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Consolidation - Investment Entities


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 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 held round-table discussions on their proposals for investment entities in Canada, UK, USA and Malaysia. The boards started their joint redeliberations on the proposals in their respective EDs in April 2012.

In October 2012, the IASB issued Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27). The Amendments define an investment entity and introduce an exception to consolidation of particular subsidiaries of investment entities. The amendments require an investment entity to measure those subsidiaries at fair value through profit or loss in accordance with IFRS 9 Financial Instruments in its consolidated and separate financial statements. The amendments also introduce new disclosure requirements for investment entities in IFRS 12 and IAS 27.

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.

The exception to consolidation would not apply in the following two cases:

(a) an investment entity's subsidiary provides services that relate to the investment entity's activities;

(b) a parent of an investment entity, that is itself not an investment entity, is still required to consolidate all its investments in subsidiaries, meaning that consolidation is still required but at a higher level. This is sometimes referred to as the prohibition of the "roll-up".

On 18 January 2013, EFRAG completed its due process regarding Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) and submitted its Endorsement Advice Letter and Effects Study Report to the European Commission. EFRAG's concluded that the Amendments meet the technical requirements of endorsement. EFRAG has also conlcuded that the benefits to be derived from implementing the Amendments are likely to outweigh the costs involved.

On 21 November 2013, the Amendments were published in the Official Journal.

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