Investment funds – the green light to IFRS

The CSA recently published amendments to its rules so that investment funds will start reporting under IFRS in 2014

The Canadian Securities Administrators recently published amendments to National Instrument 81-106 Investment Fund Continuous Disclosure, effective for financial years beginning on or after January 1, 2014. This ends a process that ended up stretching over four years, since the first version of these amendments was released for comment, and means that after several delays, investment funds will finally adopt IFRS in their financial statements.

Fixing the consolidation problem

The major stumbling block has been that until recently, IFRS didn’t contain any exemption for investment entities from its normal accounting rules for subsidiaries, meaning investment entities would be required to consolidate any entities they control, rather than to measure those holdings at fair value as for other investments in the portfolio. This has now been addressed through amendments to IFRS 10, requiring an investment entity to measure investments in subsidiaries at fair value through profit or loss. The CSA acknowledges a possible complexity in that the IFRS definition of “investment entity” might not always conform to its own definition of an “investment fund,” but says it hasn’t yet identified a case where that’s a problem.

With this out of the way, most investment funds shouldn’t encounter any recognition or measurement issues from the transition – the CSA observes in its materials that “most investment funds have disclosed in their financial statements or management reports of fund performance that the impact of IFRS will be limited to additional note disclosure and modifications to existing presentation.” It’s possible to think of areas where there could be an impact. For example, compared to old Canadian GAAP, IFRS 13 might dictate a different approach to measuring the fair value of certain investments in unquoted entities, or at least require a reassessment of the valuation methods currently in place. But of course, this wouldn’t have any relevance to investment funds that simply invest in publicly traded entities.

The (defeated) case for consolidation

It might seem strange that things took this long: certainly the amendments to IFRS 10 always seemed to me a straightforward case of giving people what they’re asking for, in that investment entities didn’t want to prepare consolidated financial statements and there was no great interest from investors in having them do so. It’s interesting to remember though that three members of the IASB opposed the original proposals, even including former Chair David Tweedie. They acknowledged that users of investment entities have generally expressed a preference for fair value information, but thought this would be better achieved by consolidating controlled investees and disclosing the fair value information in the notes, or else by providing separate parent entity financial statements showing all controlled investees at fair value.

The dissenting trio believed “measuring investments in controlled investees at fair value would impair the comparability of the reporting entity’s financial statements by making unlike things look alike.” They went on: “In their view, a controlling interest in another entity is not the same as a non-controlling interest in another entity, because the reporting entity has the power to direct the activities of the controlled entity for its benefit.” I suppose there was an inherent skepticism in their position about the gap between what people say and do. An investment entity’s management might claim their controlling interest in another entity is essentially passive, confined to income and capital appreciation and to looking for an exit strategy, without any interest in actively exercising that voting power. And yet, if they see more appeal in having that controlling stake than in a non-controlling stake of comparable economic value, it can only be because that “power to direct” stands for something, such as a form of downside protection. Still, to worry about whether the comparability of one investing entity’s statements versus another would be “impaired” by this matter always seemed rather futile, and way down the list of challenges for an investor in determining whether a particular investment entity constitutes a good vehicle for one’s capital. And that’s how the majority saw it.

No extensions

Some commentators on the CSA’s original proposal asked for a thirty-day extension to the initial filing deadline under IFRS, as was granted in 2011 for the first quarterly filings by other entities. But the CSA doesn’t see any such reason to bend its rules this time, noting that “preparers of investment fund financial statements have had three years to consider the implications of adopting IFRS and learn from the experiences of other reporting issuers” and that anyway, as already noted, most of these entities have already disclosed the impact won’t be significant. Coupled with the fact that investment funds file semi-annual rather than quarterly statements, and thus inherently have more preparation time subsequent to their last audited Canadian GAAP filing, I doubt the CSA found this a difficult request to turn down.

Overall then, there’s no apparent reason to expect any noticeable bumps from this transition. And then, with one more aspect of messiness removed from the accounting landscape, it’s on to deal with rate-regulated entities! Well, actually, that’s another story…

The opinions expressed are solely those of the author

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