Date recorded:

Managed funds and investment companies

The Board discussed issues surrounding consolidation in the context of managed funds and investment companies.

The Board noted that, by law, many mutual funds and unit trusts cannot hold interests that exceed a certain percentage of an entity, something that usually prevents consolidation from being an issue. However, the question of control does arise at the fund manager level. Of more concern to some Board members were private equity funds, for which the risks may be quite different.

The Board did not appear sympathetic to providing an exception from consolidation based on where within the group a shareholding resides. Board members saw that approach as leading to inconsistencies in a parent's consolidating entities that it controls.

The Board then addressed 'investment companies'. The staff was of the view that if an entity controls another, it should consolidate the controlled entity. The staff was also concerned about the consequences of not consolidating on other aspects of financial reporting, such as the elimination of inter-company transactions.

The staff noted that IFRS 8 provides entities an opportunity to explain how they managed their investment operations, but they do not recommend excluding those operations from the consolidation model.

Those constituents most concerned about this issue want consistency with US GAAP. However, US GAAP uses a definition of 'investment companies' that is in securities legislation, not accounting standards. It was also noted that the American Institute of Certified Public Accountants had issued recently a document of well over 200 pages that sought to clarify the US investment company material. This was not considered an example of principles-based standard setting.

The Board noted that the investments of private equity and venture capital funds are often classic subsidiaries, actively managed by the investor. As such, the Board thinks that consolidation, not fair value, is the appropriate accounting treatment. The Board agreed that the forthcoming discussion paper should state this conclusion.

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