Subsequent to IFRS 10 Consolidated Financial Statements being issued in May 2011, the IASB has addressed the accounting implications of the new standard for investment entities. These are entities where, because of the nature of their investments, information about the fair value of an investment in a subsidiary may be more relevant than consolidation of its individual assets and liabilities. In particular the IASB has considered the circumstances where relief from consolidation might be appropriate. As a consequence an amendment to IFRS 10 was issued in October 2012. The amendment will exempt many investment funds and similar entities from the requirement to prepare consolidated accounts.
The amendment defines an investment entity as one that:
- obtains funds from one or more investors for the purpose of providing those investors with investment management services
- commits to its investors that its business purpose is to invest funds solely for returns from capital appreciation, investment income or both
- measures and evaluates the performance of substantially all of its investments on a fair value basis.
An entity meeting the definition must also have regard to certain characteristics as set out below. While failure to meet one or more of the characteristics does not preclude classification as an investment entity, the amendment does indicate that additional judgement may be required.
- Multiple investments
- Multiple investors
- Investors that are not related to the parent entity or the investment manager
- Ownership interests in the form of equity or partnership interests
Under the amendment an investment entity is required to account for its investments at fair value through profit or loss (FVTPL) and any investments in associates and joint ventures must also be accounted for at FVTPL if the entity is to qualify as an investment entity.
The amendment, which applies for periods beginning on or after 1 January 2014, can be applied early and is retrospective.
Smith & Williamson commentary
The amendment addresses many of the concerns raised by investment entities in response to the original standard, but in some circumstances subsidiaries will still require consolidation. Non-investment entities are not eligible for relief from consolidation even where they have subsidiaries that are investment entities. Consequently, a non-investment parent will have to consolidate all subsidiaries including those controlled through a subsidiary meeting the definition of investment entity.
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