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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'.
Overall, EFRAG agrees with the IASB’s proposal for an exception to the consolidation principle because measuring an investment entity’s controlled investments at fair value produces more decision-useful information that meets users’ needs, as it better reflects the entity’s business model. EFRAG believes that having an exit strategy is a key aspect in the business model of an investment entity and should be one of the criteria to identify an investment entity, rather than being described in the application guidance. Furthermore, EFRAG does not believe that it is necessary to amendment IAS 28 and restricts the application of the exception to investment entities only, as the existing fair value option in IAS 28 has not raised any concerns in the past.
EFRAG believes that if application of the investment entity exception at the subsidiary level results in fair value information that is more decision-useful than consolidated information, then such fair value information would also be relevant in the financial statements of the ultimate parent entity. While EFRAG acknowledges the concerns of the IASB and the European Supervisory Authorities (EBA, ESMA and EIOPA) regarding the potential for abuse by permitting such accounting, EFRAG believes this is addressed by strict investment entity criteria to prevent inappropriate use of the exception. Moreover, to the extent that regulators have specific concerns, those would be better addressed as a matter of supervision.