Sunday, September 04, 2011

IASB Proposes to Except Investment Pools from Consolidated Financial Statements

In a joint project with FASB, the International Accounting Standards Board (IASB) proposes to define investment entities as a separate type of entity that would be exempt from the accounting requirements in IFRS 10 Consolidated Financial Statements. Investment entities are commonly understood to be entities that pool investments from a wide range of investors for investment purposes only. Currently, IFRS 10 requires consolidation if an investment pool controls an entity it is investing in. However, when developing IFRS 10, investors commented that this would not provide them with the information they need to assess the value of their investments.

Thus, the IASB proposes criteria that would have to be met by an investment pool in order to qualify as an investment entity. These entities would be exempt from the consolidation requirements and instead would be required to account for all their investments at fair value through profit or loss. The exposure draft also includes disclosure requirements about the nature and type of these investments

In order to be defined as an investment entity under IFRS 10, an investment pool’s only substantive activities must be investing in multiple investments for capital appreciation,investment income or both. To meet this requirement, the investment pool should have no substantive activities other than its investing activities and it should not have any significant assets or liabilities other than those relating to investing activities. If an entity provides services relating to investment activities, such as investment advisory services, it can still meet the substantive activities requirement if those services relate only to its own investment activities.

When considering the criterion of pooled funds, the Board noted that a typical investment entity would have significant external investors who are not involved in the management of the entity. The draft therefore requires an investment entity to have unrelated investors who collectively hold significant ownership interests in the entity. Thus, on the basis of this criterion, a fund with a single investor unrelated to the fund manager, such as a sovereign wealth fund or separate financial statements of an insurance company, would not qualify as an investment entity.

The draft proposes that the investment pool should measure its investments in entities that it controls at fair value through profit or loss in accordance with IFRS 9. It also proposes amendments to IAS 28, requiring an investment entity to measure investments in associates and joint ventures at fair value through profit or loss in accordance with IFRS 9.

This project is being undertaken jointly by the IASB and FASB and both boards’ proposals are broadly aligned. However, the FASB is considering proposing that the exemption would extend to cases in which the investment pool is owned by a larger group that is not itself an investment entity. The FASB will publish its exposure draft in due course, but will align its comment period with that of the IASB, which is January 5, 2012. If adopted, the proposals would be integrated into IFRS 10.