Sweep issue on IAS 28 Investments in Associates: Clarification on the partial use of fair value amendment
In February 2010 the Board approved an Annual Improvement amendment to IAS 28 to enable a parent entity to measure part of the investment in an associate at fair value in its consolidated financial statements when that part is designated as at fair value through profit or loss in accordance with the scope exclusion in paragraph 1 of IAS 28 (the 'venture capital organisations' exception). This amendment will be issued as a consequential amendment in the forthcoming IFRS on Joint Arrangements.
As a result of drafting the consequential amendments, the staff noted two related sweep issues, which it presented to the Board. These issues were:
- Is significant influence needed at the level of the venture capital organisation or only at group level in order to qualify for the exception at group level?
- Should the use of fair value through profit or loss be a requirement in the financial statements of the venture capital organisation to retain the use of fair value at group level?
After a short debate, the Board agreed that:
- significant influence over the investee is not required at the level of the venture capital organisation to measure the investment at fair value through profit or loss at group level, and
- it is not necessary that the venture capital organisation account for its investment at fair value through profit or loss in its separate financial statements. In other words, the accounting for the investment in the venture capital organisation does not taint the choice available in the group financial statements.
The exception will be characterised as an exception to the measurement principle in IAS 28, not a scope exception. In addition, the amendment will clarify that the exemption is available based on the business purposes for holding the investment and not restricted by the financial reporting basis used in the venture capital organisation's own financial statements.
Finally, the amendments are likely to use the phrase 'venture capital organisations or mutual funds, unit trusts and similar entities, including investment-linked insurance funds' (or something similar), until such time as the Board's forthcoming exposure draft proposing a definition of an 'investment entity' is issued in a final IFRS.