What is an "investment entity" in HKFRS and how do you account for investment in a subsidiary in an "investment entity"?

Under Hong Kong Financial Reporting Standards (HKFRS), an "investment entity" is defined in HKFRS 10 Consolidated Financial Statements. An investment entity is an entity that:

1. Obtains funds from one or more investors.

2. Provides investment management services to those investors.

3. Commits to its investors that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both.

4. Measures and evaluates the performance of substantially all of its investments on a fair value basis.

   
   

Key Characteristics of an Investment Entity (HKFRS 10)

To qualify as an investment entity, an entity must also have the following typical characteristics (though not all are mandatory):

• It has more than one investment.

• It has more than one investor.

• It has investors that are not related parties.

• It has ownership interests in the form of equity or similar interests.

  
  

Accounting for Investments in Subsidiaries (for an Investment Entity)

If an entity meets the definition of an investment entity, it does not consolidate its subsidiaries (unlike regular entities). Instead, it accounts for them at fair value through profit or loss (FVTPL) in accordance with HKFRS 9 Financial Instruments.

Key Accounting Treatment:

1. Initial Recognition

   • Investment in a subsidiary is recorded at fair value (if determinable) or cost (if fair value is not reliably measurable at initial recognition).

2. Subsequent Measurement

   • The investment is remeasured at fair value at each reporting date.

   • Changes in fair value are recognized in profit or loss (P&L).

3. Dividends Received

   • Dividends from the subsidiary are recognized in P&L as part of investment income.

4. Disclosures

   • The investment entity must disclose:

     • The fact that it is an investment entity.

     • The significant judgments made in determining its status.

     • The fair value hierarchy (HKFRS 13) for its investments.

     • Details about subsidiaries that are not held at fair value (if any).