6
• its limited partners are unrelated to LP; and
• 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. However, this is because it was still in its
start-up period and had not identified suitable investment opportunities. [IFRS 10.IE1-IE6].
Example 6.44: Start-up high technology fund that is not an investment entity
An entity, High Technology Fund, is formed by Technology Corp. to invest in start-up technology companies
for capital appreciation. Technology Corp. holds a 70% interest in High Technology Fund and controls it; the
other 30% ownership interest is held by 10 unrelated investors. Technology Corp. holds options to acquire
investments held by High Technology Fund, at their fair value, which would be exercised if the technology
developed by the investees would benefit the operations of Technology Corp.
The group structure is illustrated below:
Technology Corp.
10 unrelated Investors
70%
30%
High Technology Fund
Option
Investments
High Technology Fund has no plans for exiting the investments. High Technology Fund is managed by an
investment advisor that acts as agent for the investors in High Technology Fund.
In this example, although High Technology Fund’s business purpose is investing for capital appreciation and
it provides investment management services to its investors, High Technology Fund is not an investment
entity because:
• Technology Corp., the parent of High Technology Fund, holds options to acquire investments in investees
held by High Technology Fund if assets developed by the investees would benefit the operations of
Technology Corp. This provides a benefit in addition to capital appreciation and investment income; and
• the investment plans of High Technology Fund do not include exit strategies for its investments, which
are equity instruments. The options held by Technology Corp. are not controlled by High Technology
Fund and do not constitute an exit strategy. [IFRS 10.IE7-IE8].
Example 6.45: Master and feeder funds that are investment entities
An entity, Master Fund, is formed in 2019 with a 10-year life. The equity of Master Fund is held by two related
feeder funds. The feeder funds are established in connection with each other to meet legal, regulatory, tax or similar
requirements. The feeder funds are capitalised with a 1% investment from the general partner and 99% from equity
investors that are unrelated to the general partner (with no party holding a controlling financial interest).
The group structure is illustrated below:
Consolidated financial statements 455
GP
Third Party
Third Party
GP
1%
99%
99%
1%
Domestic feeder
Offshore feeder
Master
Portfolio of Investments
The purpose of Master Fund is to hold a portfolio of investments in order to generate capital appreciation and
investment income (such as dividends, interest or rental income). The investment objective communicated to
investors is that the sole purpose of the master-feeder structure is to provide investment opportunities for
investors in separate market niches to invest in a large pool of assets. Master Fund has identified and documented
exit strategies for the equity and non-financial investments that it holds. Master Fund also holds a portfolio of
short and medium-term debt instruments, some of which will be held until maturity and some of which will be
traded but Master Fund has not specifically identified which investments will be held and which will be traded.
Master Fund measures and evaluates substantially all of its investments, including its debt investments, on a fair
value basis. In addition, investors receive periodic financial information, on a fair value basis, from the feeder
funds. Ownership in both Master Fund and the feeder funds is represented through units of equity.
In this example, Master Fund and the two feeder funds all meet the definition of an investment entity because:
• both Master Fund and the two feeder funds have obtained funds for the purpose of providing investors
with investment management services;
• the business purpose of the master-feeder structure, which was communicated directly to investors of
the feeder funds, is investing solely for capital appreciation and investment income and Master Fund has
identified and documented potential exit strategies for its equity and non-equity financial instruments;
• although the feeder funds do not have an exit strategy for their interests in Master Fund, the feeder funds
can nevertheless be considered to have an exit strategy for their investments because Master Fund was
formed in connection with the feeder funds and holds investments on behalf of the feeder funds; and
• the investments held by Master Fund are measured and evaluated on a fair value basis and information about
the investments made by Master Fund is provided to investors on a fair value basis through the feeder funds.
Master Fund and the feeder funds were formed in connection with each other for legal, regulatory, tax or similar
requirements. When considered together, they display the following typical characteristics of an investment entity:
• the feeder fund indirectly holds more than one investment because Master Fund holds a portfolio of investments;
• although Master Fund is wholly capitalised by feeder funds, the feeder funds are funded by many
investors who are unrelated to the feeder funds (and to the general partner); and
• ownership in the feeder funds is represented by units of equity interests through a capital contribution.
[IFRS 10.IE12-IE15].
10.2.10 Multi-layered fund structures
Example 6.45 above illustrates a multi-layered fund structure. The reason and purpose
of these is usually to accomplish one or more of the following:
• regulatory reasons to invest in certain jurisdictions; or
• risk mitigation reasons, that is, to ring fence particular investees; or
• investment-return enhancement, where the after tax returns on an investment can
be enhanced by using vehicles in certain jurisdictions.
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When an investment entity has a subsidiary that is an intermediate parent that is formed in
connection with the parent investment entity for legal, regulatory, tax or similar business
reasons, the investment entity investor need not have an exit strategy for that subsidiary.
This is on condition that the intermediate investment entity parent has appropriate exit
strategies for its investments. [IFRS 10.B85H]. In addition, an entity must consider all facts and
circumstances in assessing whether it is an investment entity, including its purpose and
design. [IFRS 10.B85A]. Illustrative Example 4 of IFRS 10, represented by Example 6.45 above,
indicates that funds formed in connection with each other for legal, regulatory, tax or
similar requirements can be considered together to determine whether they display the
characteristics of an investment entity. In Example 6.45 above, both Domestic Feeder and
Offshore Feeder are considered to be investment entities.
10.3 Accounting by an investment entity
In its con
solidated financial statements, an investment entity shall:
• consolidate any subsidiary that is not an investment entity and whose main
purpose and activities are providing services that relate to the investment entity’s
investment activities and apply the requirements of IFRS 3 to the acquisition of
any such subsidiary (see 10.2.1 above); [IFRS 10.32] and
• measure all other investments in a subsidiary at fair value through profit or loss in
accordance with IFRS 9. [IFRS 10.31].
In addition, as discussed at 10.2.4 above, the investment entity must elect to account for
its own investments in investment property, associates, joint ventures and financial
assets at fair value. However, where applicable, some of these investments could be
measured at fair value through other comprehensive income. Other assets (e.g.
property, plant and equipment) and financial liabilities need not be measured at fair
value unless this is required by the relevant IFRS.
The following diagram illustrates the accounting in the consolidated financial
statements of an investment entity in a simple group structure:
Investment
20%
Associate A
Entity
FVPL
Service Co.
Sub A
Sub B
Sub C
Sub D
(Non-investment
entity)
Consolidate
FVPL
FVPL
FVPL
The accounting is less intuitive for investment entities with intermediate holding
company subsidiaries. If the intermediate holding company does not meet the
conditions for consolidation, then the intermediate holding company, including its
Consolidated financial statements 457
investments in subsidiaries, is measured at fair value through profit or loss. The
underlying subsidiaries are not measured separately.
The diagram below illustrates the accounting for an investment entity parent using the same
group structure as above but with an intermediate parent established for tax optimisation
purposes inserted between the investment entity parent and the subsidiaries. As discussed
at 10.2.1.B above, the Interpretations Committee has clarified that intermediate holding
companies established for tax optimisation purposes should be measured by a parent
investment entity at fair value through profit or loss. Therefore, in this situation, the
underlying subsidiaries are not separately measured at fair value through profit or loss (or
consolidated in the case of the non-investment entity service company). Instead, the
intermediate holding entity, including its investments in subsidiaries, is measured at fair value
through profit or loss. Parent investment entities with this type of group structure may wish
to provide further information in their financial reports to help explain their performance.
Investment
20%
Associate A
Entity
FVPL
Sub E
Established for FVPL
tax optimisation
Service Co.
Sub A
Sub B
Sub C
Sub D
(Non-investment
entity)
If Subsidiary A (the non-investment entity service company) was owned directly by the
investment entity parent, rather than by Subsidiary E, it would be consolidated.
When an investment entity has no subsidiaries that are consolidated (i.e. all subsidiaries
are measured at fair value through profit or loss as illustrated above), it presents separate
financial statements as its only financial statements. [IAS 27.8A].
When an investment entity parent prepares consolidated financial statements, any
subsidiary measured at fair value through profit or loss in those consolidated financial
statements must also be accounted for in the same way in its separate financial
statements (i.e. at fair value through profit or loss). [IAS 27.11A]. When an investment
entity parent has subsidiaries that are consolidated in its consolidated financial
statements, the parent has an separate accounting policy choice to account for those
subsidiaries either at cost, in accordance with IFRS 9 or using the equity method in its
separate financial statements (see Chapter 8 at 2).
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Fair value will be as determined by IFRS 13. US GAAP currently requires an investment
entity to recognise its underlying investments at fair value at each reporting period and
provides a practical expedient that permits an entity with an investment in an investment
entity to use Net Asset Value (NAV), without adjustment, as fair value in specific
circumstances. However, under IFRS 13, net asset value cannot be presumed to equal fair
value as the asset being measured is the equity investment in an investment entity not the
underlying assets and liabilities of the investment entity itself. Instead, the characteristics
of the investment being measured need to be considered when determining its fair value.
The use of net asset value in determining fair value is discussed in Chapter 14 at 2.5.1.
10.3.1
Accounting for a change in investment entity status
A parent that either ceases to be an investment entity or becomes an investment entity
shall account for its change in status prospectively from the date at which the change in
status occurred. [IFRS 10.30].
10.3.1.A
Becoming an investment entity
In summary, when an entity becomes an investment entity, the change in status is
treated as a loss of control of the investment entity subsidiaries. Therefore, when an
entity becomes an investment entity, it shall cease to consolidate its subsidiaries from
the date of the change in status, except for any non-investment entity subsidiary whose
main purpose and activities are providing services that relate to the investment entity’s
investment activities, and apply the loss of control provisions of IFRS 10. [IFRS 10.B101].
This means that the parent:
• derecognises the assets and liabilities of those subsidiaries from the consolidated
statement of financial position;
• recognises any investment retained in those subsidiaries at fair value through profit
or loss in accordance with IFRS 9; and
• recognises a gain or loss associated with the loss of control attributed to the
subsidiaries. [IFRS 10.25].
Similarly, in the separate financial statements of the parent, when an entity becomes an
investment entity, it shall account for an investment in a subsidiary at fair value through
profit or loss in accordance with IFRS 9. The difference, if any, between the previous
carrying amount of the subsidiary and its fair value at the date of the change in status of
the investor shall be recognised as a gain or loss in profit or loss. If the parent has
previously recorded its investment in accordance with IFRS 9 at fair value through
other comprehensive income (OCI), the cumulative amount of any gain or loss
recognised previously in OCI in respect of that subsidiary shall be treated as if the entity
had disposed of it at the date of change in status. This gain or loss in OCI would not be
recycled to profit or loss. [IAS 27.11B(b)].
IFRS 10 is silent in respect of any acco
unting changes required when an entity becomes an
investment entity in respect of its own investment property, associates, joint ventures and
financial assets. However, it is a condition of being an investment entity that a reporting
entity must measure and evaluate the performance of substantially all of its investments on
a fair value basis. This implies that those assets should have been measured already on a
fair value basis in order for the entity to meet the requirements of an investment entity.
Consolidated financial statements 459
10.3.1.B
Ceasing to be an investment entity
In summary, when an entity ceases to be an investment entity, the event is treated
similar to a business combination. Therefore, when an entity ceases to be an investment
entity, it shall apply IFRS 3 to any subsidiary that was previously measured at fair value
through profit or loss. This means that all of the individual assets and liabilities of the
subsidiary are recognised at fair value (unless IFRS 3 requires otherwise) and the
difference between the previous fair value and the value of the individual assets and
liabilities is goodwill. The date of change of status is the deemed acquisition date. The
fair value of the subsidiary at the deemed acquisition date shall represent the transferred
deemed consideration when measuring any goodwill or gain from a bargain purchase
that arises from the deemed acquisition. All subsidiaries shall be consolidated in
accordance with IFRS 10 from the date of change in status. [IFRS 10.B100].
In the separate financial statements of the parent, when the parent ceases to be an
investment entity, it shall account for an investment in a subsidiary either at cost, in
accordance with IFRS 9, or using the equity method as described in IAS 28. The date of
the change in status shall be the deemed acquisition date. The fair value of the subsidiary
at the deemed acquisition date when accounting for the investment, under any of the
permitted methods, shall represent the transferred deemed consideration. [IAS 27.11B(a)].
10.4 Accounting by a parent of an investment entity
A parent of an investment entity that is not itself an investment entity cannot use the
investment entity exception. It must therefore consolidate all entities that it controls
including those controlled through an investment entity subsidiary. [IFRS 10.33].
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 91
