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IASB meeting summaries and observer notes


 IASB 21 May 2012


 

The IASB and FASB discussed the overall approach to providing guidance for determining whether an entity is an investment entity and the related application guidance.

The boards tentatively decided that an entity would not be required to meet a list of strict criteria to be an investment entity. Instead, an entity would be required to meet a definition and consider additional factors to determine whether it is an investment entity. The boards decided that an entity would consider its purpose and design when making the assessment of whether it is an investment entity. Twelve IASB members agreed and five FASB members agreed.

Definition of an investment entity

IASB decisions

The IASB tentatively decided that the definition of an investment entity would be as follows:

  1. An investment entity does all of the following:
    1. obtains funds from an investor or investors and provides the investor(s) with professional investment management services;
    2. commits to its investor(s) that its business purpose and only substantive activities are investing the funds for returns from capital appreciation or capital appreciation and investment income; and
    3. manages and evaluates the performance of substantially all of its investments on a fair value basis.
  2. An investment entity and its affiliates do not obtain, or have the objective of obtaining, returns or benefits from their investments that are either of the following:
    1. other than capital appreciation or capital appreciation and investment income; and
    2. not available to other non-investors or are not normally attributable to ownership interests.

The IASB tentatively decided that an entity that has more than an insignificant amount of investments that are not managed on a fair value basis or held for investment income only would not be an investment entity.

All IASB members agreed.

FASB decisions

The FASB tentatively decided to have the same definition as the IASB, except that it would not include 1(c). The FASB definition also refers to 'capital appreciation, investment income or both' rather than 'capital appreciation or capital appreciation and investment income'. The FASB also decided that the concept of managing on a fair value basis, as described in the FASB's exposure draft, would be a factor that an entity would consider to determine whether it is an investment entity. That assessment would consider how the entity manages and evaluates the performance of its investments, how the entity transacts with its investors and how asset-based fees are calculated to determine whether the entity manages its investments on a fair value basis.

Five FASB members agreed.

Application guidance

The boards tentatively decided that relevant application guidance that was included in the exposure drafts would be included in the final guidance issued. The boards made the following additional tentative decisions regarding application guidance:

  1. Transactions between controlled investees would be permitted. Thirteen IASB members and all FASB members agreed.
  2. An entity can be, but does not need to be, a legal entity to be an investment entity. All IASB and FASB members agreed.
  3. Investment entities are not required to be set up at the same time in order to apply the guidance relating to when they are formed in conjunction with each other. All IASB and FASB members agreed.
  4. An entity is permitted to set up single-investor or single-investment funds alongside a main fund for various business reasons other than legal, regulatory, or tax reasons provided that the funds meet the definition of an investment entity. All IASB and FASB members agreed.

The IASB made the following additional tentative decisions regarding application guidance:

  1. An investment entity would be allowed to provide investment-related services to third parties only if those services are not substantive. Thirteen IASB members agreed.
  2. Involvement in the day-to-day management of investees would not disqualify an entity from investment entity status. Thirteen IASB members agreed.
  3. An investment entity would be required to have an exit strategy for substantially all of its investments. The exit strategy assessment would be performed at a portfolio level. All IASB members agreed.
  4. In a master-feeder structure, when determining whether a feeder fund meets the exit strategy requirement to be an investment entity, the master fund would be required to have an exit strategy for substantially all of its investments. All IASB members agreed.
  5. An entity is not required to measure its financial liabilities at fair value and manage those financial liabilities on a fair value basis to be an investment entity. All IASB members agreed.

In addition, the IASB decided that it would not include guidance regarding consideration of how an entity transacts with its investors and how asset-based fees are calculated in determining whether the entity manages its investments on a fair value basis. All IASB members agreed.

Next steps

The boards also discussed whether an entity should consider the number of investments held, the number of investors, whether the investors are related parties, and the concept of ownership interests, to be an investment entity. The boards asked the staff to explore further how these factors would interact with the definitions decided by each board, to be confirmed at a future joint meeting.

The IASB noted that it was important for them to complete the redeliberations expeditiously given the effective date of IFRS 10 Consolidated Financial Statements.

Date: 5/21/2012