On The Horizon For IFRS - November 30, 2012

Author:Ms Grant Thornton's Audit Practice Group
Profession:Grant Thornton LLP
 
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Investment entities

Introduction

Recently, the IASB issued Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27), which exempts qualifying investment entities from consolidating particular subsidiaries in accordance with the consolidation provisions in IFRS 10, Consolidated Financial Statements. Instead, an entity that meets the definition of an investment entity under the new guidance is required to measure those subsidiaries at fair value through profit or loss, using the guidance either in IFRS 9, Financial Instruments, or in IAS 39, Financial Instruments: Recognition and Measurement, if it has not yet applied IFRS 9. The amendments also establish new disclosure requirements for investment entities in IFRS 12, Disclosure of Interests in Other Entities, and IAS 27, Separate Financial Statements.

The amendments provide a solution to the long-held view that consolidating the financial statements of an investment entity and its investees does not provide the most useful information for investors. Specifically, the concern is that the reported investment performance of an investment entity is distorted by consolidating the trading activities of a small number of investees in which it holds a controlling interest. Consolidation in such circumstances makes it more difficult for investors to understand what they are most interested in—the value of the entity's investments.

Definition of an investment entity

Under the amendments, an "investment entity" is defined as an entity that meets all of the following criteria:

It obtains funds from one or more investors for the purpose of providing those investors with investment management services. It commits to its investors that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both. It measures and evaluates the performance of substantially all of its investments on a fair value basis. In assessing whether it meets the definition of an investment company, an entity is required to consider whether it has the following characteristics, which are typical of an investment company:

Multiple investments Multiple investors Investors that are not related parties of the entity Ownership interests in the form of equity or similar interests The absence of any of these characteristics does not necessarily preclude an entity from being classified as an investment entity. However, if an entity does not have one or more of the typical characteristics, additional...

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