgets, major contracts, appointing and removing senior management. The rights need not have been used yet. They need to be usable.
2. Exposure to variable returns. Your returns rise or fall with the investee's performance. Dividends, changes in the value of your stake, fees, cost savings and exposure through a guarantee all count.
3. The link between the two. You can use your power to affect your own returns. This is what separates a principal from a manager acting for someone else.

The test turns on substance, not paperwork. You assess all the facts and circumstances, and you reassess whenever they indicate that one of the three elements has changed.

Where control gets difficult

Most groups are simple: hold more than half the votes and you are in charge. The hard cases sit in the grey areas, and they are where audit questions usually start.

Less than half the votes, but still in charge

The standard's own examples settle the two classic cases. An investor holding 48% of the votes, with the rest spread among thousands of shareholders none of whom holds more than 1% and who have no arrangements to act together, has power. An investor holding 45%, where two others hold 26% each, does not: the two others need only cooperate to outvote it.

More than half the votes, but not in charge

A majority holder lacks power if another party directs the relevant activities under a contract, or if the voting rights are not substantive. A company in the hands of a liquidator, administrator or regulator is the common example.

Options and convertible instruments

Potential voting rights count only if they are substantive, meaning the holder has the practical ability to exercise them. An option that is deeply out of the money is usually ignored. One that is cheap to exercise, or that would bring clear benefits such as synergies, can tip the balance.

Rights that only protect

A lender's right to block a major asset sale, or a minority holder's right to approve unusual capital spending, protects their investment. Protective rights apply to fundamental changes or exceptional circumstances, and they do not give power.

Fund managers and agents

A manager running a fund for a market-rate fee, who can easily be removed and holds a small stake, is usually an agent acting for the investors. A large stake in the fund and weak removal rights can turn the manager into the principal that controls it.

Parties acting for you

Close family members, related companies, or parties who depend on you for funding may in practice vote as you direct. IFRS 10 calls them de facto agents, and their rights are considered together with yours.

What changes once you have control

• Add it all up. Combine the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries as a single economic entity.
• Remove internal transactions. Intragroup balances, transactions, income, expenses and profits are eliminated in full. You cannot earn a profit by selling to yourself.
• Use one set of policies. Every group company must use uniform accounting policies, adjusted on consolidation where they differ.
• Align reporting dates. Where a subsidiary's year-end differs, it prepares additional statements to the parent's date unless impracticable; even then, the gap may not exceed three months.
• Show non-controlling interests separately. The part of a subsidiary owned by outsiders sits within equity, apart from the parent's equity, and absorbs its share of losses even if that creates a deficit balance.
• Treat stake changes without loss of control as equity. Selling 10% of a subsidiary you still control produces no gain or loss in profit or loss; the difference goes to equity.
• On losing control, reset. Derecognise the subsidiary, measure any retained interest at fair value on that date, and recognise the gain or loss in profit or loss.

Consolidation starts on the date you obtain control and stops on the date you lose it. Not the start of the month, and not the year-end.

Who can skip group accounts

Paragraph 4(a) lets a parent that is itself a subsidiary skip consolidated statements if all four conditions are met: its other owners have been told and do not object; its debt and equity are not traded in a public market; it is not filing to list; and its ultimate or an intermediate parent publishes IFRS financial statements available for public use.

Investment entities follow a separate path. An entity that obtains funds from investors to provide investment management services, invests solely for capital appreciation, investment income or both, and measures and evaluates its investments on fair value, does not consolidate the subsidiaries it controls. It measures them at fair value through profit or loss. Two catches: a subsidiary that only provides investment-related services to the fund is still consolidated, and a parent that is not itself an investment entity must consolidate everything below it.

IFRS 10 and UAE tax: related, but not the same test

Accounting control and tax grouping are easy to confuse, and the difference is expensive. A UAE Corporate Tax Group under Article 40 of the Corporate Tax Law does not follow IFRS 10. It requires the parent to hold at least 95% of the subsidiary's share capital, at least 95% of its voting rights, and entitlement to at least 95% of its profits and net assets. A 60% subsidiary you plainly control is consolidated in your accounts and cannot join your Tax Group.

The global minimum tax works the other way. The UAE Domestic Minimum Top-up Tax applies to multinational groups with revenue of EUR 750 million or more in the ultimate parent's consolidated financial statements in at least two of the four preceding years. There, the consolidation perimeter IFRS 10 draws is the starting point, so a control conclusion can decide whether an entity is in scope.

A control checklist

Run every significant holding through these questions each year, and again whenever an agreement, shareholding or board seat changes.

How BIFI Partners helps

BIFI Partners is a UAE advisory firm led by qualified accountants and tax specialists. We give written control conclusions your auditor can rely on, map who owns and controls what across the family and the group, prepare consolidated accounts with intragroup items eliminated, handle the accounting when a stake is bought, sold or diluted, and check the group structure against the Tax Group and top-up tax rules so the accounts and the tax filings tell the same story.