In August 2011, the IASB issued the Exposure Draft 'Investment Entities' (the ED). The ED provides criteria and guidance to determine whether an entity is an investment entity. In accordance with the ED, investment entities are required to measure their investments in controlled entities at fair value through profit or loss in accordance with IFRS 9 Financial 'Instruments'.
EFRAG acknowledges that the accounting for investment entities has been a significant concern expressed on several occasions by the private equity and venture capital industry. EFRAG therefore supports the IASB’s efforts to address these concerns.
Overall, EFRAG agrees 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. However, EFRAG has some concerns:
(a) EFRAG is not in favour of requiring a parent, which is not an investment entity itself, to consolidate the controlled entities that it holds through subsidiaries that are investment entities.
(b) Whilst EFRAG agrees with the criteria for determining whether an entity is an investment entity, EFRAG believes that the existence of an exit strategy should be placed more prominently; and
(c) EFRAG would encourage the IASB to carry out an impact assessment to understand better the practical implications of any amendments to IAS 28.
The Draft Comment Letter asks constituents to comment on whether the criteria for identifying investments entities are appropriate, and whether the exception from the requirement to consolidate should be applied at an entity level or at the level of individual investments.
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© EFRAG - European Financial Reporting Advisory Group
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