On October 31, 2012, the IASB issued amendments to existing guidance to define an "investment entity." The purpose of the amendments is to provide an exception for such entities from the existing IFRS requirement to consolidate certain subsidiaries. Investment entities will instead report all investments at fair value through profit or loss. The amendments also introduce new disclosure requirements for an investment entity's unconsolidated interest in a subsidiary. This In brief article provides an overview of the IASB's amendments. It also includes a summary of significant differences between the IASB's final IFRS guidance and the FASB’s tentative decisions to date in its US GAAP project on investment entities.
On October 31, 2012, the IASB issued amendments to existing guidance to define an “investment entity.” The purpose of the amendments is to provide an exception for such entities from the existing requirement to consolidate certain subsidiaries. Investment entities will instead report all investments at fair value through profit or loss. The amendments also introduce new disclosure requirements for an investment entity's unconsolidated interest in a subsidiary.
Definition of an investment entity
The IASB originally proposed a set of prescribed criteria to qualify as an investment entity, but ultimately decided to provide a principles-based definition. An investment entity is an entity that:
In addition, entities are required to consider whether they have the typical characteristics of an investment entity, such as multiple investments and investors, non-related party investors, and ownership in the form of equity or similar interests. While these additional characteristics are not determinative to the conclusion, an investment entity that lacks these typical characteristics is required to disclose the reasons it concluded it is nevertheless an investment entity.
Investment entities will account for their portfolio investments at fair value, even where they have a significant influence or a controlling financial interest in the investee. However, the final amendments do not allow such exception to consolidation for a non-investment entity parent with a controlling interest in an investment company. Rather, a non-investment entity parent of an investment entity must consolidate all entities it controls, including those controlled through an investment entity.
Both the IASB and FASB have agreed on a principles-based approach to defining investment entities, but there remain significant differences between the final IFRS guidance and the FASB’s tentative decisions to date. The differences largely stem from the IASB's view that the investment entity guidance is a narrow exception to consolidation. Key differences include:
The IASB’s amendments are effective January 1, 2014, with early adoption permitted. Entities are required to apply the amendments retrospectively, subject to certain transition reliefs.
The FASB plans to continue redeliberations of its investment entity project over the next few months. Future topics for discussion include “fund of fund” disclosures for significant investments, changes to the current scope exception for REITs, transition guidance, and effective date. We expect the FASB to issue a final standard in the first half of 2013.
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