Can Sierra be installed on a virtual machine created by Parallels Desktop 10?
Yes, this is possible. 

It’s not actually too hard, but there’s a lot of steps (a couple of which can be fiddly) so be patient and read this carefully. I’ll try and outline all the steps involved, but feel free to let me know if you get stuck at all. 

Also, some of these steps are not strictly necessary, but I’m trying to make this foolproof so that it's useful to other users, and also because I want to ensure that my Terminal command at Step 12 can just be copied and pasted.


On your iMac, download the macOS Sierra installer via the Mac App Store
After its downloaded, the installer will launch automatically. When it does, quit the installer.
Grab a USB flash drive of at least 8GB in size
Connect the USB flash drive to your Mac
Launch the Disk Utility app (by default it’s in the Applications > Utilities folder)
Select the USB flash drive on the lefthand side
Click on the Erase tab
Do not change the default name of Untitled
Click on the Erase button (do not worry about any of the other settings). Note this will totally erase your drive!
Quit Disk Utility
Launch the Terminal app (by default it’s in the Applications > Utilities folder)
Now enter the following command into Terminal. It may be best to just copy it from here (try triple-clicking) and paste it in. 

sudo /Applications/Install\ macOS\ Sierra.app/Contents/Resources/createinstallmedia --volume /Volumes/Untitled --applicationpath /Applications/Install\ macOS\ Sierra.app
You will be prompted to enter your user password. Enter it now and press return (note that you won’t see the cursor move or display any of the characters you enter)
At the next prompt (about erasing your drive) press the Y key
Wait for your USB flash drive to be erased (you’ll see the progress via % values appearing within the Terminal window)
Once the erasure is complete, you will see a prompt that files are being copied to the disk. This may take a while, so be patient.
Eventually the copy process will be over and you should see a Done message in Terminal. You can now quit Terminal.
Now launch Parallels.
Go to File > New (or press commandN)
In the window that appears, select the Install Windows or another OS from a DVD or image file option
Click on the Continue button at bottom right
At the next window, ignore what Parallels is searching for and click on the Continue button again
At the next window, give your virtual machine a name and select the location you want it created in
Now, click on the checkbox to indicate you want to Customize settings before installation
Click on the Continue button
Parallels will now create your virtual machine
When complete, you will be presented with the configuration settings
Click on the Hardware tab
Select the Boot Order option in the left hand list
On the righthand side, tick the Select boot device on startup checkbox. This is a temporary, but critical step!
Feel free to configure your other settings for the virtual machine 
Once you’ve configured everything, exit the configuration screen
Click on the Continue button
You should see a message that your virtual machine is starting. Wait until you see the Boot Menu appear (it’ll probably be a grey screen with blue and black text on it).
The Continue option will probably be selected. Ignore this and use your down arrow key to select the Boot Maintenance Manager option
Press return
Once the Boot Maintenance Manager window appears, use your down arrow key to select the Boot From File option
Press return
Once the File Explorer window appears, use your down arrow key to select the second file listed
Press return
In the next window, use your down arrow key to select the .IABootFiles option
Press return
In the next window boot.efi should be preselected
Press return
Shortly the Apple logo should appear on a black screen


Now you can follow the prompts to install macOS Sierra. 

NOTE 1: - Once you’re within the Boot Menu screens (i.e. Steps 34 - 44) you can press the ESC key at any stage to go back to the previous screen if you need to.

NOTE 2: - Please be patient - the macOS Sierra installation process can take a long time within a virtual machine!

NOTE 3: - Once you're all set up, you will want to go back into the configuration settings for your macOS Sierra virtual machine and uncheck the Select boot device on startup checkbox you ticked at Step 30.

NOTE 4: - If you get stuck at any stage, feel free to post a comment below.