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IASB proposes consolidation exemption for 'investment entities'

25 Aug 2011

The International Accounting Standards Board (IASB) has published Exposure Draft ED/2011/4 'Investment Entities', proposing to define 'investment entities' as a separate type of entity that would be exempt from the consolidation accounting requirements in IFRS 10 'Consolidated Financial Statements'.

The proposals arise from the consultation process around the issue of IFRS 10, where many respondents questioned the usefulness of the financial statements of investment entities if IFRSs continued to require the consolidation of entities that an investment entity controls.

In summary terms, the exposure draft proposes:

  • criteria for an entity to qualify as an 'investment entity' (see below)
  • an investment entity to measure its investments in controlled entities at fair value through profit or loss in accordance with IFRS 9 Financial Instruments (exceptions would apply to investees providing services that relate only to the entity's own investment activities, and investment entities that take control of collateral as a result of defaults related to its investments)
  • additional disclosures to enable users to evaluate the nature and financial effects of its investment activities
  • not to permit a parent of an investment entity to retain fair value accounting applied by its subsidiary, unless the parent itself qualifies as an investment entity, i.e. the parent would consolidate all entities in the group
  • amendments to IAS 28 Investments in Associates and Joint Ventures to require an investment entity to measure its investments in associates and joint ventures at fair value through profit or loss in accordance with IFRS 9 (replacing the concept of 'venture capital organisation, mutual fund, unit trust and similar entities' with 'investment entity')
  • entities which apply the investment entity guidance early would also be required to apply all aspects of IFRS 10, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other Entities and IAS 28 (as amended in 2011).

Proposed 'investment entity' criteria

Under the proposals in ED/2011/4, an investment entity is an entity that meets all of the following criteria:

  • Nature of the investment activity. The entity's only substantive activities are investing in multiple investments for capital appreciation, investment income (such as dividends or interest), or both
  • Business purpose. The entity makes an explicit commitment to its investors that the purpose of the entity is investing to earn capital appreciation, investment income (such as dividends or interest), or both
  • Unit ownership. Ownership in the entity is represented by units of investments, such as shares or partnership interests, to which proportionate shares of net assets are attributed
  • Pooling of funds. The funds of the entity's investors are pooled so that the investors can benefit from professional investment management. The entity has investors that are unrelated to the parent (if any), and in aggregate hold a significant ownership interest in the entity
  • Fair value measurement. Substantially all of the investments of the entity are managed, and their performance is evaluated, on a fair value basis
  • Disclosures. The entity provides financial information about its investment activities to its investors. The entity can be, but does not need to be, a legal entity.

The IASB is undertaking this project jointly with the FASB with the objective of improving existing US GAAP requirements and achieving convergence in the accounting for these types of entities. The FASB is expected to issue equivalent proposals shortly.

Comments on the exposure draft are due by 5 January 2012. Click for:

 

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