In its Exposure Draft, the IASB proposed three changes to IAS 28 and IFRS 10:

• Exemption from preparing consolidated financial statements. The suggested amendments confirm that an entity can apply the consolidation exemption even if its parent entity measures its subsidiaries at fair value in accordance with IFRS 10.
• A subsidiary providing services that relate to the parent's investment activities. A subsidiary that provides services related to the parent's investment activities should not be consolidated if the subsidiary itself is an investment entity.
• Application of the equity method by a non-investment entity investor to an investment entity investee. When applying the equity method, a non-investment entity investor in an investment entity retains the fair value measurement applied by the associate to its interests in subsidiaries, unless the non-investment entity investor is a joint venturer where the joint venture is an investment entity.

ESMA agrees that a subsidiary that provides services related to the parent's investment activities should not be consolidated if the subsidiary itself is an investment entity.

Exemption from preparing consolidated financial statements

ESMA does not agree that an entity should be able to apply the consolidation exemption in IFRS 10 if its parent entity measures its subsidiaries at fair value. In ESMA's view, users of financial statements (in particular non-investors) might not be adequately informed about the financial position and performance of such a subsidiary in the absence of consolidated financial statements. ESMA does not believe that the disclosures required by IFRS 7, IFRS 12 and IFRS 13 in the financial statements of the investment entity parent, taken in combination with separate financial statements for the subsidiary, would provide sufficient information for the needs of such users. Furthermore, ESMA does not agree that the preparation of such accounts would result in significant additional costs, as they would expect that such consolidated information is being prepared for internal use in any case.

Application of the equity method by a non-investment entity investor to an investment entity investee

In relation to these amendments, ESMA partly supports the IASB's proposals but partly disagrees. It believes that a non-investment entity investor should, when applying the equity method, retain the fair value measurements used for investments in subsidiaries by an investment entity associate or joint venture. This is different to the IASB's position which would mandate this treatment for investments in subsidiaries held by associates but forbid it for joint ventures.

ESMA does not believe that there is sufficient difference in the practical relationship between an investor and its associate or joint venture investees to justify the introduction of a distinction between these two cases. Moreover, ESMA believes that the fair value measurements applied by a non-investment entity investor to investment entity associates and joint ventures provides useful information.

ESMA also makes several other observations, namely that:

• the proposed amendments should have clarified the equity method treatment of other associate and joint venture relationships with investment entities.
• the IASB should take this opportunity to amend IAS 28 and IFRS 10 to clarify differences in terminology which may cause uncertainty as to the correct accounting treatment in some situations.
• the high number of recent exposure drafts clarifying aspects of the equity method indicates the need for a broader project on the equity method. As a result ESMA is supportive of the IASB's current research project on this topic.

ESMA has also submitted a response to the consultation on EFRAG's response to this IASB consultation, expressing the same views.

The response to the IASB and response to EFRAG can both be downloaded from the ESMA website.