To address market confusion, the International Accounting Standards Board (IASB) confirmed that fund of funds should use fair value accounting on their underlying fund investments as opposed to the traditional consolidation method.
The international accounting standard setter, which made amendments to IFRS 10 Consolidated Financial Statements, clarified that investment companies do not need to consolidate all the assets and liabilities and the income and expenses of their underlying fund holdings line-by-line in to the balance sheet and income statement.
The changes come after the IASB’s Interpretations Committee, which reviews widespread accounting issues, was flooded with questions regarding consolidation.
The IASB’s US counterpart, Financial Accounting Standard Board (FASB), also made some changes to its consolidation rules earlier this year.
Under the US’ old accounting standards, fund advisers that do not provide investors certain voting rights like GP removal options must consolidate funds into their own financial statements, even if the fund advisers only owns a very small economic interest in the fund. Under the new rules, the adviser must hold a significant economic stake in the fund to be required to consolidate under certain circumstances.