“Inconsistencies in the requirements for measuring fair value, and for disclosing information about fair value measurements, have contributed to diversity in practice and have reduced the comparability of information reported in financial statements.”
• Those that clarify the FASB’s intent about the application of existing fair value measurement and disclosure requirements; and
• Those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements.
The amendments in this ASU are effective for annual periods
beginning after December 15, 2011. Once IFRS 13 and the amendments from ASU 2011-04 are implemented,
the definition, measurement criteria and disclosure requirements for fair value measurements will be almost identical under IFRS and US GAAP, with only minor differences. This will, therefore, eliminate the difference on fair value of investments noted above.
Exposure Draft 2011/04 (IASB) and Proposed Accounting Standards Update (PASU) 2011-200
(FASB) ED 2011/04 proposes criteria for an entity to qualify as an investment
entity. The proposals would require an investment entity to measure its investments in controlled entities at fair value through profit or loss in accordance with IFRS 9 and to provide additional disclosures to enable users of its financial statements to evaluate the nature and financial effects of its investment activities.
This exposure draft also proposes that in its consolidated financial
statements, a parent of an investment entity should not retain the fair value accounting that is applied by its investment entity subsidiary to controlled entities, unless the parent qualifies as an investment entity itself. As a consequence, a parent of an investment entity should consolidate all entities it controls, including those that are controlled by an investment entity subsidiary, unless the parent is an investment entity itself. Comments on this ED were due on January 5, 2012.
The main elements of PASU 2011-200 are to:
1. Amend the IC definition in Topic 946 to make it almost identical to that of ED 2011/04.
2. Require an IC to consolidate another IC or an investment property entity (IPE) if it holds a controlling financial interest in the entity in a fund-of-funds structure. The IC parent would retain the specialised guidance when consolidating another IC or an IPE.
3. Amend the financial statements and financial highlights presentation requirements for situations in which an IC consolidates a less-than- wholly-owned IC or a less-than-wholly-owned IPE.
60 CAYMAN FUNDS | 2012
4. Prohibit an IC that is able to exercise significant influence over another IC or an IPE from accounting for its interest using the equity method of accounting. Rather, those investments would be measured at fair value.
5. Require additional disclosures including changes in an entity’s status as an IC, whether the IC has provided support to any of its investees, and any significant restrictions on an investee’s ability to transfer funds to the IC.
There are two significant differences in the proposed scope of entities
that would be an IC under US GAAP compared with IFRS. Under PASU 2011-200, an entity that is regulated as an IC under the Investment Company Act of 1940 would be an IC. The IASB decided not to base its definition of an investment entity under any local regulations.
The other significant difference under PASU 2011-200 is that if an IC
meets the criteria to be an IPE in the FASB’s proposed Update on IPEs, it would apply the requirements in that proposed update. The IASB has not proposed specific guidance to define an IPE. Therefore the entity would account for its investment properties in accordance with IAS 40, Investment Property. Comments on PASU 2011-200 were due on January 5, 2012.
Conclusions The IASB and the FASB are making progress in addressing the main
differences between IFRS and US GAAP for investment companies regarding financial instruments and fair value. However, while Topic 946 remains in effect there will be differences in the format of a set of financial statements prepared under IFRS compared to one prepared under US GAAP as Topic 946 provides specific guidance for investment entities. The IASB has made a start on specific guidance for investment entities (with the publication of ED 2011/04), but it may be some time before all the differences noted above are eliminated.
Ben Leung is the managing partner of PKF (Cayman) Ltd. He can be contacted at:
bleung@pkfcayman.com
Rennie Khan is an audit director at PKF (Cayman) Ltd. He can be contacted at:
rkhan@pkfcayman.com
Ben Leung has more than 15 years of accounting and auditing experience. He has specialised in the audits of Cayman-based mutual funds and captive insurance companies. He is a member of the Institute of Chartered Accountants in England and Wales and a member of the Cayman Islands Society of Professional Accountants.
Rennie Khan has 15 years of accounting experience, including 11 years in the Cayman Islands. Prior to joining the firm, he served with another major accounting firm in Trinidad and Tobago and the Cayman Islands. He gained his experience working on audits of investment funds, private banks, insurance captives and trust companies.
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