RESPONSE OF THE ACCOUNTING COMMITTEE OF CHARTERED ACCOUNTANTS IRELAND

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1 Project Manager International Accounting Standards Board 30 Cannon Street London EC4M 6XH United Kingdom 15 September 2014 RESPONSE OF THE ACCOUNTING COMMITTEE OF CHARTERED ACCOUNTANTS IRELAND EXPOSURE DRAFT 2014/2: INVESTMENT ENTITIES - APPLYING THE CONSOLIDATION EXCEPTION (PROPOSED AMENDMENTS TO IFRS 10 AND IAS 28) The Accounting Committee ( AC ) of Chartered Accountants Ireland welcomes the opportunity to comment on the proposals contained in the above document. AC appreciates the IASB s initiative to try and clarify the existing investment entity consolidation exception. While AC is supportive of an exception from consolidation in the case of private equity investments and in master-feeder structures, it has concerns in the granting of an exception more widely and to intermediate tax holding companies in particular. These concerns are explained in the response to Question 2 in the appendix to this letter. Furthermore, in relation to Question 3, AC would instead favour the approach proposed for a non-investment entity s interest in a joint venture to be aligned with that proposed for associates, being the retention of the fair value measurement applied by the investment entity to its interests in subsidiaries. This will then allow the noninvestment entity to apply a consistent approach when it is equity accounting for its associate or joint venture level interests in investment entities. Should you wish to discuss any of the views expressed, please feel free to contact me. Yours faithfully Mark Kenny Secretary to the Accounting Committee

2 APPENDIX Question 1 Exemption from preparing consolidated financial statements The IASB proposes to amend IFRS 10 to confirm that the exemption from preparing consolidated financial statements set out in paragraph 4(1) of IFRS 10 continues to be available to a parent entity that is a subsidiary of an investment entity, even when the investment entity measures its subsidiaries at fair value in accordance with paragraph 31 of IFRS 10. Do you agree with the proposed amendment? Why or why not? AC supports this relief on the basis that it reduces the burden on a non-investment intermediate entity parent of having to produce consolidated financial statements. We note that a key user of an intermediate parent s financial statements is likely to be its own parent and it is likely to be able to access information it requires. There are various other criteria set out in paragraph 4 of IFRS 10 that still need to be met in order for the intermediate parent to qualify for the exemption. In particular, there is a mechanism for a non-controlling shareholder of the intermediate parent entity to require the preparation of consolidated financial statements. Question 2 A subsidiary that provides services that relate to the parent s investment activities The IASB proposes to amend IFRS 10 to clarify the limited situations in which paragraph 32 applies. The IASB proposes that the requirement for an investment entity to consolidate a subsidiary, instead of measuring it at fair value, applies only to those subsidiaries that act as an extension of the operations of the investment entity parent, and do not themselves qualify as investment entities. The main purpose of such a subsidiary is to provide support services that relate to the investment entity s investment activities (which may include providing investment-related services to third parties). Do you agree with the proposed amendment? Why or why not? AC does not agree that the requirement to consolidate should just be limited to noninvestment entity subsidiaries that act as an extension of the operations of the investment entity parent. AC is of view that certain intermediate holding companies as described in (i) below should also be consolidated in order to present more decisionuseful information to users and greater transparency in the resulting financial statements. (i) Internally focussed intermediate holding companies AC has concerns with the requirement that all an investment entity s subsidiaries (excluding those providing support services) should be measured at fair value through profit or loss and therefore not be consolidated. This concern relates in particular to

3 intermediate holding companies that are set up for legal, tax or regulatory reasons, through which the investment entity parent holds the underlying pool of investments. An example is noted below whereby IE Parent X has opted, for its own internal tax efficiency purposes, to insert an intermediate wholly owned intermediate holding company (IE Parent Y) which then holds the portfolio of underlying investments for income and/or capital appreciation purposes: We note the IASB s comments in the current IFRS 10 s Basis of Conclusions: Some respondents questioned this proposal [to measure all subsidiaries at fair value through profit or loss except those providing investment related services] and suggested that at least some investment entity subsidiaries should be consolidated (for example, wholly-owned investment entity subsidiaries that are created for legal, tax or regulatory purposes). However, the Board thinks that fair value measurement of all an investment entity s subsidiaries (except for those subsidiaries providing investment-related services or activities) would provide the most useful information and therefore decided to retain this proposal. The Board considered requiring an investment entity to consolidate only those investment entity subsidiaries that are formed for legal, tax or regulatory purposes, but decided against this because there is no conceptual basis for distinguishing between different investment entity subsidiaries. Moreover, the Board thinks that it would be very difficult to distinguish between an investment entity subsidiary formed for a specific legal, tax or regulatory purpose and those set up only for other business reasons. (IFRS 10, BC 272)

4 However, AC is of the view that, based on its experience of applying the IE Amendment in practice, it would be more appropriate if (in our example above) X were required to consolidate Y and then reflect Y s underlying investment portfolio directly on X s statement of financial position. Y may in practice undertake no activities at all or it may receive external funding that is used to in part fund the purchase of the investment portfolio. AC is of the view that permitting X to achieve a different accounting result by the simple insertion of Y, is not providing sufficient transparency and would therefore prefer to see a requirement for Y to be consolidated in this instance. (ii) Master-Feeders distinguishing these from internally focussed structures AC sees a distinction between the above internally focussed structures and the more standard master-feeder type arrangements and is of the view that it is important to retain the consolidation exemption for master-feeders. These master-feeder arrangements are typically set up to facilitate investors, e.g.: a) providing a tax efficient pooling of funds by US and overseas investments into a single master fund, via their respective feeders. b) more recently in Europe, master-feeder structures allowing asset managers to set up feeder funds to gather investors funds in from individual EU member states into a single master investment holding vehicle. This allows the tailoring of feeder funds to suit the investors of a particular jurisdiction and also achieve economies of scale by allowing the investment manager to undertake investing via a large master vehicle. AC is of the view that the original IE consolidation exception was clearly intended to allow a relief from consolidation for these master-feeder type structures and also certain private equity fund structures. In the case of master-feeders, the relief was viewed by the funds industry as being helpful and practical due to the fact that a particular parent feeder s percentage holding changes over time, sometimes due to subscriptions and redemptions occurring in other feeders in the structure. These various changes might also mean that the initial feeder would no longer be the parent of the master, thus causing practical difficulties as that feeder would have initially needed to consolidate, then de-consolidate and potential re-consolidate the master at various points in time. Therefore AC s concern is more related to what it sees as the wider and unintended consequences of the IE Amendment as it currently allows the more internally structured intermediate holding companies to be measured at fair value instead of being consolidated.

5 Question 3 Application of the equity method by a non-investment entity investor to an investment entity investee The IASB proposed to amend IAS 28 to: a) Require a non-investment entity investor to retain, when applying the equity method, the fair value measurement applied by an investment entity associate to its interest in subsidiaries; and b) Clarify that a non-investment entity investor that is a joint venturer in a joint venture that is an investment entity cannot, when applying the equity method, retain the fair value measurement applied by the investment entity joint venture to its interests in subsidiaries. Do you agree with the proposed amendments? Why or why not? AC supports the proposal in (a) above in relation to associates. However, AC disagrees that a different conclusion (in (b) above) be reached for joint ventures due to the resulting extra costs involved for the joint venture investor in preparing the additional information. Related to this, AC notes that it is also possible that the investment entity (which is the joint venture referred to in (b) above) might itself have associate interests measured at fair value. If the approach in (b) was required, the joint venturer would still be faced with the difficulty of unwinding this associate fair value accounting in order to produce financial information for its joint venture interest on the equity method basis. Finally, AC notes that the where the joint venture interest is material to the joint venturer, IFRS 12 requires the disclosure of certain information in relation to the interest held. AC notes that where the joint venturer measures its investment at fair value, it is still required to provide financial information relating to the underlying joint venture itself which will then provide helpful information to users (IFRS 12.21(b) and IFRS 12 Appendix B, paragraphs B12-B15). Therefore sufficient additional information is available to users through these disclosures.