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JBA concerns on IASB investment rules

Friday 6 January 2012 – by Karina Whalley

Japanese bankers and European accountants have raised concerns over international accounting standards, calling for better criteria in identifying investment entities.

In letters to the International Accounting Standards Board on Thursday, the Japanese Bankers Authority and the European Accountants Federation highlighted issues in the exposure draft for investment entities, published in August.

The IASB proposed that an investment company be defined by the nature of its investment activity, the purpose of its business, whether it has unit ownership, and pooling of funds and whether it uses fair value management.

But the EEF said: “The definition of an investment company could be improved.”

Investment entities will be required to measure their investments in controlled entities at fair value through profit or loss, according to the draft proposals.

However, both the JBA and the EEF have pointed out that fair value measurement could be relevant to entities not captured within the IASB’s proposed definition.

“We would recommend that the IASB could consider a more principle-based definition with a focus on the business model and the relevance of fair value over consolidation,” said the EEF.

The draft says an investment company’s only substantive activities should involve multiple investments for capital appreciation and investment income.
But the JBA has criticised the “nature of the investment activity” criterion for limiting “the scope of applicable entities”.

The EEF has put an emphasis on so-called exit strategies which it says are “key in identifying an investment entity.

“The investment entity’s business plan should… also provide potential exit strategies enabling it to realise its capital appreciation or investment strategies that generate long-term investment income,” the federation said.

The IASB draft describes the “pooling of funds” as merging funds of the company’s investors in order for investors to benefit from professional investment management.

But the JBA, which represents 251 members in the Japanese banking industry, as well as the EEF, thinks this condition should be dropped.

“The existence of multiple, unrelated investors is certainly a typical feature of investment entities, but we do not believe that it should be a prerequisite,” said the JBA.

The EEF added: “The criteria unit of ownership and pooling of funds seem less essential and could potentially be eliminated.”

Among other issues, it was raised by the JBA that entities with single investors should also be considered as investment entities.

The EEF also complained that the parent of an investment company should not need to consolidate the investments controlled by an investment entity subsidiary.

The IASB is aiming to finalise the proposals by the second half of this year.

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