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FEE believes that if an investment controlled by an investment entity is held for capital appreciation, investment income or both only, and the investor has a stated exit strategy for the investment or strategies for generating long-term investment income, that investment should be measured at fair value through profit or loss.
FEE believes that the exception to the consolidation principle should be limited to those entities for which measurement at fair value through profit and loss provide more decision useful information than consolidated financial information.
While FEE agrees that clear criteria are needed to identify where it is appropriate to exempt investments from consolidation, FEE would recommend that the IASB could consider a more principle-based definition with a focus on the business model (holding investments solely for capital appreciation, investment income, or both) and the relevance of fair value over consolidation.
The criteria could mainly be developed from paragraph 2(a) (nature of the investment activity) in conjunction with criteria from 2(b) (business purpose), together a more explicit reference to the exit strategy. Criteria 2(c) (unit ownership) and 2(d) (pooling of funds) seem to be less essential and could potentially be eliminated.
On balance, FEE does not support the proposal that the parent of an investment company would need to consolidate the investments that are controlled by an investment entity subsidiary, if it does not qualify itself as an investment company according to the ED.
Once it is established that fair value is the appropriate measurement basis at the investment entity subsidiary level, this accounting should be “rolled up” to the consolidated financial statements of the upper level parent. This would reflect the fact that part of the activities of the upper level parent involves a different business model which is to hold the investments of an investment entity for capital appreciation, investment income or both.
FEE agrees with the concept of having a disclosure objective for investment entities requiring information about the nature and the financial effect of the investment activities. However, the level of detailed narrative may result in excessive disclosures as developed in our detailed response.
FEE agrees with EFRAG that transition requirements proposed in this ED should be consistent with those in IFRS 10 'Consolidated Financial Statements'. FEE is supportive of full retrospective application of the new requirements unless impractical or the costs outweigh the benefits.