ESMA's response to EFRAG on the IASB's ED Investment Entities

11 January 2012

ESMA has considered through its Standing Committee on Corporate Reporting EFRAG's draft response to the IASB's ED Investment Entities. ESMA provided the comments aimed at improving the decision-usefulness of financial statements and the transparency and enforceability of IFRSs.

ESMA is generally supportive of EFRAG's draft response but holds different views in the following areas:

• ESMA believes that the Board should introduce a main principle that the general business model of the parent investment company is to invest in investments for capital appreciation, investment income (such as dividends or interest) or both. For an entity to meet this principle, ESMA believes that its business model must meet all the criteria identified in paragraph 2 of the ED (except criterion 2f as ESMA believes the assessment should happen irrespective of the status of the entity). ESMA agrees with EFRAG to introduce the exit strategy in the criteria;
• ESMA disagrees with EFRAG when it objects the requirement that a parent, which is not an investment entity in itself, to consolidate the controlled entities that it holds through subsidiaries that are investment entities. As management's strategy for the whole group is unlikely to be earning all of its profit through capital appreciation and investment income, the parent company does not fulfil the criteria to apply the exception the consolidation principle. Consequently, the investment entity should be consolidated;
• Whilst ESMA would not be supportive of an overly prescriptive requirement for the format of disclosures, it may be helpful to users of the information to include the proposed schedules (of investments and financial highlights) as a disclosure requirement.

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