Under International Financial Reporting Standards (IFRS 10 – Consolidated Financial Statements), an entity is required to consolidate its financial statements based on the control principle rather than ownership percentage alone.
Why Option B (Control ownership) is Correct:
According to IFRS 10, consolidation is required when an entity has control over another entity.
Control is defined as having power over the investee, exposure to variable returns, and the ability to influence those returns.
Even if an entity owns less than 50% of voting rights, it may still have control through contractual arrangements, rights over key decisions, or majority board influence.
Why Other Options Are Incorrect:
Option A (Variable entity approach):
This is a concept used in U.S. GAAP (ASC 810 – Variable Interest Entities) rather than IFRS. IFRS focuses on the broader control model.
Option C (Risk and reward):
IFRS previously considered risk and reward under IAS 27/SIC-12, but IFRS 10 replaced this with the control model.
Option D (Voting interest):
Voting rights alone do not determine consolidation under IFRS. Control can exist even without majority voting rights through contractual arrangements or potential voting rights.
IFRS 10 – Consolidated Financial Statements: Defines the principle of control for consolidation.
IIA GTAG – "Auditing Financial Reporting Risks": Discusses the impact of IFRS consolidation principles.
COSO ERM Framework: Emphasizes risk assessment in financial reporting, including consolidation decisions.
IIA References:Thus, the correct answer is B. Control ownership.
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