ACCA Applied Knowledge · Financial Accounting · Subsidiaries
Under IFRS 10 Consolidated Financial Statements, which of the following is the key criterion that establishes that one entity is a subsidiary of another?
The key criterion is control. Under IFRS 10, a subsidiary is an entity controlled by the parent, meaning the parent has power, exposure to variable returns and the ability to use that power to affect returns. A 20% holding points to an associate instead.
- AThe investor holds more than 20% of the investee's equity shares
- BThe investor has control of the investeeCorrect
- CThe investor has a long-term trading relationship with the investee
- DThe investor has representation on the board of the investee
Explanation
IFRS 10 defines a subsidiary as an entity that is controlled by another entity. Control means power over the investee, exposure to variable returns and the ability to use power to affect those returns. A holding of more than 20% usually indicates significant influence, which relates to an associate, not a subsidiary.
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