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IFRS 10 — Investment entity subsidiary that provides investment-related services

Date recorded:

The staff introduced the paper. In November 2013, the IC discussed a request to clarify some issues related to the Investment Entities amendments to IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure of Interests in Other Entities and IAS 27 Separate Financial Statements. One of the issues was about the accounting by an investment entity that has an investment entity subsidiary (which has investees measured at fair value) and, additionally, provides investment-related services or activities

The Investment Entity amendments to IFRS 10 require an investment entity to measure its investments in subsidiaries at fair value. There is an exception to this requirement: if a subsidiary provides investment-related services or activities, the investment entity shall consolidate the subsidiary. According to the submitter, in the case in which an investment entity subsidiary meets the definition of an investment entity (which has investees measured at fair value) and, additionally, provides investment-related services or activities, it is unclear whether the investment entity parent should measure that subsidiary at fair value or consolidate it.

The staff analysed the nature of the services, and to whom services are provided, for investment-related services and activities stated in paragraph B85C and B85D as follows:

 

Nature of services

To Whom

Investment-related services (B85C)

 

(examples)

  • investment advisory services;
  • investment management;
  • investment support; and
  • administrative services.

 

 

To third parties

To investors

Investment-related activities (B85D)

 

(if these activities are undertaken to maximise the investment return from its investees)

  • management services;
  • strategic advice; and
  • financial support.

To its investees

In its June 2012 meeting, the IASB tentatively decided that an investment entity should be required to measure all controlling financial interests in another investment entity at fair value, rather than consolidating those subsidiaries.

When the tentative decision was made in the June 2012 meeting, an entity was not allowed to qualify as an investment entity if it provided substantive investment-related services to third parties.

Alternatives for accounting for an investment entity subsidiary that provides investment-related services to third parties:

Alternative 1: require an investment entity parent to consolidate an investment entity subsidiary that provides investment-related services to third parties. In addition, require fair value measurement for its portfolio of investments.

Alternative 2: require an investment entity parent to measure an investment entity subsidiary at fair value, even if the investment entity subsidiary provides investment-related services to third parties.

Staff recommendation: The staff recommends that in order to maintain the simplicity of the standard rather than introducing an additional complication that would deal only with circumstances that are rare in practice, these investment entity subsidiaries are accounted for in the same way as all other investment entity subsidiaries, ie at fair value (alternative 2).

Comments raised by IC members:

Several members expressed support for the amendments, one member indicated that it will be necessary to clarify in the paper why the amendments are necessary.

The chairman concluded that there is enough support to go ahead with the staff recommendation.

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