Control for consolidation can be defined as authority of the investing entity over the financial and operating decisions of the voting entities. Control in consolidated entities is more aligned to majority control rights rather than majority financial ownership. Control can therefore be exercised in the absence of a parent’s 50% ownership, when the power to appoint or remove a part of the board of directors. The examination of the International Accounting Standard No. 27 (IAS 27) has shown that investment efficiency has been achieved since its’ adoption in various states (Hsu et al, 2015: 1).
The quest for establishing the significance of IAS 27 in the recent management of investment activities, has led to findings. The paper focused on establishing the coherence of IAS 27 while comparing it with methods that have been used before such as the equity method. Some firms are still compelled to use the equity method for how it covers cross-sub-sidization within the company along with, the ability of companies to hide investees assets and liabilities off the balance sheet.
In comparison with ARB 51, IAS 27 defines control as the power to exercise authority over both the financial and operating policies of voting entities as compared to ARB 51, which postulates that consolidation should be founded on financial control. Consolidation can be done by one firm with a domineering interest over the trustees. IAS 27 has a wider definition of a subsidiary with a requirement on having restricted trustees to be accounted for in consolidated financial statements.
While developing the hypothesis, The study was involved on proving whether IAS 27 could in pacifying agency problems including adverse selection, moral hazardous behavior or both. With the addition of more trustees under IAS 27 there is an expected significant decrease in unusual related transactions and a rise in income quality.