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CL IFRS Off-Balance-Sheet Entities


									Hans Hoogervorst
International Accounting Standards Board
30 Cannon Street

4th January 2012

Dear Mr Hoogervorst,

ED/2011/4: Investment Entities

This is the British Bankers’ Association’s response to the above exposure draft; we welcome
the opportunity to comment.

We are broadly supportive of the proposal for the exemption and agree that there are
circumstances where the measurement of investments controlled by an investment entity at
fair value results in information of greater decision-usefulness than consolidation. However,
we believe that further attention needs to be given to the proposed criteria for determining
whether an entity qualifies as an investment entity and believe that the proposed transition
arrangements should be revisited. In particular, a number of our members make use of the
current provision within IAS 28 to record venture capital investments at fair value rather than
apply equity method accounting. They believe that such treatment better reflects the way
such investments are managed and evaluated. As drafted, the exposure draft would remove
the ability to use this treatment since the bank or banking group concerned would not meet
the proposed definition of an investment entity. Consequently, we would recommend no
changes are made to IAS 28 at this time since this standard is likely to be subject to a wider
review on the purpose of equity accounting.

We offer our thoughts on the specific question raised in the ED below.

Do you agree that there is a class of entities, commonly thought of as an investment
entity in nature, that should not consolidate controlled entities and instead measure
them at fair value though profit or loss? Why or why not?

We agree with the proposal to establish an exception from the requirement in IFRS 10 to
consolidate when the parent entity meets the definition of an investment entity. In our view,
consolidating the underlying assets and liabilities will provide information which is less
decision-useful than measurement at fair value through profit or loss, as this better aligns
with the business model.

Question 2
Do you agree that the criteria in this exposure draft are appropriate to identify entities
that should be required to measure their investments in controlled entities at fair value
through profit or loss? If not, what alternative criteria would you propose, and why are
those criteria more important?

As a matter of principle, we believe that consolidated financial statements provide the most
decision-useful form of financial reporting but accept that, as argued in BC4, consolidated
financial statements of an investment entity may impede users’ ability to assess an
investment entity’s financial position because they emphasise the position of the investee
rather than the investment entity. Further, we agree that any exemption from the
consolidation principle must be carefully limited to those circumstances where measurement
at fair value is more decision-useful than consolidation. We are not wholly convinced,
however, that the criteria in paragraph 2 strike this balance correctly. In particular we have
concerns with the extension of the investment entity definition to the current ‘venture capital
exemption’ in IAS 28. Many banks make non-controlling equity investments as part of a
restructuring with a view to helping to turn a business around and exiting through sale in the
medium term. These investments are not a strategic part of the underlying business and we
believe that equity method accounting for such interests provides less decision useful
information than fair value through profit and loss. It is also inconsistent with the way in
which such investments are managed. We would suggest that an irrevocable decision on
initial recognition to treat such investments as fair value through profit and loss provides an
appropriate means of determining the accounting treatment. While we appreciate that the
Board intends this amendment to form part of IFRS 10, it may be sensible for this change to
be included in a wider review of equity accounting or, at the least, the Staff should undertake
further field-testing before the Board takes a final decision.

Question 3
Should an entity still be eligible to qualify as an investment entity if it provides (or
holds an investment in an entity that provides) services that relate to:

      a) its own investment activities?
      b) the investment activities of entities other than the reporting entity?

Why or why not?

We believe that the accounting treatment should reflect the underlying substance of the
entity’s business, therefore providing services directly connected to its own activities or the
activities of other entities in its group should not affect its eligibility to be an investment entity.

Question 4
    a) Should an entity with a single investor unrelated to the fund manager be
        eligible to qualify as an investment entity? Why or why not?
    b) If yes, please describe any structures/examples that in your view should meet
        this criterion and how you would propose to address the concerns raised by
        the Board in paragraph BC16.

Whilst we can understand the Board’s desire to avoid the creation of a loophole which could
be utilised to achieve off-balance sheet accounting, we are not convinced of the conceptual
merit of ruling that an investment entity which has a single investor, provided the investor is
not a related party, could not be considered an investment entity. For example, funds can be
structured so that individuals have their own funds under the umbrella of a shared investment

Question 5
Do you agree that investment entities that hold investment properties should be
required to apply the fair value model in IAS 40, and do you agree that the
measurement guidance otherwise proposed in the exposure draft need apply only to
financial assets, as defined in IFRS 9 and IAS 39 Financial Instruments: Recognition
and Measurement? Why or why not?

To the extent that investment properties are managed with the same purpose and on a fair
value basis, then we agree that an investment entity should apply fair value measurement to
asset classes such as investment property and financial assets.

Question 6
Do you agree that the parent of an investment entity that is not itself an investment
entity should be required to consolidate all of its controlled entities? If not, why not
and how would you propose to address the Board’s concerns?

We urge the Board to review this decision as we believe that if more useful information is
provided by requiring the investment entity subsidiary to measure controlled investees at fair
value, then it is more than likely that useful information would also be provided by retaining
this accounting in the consolidated financial statements. Further, we believe that concerns
about possible abuse are overstated and that the proposed criteria are drawn sufficiently
tightly to mitigate any abuse and could be tightened further if deemed necessary, i.e. if the
concern is the investment entity subsidiary holding an equity interest in the parent this could
be addressed by mandating that investment entities may not make such investments.

Question 7
    a) Do you agree that it is appropriate to use this additional disclosure objective
        for investment entities rather than including additional specific disclosure
    b) Do you agree with the proposed application guidance on information that
        could satisfy the disclosure objective? If not, why not and what would you
        proposed instead?

We support the proposed disclosure objective, although we do not support the inclusion of
the long list of suggested disclosures to meet the objective in B19. This list is highly likely to
be interpreted as a checklist. We would favour a shorter and more targeted example which
places the onus on management to use its judgment over what disclosures should be

Question 8
Do you agree with applying the proposals prospectively and the related proposed
transition requirements? If not, why not? What transition requirements would you
propose instead and why?

We believe that the transition provisions should be aligned with those of IFRS 10, i.e.
retrospective application unless that is impracticable. Although we welcome the Board’s
decision to consider practicality, we fear that prospective application would seriously
undermine comparability between current and comparative periods. We believe that the
Board’s concerns about undue use of hindsight in determining fair value are overstated given
that to qualify for the use of the exemption the entity must manage its investments at fair
value. It is therefore highly likely that qualifying investment entities will have collected fair
value information.

Question 9
    a) Do you agree that IAS 28 should be amended so that the mandatory
        measurement exemption would apply only to investment entities as defined in
        the exposure draft? If not, why not?
    b) As an alternative, would you agree with an amendment to IAS 28 that would
        make the measurement exemption mandatory for investment entities as
        defined in the exposure draft and voluntary for other venture capital
        organisations, mutual funds, unit trusts and similar entities, including
        investment-linked insurance funds? Why or why not?

As we have explained in our response to question 2, we are concerned by the proposal to
remove the existing IAS 28 measurement exemption for venture capital. As BC29 observes,
the proposed amendment will have the effect of limiting the ability of entities to measure their
investments in joint ventures at fair value through profit or loss, even though management
judges that this measurement produces more decision-useful information for the users of
financial statements. We encourage the Board to consider further work before reaching a

Yours sincerely,

Paul Chisnall
Executive Director

T +44(0)20 7216 8865

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