IFRS News Special Edition (December 2012)

Many commentators have long believed that consolidating the financial statements of an investment entity and its investees does not provide the most useful information. Their concern is that consolidation does not reflect the investment business model and makes it harder for investors to understand what they are most interested in – the value of the entity's investments.

We share these concerns and therefore welcome these Amendments. Although consolidation normally provides the most relevant and useful information for a group, we believe there is a class of investment entity for which fair value accounting is significantly more useful. The IASB has worked hard to identify this class appropriately – aiming for a robust definition that still allows some flexibility and scope for reasonable judgement. The timing of publication is significant given that IFRS 10 'Consolidated Financial Statements' is effective from 1 January 2013. The consolidation exception will have a huge impact on affected entities and, if adopted early, could spare them from much time and effort on reassessing control conclusions under IFRS 10.

A consolidation exception for investment Entities

The IASB has published 'Investment Entities – Amendments to IFRS 10, IFRS 12 and IAS 27' (the Amendments). The Amendments introduce an exception for investment entities to the well-established principle that a parent entity must consolidate all its subsidiaries. The Amendments:

define the term 'investment entity' and provide supporting Guidance require investment entities to measure investments in the form of controlling interests in another entity (in other words, subsidiaries) at fair value through profit or loss in accordance with IFRS 9 'Financial Instruments' (or IAS 39 'Financial Instruments: Recognition and Measurement') instead of consolidating them specify disclosure requirements for entities that apply the exception. This special edition of IFRS News explains the key features of the Amendments and provides practical insights into their application and impact.

A consolidation exception for investment entities

Many commentators have long held the view that consolidating the financial statements of an investment entity and its investees does not provide the most useful information. Consolidation makes it more difficult for investors to understand what they are most interested in – the value of the entity's investments.

The IASB has been influenced by these arguments. On 31 October 2012 it published 'Investment Entities – Amendments to IFRS 10, IFRS 12 and IAS 27' (the Amendments). The Amendments define an investment entity and provide detailed application guidance on that definition. Entities that meet the definition are required to measure investments that are controlling interests in another entity (in other words, subsidiaries) at fair value through profit or loss instead of consolidating them. The Amendments also introduce new disclosure requirements for investment entities.

The...