Issued October 2012
Investment Entities creates an exception to consolidation for certain subsidiaries of investment entities, which is defined. An investment entity is required to measure those subsidiaries at fair value through profit and loss and must provide related disclosures.
The amendments are effective for annual periods beginning on or after January 1, 2014 and must be applied retrospectively subject to relief in certain situations. Early application is permitted.
An investment entity is defined as an entity that:
- obtain funds from one or more investors 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.
The amended guidance only applies to investees that are controlled by the investment entity. Any non-controlled investments are still accounted for in accordance with the relevant standards.
Assessing performance of investments on a fair value basis is described as “an essential element” of the definition. To satisfy this aspect would require the entity to elect, where possible, fair value accounting for other investments. Those elections would cover investment property (IAS 40), investments in associates and joint ventures (IAS 28) and financial assets (IFRS 9).
An investment entity typically has the following characteristics:
- more than one investment
- more than one investor, that are not related parties of the entity
- ownership interests in the form of equity or similar interests.
Guidance has been added to Appendix B of IFRS 10 to describe the application of the definition and characteristics of investment entities in more detail. The guidance describes in more detail the investment business model.
The absence of one or more of these characteristics does not prevent an entity from concluding that it is an investment entity; the approach is based on the nature of the entity’s business and takes into account all the relevant facts and circumstances. This judgmental approach is similar to that taken in IFRS 9 for the classification of financial assets: the business the entity is in and how are the assets managed.
An investment entity does not consolidate its subsidiaries or apply IFRS 3 when it obtains control of another entity, but measures its subsidiaries at fair value through profit and loss in accordance with IFRS 9 or IAS 39.
If investment services are provided by a separate subsidiary of the investment entity parent, that subsidiary is consolidated in accordance with IFRS 10. If an investment entity has a non-investment entity parent that parent must still consolidate all its subsidiaries, including those it controls through investment entities.
When an investment entity ceases to meet the definition of an investment entity it accounts for its subsidiaries as acquisitions on the date of change. The fair value on that date is deemed to be the consideration transferred.
When an entity becomes an investment entity, it accounts for the subsidiaries as though there was a loss of control on that date and measures them at fair value prospectively.
Disclosure is required of the significant judgments and assumptions in making the determination that an entity is an investment entity, including any departure from the typical characteristics of such an entity.
Detailed disclosure is required for each non-consolidated subsidiaries and also of the restrictions, commitments and other arrangements between the non-consolidated subsidiaries and the investment entity parent.