Friday, August 7, 2015

Determining whether an ENTITY is an INVESTMENT ENTITY (exception to Consolidation)

On 31 October 2012, the IASB published Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27), providing an exception to the consolidation requirements in IFRS 10 for INVESTMENT ENTITIES.

The amendments define an investment entity and introduce an exception to consolidating particular subsidiaries for investment entities. These amendments require a parent that is an investment entity to measure those subsidiaries at FAIR VALUE through Profit or Loss in accordance with IFRS 9 Financial Instruments instead of consolidating those subsidiaries in its consolidated and separate financial statements. In addition, the amendments also introduce new disclosure requirements related to investment entities in IFRS 12 Disclosure of Interests in Other Entities and IAS 27 Separate Financial Statements.

Under IFRS 10 Consolidated Financial Statements, reporting entities were required to consolidate all investee that they control (i.e. all subsidiaries). Preparers and users of financial statements have suggested that consolidating the subsidiaries of investment entities does not result in useful information for investors. Rather, reporting all investments, including investments in subsidiaries, at fair value, provides the most useful and relevant information.

Para.27 of the amendments states that :

A parent shall determine whether it is an INVESTMENT ENTITY. An investment entity is an entity that :

  1. obtains funds from one or more investors for the purpose of providing those investor(s) with investment management services;
  2. commits to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both; and
  3. measures and evaluates the performance of substantially all of its investments on a fair value basis.

Para.28 further states that :

In assessing whether it meets the definition described in paragraph 27, an entity shall consider whether it has the following typical characteristics of an investment entity :

  1. it has more than one investment
  2. it has more than one investor
  3. it has investors that are not related parties of the entity; and
  4. it has ownership interests in the form of equity or similar interests

The absence of any of these typical characteristic does not necessarily disqualify an entity from being classified as an investment entity. An investment entity that does not have all of these typical characteristics provides additional disclosure required by paragraph 9A of IFRS 12 Disclosure of Interests in Other Entities.

In facts and circumstances indicate that there are changes to one or more of the three elements that make up the definition of an investment entity, as described in paragraph 27, or the typical characteristics of an investment entity, as described in paragraph 28, a parent shall reassess whether it is an investment entity.

A parent that either ceases to be an investment entity or become an investment entity shall account for the change in its status PROSPECTIVELY from the date at which the change in status occurred.

An Investment Entity shall not consolidate its subsidiaries. Instead, an investment entity shall measure an investment in a subsidiary at fair value through profit or loss in accordance with IFRS 9 (HRD).

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