This free, guided checker walks your finance team through the key decision points for IFRS 10 Investment Entity Exemption. Answer a few questions to see the likely treatment and the evidence to document.
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This tool is a high-level IFRS screening aid for general information only and is not accounting, audit or legal advice. Conclusions require entity-specific evidence and judgement - confirm the treatment with your advisor.
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The investment entity exception applies only where a parent controls subsidiaries but qualifies as an investment entity and measures those subsidiaries at fair value through profit or loss under IFRS 10.31. Confirm control under IFRS 10.6-7 before assessing the exception, since interests short of control follow IFRS 9 or IAS 28. Control can arise over a structured entity through contractual rights without a majority equity holding, so the population of subsidiaries is wider than the legal ownership register.
No subsidiaries are controlled, so the IFRS 10.31 investment entity exception does not apply; account for the interests held under IFRS 9 or IAS 28.
Official guidance: IFRS issued standards
The first defining criterion (IFRS 10.27(a)) requires the entity to obtain funds from one or more investors for the purpose of providing those investors with investment management services as its business purpose. Weigh offering documents, investment management agreements, and the way the entity presents itself to investors. An operating or holding company that raises capital to run trading businesses, rather than to provide investment management services, does not meet this criterion.
The entity fails the IFRS 10.27(a) criterion of obtaining funds to provide investment management services, so it is not an investment entity and consolidates its subsidiaries under IFRS 10.19-26.
Official guidance: IFRS issued standards
The second defining criterion (IFRS 10.27(b)) requires the entity to commit to investors that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both. Documented exit strategies stating how and over what period each investment class will be realised are the primary evidence (IFRS 10.B85F). Holding investments indefinitely to obtain operating synergies or benefits unavailable to unrelated parties points away from investment entity status.
Without a business purpose of investing for capital appreciation or investment income and a documented exit strategy, the entity fails IFRS 10.27(b) and is not an investment entity.
Official guidance: IFRS issued standards
The third defining criterion (IFRS 10.27(c)) requires the entity to measure and evaluate the performance of substantially all of its investments on a fair value basis, and fair value must be the primary measurement attribute reported internally and to investors (IFRS 10.B85K). Weigh investor reporting packs, key management information, and incentive arrangements. Reporting consolidated operating results, or measuring investments at cost or under the equity method for performance evaluation, indicates the criterion is not met.
Performance is not measured and evaluated on a fair value basis, so the entity fails IFRS 10.27(c) and cannot apply the consolidation exception.
Official guidance: IFRS issued standards
An investment entity measures its controlled investees (portfolio companies) at fair value through profit or loss under IFRS 10.31. The one exception is a subsidiary that is not itself an investment entity and whose main purpose is providing services that relate to the entity's investment activities: that services subsidiary is consolidated under IFRS 10.32, not measured at fair value (IFRS 10.B85C-B85E). The common trap is defaulting all subsidiaries to fair value and overlooking a services subsidiary that must be consolidated, or the reverse.
Resolve the measurement model: measure controlled investees at fair value through profit or loss under IFRS 10.31 and consolidate any non-investment-entity investment-related-services subsidiary under IFRS 10.32.
Official guidance: IFRS issued standards
IFRS 10.31 requires an investment entity to measure each subsidiary at fair value through profit or loss in accordance with IFRS 9, and not to apply the consolidation procedures of IFRS 10.19-26 or IFRS 3 on obtaining control. All fair value movements flow through profit or loss, not other comprehensive income. The only subsidiary exempt from this treatment is an investment-related-services subsidiary that is consolidated under IFRS 10.32.
Measure controlled investees at fair value through profit or loss with changes in profit or loss under IFRS 10.31 rather than consolidating them line by line.
Official guidance: IFRS issued standards
Because IFRS 10.31 measures each controlled investee at fair value through profit or loss, fair value must be determined at each reporting date as the price to sell the investment in an orderly transaction between market participants (IFRS 13.9; IFRS 13.24). Maximise observable inputs and categorise every measurement in the fair value hierarchy (IFRS 13.72). For unquoted investees, obtain supportable Level 3 valuations rather than carrying cost forward as a proxy, and refresh the valuation for conditions at the reporting date.
Determine fair value for each controlled investee at the reporting date on the IFRS 13 exit-price basis with hierarchy classification (IFRS 13.9; IFRS 13.72).
Official guidance: IFRS issued standards
IFRS 10.29 requires continuous assessment: reassess status whenever facts and circumstances indicate a change to one or more of the three defining criteria (IFRS 10.27) or the typical characteristics (IFRS 10.28). Ceasing to be an investment entity triggers IFRS 3 acquisition accounting for subsidiaries previously held at fair value, with the change-of-status date as the deemed acquisition date (IFRS 10.B100). Becoming an investment entity triggers deconsolidation as though control were lost at that date (IFRS 10.B101), applied prospectively.
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Official guidance: IFRS issued standards
An investment entity still provides IFRS 12 disclosures even though its subsidiaries are not consolidated. Disclose the fact that the exception is applied (IFRS 12.19A) and, for each unconsolidated subsidiary, its name, principal place of business, and ownership proportion (IFRS 12.19B), plus significant restrictions and any financial support or commitments to those investees (IFRS 12.19D-19G). The most commonly omitted items are commitments and support provided to unconsolidated investees.
Prepare the IFRS 12 investment-entity disclosures for the unconsolidated controlled investees (IFRS 12.19A-19G).
Official guidance: IFRS issued standards
Where a parent concludes it is an investment entity, IFRS 12.9A requires disclosure of the significant judgements and assumptions made in reaching that conclusion, including where the entity does not have one or more of the typical characteristics in IFRS 10.28. The measurement accounting policy stating that controlled investees are held at fair value through profit or loss is a material accounting policy under IAS 1.117. Users rely on these disclosures to understand why subsidiaries are not consolidated.
Add the investment entity accounting policy and the significant-judgement disclosure supporting the conclusion before authorization (IFRS 12.9A).
Official guidance: IFRS issued standards
IFRS 10.33 requires a parent of an investment entity that is not itself an investment entity to consolidate all entities it controls, including those controlled through an investment entity subsidiary. Assess each parent and intermediate parent separately against the IFRS 10.27 definition. The trap in fund-of-funds and holding structures is applying the ultimate parent's fair value treatment down the chain when a non-investment-entity intermediate parent must consolidate the underlying investees.
Assess each parent tier separately; a non-investment-entity parent consolidates investees held through an investment entity subsidiary under IFRS 10.33.
Official guidance: IFRS issued standards
Confirm whether the entity meets all three IFRS 10.27 defining criteria and therefore applies fair value through profit or loss to every controlled investee under IFRS 10.31, with complete IFRS 13 valuations and IFRS 12 disclosures. If any defining criterion fails, the exception is unavailable and the entity consolidates its subsidiaries under IFRS 10.19-26. Record the basis for the conclusion so it can be reassessed as facts change (IFRS 10.29).
Finalize FVTPL measurement, IFRS 13 fair value disclosures, and the IFRS 12 interest note (IFRS 10.31; IFRS 12.19A). Consolidate all subsidiaries line by line under IFRS 10.19-26, eliminating intragroup balances and transactions (IFRS 10.B86).
Official guidance: IFRS issued standards
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