In May 2011, the International Accounting Standards Board (IASB) issued IFRS 10 Consolidated Financial Statements which provides guidance on when investments should be consolidated.
The consolidation principles of International Financial Reporting Standards (IFRSs) have long been a matter of discontent amongst fund managers. This new standard has resulted in various accounting issues, particularly for fund managers.
IFRS 10 must be applied for annual periods beginning on or after 1 January 2013. Early adoption is allowed.
IFRS 10 requires that for a fund manager to consolidate a fund the following criteria must be met:
- The manager has power over the relevant activities of the fund.
- The manager has exposure, or rights to, variable returns from the fund
- There is a link between power and returns.
Fund managers will generally meet the first two criteria as they direct the investment decisions and are exposed to the returns of the fund. Therefore, the analysis of whether fund managers meet the third criterion is crucial.
Link between power and returns
This criterion establishes whether a fund manager is exerting its power in the capacity of a principal or an agent. An agent acts primarily on behalf of other parties. If a fund manager acts as an agent on behalf of the investors, it will not be required to consolidate the fund. If a fund manager acts as a principal, it will be required to consolidate the fund.1
- IFRS 10 provides various indicators to rights to 'kick-out' the fund manager.
- The aggregate economic interest of the fund manager (which includes asset management fees, performance fees, investments in the fund and any other returns). The key measure of aggregate economic interest is the variability of the funds' returns. The variability is effectively the percentage of any incremental performance that would accrue to the fund manager if the fund is performing where performance fees are payable.
For a detailed analysis on the effect of IFRS 10 on a fund manager, please refer to the KPMG publication: "Applying the Consolidation Model to Fund Managers, March 2012".
1. Appendix B to IFRS 10, paragraph B58
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.