Currently such investments are consolidated, with their assets, liabilities, income and expenses recognised in the investment company’s own financial statements.
This could ease the burden of reporting under IFRS, as obtaining and consolidating information about individual assets, liabilities, income and expenses from controlled investments typically is more onerous for an investment company than estimating the fair value of such investments.
Martin McGrath, KPMG Partner in Charge, Dept of Professional Practice, said: “This initiative is another step by the IASB in aligning the way investments are managed and their performance evaluated internally with external financial reporting. Investment companies that qualify for the exemption could benefit from the amendments, not least by avoiding the cost of consolidating controlled investments. However it is early days, and not all Australian entities should automatically expect relief as proposed by the amendment.”
McGrath said, “Not all investment companies will qualify for the exemption. There are a number of criteria to be met, which means that companies should carefully consider the proposals against their specific circumstances.” As an example, the company’s only substantive activities must be investing in multiple investments for capital appreciation and/or investment income; this means that some investment companies that take a more active role with respect to their investors may not qualify.
McGrath continued: “This will certainly be something for the private equity sector in particular to look at very carefully. Australian entities contemplating potential relief under the exemption to their own reporting obligations will need to watch for any actions of the AASB in accepting the IASB proposals without amendment.
Specifically, given the restrictive nature of the exemption and the challenges for the AASB in adopting the proposal into the Australian environment, Australian entities such as superannuation funds should examine the ownership interest criterion to ascertain if they can obtain the exemption. This may not be a forgone conclusion as the AASB is currently working on an Australian specific superannuation standard.”
McGrath also questioned whether the IASB has gone far enough in its proposals. He noted: “The exemption does not extend to any parent of an investment company that is not itself an investment company. This means that in many cases the cost saving will be lost because consolidation will still be required, just at a higher level.”
“This change could mean that investment funds will be able to reduce the amount of financial information prepared for investors. Exemption from consolidation for investment companies is an important issue for the sector and we urge all interested parties to comment on today’s proposals.”
The IASB’s proposals are out for consultation until early in 2012, with any final standard likely to take effect in 2013, at the same time as the recently amended consolidation requirements.