Fair Valuation of Subsidiaries

Query:

An Investment bank has 3 subsidiaries that are into portfolio investment in private equities,

funds, real estate business. Investment bank does typical business of spotting

opportunities , collects deposits and invests in private equities/real estate portfolios on

behalf of investors where it also takes a 1-3% stake. It has been consolidating these 3

subsidiaries so far and seeking advise if it can do fair valuation of such subs and how

should it do? ?

Answer:

Based on the query and the provided knowledge base, I will provide a comprehensive

response addressing the investment bank’s situation regarding consolidation of its

subsidiaries and fair value measurement. Here is my analysis and advice:

Fair Value Measurement of Investment Bank Subsidiaries

1. Introduction

The investment bank in question has three subsidiaries engaged in portfolio investment

activities in private equities, funds, and real estate. The bank’s core business involves

identifying investment opportunities, collecting deposits, and investing in these assets on

behalf of investors while taking a 1-3% stake. Currently, the bank has been consolidating

these subsidiaries, but is seeking advice on whether it can apply fair value measurement to

these entities and how to implement this approach.

2. Relevant Standard/Law References
3. The primary guidance for this situation comes from IFRS 10 Consolidated Financial

Statements, which provides an exception to consolidation for investment entities.

1. An investment entity is defined as an entity that: i. Obtains funds from one or more

investors for the purpose of providing those investor(s) with investment management

services; ii. Commits to its investor(s) that its business purpose is to invest funds solely

for returns from capital appreciation, investment income, or both; and iii. Measures and

evaluates the performance of substantially all of its investments on a fair value basis. IFRS

10, para 27

1. If an entity meets the definition of an investment entity, it is required to measure its

investments in subsidiaries at fair value through profit or loss, rather than consolidating

them. IFRS 10, para 31

3. Detailed Explanations3.1 Assessment of Investment Entity Status

Based on the information provided, the investment bank appears to meet the criteria for an

investment entity:

1. It obtains funds from investors to provide investment management services. ii. Its

business purpose is to invest funds for returns from capital appreciation and investment

income. iii. It likely measures and evaluates the performance of its investments on a fair

value basis, given its focus on portfolio investments.

To confirm its status as an investment entity, the bank should ensure that it:

1. Measures and evaluates the performance of substantially all of its investments on a fair

value basis. b. Has more than one investment (which is evident from the multiple

subsidiaries and diverse portfolio). c. Has more than one investor (which seems likely given

its business model). d. Has investors that are not related parties of the entity (this should

be confirmed). e. Has ownership interests in the form of equity or similar interests. IFRS

10, para B85K-B85M

3.2 Application of Fair Value Measurement

If the investment bank qualifies as an investment entity, it should:

1. Measure its investments in the three subsidiaries at fair value through profit or loss,

rather than consolidating them. b. Apply this treatment consistently to all subsidiaries that

are investment entities themselves. c. Continue to consolidate any subsidiaries that provide

investment-related services and are not themselves investment entities. IFRS 10, para 31,

32

3.3 Implementation of Fair Value Measurement

To implement fair value measurement for its subsidiaries:

1. The bank should use appropriate valuation techniques to determine the fair value of

each subsidiary, considering the nature of their underlying investments (private equities,

funds, real estate). b. Fair value should be measured at each reporting date, with changes

in fair value recognized in profit or loss. c. The bank should ensure it has systems and

processes in place to reliably measure fair value on an ongoing basis. d. Adequate

disclosures should be provided in the financial statements regarding the fair value

measurements and the bank’s status as an investment entity.

3.4 Considerations for the Parent CompanyIt’s important to note that if the investment bank itself is a subsidiary of a non-investment

entity parent, the exception to consolidation would not apply at the parent level. The parent

would still need to consolidate the investment bank and its subsidiaries. IFRS 10, BC277

4. Used Cases/Interpretations & Disclosures by the listed entities

Several entities have implemented the investment entity exception and provide useful

examples of how to apply fair value measurement to subsidiaries:

3i Group plc (UK, 2022): “In accordance with IFRS 10 the Company meets the criteria as

an investment entity and therefore is required to recognise subsidiaries that also qualify as

investment entities at fair value through profit or loss. It does not consolidate the

investment entities it controls. Subsidiaries that provide investment related services, such

as advisory, management or employment services, are not accounted for at fair value

through profit and loss and continue to be consolidated unless those subsidiaries qualify as

investment entities, in which case they are recognised at fair value.” 3i Group plc, page 158

Investcorp Holdings B.S.C. (Bahrain, 2022): “The Group qualifies as an investment entity

as defined under IFRS 10, and as such, measures its investments in accordance with the

requirements set out in the standard. The results of all subsidiaries are included in the

consolidated statement of profit or loss from the effective date of formation or acquisition.

The financial statements of the Company’s subsidiaries are prepared for the same

reporting year as the Company, using consistent accounting policies. All intercompany

balances, income and expenses have been eliminated on consolidation.”

Investcorp-Annual-Report-2022, page 127

5. Summary

Based on the analysis of IFRS 10 and industry practices, we can conclude:

1. The investment bank likely qualifies as an investment entity under IFRS 10, given its

business model and investment activities.

2. As an investment entity, the bank should measure its investments in subsidiaries that

are also investment entities at fair value through profit or loss, rather than consolidating

them.

3. The bank should implement appropriate valuation techniques to measure the fair

value of its subsidiaries at each reporting date, recognizing changes in fair value through

profit or loss.4. Subsidiaries that provide investment-related services and are not themselves

investment entities should continue to be consolidated.

5. The bank should ensure proper disclosures regarding its status as an investment

entity and the fair value measurements of its subsidiaries.

6. If the investment bank is itself a subsidiary of a non-investment entity, the parent

company would still need to consolidate the investment bank and its subsidiaries in its

own financial statements.

By adopting this approach, the investment bank can provide more relevant financial

information that reflects the nature of its business and aligns with industry practices for

similar entities.

6. Attribution

The information provided in this response is based on IFRS 10 Consolidated Financial

Statements as issued by the International Accounting Standards Board (IASB). The

specific rules referenced are IFRS 10 paragraphs 27, 31, and 32. For complete and

authoritative guidance, please refer to the full IFRS 10 standard available through the IFRS

Foundation website.