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Practical guide to IFRSInvestment entities: Exception to consolidation

December 2012

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Practical guide to IFRSInvestment entities: Exception to consolidation

Practical guide to IFRS 10Investment entities: Exception to consolidation

Practical guide to IFRS 10

Investment entities: Exception to consolidation PwC Contents

Contents

At a glance 1

Key features of the guidance 1

Investment entities: Exception to consolidation 3

Background 3

Definition 4

Determining whether an entity is an investment entity 4

Business purpose 5

Fair value measurement 14

Typical characteristics of an investment entity 14

More than one investment 14

More than one investor 17

Unrelated investors 19

Ownership interests 20

Separate financial statements 21

Reassessment of investment entity status 21

Accounting for a change in status – Becoming or ceasing to be an investmententity 22

Disclosure 23

Date of application and transition requirements 24

Appendix A 26


Investment entities: Exception to consolidation PwC 1

Many funds and similar entities will be exemptedfrom consolidating controlled investees underamendments to IFRS 10, ‘Consolidated financialstatements’. This is a result of the IASB issuingamendments to IFRS 10, IFRS 12, ‘Disclosure ofinterests in other entities’ and IAS 27, ‘Separatefinancial statements’, on 31 October 2012. Theseamendments will particularly benefit funds, as thosethat qualify will be able to fair value controlledinvestments, rather than having to consolidate them.

The guidance applies to an ‘investment entity’. Theamendment to IFRS 10 defines an investment entityand introduces an exception to consolidation. Theamendments to IFRS 12 introduce disclosures that aninvestment entity needs to make.

The amendments apply for annual periods beginningon or after 1 January 2014; earlier applicationis permitted.

Key features of the guidanceDefinition of an investment entityFirst you will need to assess whether your entitymeets the investment entity definition.

“An investment entity is an entity that: obtains funds from one or more investors for the

purpose of providing those investor(s) withinvestment management services;

commits to its investor(s) that its businesspurpose is to invest funds solely for returns fromcapital appreciation, investment income orboth; and

measures and evaluates the performance ofsubstantially all of its investments on a fairvalue basis.”

You will also need to consider a set of typicalcharacteristics. These, combined with the definition,are intended to allow for an appropriate balancebetween creating a clear scope and allowingjudgement in assessing whether your entity is aninvestment entity. The characteristics are: holding more than one investment; having more than one investor; having investors that are not your entity’s related

parties; and having ownership interests in the form of equity

or similar interests.

The absence of one or more of these characteristicsdoes not prevent your entity from qualifying as aninvestment entity but you will need to determine whyit is an investment entity even though it does not meetat least one of the typical characteristics; and you willneed to give disclosures.

Your entity will not be disqualified from being aninvestment entity where it also carries out any of thefollowing activities: Providing investment-related services to third

parties and to its investors, evenwhen substantial.

Providing management services and financialsupport to its investees, but only when these donot represent a separate substantial businessactivity and are carried out with the objective ofmaximising the investment return from theentity’s investees.

Accounting by an investment entityInstead of consolidating the entity’s subsidiaries, youwill account for them at fair value through profit orloss. The only exception is for subsidiaries providingservices that are related to the entity’s investmentactivity, which should be consolidated.

Accounting by a non-investmententity parent for investments of aninvestment entity subsidiaryYour business might be an investment entity but itsparent might not be. A non-investment entity parentis required to consolidate line by line all entities itcontrols including those controlled through aninvestment entity. For example, an investment entityfund is controlled by an insurance group. Theinsurance group will have to consolidate line by linethe subsidiaries of the fund in the insurance group’sfinancial statements, even though the subsidiaries willbe fair valued in the fund’s own financial statements.What is known as the fair value ‘roll-up’ is not allowedto be applied in a non-investment parent entity.

DisclosuresWhere your entity qualifies as an investment entity,required disclosures include the following: significant judgements and assumptions made in

determining that the entity meets the definitionof an investment entity;

At a glance



reasons for concluding that the entity is aninvestment entity, even though it doesn’t haveone or more of the typical characteristics;

information on each unconsolidated subsidiary(name, country of incorporation, proportion ofownership interest held);

restrictions on unconsolidated subsidiariestransferring funds to the investment entity;

financial or other support provided tounconsolidated subsidiaries during the year,where there wasn no contractual obligation to doso; and

information about any ‘structured entities’ thatthe entity controls (for example, any contractualarrangements to provide financial orother support).

Transition guidanceThe amendments are generally applied retrospectivelywhen your entity meets the definition of aninvestment entity at the date of initial application;this applies irrespective of whether the entity wouldhave met the definition of an investment entity inprior reporting periods. Any difference at thebeginning of the comparative period between:

the previous carrying amount of the assets,liabilities and non-controlling interest of acontrolled investee; and

the recognised amount of the investor’s interestin the investee (that is, it fair value), is adjustedto equity at the beginning of the immediatelypreceding period.



BackgroundThe IASB has amended IFRS 10 so that an‘investment entity’ fair values its subsidiaries insteadof consolidating them. The Board believes that a classof entity (an investment entity) uses a differentbusiness model to most other entities. It manages allof its investments on a fair value basis, whether theyare simple investments, associates or controlled. Itprovides fair value information to its users, and thatfair value information is more useful for decision-making than consolidated information. The Boardfurther noted that preparing consolidated financialstatements for such entities could hinder users’ abilityto assess their financial position and results; this isbecause consolidated financial statements emphasisethe financial position, operations and cash flowposition of their investees, rather than those of theentities themselves. Consolidation also hinderscomparability within the financial statements; someof the items consolidated might be measured athistorical cost, whilst other non-controlling interestsmight be carried at fair value.

This makes assessment of the performance of aninvestment entity difficult; and it does not reflect theway in which the entity’s business is managed.

Such entities are investment entities and are usuallyinvestment funds. The IASB decided that theseentities should fair value their investments (includinginvestments in subsidiaries).

Accounting by an investment entityIFRS 10 requires an entity that is a parent to presentconsolidated financial statements. The amendmentprovides a limited scope exception to parents that are‘investment entities’. If your entity is an investmententity under the standard, it is exempt fromconsolidating underlying investees that it controls;instead, it is required to account for these subsidiariesat fair value through profit or loss under IFRS 9,‘Financial instruments’. [IFRS 10 para 31].

PwC observation

Many funds and similar entities do not have any

subsidiaries. For example, a mutual fund might have

many equity investments in other entities that are

each a small, non-controlling holding in those

entities. The exception in IFRS 10 only applies to a

parent that is an investment entity. Similarly, the

new disclosure requirements in IFRS 12 apply only to

a parent that is an investment entity and has

unconsolidated subsidiaries. So, you do not need to

make an assessment of whether your entity is an

investment entity where it does not control any

subsidiaries. Similarly, even if it is an investment

entity but does not have subsidiaries, the

amendments to IAS 27 and IFRS 12 have

no consequences.

Notwithstanding the exception from consolidation inthe amendment, you are required to consolidate anysubsidiaries that provide services relating to yourentity’s investment activities. [IFRS 10 para 32]. Thisincludes investment management services,investment advisory services and administrativesupport. Such services might form a substantial partof your business and might be provided to thirdparties as well; this will not disqualify your entityfrom being an investment entity.[IFRS 10 para B85C].

Accounting by the parent of aninvestment entityThe exception from consolidation extends to theconsolidated financial statements prepared by yourinvestment entity’s parent only where the parentqualifies as an investment entity itself. If your parententity does not qualify as an investment entity, it willbe required to consolidate all entities that it controls(including all underlying investees controlled throughyour investment entity and any other investmententities) under IFRS 10.

Investment entities: Exceptionto consolidation



Facts

Parent is an insurance company, writing insurancebusiness. Parent does not qualify as an investmententity under IFRS 10 because, amongst other things,its purpose is not to invest funds solely for capitalappreciation and/or investment income. It sets up asubsidiary, ‘IE’, which manages funds that back someof Parent’s insurance liabilities. Some of IE’s investeesare controlled private equity investments. IE qualifiesas an investment entity under the criteria set out in theamendment to the standard and explained below.

Accounting treatment

In IE’s own separate and/or consolidated financial statements, IE measures its controlled investees at fair valuethrough profit or loss. But Parent’s consolidated financial statements will consolidate all of its controlledinvestees, including IE and IE’s investees.

DefinitionThe standard defines an investment entity as, “anentity that: obtains funds from one or more investors for the

purpose of providing those investor(s) withinvestment management services;

commits to its investor(s) that its businesspurpose is to invest funds solely for returns fromcapital appreciation, investment income orboth; and

measures and evaluates the performance ofsubstantially all of its investments on a fairvalue basis.”

[IFRS 10 para 27].

For your entity to qualify as an investment entity youmust meet the above definition.You must alsoconsider the following typical characteristics of aninvestment entity: holding more than one investment; having more than one investor; having investors that are not your entity’s related

parties; and having ownership interests in the form of equity

or similar interests.[IFRS 10 para 28].

The above typical characteristics are indicative andsupplement the definition to allow the use ofjudgement in assessing whether your entity qualifiesas an investment entity. You will be required to makeappropriate disclosures in your financial statementsto explain why your entity meets the definition of aninvestment entity if (in the absence of one or more ofthe above typical characteristics) you conclude thatyour entity is nevertheless an investment entity. It ishighly unlikely that your entity will meet thedefinition of an investment entity where it has none of

the typical characteristics; but it might be possible.[IFRS 10 para BC234].

Determining whether an entity isan investment entityThe above definition and typical characteristicsrequire you to consider all the facts and circumstanceswhen assessing whether your entity is an investmententity including its purpose and design. [IFRS 10B85A]. The definition has three key elements: investment management services; business purpose; and fair value measurement.

The amendment does not provide detailed guidanceon the first element of the definition; but it does notethat provision of investment management servicesdifferentiates investment entities from other entities.[IFRS 10 para BC237].

The amendment provides guidance around the secondand third elements of the definition: business purposeand fair value measurement.

Parent (non-IE)

Investmententity (IE)

IE’s investees

Consolidates IE andits underlyinginvestees

Carries its investeesat fair value throughprofit or loss

Example



Business purposeThe purpose of your entity’s business should be toobtain funds from its investor or investors, and toinvest them solely to obtain returns from capitalappreciation and/or investment income. Its businesspurpose might be evidenced in:

documents (such as its offering memorandum,publications and other corporate or partnershipdocuments); and

the way it presents itself to other parties (forexample, to potential investors orpotential investees).

So, if the entity states to its investors that it is makingmedium-term investment for capital appreciation,this will be consistent with the business purpose of aninvestment entity. But, if the entity presents itsinvestment objective as jointly developing, producingor marketing products with its investees, its businesspurpose would appear to be inconsistent with that ofan investment entity; this is because it suggests thatits purpose includes earning returns fromdevelopment, production or marketing activity.[IFRS 10 para B85B].

Part of your entity’s business purpose might be toprovide investment-related services (includinginvestment advisory services, investmentmanagement, and investment support andadministrative services) either directly or through asubsidiary. These services could be provided toinvestors and/or third parties. Participating in suchinvestment-related services does not disqualify yourentity from being an investment entity, even if theseservices form a substantial part of its business; this isbecause such services are an extension of itsoperations. [IFRS 10 paras B85C, BC240].

But , if such services are provided by one of yourinvestment entity’s subsidiaries, you will be requiredto consolidate the subsidiary. [IFRS 10 para 32].

PwC observation

In many cases, entities will provide little or no

investment management, consultancy or other

services but they will have significant investing

activities (for example mutual funds). In other cases,

entities might provide significant investment

management, consultancy or other services with

little or no investing activities of their own (for

example asset management companies). In either of

these cases, it might be clear that the entity is an

investment entity (the mutual fund), or is not an

investment entity (the asset manager). But, for

business models that include both investing activities

and providing investment related services,

judgement is likely to be required to determine

whether or not the entity is an investment entity. The

judgement applied could be so significant that an

entity should describe it in its critical estimates

and judgements.

For example, a private equity firm that obtains funds

from its investors, committing to provide them with

investment management services in order to invest

for capital appreciation and/ or investment income,

might be an investment entity. This would be the case

even though a significant portion of its activities

includes providing sub-advisory and portfolio

management services to third parties. But, the entity

should consider all relevant factors, not only the mix

of services and investing activity. Factors that are

likely to indicate that the entity is not an investment

entity are: earning revenue from providing

substantial management services or strategic advice

to investees; not measuring and evaluating all

investments at fair value; or holding investments

with no defined exit strategies. Careful consideration

of all relevant facts and circumstances will be

necessary to determine the appropriate accounting

for the entity to apply.



Participating in the following investment relatedactivities (either directly or through one of yoursubsidiaries) does not disqualify your entity frombeing an investment entity; this is because theseactivities can be seen as being consistent with theentity’s overall purpose of investing for capital and/orincome. But, these activities need to be undertaken tomaximise investment returns (capital appreciationand/ or investment income) from the entity’sinvestees; and they must not represent a separatesubstantial business activity or a separate substantialsource of income. These permitted activities are: providing management services and strategic

advice to an investee; and providing financial support(such as a loan,

capital commitment or guarantee) to an investee.[IFRS 10 para B85D].

A subsidiary of an investment entity that providesthese services should be consolidated by theinvestment entity. [IFRS 10 para B85E].

PwC observation

It might not always be apparent whether a

subsidiary of an investment entity is providing

investment related services (and should be

consolidated) or is not providing such services (and

should be measured at fair value through profit or

loss). This assessment could be complicated by some

apparent overlap between paragraph 27(a)

(definition of an investment entity) and paragraph

32 (definition of entities that should be consolidated

by an investment entity) of IFRS 10.

The first element of the investment entity definition is

that an entity obtains funds from investor(s) in order

to provide them with ‘investment management

services’. So, it might be argued that for a subsidiary

of an investment entity to qualify as an investment

entity itself, it must be providing investment

management services. This could imply that all

investment entity subsidiaries of investment entity

parents should be consolidated by those parents.

We do not believe that the IASB intended all

investment entity subsidiaries of an investment

entity parent to be consolidated. Otherwise, the

amendment would have been clear that subsidiaries

falling into paragraph 32 of IFRS 10 (providing

investment related services) included all investment

entity subsidiaries. Paragraph BC272 seems to

confirm that investment entity subsidiaries generally

should be measured at fair value by investment

entity parents.

Our view is that the only investment entity

subsidiaries that should be consolidated by an

investment entity parent are those which have a

separate substantial business activity of providing

investment-related services (such as those described

in paras 32 and B85C-E).

It might be unusual for an investment entity

subsidiary to provide such services as a separate

substantial activity. For example, a master fund that

is controlled by a feeder fund, where the master

fund's substantive activities are investing and

managing the feeder’s funds, is not providing

investment related services. So it should be fair

valued in the feeder funds financial statements.



PwC observation

Some funds provide management services and financial support to their investees. Such activities do not form

a substantial business activity carried out by the fund and income from such activities does not form a

substantial source of their income. The purpose is to maximise investment return from the underlying

investees. Where this is the case, such funds will not be disqualified as investment entities.

Fund(limited lifeof 12 years)

Asset manager Employees40 limited partners (unrelated)LPs commit €2,500 in capital

Holds controlling or significant interestin entities.

Co-investment LPGP and manager of the fund(directs relevant activities ofthe fund and is responsible forselection, management and saleof portfolio)

LPs entitled to proportionateshare of net asset of the fund

Example – Private equity fund providing guarantee or funding support

Facts

Two years ago, an asset manager (AM) set up a fund as a limited partnership with 40 limited partners (LPs) anda limited life of 12 years. The LPs are not related; they commit to provide €2,500m. The AM (as a co-investmentlimited partner) commits an additional €25m, which are its own funds or funds of its employees.

The investment objective of the partnership (as set out in the limited partnership agreement) is as follows: toinvest directly in entities in order to acquire a controlling or significant share; and to exit these at a later stagethrough a trade sale or an IPO process (a ‘buy-out fund’) between the eighth and twelfth years of the fund’soperation, with the aim of generating at least a preferred return rate (the hurdle rate) of 10%.

The AM (who is the general partner of the fund) directs the relevant activities of the partnership; these include:

The appointment of an AM representative to the board of directors of the underlying investee entities.

Providing strategic and economic advice to the investees through separate service agreements.

Providing and arranging financing and (where necessary) financial guarantees in order to assist investees inexecuting their strategic plans.

Evaluating and influencing the underlying policies, procedures and key management of the investments.



The AM considers these activities to be necessary to maximise the overall value of the underlying investees. TheAM is also responsible for the selection, management and sale of the fund’s investment portfolio.

The AM is responsible for providing a quarterly individual capital statement for each LP, detailing the fair valueof each investment; and the partnership accounts for all its investees on a fair value basis.

Each LP interest is entitled to a share of disposal proceeds or net asset values on a winding up of the fund. Thegeneral partner (that is, the AM) is entitled to management fees and a profit share of capital gains above the10% hurdle rate. The partnership has no equity.

Is the fund an investment entity, in view of the activities that it performs?

Conclusion

Judgement is required to conclude whether the fund is an investment entity.

The fund meets the first and third parts of the definition of an investment entity:

It obtains funds from more than one LP to make investments and to provide them with investmentmanagement services.

It measures and evaluates the performance of its investments on a fair value basis.

The second part of the definition is less clearly satisfied. The fund makes each investment with the objective ofgenerating capital return and investment income. It does not intend to hold any of its investments indefinitely;this is because it has a limited life and a defined exit strategy for its investees. But it carries out other activitiesand its business purpose requires further consideration.

The fund also displays all four typical characteristics:

it holds more than one investment;

it has more than one investor;

investors in the fund are unrelated to the reporting entity; and

ownership interests in the fund are in the form of partnership interests that entitle partners to a share ofnet assets.

Regarding business purpose, the fund is involved in providing other investment related activities, these include:

Providing financial support to the underlying investee, including providing guarantees.

Providing strategic and economic direction to the underlying investments.

These activities are consistent with the business purpose of an investment entity; and they are permitted so longas they are undertaken to maximise investment returns (capital appreciation and/ or investment income) fromthe investees. But they should not represent a separate substantial business activity or source of income.Judgement is required to make this assessment.

Exit StrategyOne of the ways your entity’s business purpose will beevident is through having an exit strategy for itsinvestments, specifically documenting how it plans torealise capital appreciation on substantially all of itsequity and non-financial investments. The exitstrategy should clearly document a substantivetimeframe for exiting the investments. This does notneed to be detailed for each investment: strategiescould be identified by types or portfolios ofinvestments held. [IFRS 10 para B85F]. The absenceof such a strategy indicates an intention to holdinvestments indefinitely.

Similarly, if your entity holds any debt investmentsthat are perpetual, it should have identified an exit

strategy for such debt investments. [IFRS 10 paraB85F]. Without an exit plan, the entity’s intentioncould be to hold such debt securities indefinitely.

Holding dated debt instruments to maturity is seen asa valid exit strategy; this is because there is nopossibility of holding dated debt investmentsindefinitely. [IFRS 10 para BC245].



PwC observation

A business purpose of investing for capital

appreciation and/or income is not consistent with an

objective of holding investments indefinitely. Most

non-investment entities do not plan to sell, list or

otherwise dispose of most of their subsidiaries within

a particular timeframe. A fund, on the other hand,

will usually have an exit strategy. An entity should

have exit strategies in order to demonstrate a

business purpose consistent with being an

investment entity.

The amendment gives the following examples ofpotential exit strategies for different typesof investment: Exit strategies for private equity securities can

include an initial public offering, a privateplacement, a trade sale of a business,distributions (to investors) of ownership interestsin investees and sales of assets (including the saleof an investee’s assets followed by a liquidation ofthe investee, such as when the fund is a limitedlife fund).

If your entity has investments in traded equityinvestments, exit strategies might include sellingthe investment in a private placement or in apublic market.

An exit strategy for real estate investments mightbe sale through specialised property dealers orthrough the open market.

[IFRS 10 para B85G].

Example

A fund holds investments in both equity securitiesand fixed-maturity debt securities. The statedobjective of the fund is to provide investmentmanagement services to its investors, and investfunds received from investors solely for returns fromcapital appreciation and/or investment income.Assume that the fund meets all of the typicalcharacteristics listed in IFRS 10. The fund’s strategyfor holding debt instruments is to manage its liquidityrisk and to mitigate the risk of holding morevolatile investments.

The fund has a documented exit strategy forsubstantially all of its equity investments; but it hasno documented exit strategy for its debt investments.

The absence of a documented exit strategy for debtinvestments does not disqualify the fund from beingan investment entity, and it does not contradict itsbusiness purpose. The debt instruments have a fixedmaturity, so they cannot be held indefinitely.

Exit mechanisms that have been put in place only fordefault events (such as breach of contract or non-performance) are not considered exit strategies forthe purpose of the investment entity assessment.[IFRS 10 para B85F].

PwC observation

Exit strategies will often be evident from a fund

prospectus or an entity’s investment management

agreement. For example, a limited life fund by

definition has exit strategies for its investments. A

fund that instructs its manager to turn over its equity

investments at least every five years has an

exit strategy.

But an entity that is set up for long-term capital

growth through manufacturing and selling products

in a particular market - and which has no explicit

plans to dispose of any of its equity investments -

might have more difficulty determining that it has

exit strategies for its investments. Such an entity

might in fact, be more like a conglomerate and might

not have a business purpose of investing for capital

appreciation and/or investment income.

Your entity might meet its business objective throughholding some investments in another entity for legal,regulatory, tax or similar business reasons. You mightnot have identified an exit strategy for suchinvestments. But, if the entity that you have investedin has an exit strategy for its investments, your entitywill likely qualify as an investment entity. This willoften be the case in master-feeder structures. A feederfund invests in a master fund and does not have aplan to exit the master fund. But, the master fund willmake investments and provided there are exitstrategies for those investments, the feeder fund willnot be disqualified from being an investment entity.



Example – A master-feeder structure (based on IFRS 10 para IE12, example 4)

An entity, master fund ‘MF1’, is formed in 20X1 with a 10-year life. The equity of MF1 is held by two relatedfeeder funds. The feeder funds are established in connection with each other to meet legal, regulatory, tax orsimilar requirements.

The feeder funds are capitalised with a 1% investment from the general partner and 99% from equity investorsthat are unrelated to the general partner (with no party holding a controlling financial interest). The generalpartner of both FFD (a domestic feeder) and FFO (an offshore feeder) is the manager of MF1, FFD and FFO.

GP 1%Multipleinvestors

99%GP 1%

Multipleinvestors

99%

FFD(Domestic

Feeder fund)

FFO(Off shore

Feeder fund)

MF 1(Master fund)

Portfolio ofinvestments

Facts

The purpose of MF1 is to hold a portfolio of investments in order to generate capital appreciation andinvestment income (such as dividends, interest or rental income). The investment objective communicated toinvestors is that the sole purpose of the master-feeder structure is to provide investment opportunities forinvestors to invest in a large pool of assets. MF1 has identified and documented exit strategies for the equity andnonfinancial investments that it holds. MF1 also holds a portfolio of dated debt investments: some of these willbe held until maturity and others will be traded. MF1 has not identified which specific investments will be heldand which will be traded. MF1 measures and evaluates substantially all of its investments (including its debtinvestments) on a fair value basis. Also, investors receive periodic financial information, on a fair value basis,from the respective feeder funds, FFD and FFO.

Are MF1, FFD and FFO investment entities?

Conclusion

MF1 and the feeder funds FFD and FFO each meet the definition of an investment entity. The followingconditions exist:

MF1 and the feeder funds FFD and FFO have obtained funds for the purpose of providing investors withinvestment management services.

The master-feeder structure’s business purpose (which was communicated directly to investors of thefeeder funds) is investing solely for capital appreciation and investment income and MF1 has identified anddocumented potential exit strategies for its equity and non-financial investments.



Although FFD and FFO do not have an exit strategy for their interests in MF1, they can be considered tohave an exit strategy for their investments; this is because MF1 was formed in connection with the feederfunds and holds investments on their behalf.

The investments held by MF1 are measured and evaluated on a fair value basis and information about theinvestments made by MF1 is given to investors on a fair value basis through the feeder funds.

MF1 and the feeder funds were formed in connection with each other for legal, regulatory, tax or similarrequirements. When considered together, MF1, FFD and FFO display the following typical characteristics of aninvestment entity:

Although the feeder funds each hold a single investment in MF1, they could be considered indirectly to holdmore than one investment; this is because MF1 holds a portfolio of investments.

Although MF1 is 100% owned by the two feeder funds, the feeder funds FFD and FFO are funded by manyinvestors who are unrelated to the feeder funds (and also unrelated to the general partner/manager ofthe funds).

Ownership in the feeder funds is represented by units of equity interests.

Earnings from investmentsIf your entity or another member of your group canobtain or is seeking other benefits from your entity’sinvestees that are unavailable to unrelated parties,that investee is not held with the sole objective ofobtaining capital appreciation and/ or investmentincome. Instead, your entity might hold theinvestment in some operating or strategic capacity.Such an objective means that your entity does notqualify as an investment entity.

Some examples of such benefits, which areinconsistent with an investment entity’s businesspurpose, include: The acquisition, use, exchange or exploitation of

the processes, assets or technology of an investee.This includes scenarios where you have (oranother member of the group that you are a partof has) disproportionate or exclusive rights toacquire assets, technology, products or services ofany investee (for example, by holding an optionto purchase an asset from an investee if theasset’s development is deemed successful).

Your entity or any other member of your groupentering into a joint arrangement (as defined inIFRS 11) or other agreement with an investee todevelop, produce, market or provide productsor services.

Financial guarantees or assets provided by yourentity’s investee serve as collateral for your

entity’s borrowing arrangements or for those ofanother member of your group; but aninvestment entity can use an investment in aninvestee as collateral for any of its borrowings.

An option held by your entity’s related party topurchase from your entity or any other memberof your group an ownership interest in aninvestee of the entity.

Any transactions between you (or any othermember of your group) and an investee that:

are on terms that are unavailable to entitiesthat are neither your related parties orrelated parties of another member of yourgroup or the investee;

are not at fair value; or represent a substantial portion of the

investee’s or your business activity, includingbusiness activities of other entities ofyour group.

[IFRS 10 para B85I].

It is consistent with an investment entity’s businesspurpose to have a strategy to invest in more than oneinvestment in the same industry, market orgeographical area in order to benefit from synergiesthat increase the capital appreciation of thoseinvestments. This is the case unless your entity isreceiving any returns beyond solely capitalappreciation and/ or investment income by holdingsuch investments. [IFRS 10 paras B85J and BC243].



Example – High technology fund (based on IFRS 10 para IE7, example 2)

TechCorp

New Opportunities Tech Fund

Technology start-up companies

Investmentadviser

Unrelatedinvestors

Option to buyTechnology

70% ownership

30% ownership interest

Manages

Holds investments

Facts

A fund is formed by Technology Corp Inc (‘TechCorp’) to invest in technology start-up companies for capitalappreciation. TechCorp holds 70% of the shares in the fund, called ‘New Opportunities Tech Fund’ and controlsthe fund. The other 30% of the shares in New Opportunities Tech Fund is owned by a number of unrelatedinvestors. New Opportunities Tech Fund will invest in start-ups; and it will bring together a team of specialiststo grow the start-ups.

TechCorp holds options to acquire any of the investments held by New Opportunities Tech Fund, exercisableafter 5 years following the purchase of the start-ups by the fund. The exercise price of the options is fair value.TechCorp is likely to exercise the options if the businesses or technology developed by the investees wouldbenefit the operations of TechCorp. No plans for exiting the investments have been identified by the fund. NewOpportunities Tech Fund is managed by an investment adviser that acts as agent for the investors in the fund.

Is New Opportunities Tech Fund an investment entity?

Conclusion

New Opportunities Tech Fund’s business purpose is to invest for capital appreciation, and it providesinvestment management services to its investors. But the fund is not an investment entity because of thefollowing arrangements and circumstances:

TechCorp, the fund’s parent, holds options to acquire the investees owned by New Opportunities Tech Fundif the assets developed by the investees would benefit the operations of TechCorp. This provides a benefit toTechCorp in addition to capital appreciation and/or investment income.

The investment plans of the fund do not include exit strategies for its equity investments. The options heldby TechCorp are not controlled by the fund (since they are exercisable by TechCorp) and do not constitutean exit strategy.



Example – Real estate fund

Facts

A real estate fund is set up to invest in real estate assets for the benefit of institutional and retail investors. It isset up and managed by an investment manager experienced in the real estate business. The fund invests in realestate companies and other real estate investment funds which own, manage and lease out real estate assets.The investment manager has a policy of acquiring and disposing of its real estate investments over a five to tenyear timeframe, based on market conditions.

The fund earns dividends and share of profits, and it realises capital gains from its real estate investments.

The fund reports (internally and externally) all its investments at fair value and its performance is assessedbased on those fair values.

The fund issues redeemable participating units which are redeemable at a share of the fund’s net asset value(NAV). The founding documents of the fund confirm its objectives and strategy as stated.

Is the fund an investment entity?

Conclusion

The fund meets the definition of an investment entity because its objective is to generate returns from capitalappreciation and investment income through investment management services. It manages its investments on afair value basis, which is reported to its investors. It displays the typical characteristics of an investment entitywhich are: it has more than one unrelated investor; it holds multiple investments; and it has ownershipinterests in the form of fund units which represent a proportionate share of its underlying assets.

Example – Real estate entity (based on IFRS 10 para IE9, example 3)

Facts

Real Estate Investments (‘REI’) was formed in order to develop, own and operate retail, office and othercommercial properties. REI usually holds each of its properties in separate wholly-owned subsidiaries. Thosesubsidiaries have no other substantial assets or liabilities other than borrowings used to finance the relatedinvestment property. REI and each of its subsidiaries report their investment properties at fair value under IAS40, ‘Investment property’. REI does not have a set time frame for disposing of its property investments, but ituses fair value to help identify the optimal time for disposal. REI and its investors also use measures other thanfair value (including information about expected cash flows, rental revenues and expenses) to assessperformance and to make investment decisions. The directors and managers of REI do not consider fair valueinformation to be the primary measurement attribute to evaluate the performance of REI’s investments;instead, they see that information as part of a group of equally relevant key performance indicators.

REI undertakes extensive property and asset management activities (including property maintenance, capitalexpenditure, redevelopment, marketing and tenant selection) some of which it outsources to third parties. Thisincludes the selection of properties for refurbishment, development and the negotiation with suppliers for thedesign and construction work to be done to develop such properties. This development activity forms a separatesubstantial part of REI’s business activities.

Is REI an investment entity?

Conclusion

REI is not an investment entity because:

It has a separate substantial business activity that involves the active management of its property portfolio,including lease negotiations, refurbishments and development activities, and marketing of properties toprovide benefits other than capital appreciation and/ or investment income.

REI’s investment plans do not include specified exit strategies for its investments. As a result, it plans tohold those property investments indefinitely.

Although REI reports its investment properties at fair value under IAS 40, fair value is not the primarymeasurement attribute used by management to evaluate the performance of its investments. Otherperformance indicators are used to evaluate performance and make investment decisions.



Fair value measurementAs an investment entity, fair value should be theprimary measurement attribute for substantially allinvestments. For an entity that provides investmentmanagement services and invests for capitalappreciation and/or investment income, fair value islikely to be more relevant information to evaluate theperformance of your entity’s investments (bothinternally and externally) compared to consolidatingthe entity’s subsidiaries or using the equity methodfor the entity’s interests in associates orjoint ventures.

Consequently, the amendment requires your entity tomeasure and evaluate the performance ofsubstantially all of its investments on a fair value basisin order to qualify as an investment entity. [IFRS 10para 27(c)]. This requirement applies to ‘investments’.So, it does not apply to non-investment assets or tofinancial liabilities. For example head office propertyand related equipment held under IAS 16, ‘Property,plant and equipment’ do not need to be measured andevaluated on a fair value basis. [IFRS 10 para B85M].

It is evident that fair value information is yourprimary measurement attribute if fair valueinformation is: used internally by key management personnel to

assess performance of substantially all theentity’s investments; and

provided to your entity’s investors and the entitymeasures substantially all its investments at fairvalue in its financial statements where this ispermitted or required by IFRS.

[IFRS 10 para B85K].

Note that ‘fair value information’ includes usinginformation from financial assets that are fair valuedon the statement of financial position with fair valuechanges recognised in other comprehensive incomeunder IFRS 9 and IAS 39, ‘Financial instruments:Recognition and measurement’ such as available forsale assets.

An investment entity accounts for: investment property using the fair value model in

IAS 40, ‘Investment property’; associates and joint ventures on a fair value basis

by electing the exception from the equity methodin IAS 28, ‘Investment in associates’; and

financial assets on fair value basis under IFRS 9.[IFRS 10 para B85L].

Typical characteristics of aninvestment entityYour entity is expected to display the followingcharacteristics in order to qualify as an investmententity, in addition to meeting the definition. Thesecharacteristics are considered typical ofinvestment entities:

holding more than one investment; having more than one investor; having investors that are not the entity’s

related parties; and having ownership interests in the form of equity

or similar interests.[IFRS 10 para 28].

The characteristics require you to apply additionaljudgement. Your entity can be an investment entity inthe absence of one or more of these characteristics,provided you have assessed why it is appropriate for itto qualify as an investment entity in the absence of thetypical characteristic(s) and make appropriatedisclosure in the financial statements (see section on‘Disclosures’). It is considered highly unlikely, butpossible, that your entity will qualify as an investmententity where it seems to strictly meet the definitionbut possesses none of the typical characteristics.[IFRS 10 para BC234].

More than one investmentAn investment entity will typically hold (directly orthrough another entity) more than one investment,with the objective of diversifying its risks andmaximising returns. [IFRS 10 para B85O].

You should look at all the facts and circumstances todetermine whether your entity qualifies as aninvestment entity, considering its business purpose,where you hold only one investment. Some scenarioswhere it might be appropriate to hold a singleinvestment - and nevertheless qualify as aninvestment entity - are included in the amendment: Your entity has made only one investment

because it is in a start up period and has not yetidentified suitable multiple investments.

Your entity has not yet made new investments toreplace those that have been disposed of.

Your entity has been established to poolinvestors’ funds to purchase a single investmentthat would have been unobtainable by individualinvestors (for example, when the requiredminimum investment is too high for anindividual investor).

Your entity is in the process of liquidation.[IFRS 10 para B85P].



PwC observation

Most of the above single investor situations occur where a single investment is held temporarily or during a

period of transition. It would be highly unusual to have only one investment for the life of an investment

entity. The intention of investment entities is usually to hold more than one investment.

If the intention is to hold multiple investments (but, for some practical or genuine reasons, your entity could

not do so at the reporting date) it will likely continue to qualify as an investment entity.

Example – Limited Partnership (based on IFRS 10 para IE1, example 1)

Facts

An entity (LP) is formed in 20X1 as a limited partnership with a 10-year life. The offering memorandum statesthat LP’s purpose is to invest in entities with rapid growth potential, with the objective of realising capitalappreciation over their life. Entity GP (the general partner of LP) provides 1% of the capital to LP and has theresponsibility of identifying suitable investments for the partnership. Approximately 75 limited partners (whoare unrelated to GP) provide 99% of the capital to the partnership.

LP begins its investment activities in 20X1.But no suitable investments are identified by the end of 20X1. In20X2, LP acquires a controlling interest in one entity, ABC Corporation. LP is unable to close anotherinvestment transaction until 20X3, when it acquires equity interests in five additional operating companies.Other than acquiring these equity interests, LP conducts no other activities. LP measures and evaluates itsinvestments on a fair value basis and this information is provided to GP and the external investors.

LP has plans to dispose of its interests in each of its investees during the 10-year stated life of the partnership.Such disposals include the outright sale for cash, the distribution of marketable equity securities to investors(following the successful public offering of the investees’ securities) and the disposal of investments to thepublic or other unrelated entities.

Is LP an investment entity?

Conclusion

From the information provided, LP meets the definition of an investment entity from formation in 20X1 to 31December 20X3 because the following conditions exist:

LP has obtained funds from the limited partners and is providing those limited partners with investmentmanagement services.

LP’s only activity is acquiring equity interests in operating companies with the purpose of realising capitalappreciation over the life of the investments. LP has identified and documented exit strategies for itsinvestments, all of which are equity investments.

LP measures and evaluates its investments on a fair value basis and reports this financial information toits investors.

In addition, LP displays the following typical characteristics of an investment entity:

LP is funded by many investors.

Its limited partners are unrelated to LP.

Ownership in LP is represented by units of partnership interests acquired through a capital contribution.

LP does not hold more than one investment throughout the period. But this is because it was still in itsstart-up period and had not identified suitable investment opportunities.



Example – Access fund

Facts

An ‘access fund’ was set up in connection with a ‘main fund’. The access fund is the named shareholder on theregister of the main fund. The access fund originally invested in the main fund at the initial offering stage of themain fund. Within the governing documents of the main fund, there was an initial subscription of $500 million.Once these capital amounts were raised, the main fund would be closed to new investors. This is referred to as a‘soft-closed’ fund. The main fund is closed to monies from new investors but not from existing investors.

The main fund has been set up to make multiple investments, and it has an exit strategy set out in itsfounding documents.

The objective of the access fund is to invest solely in the main fund. Shareholders who want access to the mainfund can only do so through the access fund; this is because the main fund is closed to new shareholders.Shareholders of the access fund are entitled to a proportionate share of net assets of the access fund.

The access fund provides investment management services to its unrelated investors; and it will receive returnsfrom capital appreciation and investment income (that is, distributions from the main fund). The access fundmanages its investment in the main fund on a fair value basis.

Is the access fund an investment entity?

Conclusion

The access fund meets the definition of an investment entity:

The fund obtains funds from investors with the objective of providing investment management services.

The objective of making investments is generating capital returns and investment income; the fund willreceive dividends from the main fund and capital appreciation through increases in the fair value of themain fund. Although the access fund does not have an exit strategy for its investment in the main fund, themain fund has exit strategies for its investments.

It measures and evaluates the performance of its investment in the main fund on a fair value basis.

The access fund displays three of the four typical characteristics of an investment entity:

The fund has multiple investors.

The multiple investors are unrelated.

The fund has ownership interests in the form of units that entitle the investors to the net assets of the fund.

The access fund does not display the fourth typical characteristic (that is, it has one single investment), but itconcludes that it qualifies as an investment entity. It has been set up to provide investment managementservices to its investors with the objective of earning capital appreciation and investment income from itsinvestment in the main fund. It manages its underlying investment on a fair value basis. The fact that it doesnot meet the characteristic in these circumstances is not inconsistent with the overall definition and businesspurpose of being an investment entity. The access fund is required to make appropriate disclosures as to why ithas concluded that it is an investment entity despite not displaying all of the typical characteristics.



More than one investorIn order to qualify as an investment entity, yourentity would typically obtain funds from severalinvestors, with the objective of providing its investorswith investment management services andinvestment opportunities that they might not haveaccess to individually.

There could be scenarios where your entity has onlyone investor. In such cases, you should examine thereasons and whether they are consistent with thedefinition of an investment entity. The amendmentidentifies some situations where it might be

appropriate to conclude that your entity is aninvestment entity despite having only one investor.These are situation where:

Your entity’s initial offering period has notexpired and it is actively identifying additionalsuitable investors.

Your entity has not identified suitable investorsto replace ownership interests that havebeen redeemed.

Your entity is in the process of liquidation.

[IFRS 10 para B85S].

PwC observation

Most of the above single-investor situations occur where an entity has a single investor temporarily or as part

of a winding up process. It would be unusual to have only one investor other than as noted above. Investment

entities are usually set up to provide investment management services to a group of investors.

Example – Single investor fund – seed capital

Facts

An investment fund has been set up by its manager; initially the manager is the sole shareholder (that is, themanager has provided ‘seed capital’). As at its first period end, the fund has not been successful in receivingfunds from other prospective shareholders; but it is actively soliciting new investors. The fund invests in globalequities and equity-related derivatives; and it provides its one shareholder with investment managementservices (as mandated in its prospectus). Its prospectus states that it expects to buy and sell investmentsregularly, and it expects holding periods of more than one year to be rare.

The fund generates returns from capital appreciations and investment income in the form of dividends. Thefund fair values all investments and these valuations are the basis for subscriptions and redemptions into andout of the fund. Subscriptions and redemptions can occur daily.


Conclusion

The fund is an investment entity.

It meets the definition of an investment entity:

It has been set up to provide investment management services to its investors. For this period, it has onlyone manager-shareholder and so it is providing investment management services to itself, but this is not itslonger-term manager intention.

It is carrying on its investment activities with the objective of capital appreciation and investment income.

It measures its underlying investments on a fair value basis and fair value is the basis for subscriptions andredemptions into and out of the fund.

The fund displays the following characteristics:

It holds multiple investments.

It does not have multiple investors; but, this is expected to be temporary and the fund manager is activelysoliciting new investors.

It does not have unrelated investors, because it has only a single investor.

It issues ownership interests in the form of redeemable units that entitle the holders to a share of net assets.

Although the fund has a single investor, this is expected to be temporary. Failing to meet this typicalcharacteristic does not mean that the fund is not an investment entity. In the context of the definition and thefund’s overall business purpose, it is an investment entity. The fund is required to make appropriate disclosuresin its financial statements on why it qualifies as an investment entity even when it has only one investor.



Your fund or entity might have been set up by a singleinvestor to meet a specific objective or to help supportthe interest of a wider group of investors. Forexample, your entity is a fund that has been set up bya corporate entity to make investments on behalf ofthat corporate entity’s employees. So, your entity hasa single investor but, in substance, it has been set upto support the interests of a wider group (that is, its

parent investor’s employees). Other examples of suchentities might include a pension fund, a government-owned investment fund or a family trust. Each ofthese is formed by or for a single investor but itrepresents or supports the interests of a wider groupof investors. Failing to meet this characteristic in suchcircumstances is not inconsistent with the overallbusiness purpose and definition of an investmententity. [IFRS 10 para B85R].

Example – Sovereign wealth fund

Facts

The government of Country X sets up a sovereign wealth fund (SWF) to manage its income from naturalresources for the long-term benefit of its citizens. The SWF will, for example, be used to fund future pensionsand significant capital projects carried out by the state. The fund is set up as a separate legal entity establishedunder statute, and it is owned by the central bank of country X. It has issued shares to the bank. The fundemploys a team of professional investment managers, who work to a mandate that is overseen by the centralbank and annually approved by country X’s government. The fund makes multiple investments (some of whichare controlling stakes) and sets out exit strategies for different classes of investment. The fund produces publicreports twice-yearly, which detail the total value of the fund and of its main asset classes. Internal reporting ismore detailed and also on a fair value basis.

Is country X’s SWF an investment entity?

Conclusion

Country X’s SWF is an investment entity because:

It has been set up to provide investment management services to its investor (which, in this case, is thegovernment of country X).

It is carrying on its investment activities with the objective of capital appreciation and investment income.

It measures its underlying investments on a fair value basis, and it reports its funds value on a fairvalue basis.

It also displays the following typical characteristics of an investment entity:

It holds more than one investment.

It has only one investor, which is the central bank of country X. It can nevertheless be seen, in substance, asinvesting the funds of the citizens of country X on their behalf. This is not inconsistent with the overalldefinition and business purpose of an investment entity. It has one related party direct beneficiary, due tohaving one investor; but, again, it could be argued that, in substance, it operates on behalf of manyunrelated beneficiary investors.

The fund has issued units that entitle its investor to a share of its net assets.



Unrelated investorsAn investment entity will typically have multipleinvestors that are not its related parties (as defined byIAS 24, ‘Related party disclosures’) and are notrelated to the group to which the investment entitybelongs. You need to look at all the facts andcircumstances in a situation where your entity hasinvestors that are related to it. This is because havingrelated parties as investors makes it more likely that

your entity (or other members of its group) couldobtain benefits other than capital appreciation orinvestment income.

Your entity might qualify as an investment entity evenwhen its investors are related parties. For example, itmight be a parallel fund (that is, investing in the sameassets as another fund) set up by the manager of thatother fund to incentivise and reward a group of themanager’s employees. [IFRS 10 para 85U].

Example –Nuclear power plant

N u clearpower plant

Corporate entity

Dedicated fund

A sset manager(3rd party)

Equity anddebt investments

Operates

100% ownershipManages the fund

Holds investments

Facts

A dedicated fund is set up by a corporate entity that runs a nuclear power plant. The corporate entity (whichowns all of the units in the fund) needs to keep funds available in case of a technical failure of the nuclear powerplant. The entity does not have the expertise to manage the fund, so it appoints a third party asset manager. Theentity can remove the fund manager on three months’ notice.

The fund invests in traded equity and debt instruments (as set out in the investment management agreementand fund founding documents) and its maximum exposure to one investment is not more than 10% of moniesinvested. The objective of the fund is to generate returns either from dividends and interest or from selling theinstruments. The fund does not invest in the nuclear energy industry and the corporate entity has no otherrelationship with the fund; for example, it does not have options to buy any of the investments made bythe fund.

The fund reports fair value information internally and to its corporate parent; and its performance is evaluatedagainst a benchmark stock exchange index.

The fund issues units that are redeemable at any time. The redeemable shares pay the net asset value of thefund when liquidated, and they are accounted for by the fund as equity under IAS 32. The units do not carryvoting rights.


How does the corporate entity account for its interest in the fund?



Conclusion

The fund is an investment entity. It meets the definition of an investment entity:

It provides investment management services to its investor.

Its business purpose is to invest in debt and equity instruments for capital appreciation andinvestment income.

It measures and evaluates the performance of its investments on a fair value basis.

The fund also displays two of the four typical characteristics:

The fund holds multiple investments.

The fund only has one investor but in these circumstances that is not inconsistent with its overall businesspurpose and with the definition of an investment entity.

The fund does not have unrelated investors, because there is only one investor; but, again, in thesecircumstances this is not inconsistent with the definition of an investment entity.

Units issued by the fund entitle the holder to a proportionate share of the net asset value of the fund.

Two of the characteristics are not satisfied because the fund has a single investor. When examining all the factsand circumstances, however, the fund concludes that it is an investment entity and that the failure to meet twoof the typical characteristics is not inconsistent with the definition. It gives appropriate disclosure about itsjudgement under IFRS 12 (see section on Disclosures).

The corporate entity is not an investment entity. It consolidates the fund (including any controlled investmentsmade by the fund).

Ownership interestsYour entity need not be a separate legal entity toqualify as an investment entity. Whatever its legalform, its ownership interest would generally be in theform of equity or similar interests (for example,partnership interest) to which a proportionate shareof its net assets is attributable. This is because yourentity will generally need a means by which itdistributes or attributes value from its capital andincome returns. Having different classes of investorsdoes not mean that an entity is not an investmententity. [IFRS 10 para B85V].

Your entity’s ownership interests might be accountedfor as debt because they do not meet the definition ofequity under IAS 32, ‘Financial instruments:presentation’. Even though the instruments are notequity, this will usually not indicate that your entity isnot an investment entity so long as they provideholders with exposure to variable returns fromchanges in the fair value of the entity’s net assets.[IFRS 10 para B85W].

PwC observation

Unit trusts and mutual funds often issue units that

are accounted for as liabilities under IAS 32

guidance; this is because they do not qualify to be

presented as equity under the IAS 32 ‘puttables’

amendment. Where such units (whether or not they

are presented as equity) entitle the entity’s holders to

proportionate shares of net assets, they will not be an

indicator that the fund is not an investment entity.

Some funds are financed through debt instruments

(particularly in private equity) which participate in

the returns of the fund. Such debt instruments would

not be a negative indicator of investment entity

status under the ‘ownership interests’

typical characteristic.



Separate financial statementsThere are two different situations where separatefinancial statements are relevant toinvestment entities.

The first situation is where your entity controlsinvestee subsidiaries but none of these subsidiaries isrequired to be consolidated; in other words, it doesnot control any subsidiaries that provide investment-related services. [IFRS 10 para 32]. In such asituation, it will measure all of its subsidiaries at fairvalue through profit or loss, and it will presentseparate financial statements as its only financialstatements. [IAS 27 para 8A].

Alternatively, your entity might be an investmententity that has some investee subsidiaries that areaccounted for at fair value through profit or loss, andother subsidiaries that provide investment-relatedservices and which are consolidated. In this case, itwill prepare consolidated financial statements underIFRS 10. In these consolidated financial statements,

the subsidiaries providing investment-related servicesare consolidated and other investees are measured atfair value through profit or loss. The entity might alsobe required to prepare separate financial statements.In those separate financial statements, it mustaccount for the subsidiaries that are measured at fairvalue through profit or loss in its consolidatedfinancial statements in the same way as in its separatefinancial statements. [IAS 27 para 11A].

Reassessment of investmententity statusYou should reassess investment entity status whenfacts and circumstances indicate that there is a changeto one or more of the three elements making up thedefinition of an investment entity or to any of thetypical characteristics. [IFRS 10 para 29].

Any change in status is accounted for prospectively(that is, from the date when the change in statusoccurred). [IFRS 10 para 30].

Example – Investors redeem units

Due to a change in market conditions, investors in a fund are redeeming their units. As a result of thisredemption, one significant investor remains in the fund. The fund should reassess its investment entity status.In this case, the fund might continue to meet the definition and remain an investment entity, in either of thefollowing situations: if its business continues to be management of investments for capital appreciation and/orincome, but now for one investor instead of many; or if it expects that this will be a temporary situation.

Example – Fund nearing end of life

A fund was set up with a limited life of 10 years. The fund is in its final year, and it reaches a stage where it hasone single investment remaining. The objective of the fund has not changed; and the fund is realising its finalinvestment with the objective of maximising the return to its investors. The fund should reassess its investmententity status when it has a single investment, because it no longer meets one of the typical characteristics. But itmight conclude that it continues to be an investment entity if its single investment is not inconsistent with itsoverall purpose; in that case, it continues to meet the definition of an investment entity.



Accounting for a change in status – Becoming or ceasing to be an investmententityConsolidated financial statementsThe amendment contains guidance on how your entity should account in its consolidated financial statementsfor a change in status - when it either becomes or ceases to be an investment entity. This is done prospectively.[IFRS 10 para 30, paras B100, B101].

The flowchart below illustrates how the change in status is accounted for in the consolidated financialstatements

Change in investmententity status?

Change is accounted for fromthe date when change in statusoccurred

Have you ceased to be aninvestment entity?

Have you become aninvestment entity?

For subsidiaries that had been measured at fair value through profit or loss:

• Apply acquisition method under IFRS 3 Business combinations.

• Date of change in status shall be the deemed acquisition date.

• Fair value on deemed acquisition date shall represent the transferred deemedconsideration when measuring any goodwill or any gain arising from deemed acquisition.[IFRS 10 para B100].

• Change in status is accounted for as ‘deemed disposal’ or ‘loss of control’ of subsidiaries atthe date of change in status.

• Derecognise assets and liabilities of the subsidiaries which you cease to consolidate.

• Determine fair value of subsidiaries at the date of change in status.

• Difference between the previous carrying amount of the subsidiaries and their fair valueshall be recognised as a gain or loss in profit or loss. [IFRS 10 para B101, BC271].

No adjustmentsNo

Yes

All subsidiariesare consolidated Cease to consolidate

subsidiaries (other thanpara 32 subsidiaries1)

Yes

Yes

1 Subsidiaries that provide investment related services.



Separate financial statementsIf your entity prepares separate financial statements, the flowchart below illustrate how to account for a changein status (that is, when your entity becomes or ceases to be an investment entity). This is done prospectivelyfrom the date of the change in status. [IFRS 27 para 11B].

Change in investmententity status?

Change is accounted forfrom the date when changein status occurred

Have you ceased to be aninvestment entity?

Are you now an investmententity ?

You can either:

• continue to account for your investments in subsidiaries in accordance with IFRS 9 or IAS39; or

• account for your investments in subsidiaries at cost. The fair value of the subsidiaries at thedate of change shall be used as the deemed cost. [IAS 27 para 11B(a)].

• Determine fair value of your subsidiaries at the date of change in status.

• Recognise the difference between the previous carrying amount of the subsidiaries andtheir fair value as a gain or loss in profit or loss.

• Account for your investments in subsidiaries at fair value through profit or loss inaccordance with IFRS 9 or IAS 39. [IAS 27 para 11B(b)].

No adjustments

No

Yes

YesYes

DisclosureIFRS 12, ‘Disclosure of interests in other entities’ hasbeen amended to introduce disclosure requirementsfor investment entities with controlled subsidiaries.Appendix A to this document sets out the disclosures.These disclosures are also required by an investmententity parent that prepares separate financialstatements as its only financial statements (see page21). [IAS 27 para 16A].

The intention of the IFRS 12 disclosures is to giverelevant information to users to help themunderstand: significant judgements and assumptions made in

making the investment entity determination;

reasons for concluding why you consider yourentity to be an investment entity, even if itdoesn’t have one or more of the typicalcharacteristics; and

information about unconsolidated subsidiariesand unconsolidated structured entities controlledby your entity.

An investment entity is exempt from providingsummarised financial information about its associatesand joint ventures when they are accounted for on afair value basis under IAS 28. [IFRS 12 para 21A].

IFRS 7, ‘Financial instruments: Disclosures’ applies toinvestments in subsidiaries that are measured at fairvalue through profit or loss.



Date of application andtransition requirementsThe amendment is applicable for periods beginningon or after 1 January 2014. Earlier application ispermitted. If you apply the amendment early, that factshould be disclosed; and the amendments to otherstandards should also be applied. [IFRS 10 para C1B].

PwC observation

Early adoption will allow entities that apply IFRS 10

at its application date of 1 January 2013 to apply the

investment entity amendment at the same time.

To apply the amendment, you first need to determinewhether your entity meets the definition of aninvestment entity at the date of initial application ofthe amendments. The date of initial application is thebeginning of the annual reporting period for whichthe amendment is applied for the first time. [IFRS 10para C2B]. For example, if you apply the amendmentfor the accounting period beginning on 1 January2014, the date of initial application will be 1 January2014. You should make the assessment as at the dateof initial application (in this example, 1 January 2014)based on all the facts and circumstances that exist atthat date. [IFRS 10 para C3A].

The following paragraphs assume that your entitymeets the definition of an investment entity at thedate of initial application and is applyingthe amendment.

The amendment should be applied retrospectively.This is the case irrespective of whether the entitywould have met the definition of an investment entityin prior reporting periods. The entity should cease toconsolidate its subsidiaries; instead, it shouldmeasure them at fair value through profit or loss as ifthe amendment had always been effective except forany subsidiaries it is required to consolidate becausethey provide investment-related services (under IFRS10 para 32). But your entity is not required to makeany adjustment for subsidiary investments which ithad disposed of or lost control of before the date ofinitial application. [IFRS10 paraC3E]. The entityshould adjust equity at the beginning of theimmediately preceding period, for an amount that isthe difference between: the previous carrying amount of the subsidiary;

and

the fair value of the investment entity’sinvestment in the subsidiary.

The entity should also transfer to retained earningsany fair value adjustments that had been recognisedin other comprehensive income at the beginning ofthe preceding annual period. [IFRS 10 para C3B].

The fair value of your entity’s investments at thebeginning of the immediately preceding period shouldbe determined under IFRS 13, ‘Fair valuemeasurement’. If fair value is to be determined on adate before IFRS 13 is adopted, the fair value of yourinvestments should be the fair value amounts thatwere previously reported to investors or tomanagement (provided those amounts represent theamount for which the investments could have beenexchanged between knowledgeable, willing parties inan arm’s length transaction at the date of thevaluation). [IFRS10 paraC3C].

If it is impracticable to measure subsidiaries atprevious fair values, you should apply therequirements of the amendment at the beginning ofthe earliest period for which its application ispracticable; this might be the current period. Wherethis is the case, the adjustment to equity noted aboveshould be made at the beginning of the currentperiod. [IFRS 10 para C3D].

PwC observation

We would expect that most investment entities will,

be able to apply the amendment retrospectively (if

they would also have met the definition of an

investment entity in prior periods). This is because

fair value measurement, evaluation and information

provision are essential features of investment

entities.

The IFRS 10 transition requirements are applicablewhere your entity prepares consolidated financialstatements in the previous period and in the currentperiod. Where you prepare separate financialstatements (either as your only financial statementsor in addition to consolidated financial statements)the amendments to IAS 27 include transitionrequirements. These are similar to ones in IFRS 10described above and can be found in paragraphs 18C-18I of IAS 27.



The flowchart below illustrates IAS 27 transition requirements for separate financial statements of aninvestment entity.

On date of initial application, are you aninvestment entity? [IAS 27 para 18B].

Have you disposed of or lost control of any ofyour investments before the date of initialapplication?

Did you measure investments controlled byyou at cost in previous years?

• measure investments controlled by you on FVTP&L basis.• adjust equity, at the beginning of the immediately preceding

period, for an amount that is difference between the:- previous carrying amount of the assets, liabilities and non-

controlling interest; and- recognised amount of your interest in the investee.[IAS 27 para 18C].

No adjustments?

No asdjustments?

• continue to measure its investments on fairvalue basis.

• transfer to retained earnings any fair valueadjustments that had been previously recognisedin other comprehensive income at the beginning ofthe preceding annual period. [IAS 27 para 18D, 18E].

Did you measure investments in subsidiaries atfair value?

No

Yes

No

Yes

No

Yes

Yes

Disclosures Appropriate disclosuresmade? (Yes/ No/ N/A)

General disclosures

The investment entity shall disclose information about significantjudgements and assumptions it has made (and changes to thosejudgements and assumptions) in determining that it has met thedefinition of an investment entity.

[IFRS 12 para 9A]

If the investment entity does not have one or more of the typicalcharacteristics of an investment (see para 28 of IFRS 10), it shall discloseits reasons for concluding that it is nevertheless an investment entity.

[IFRS 12 para 9A]

When an entity becomes, or ceases to be, an investment entity, it shalldisclose the change of investment entity status and the reasons for thechange. In addition, an entity that becomes an investment entity shalldisclose the effect of the change of status on the financial statements forthe period presented, including:

the total fair value, as of the date of change of status, of thesubsidiaries that cease to be consolidated;

the total gain or loss, if any, calculated in accordance withparagraph B101 of IFRS 10; and

the line item(s) in profit or loss in which the gain or loss isrecognised (if not presented separately)

[IFRS 12 para 9B]

Interests in unconsolidated subsidiaries

An investment entity that, in accordance with IFRS 10, is required toapply the exception to consolidation - and instead account for itsinvestment in a subsidiary at fair value through profit or loss - shalldisclose that fact.

[IFRS 12 para 19A]

For each unconsolidated subsidiary, an investment entity shall disclose:

the subsidiary’s name; the principal place of business (and country of incorporation if

different from the principal place of business) of the subsidiary; and the proportion of ownership interest held by the investment entity

and, if different, the proportion of voting rights held.

[IFRS 12 para 19B]

If an investment entity is the parent of another investment entity, theparent shall also provide the disclosures in 19B (a)–(c) for investmentsthat are controlled by its investment entity subsidiary. The disclosuremay be provided by including, in the financial statements of the parent,the financial statements of the subsidiary (or subsidiaries) that containthe above information.

Appendix A

Disclosures Appropriate disclosuresmade? (Yes/ No/ N/A)

[IFRS 12 para 19C]

An investment entity shall disclose:

the nature and extent of any significant restrictions (for exampleresulting from borrowing arrangements, regulatory requirements orcontractual arrangements) on the ability of an unconsolidatedsubsidiary to transfer funds to the investment entity in the formof cash dividends or to repay loans or advances made to theunconsolidated subsidiary by the investment entity; and

any current commitments or intentions to provide financial or othersupport to an unconsolidated subsidiary, including commitments orintentions to assist the subsidiary in obtaining financial support.

[IFRS 12 para 19D]

If, during the reporting period, an investment entity or any of itssubsidiaries has, without having a contractual obligation to do so,provided financial or other support to an unconsolidated subsidiary (forexample, purchasing assets of, or instruments issued by, the subsidiaryor assisting the subsidiary in obtaining financial support), the entityshall disclose:

the type and amount of support provided to each unconsolidatedsubsidiary; and

the reasons for providing the support.

[IFRS 12 para 19E]

An investment entity shall disclose the terms of any contractualarrangements that could require the entity or its unconsolidatedsubsidiaries to provide financial support to an unconsolidated,controlled, structured entity, including events or circumstances thatcould expose the reporting entity to a loss (for example, liquidityarrangements or credit rating triggers associated with obligations topurchase assets of the structured entity or to provide financial support).

[IFRS 12 para 19F]

If during the reporting period an investment entity or any of itsunconsolidated subsidiaries has, without having a contractual obligationto do so, provided financial or other support to an unconsolidated,structured entity that the investment entity did not control, and if thatprovision of support resulted in the investment entity controlling thestructured entity, the investment entity shall disclose an explanation ofthe relevant factors in reaching the decision to provide that support.

[IFRS 12 para 19G]

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. It does not takeinto account any objectives, financial situation or needs of any recipient; any recipient should not act upon the information contained in thispublication without obtaining independent professional advice. No representation or warranty (express or implied) is given as to the accuracy orcompleteness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members,employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, orrefraining to act, in reliance on the information contained in this publication or for any decision based on it.

© 2012 PricewaterhouseCoopers LLP. All rights reserved. In this document, "PwC" refers to PricewaterhouseCoopers LLP (a limited liabilitypartnership in the United Kingdom), which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is aseparate legal entity. 121214-133621-MS-OS

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