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Tom Brown, European head of investment management at KPMG

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IASB proposals for investment companies could encourage more to switch to IFRS, but do they go far enough?

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KPMG in the UK has given a qualified welcome to this week’s proposed amendments to consolidation requirements issued by the International Accounting Standards Board (IASB).

The amendments would require qualifying investment companies to recognise their investments in controlled entities in a single line item on the balance sheet, measured at fair value through profit or loss. Currently such investments are consolidated, with their assets, liabilities, income and expenses being recognised in the investment company’s own financial statements. This change could encourage more investment funds to switch to IFRS reporting.

Tom Brown (pictured), Head of Investment Management & Funds at KPMG in the UK, says: “This initiative is another step by the IASB in aligning the way investments are managed and their performance evaluated internally with external financial reporting. This could be a significant, positive change compared with the current position in IFRS. Investment companies that qualify for the exemption could benefit from the amendments, not least by avoiding the cost of consolidating controlled investments.”

Mike Metcalf, technical accounting partner at KPMG in the UK, says: “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 investees may not qualify.

Metcalf adds: “This will certainly be something for the private equity sector in particular to look at very carefully.”

Metcalf also questioned whether the IASB has gone far enough in its proposals.

He says: “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.”

Notwithstanding questions about the scope, Brown adds: “This change could encourage investment funds that have so far held back, partly because of the consolidation issue, to make the switch to IFRS. 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.

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