Application of Professional Judgement by Russian and European Companies in Determining the Scope of Consolidation

Abstract

It is within the field of the accountant's professional substantial judgment application to determine whether the investor controls an investee. The research based on 237 consolidated financial statements in accordance with IFRS of Russian and European companies was aimed at revealing and comparing the impact of accountant's judgement on determination of the scope of consolidation. As a result, it has been found out that a considerable proportion of both Russian (40.0%) and European (43.93%) companies are governed by the judgement in determination of the control over an investee. IFRS 10 "Consolidated Financial Statements" contains principles of determination the existence of control de facto. Yet, the concept of "de facto" control can be interpreted by different accountants in various ways. The range of an accountant's interpretation of control is influenced (i.e. may "expand" or "taper") by companies's size and industry, local laws and other circumstances. Furthermore, this paper reveals factors owing to which the companies were entitled with the right to control the investee in accordance with "de facto" control in the absence of "de jure" control; also factors of the absence of "de facto" control with the majority voting rights in the subsidiary (in the presence of "de jure" control).