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How Investment Entities Consolidate or Measure Subsidiaries under IFRS 10 and ASC 946

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Investment entities differ fundamentally from traditional holding companies because their business model focuses on investing for capital appreciation or investment income, not on controlling or operating subsidiaries. Under IFRS 10 and US GAAP (ASC 946 — Financial Services: Investment Companies), investment entities are exempt from full consolidation and instead measure most subsidiaries at fair value through profit or loss (FVTPL).

This approach enhances comparability among investment funds, private equity firms, and venture capital structures, ensuring that financial statements reflect investment performance, not operational control.

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How investment entities are defined

IFRS 10.27–33 defines an investment entity as an entity that:

  • Obtains funds from investors to provide investment management services.

  • Commits to invest solely for returns from capital appreciation, investment income, or both.

  • Measures and evaluates performance on a fair value basis.

Additional indicators include:

  • More than one investment.

  • More than one investor (though single-investor funds can qualify in some cases).

  • Investors unrelated to the parent.

  • Ownership interests represented by equity or similar units.

US GAAP (ASC 946-10-15) defines an investment company similarly, requiring:

  • Business purpose centered on investment returns.

  • Multiple investments and investors (with limited exceptions).

  • Fair value measurement as the primary basis for performance reporting.

Both frameworks rely heavily on substance over form, focusing on the entity’s activities, exit strategy, and measurement philosophy.

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How consolidation is exempted under IFRS 10

Under IFRS 10.31, investment entities do not consolidate subsidiaries that are themselves controlled for investment purposes. Instead, they measure those subsidiaries at fair value through profit or loss under IFRS 9.

Exception:A subsidiary providing services related to investment activities (e.g., investment advisory, risk management, or administrative support) must be consolidated.

Example:A private equity fund holds:

  • Subsidiary A — portfolio company (investment purpose).

  • Subsidiary B — internal management entity providing fund administration.

→ Subsidiary A measured at fair value (FVTPL).→ Subsidiary B fully consolidated.

Journal entry (measurement approach):

  • Debit: Investment in Subsidiary A (at fair value) xx

  • Credit: Fair Value Gain/Loss – P&L xx

This ensures the investment’s carrying amount aligns with investor reporting at fair value NAV.

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How US GAAP (ASC 946) applies fair value measurement

ASC 946 requires investment companies to measure all investments at fair value, including controlling interests, unless those investments are in operating companies consolidated for operational reasons (rare cases).

Unlike IFRS, there is no consolidation exemption rule—investment companies inherently do not consolidate controlled portfolio companies. Instead, the fair value principle dominates.

Example:A US private equity fund owns 100% of a start-up valued at 25,000,000.The fund does not consolidate the start-up’s balance sheet; it recognizes:

  • Investment in Portfolio Company (FVTPL) 25,000,000.Subsequent valuation gains/losses go directly to net income.

Key consistency rule:All controlled portfolio investments must follow ASC 946 fair value unless the parent ceases to qualify as an investment company.

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Comparative framework between IFRS 10 and ASC 946

Aspect

IFRS 10

US GAAP (ASC 946)

Primary objective

Capital appreciation / investment income

Same

Definition

Based on IFRS 10 criteria (fund structure, investors, exit strategy)

Based on ASC 946 guidance (fair value focus)

Consolidation rule

Exempt from consolidating investment subsidiaries

No consolidation for portfolio investments

Service subsidiaries

Must be consolidated

Generally not applicable; rare exceptions

Measurement

Fair value through profit or loss (IFRS 9)

Fair value through net income (ASC 946)

Parent exemption

Parent of investment entity cannot consolidate underlying investment subsidiaries

Same; consolidation not required

Disclosures

IFRS 12 expanded disclosures on unconsolidated investees

ASC 820 and ASC 946 fair value disclosures

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Presentation and disclosure requirements

Under IFRS 12, investment entities must disclose:

  • The nature and extent of interests in unconsolidated subsidiaries.

  • Significant judgments made in determining investment entity status.

  • Restrictions on transferring funds between the entity and investees.

  • Financial or support commitments to unconsolidated subsidiaries.

Under US GAAP, disclosures under ASC 820 and ASC 946 include:

  • Valuation techniques and inputs used to determine fair value (Level 1–3 hierarchy).

  • Quantitative reconciliation of Level 3 fair value movements.

  • Income, realized/unrealized gains, and fees by investment class.

Example disclosure summary (IFRS 12 style):

Investment

Ownership (%)

Measurement Basis

Fair Value (USD)

Portfolio Company A

80

FVTPL (IFRS 9)

15,000,000

Portfolio Company B

60

FVTPL (IFRS 9)

8,500,000

Admin Subsidiary

100

Consolidated

n/a

Total fair value of unconsolidated subsidiaries: 23,500,000

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Accounting entries summary

IFRS — Investment Entity:Initial recognition

  • Debit: Investment in Subsidiary (at cost/fair value) xx

  • Credit: Cash xx

Subsequent fair value change

  • Debit: Investment in Subsidiary xx

  • Credit: Fair Value Gain – P&L xx

Service subsidiary consolidation

  • Full consolidation under IFRS 10 with standard elimination entries.

US GAAP — Investment Company:Fair value changes

  • Debit: Investment xx

  • Credit: Unrealized Gain – Income xx(or reverse for loss)

Distributions received

  • Debit: Cash xx

  • Credit: Investment xx

No consolidation adjustments are made for controlled investees.

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Impact on financial performance and ratios

  • Revenue volatility: higher due to fair value remeasurement each period.

  • Net Asset Value (NAV): aligns accounting value with investor reporting.

  • EBITDA / operating profit: less meaningful, as returns are valuation-driven.

  • Debt-to-equity: appears lower since portfolio company liabilities are not consolidated.

  • ROE: may fluctuate significantly with valuation changes rather than operating results.

Analysts evaluating investment entities focus on NAV growth, distributions, and realized vs unrealized gains instead of operating margins.

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Operational considerations

  • Reassess investment entity status each reporting date (IFRS 10.27–30) to confirm exemption validity.

  • Implement robust fair value governance for portfolio valuations, including third-party appraisal and valuation committees.

  • Ensure consistent valuation hierarchy classification under IFRS 13 / ASC 820.

  • Disclose any commitments to provide additional financial support to unconsolidated subsidiaries.

  • Align accounting with investor reporting (NAV statements, fund reporting cycles).

Accurate application of IFRS 10 and ASC 946 ensures transparency in how investment entities represent performance and risk exposure—reflecting fair value economics rather than consolidation-based control.

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