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IFRS 12
Structured entities – considerations
for fund managers
February 2014
Contents
In this issue:
Introduction....................................................................................... 2
Structured entities – summary of what fund managers need to know ...... 3
1. What is a structured entity? ............................................................ 5
2. How to assess if your funds are structured entities............................ 7
3. What is an ‘interest’ in a structured entity? ..................................... 10
4. IFRS 12 disclosure requirements for unconsolidated structured
entities ........................................................................................ 12
5. What disclosure is required to explain the nature, purpose, size
and activities of the unconsolidated structured entity and how it is
financed? .................................................................................... 13
6. What information would an entity disclose to explain the ‘nature of
risks’ from an unconsolidated structured entity? ............................. 14
7. What constitutes financial or other ‘support’ provided to an
unconsolidated structured entity? ................................................. 15
8. What should be disclosed as ‘additional information’? ...................... 15
9. At what level should the information required be aggregated? ......... 18
Appendix A: Example Disclosures ...................................................... 19
Effective date
IFRS 12 is effective for periods beginning on or after 1 January 2013, or, for those
reporting under IFRS as endorsed by the European Union, for periods beginning on
or after 1 January 2014. The standard may be early adopted.
Required disclosures
IFRS 12 requires specific disclosure for interests in unconsolidated structured
entities, which are split into two areas, namely ‘nature of interests’ and ‘nature of
risks’. Paragraph 24 of IFRS 12 requires an entity to disclose information that
enables users of its financial statements to:
a) Understand the nature and extent of its interests in unconsolidated structured
entities (paragraphs 26-28); and
b) Evaluate the nature of, and changes in, the risks associated with its interests in
unconsolidated structured entities (paragraphs 29-31).
The following sections 3 to 9 discuss structured entities and the required
disclosures in more detail.
Although IFRS 12 is a disclosure standard, it provides no examples to illustrate its
disclosure requirements. We have included an illustrative example, in Appendix A to
this publication, of possible disclosures that a fund manager may make, when it
manages several investment funds which have been classified as unconsolidated
structured entities.
Substantive rights
Further guidance on substantive rights can be found in IFRS 10. Paragraph 22 of
IFRS 10 states ‘An investor, in assessing whether it has power, considers only
substantive rights relating to an investee (held by the investor and others). For a
right to be substantive, the holder must have the practical ability to exercise that
right.’
Paragraphs B23 and B24 of IFRS 10 provide the following examples of factors to
consider when determining whether voting or similar rights are substantive:
a. Whether there are any barriers (economic or otherwise) that prevent the
holder (or holders) from exercising the rights
b. The parties required to exercise the rights, particularly where more than one
party must act collectively to exercise the rights
c. Whether the party or parties that hold the rights would benefit from the
exercise of those rights
d. Whether the rights are exercisable when decisions about the direction of the
relevant activities need to be made
Below, we look at each of these factors in turn.
Decision Tree
Yes
Yes
No
No Yes
Not a structured
Structured entity
entity
Is the entity a
Outside the scope of
subsidiary, associate
this document
or joint venture
Yes
No
Management fees
Management fees may be based on a percentage of the value of funds under
management and will vary depending on the valuation movements of those funds.
Fund managers may also earn incentive fees based on the performance of the
funds (e.g., outperformance of a benchmark or return above a hurdle return).
Our view is that management fees are variable returns because they expose the
fund manager to the performance risk of the fund. Therefore, fund managers that
receive management fees from their funds have a variable interest in those funds.
Size
The requirement to disclose the size of an unconsolidated structured entity would most
likely be satisfied by providing information about the net asset value of the fund.
However, paragraph BC120 (h) of the Basis for Conclusions to IFRS 12 specifically
states that IFRS 12 does not require the disclosure of the net asset value of the fund
held by a structured entity in which an entity has an interest. This would seem to
suggest that measures of size other than the fair value of assets would be acceptable.
Our view is that ‘funds under management’ is a well-known measure in the fund
management industry and is readily available. Therefore, this may be the easiest
and most useful measure of size for a fund manager to use in order to quantify the
size of an investment fund. However, there may be circumstances (e.g., early in the
life of a fund) when other measures like total fund commitments may be more
appropriate than net asset value.
Activities
When disclosing the activities of an investment fund, the fund manager should
disclose the primary activities for which the investment fund was designed, which
are the activities that significantly affect the investment fund’s returns. Paragraph
B11 of IFRS 10 provides examples of such activities, which, for an investment fund,
would be the purchasing and selling of investments and the obtaining of financing.
Financing
This disclosure requirement is not limited to financing provided by the fund manager
to the investment fund and would include financing received from third parties. It is
also not limited to equity financing and would appear to include all forms of
contractual financing which allow the investment fund to conduct its business
activities.
Support
Support is not defined in IFRS. Paragraph BC105 of the Basis for Conclusions to
IFRS 12 explains that the IASB did not define support because a definition would
either be so broad that it would be ineffective, or it would invite restructuring so as
to avoid disclosure. The IASB believes that support is widely understood as the
provision of resources to another entity, either directly or indirectly. Examples of
the type of support that may be disclosed for unconsolidated structured entities
include purchase of the assets of a structured entity or forgiveness of debt owed by
the structured entity.
IFRS 12 does not explain what is meant by ‘other support’ and whether this extends
to such non-financial support as the provision of human resources or management
services. Fund managers may provide other services to the investment funds they
manage including administration and company secretarial services, although these
may be provided by other companies within the fund manager’s group.
Losses incurred
A fund manager is required to disclose losses incurred in the reporting period from
its interests in an unconsolidated investment fund.
The standard does not elaborate on losses incurred, but we believe that it
contemplates both realised and unrealised losses and losses recognised in both
profit and loss and other comprehensive income. It may be informative to explain to
users of the financial statements, the line items in the financial statements in which
the losses have been recognised. It would also be informative to disclose the
aggregate losses incurred with respect to investments held at the reporting date as
well as the losses incurred in the reporting period. Examples of such losses may be
fair value losses from the fund manager’s holding in the investment fund and claw
back of fees.
Liquidity arrangements
This disclosure might include:
• Liquidity arrangements, guarantees or other commitments provided by third
parties to the structured entity which affect the fair value or risk of the
reporting entity’s interests in the structured entity
• Liquidity arrangements, guarantees or other commitments provided by third
parties to the reporting entity which affect the risks of the reporting entity’s
interests in the structured entity
We do not believe that this disclosure is intended to include liquidity arrangements,
guarantees or other commitments made by the structured entity to third parties.
This is because, while an arrangement provided to a third party may itself qualify as
an interest in a structured entity, it would not normally affect the fair value of an
entity’s interests in an unconsolidated structured entity.
20X1 20X0
£m £m
Listed equities – developed markets 12,560 11,118
Listed equities – emerging markets 3,402 3,680
Private equities – developed markets 800 780
Private equities – emerging markets 4,231 4,400
Corporate bonds 9,777 8,889
Property 6,850 7,250
Total 37,620 36,117
The listed and private equities are held in both developed and emerging markets
around the world. The corporate bonds are held in the US and Europe. The property
is held in the United Kingdom.
The investment funds have various investment objectives and policies but all funds
invest capital received from investors in a portfolio of assets in order to provide
returns to those investors from capital appreciation of those assets, income from
those assets or both.
The listed equity and property funds had debt financing with the following
maturities as at 31 December 20X0:
Between one and More than five
Within one year five years years Total
£m £m £m £m
Listed equity –
developed
markets 200 200 250 650
Listed equity –
emerging
markets 80 70 100 250
Property 10 150 100 260
Total 290 420 450 1,160
The following table summarises the carrying values of the Group’s interests in
unconsolidated structured entities recognised in the statement of financial position
as at 31 December 20X1:
Investments Accrued Deferred
at fair value income – income –
Fund asset through profit fees paid fees paid
type or loss Loans in arrears in advance Assets Liabilities
£m £m £m £m
Listed equities –
developed
markets 12.1 - 0.4 - 12.5 -
Listed equities –
emerging
markets 1.2 - 0.1 - 1.3 -
Private equities
– developed
markets 0.9 - - - 0.9 -
Private equities
– emerging
markets 3.0 - 0.5 - 3.5 -
Corporate
bonds 1.1 - - 0.1 1.1 0.1
Listed
equities –
emerging
markets 1.0 - 0.2 - 1.2 -
Private
equities –
developed
markets 1.0 - - - 1.0 -
Private
equities –
emerging
markets 2.8 - 0.4 - 3.2 -
Corporate
bonds 1.0 - - 0.1 1.0 0.1
Listed equities –
emerging markets 49.2 - 0.2 0.1 1.0 50.5
Private equities –
developed markets 16.7 1.1 - - 0.8 18.6
Private equities –
emerging markets 84.4 22.3 - - 0.2 106.9
The following table presents the Group’s total income and losses from
unconsolidated structured entities in the income statement for the year ended
31 December 20X0:
Fair value
Management gains and
and losses
Structured entity performance Carried Other Investment through
type fees interest fees income P&L Total
£m £m £m £m
Listed equities –
developed markets 105.0 - 1.0 0.8 1.2 108.0
Listed equities –
emerging markets 50.1 - 0.3 0.1 1.2 51.7
Private equities –
developed markets 15.7 1.0 - - 1.0 17.7
Private equities –
emerging markets 65.2 19.3 - - 0.4 84.9
Other fees include fees for property management and administrative services and
fees earned on property acquisitions.
Investment income includes dividend and interest income from funds and interest
on a bridging loan provided to a property fund (see below).
Other information
The Group holds all the management shares in ABC Hedge Fund, which have a par
value of £0.6 million (20X0: £0.6 million). These shares hold 100% (20X0: 100%) of
the voting rights and are subordinate to the redeemable preference shares held by
other investors in this fund. In all other funds, the rights of the shares held by the
Group are the same as those of other investors.
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