Investment entities: applying the consolidation exception, proposed amendments to IFRS 10 and IAS 28

Comments from ACCA to the International Accounting Standards Board (IASB)
September 2014


General comments

ACCA supports the proposed changes, to the extent that they reinforce the IASB’s original intentions and reduce uncertainty. Our specific comments below provide a fuller explanation of this support, and make a practical comment with respect to changes to the wording of IFRS 10 (part 2 of the response to Question 2).

In two respects, we have expressed reservations about the proposals in the ED:

Firstly, a greater number of instances in which consolidated financial statements are not required increases the chance of a conflict with legislation. National or regional law might require consolidated financial statements to be presented in situations where IFRS 10 would not require this, or would preclude it. Whilst preparers would be clear about the approach in this situation (as national legislation over-rides the provisions of IFRS where necessary), the IASB has recently sought to avoid such conflict. In ED/2013/10, it was proposed to permit the use of the equity method in separate financial statements, and national legislative requirements were a factor in this proposal.

Secondly, we acknowledge that the availability of information about an entity’s associate is typically less than for its joint venture, and that this practical matter does have a bearing on feasible accounting treatments. However, we believe that a joint venture situation should be treated consistently with one where there is an associate, as both share the key characteristic of a minority interest. This treatment is both possible if the fair value approach is adopted, and provides a distinction from the treatment of a subsidiary, where there is a majority interest or other form of control.


Specific comments

Question 1 - Exemption from preparing consolidated financial statements. The IASB proposes to amend IFRS 10 to confirm that the exemption from preparing consolidated financial statements set out in paragraph 4(a) of IFRS 10 continues to be available to a parent entity that is a subsidiary of an investment entity, even when the investment entity measures its subsidiaries at fair value in accordance with paragraph 31 of IFRS 10. Do you agree with the proposed amendment? Why or why not?

ACCA welcomes this clarification in both IFRS 10 and IAS 28, both on cost-benefit grounds and because it confirms a similar accounting treatment for both investment entities, and non-investment entities which are, nonetheless, controlled by an investment entity.

In a minority of cases, there is the risk of group entities not being consolidated at any level in the group. This will conflict with national law in a number of jurisdictions, and this is a situation which the IASB needs to take into account.


Question 2 - A subsidiary that provides services that relate to the parent’s investment activities. The IASB proposes to amend IFRS 10 to clarify the limited situations in which paragraph 32 applies. The IASB proposes that the requirement for an investment entity to consolidate a subsidiary, instead of measuring it at fair value, applies only to those subsidiaries that act as an extension of the operations of the investment entity parent, and do not themselves qualify as investment entities. The main purpose of such a subsidiary is to provide support services that relate to the investment entity’s investment activities (which may include providing investment-related services to third parties). Do you agree with the proposed amendment? Why or why not?

ACCA also welcomes the clarification that a subsidiary which primarily provides investment services for or on behalf of its parent, is subject to the requirement to consolidate set out in para 32 of IFRS 10. We agree that this clarification is in accordance with the IASB’s original intentions for the accounting by investment entity groups.

The current proposals, as worded, require consolidation for an entity which is both not an investment entity and primarily provides investment services. Our view is that by definition, a subsidiary which is an investment entity is not one whose main purpose is to provide investment services (and vice versa) – the two types are likely to be mutually exclusive. We recommend that the IASB reconsiders the wording of revised paras 32 and B85E, as it will be helpful to make this distinction clearer.


Question 3 - Application of the equity method by a non-investment entity investor to an investment entity investee. The IASB proposes to amend IAS 28 to: require a non-investment entity investor to retain, when applying the equity method, the fair value measurement applied by an investment entity associate to its interests in subsidiaries; and clarify that a non-investment entity investor that is a joint venturer in a joint venture that is an investment entity cannot, when applying the equity method, retain the fair value measurement applied by the investment entity joint venture to its interests in subsidiaries. Do you agree with the proposed amendments? Why or why not?

ACCA supports the amendment with respect to an associate (proposal (a)) above, on the grounds of practicality as explained by the IASB in the ED.

Notwithstanding the greater access to information which exists in a joint venture situation, we recommend that the IASB reconsiders the differing treatment proposed for a joint venture stake ((b) above). This results in accounting treatments which are not the same for the two types of interest which, however, share the characteristic of conferring less than the control of the investee. The proposed treatment for a joint venture investment is more in line with that for investment entity subsidiaries. We would question this outcome, as the requirements for the non-investment entity parents of investment entities were set in order, to some extent, to avoid an accounting  manipulation specifically with respect to a parent-subsidiary situation (para BC280 of IFRS 10).