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Currently in IFRS 10, investment entities are required to consolidate the investees they control because there is no scope exemption for these types of entities.
In response to the IASB’s request for comments on ED10, many respondents, particularly those from the United States and Canada, have stated that some local GAAPs exempt investment entities from consolidating entities they control. The call for a scope exemption has arisen because these respondents believe that consolidation by the investment entity of the underlying assets and liabilities of the investee's does not provide decision useful information.
In previous IASB outreach activities, users from Europe, US and Canada confirmed that fair value provides the most relevant information. This is because investment entities invest to maximise income or capital gains rather than manage the underlying assets and liabilities of the investee companies controlled by the investment entity.
The IASB has tentatively decided that there should be an exception to consolidation in circumstances where an entity meets the criteria of an investment entity. This means that all entities that meet the criteria of an investment entity must measure the investments that it controls at fair value through profit or loss in accordance with IFRS 9 Financial Instruments.
When thinking about the interaction with IFRS 10, a parent entity firstly assesses control to determine the boundaries of the consolidation group. Then, the parent entity will apply the requirements to determine if it meets the criteria of an investment entity.
It is possible that in certain group structures an investment entity will be controlled by a non-investment company parent entity. It is proposed that where this is the case, then the non-investment entity parent entity shall consolidate all entities it controls, including those entities that are controlled through the investment entity.
There are three tentative decisions in respect of potential amendments to IAS 28:
(a) replace the reference in IAS 28 to ‘venture capital organizations, mutual funds, unit trusts and similar entities including investment linked insurance funds’ with ‘investment entity’;
(b) the measurement election in IAS 28 will be replaced by a measurement exception that will require an investment entity to measure the investments in associates and joint ventures at fair value through profit or loss in accordance with IFRS 9; and
(c) a non-investment entity parent of an investment entity shall retain the fair value accounting applied by the investment entity for its associates and joint ventures.
The IASB issued an exposure draft in August 2011. EFRAG issued a draft comment letter in September 2011. EFRAG agreed with the IASB’s proposal for an exception to the consolidation principle on the basis that the measurement of investees controlled by an investment entity at fair value produces more decision useful information than consolidation, but with some concerns and asking for specific input from constituents on some issues. EFRAG issued its final comment letter on 18 January 2012.
In February and March 2012 the IASB and the FASB will hold round-table discussions on their proposals for investment entities.
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