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IASB issues investment entities amendments

31 Oct 2012

The IASB has published 'Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27)', providing an exemption from consolidation of subsidiaries under IFRS 10 'Consolidated Financial Statements' for entities which meet the definition of an 'investment entity', such as certain investment funds. Instead, such entities would measure their investment in particular subsidiaries at fair value through profit or loss in accordance with IFRS 9 'Financial Instruments' or IAS 39 'Financial Instruments: Recognition and Measurement'.

The amendments define an 'investment entity' as an entity that:

  • obtains funds from one or more investor for the purpose of providing those investor(s) with investment management services
  • commits to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both, and
  • measures and evaluates the performance of substantially all of its investments on a fair value basis.

An entity is required to consider all facts and circumstances when assessing whether it is an investment entity, including its purpose and design.  The amendments provide that an investment entity should have the following typical characteristics:

  • more than one investment
  • more than one investor
  • investors that are not related to the entity or other members of the group containing the entity
  • ownership interests, typically in the form of equity or similar interests (e.g. partnership interests), to which proportionate shares of the net assets of the investment entity are attributed.

If an entity does not meet one or more of these typical characteristics, it is required to justify and disclose how its activities continue to be consistent with that of an investment entity. Additional guidance is provided on detailed specifics in determining whether an entity is an investment entity, such as the impacts of being involved in the day-to-day management of an investee or providing investment-related services to third parties, the nature of the entity, and how the entity measures and manages its financial liabilities.

The types of entities which may meet the definition of an investment entity may include private equity organisations, venture capital organisations, pension funds, sovereign wealth funds and other investment funds.

Where an entity meets the definition of an investment entity, it is not permitted to consolidate its subsidiaries and is required to measure its investments in those subsidiaries at fair value through profit or loss.   However, an investment entity is still required to consolidate a subsidiary where that subsidiary provides services that relate to the investment entity’s investment activities.

The amendments also:

  • introduce new disclosure requirements related to investment entities in IFRS 12 Disclosure of Interests in Other Entities and IAS 27 Separate Financial Statements
  • provide an scope exemption for investment entities from IFRS 3 Business Combinations (meaning such entities do not need to apply business combination accounting to the acquisition of subsidiaries)
  • include various consequential amendments to numerous standards.

The amendments do not introduce any new accounting requirements for investments in associates or joint ventures.  IAS 28 Investments in Associates and Joint Ventures already permits a venture capital organisation, mutual funds, unit trusts and similar entities including investment-linked insurance funds to elect to measure investments in associates and joint ventures at fair value through profit or loss in accordance with IFRS 9 or IAS 39, and the IASB expects that investment entities would apply these requirements.

The new requirements are applicable, on a modified retrospective basis, to annual periods beginning on or after 1 January 2014, a year later than IFRS 10 which is applicable to annual periods beginning on or after 1 January 2013. The amendments can be applied early, and accordingly entities can elect to apply them from when they first apply IFRS 10, avoiding the need for investment entities to consolidate subsidiaries only in the first year of applying IFRS 10.

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