Equity investments held at cost?

[hubertd]

Hi Everyone,

I've just seen a message from someone claiming that our equity-like investments made since Sep last year won't need to be valued for March year end. This person is saying that his previous employers - which I can see were infrastructure assets managers - "had it written in their valuation procedures that they would hold investment at cost for 12 months in one case and through the first valuation cycle for the other". He further claims that "neither company prepared any materials or memos to support this and respective auditors (PWC and Deloitte) never queried this approach". Then again, he says that "once this stated period of holding at cost had passed they could continue to hold at cost if appropriate but would be required to justify this to the auditors. And 'investments that were going through a development phase could continue to be held at cost for some time if things were progressing to plan per the acquisition case though investments which were revenue generating would always be valued once the fixed period of holding at cost was over."

Now, he's creating the expectations amount ex-co members that we don't need to fair value our investments for year end accounts. It seems plain ridiculous to me and hard to believe that 'valuation procedures' would take priority over and disregard the accounting rules. It looks to me that the statements prepared in such a way would not be compliant with IFRS and couldn't be signed...

Before I start making a fuss about his claims, I'd like to check if anybody has ever seen or heard about the similar practices? Could it be there's something working differently for asset managers?

[Marek Muc]

This could stem from practices before implementation of IFRS 9. Under IAS 39 there was a clear exception allowing equity investments whose fair value couldn't be reliably measured to be carried at cost. IFRS 9 is stricter, but still offers a bit of flexibility (see IFRS 9.B5.2.3-B5.2.6)

[hubertd]

Many thanks Marek, really useful comments.

What about the disclosure requirements regarding instruments held at fair value, f.e the identification of the key parameters driving valuations and providing the sensitivities for same? Assuming it could be proved cost is the approximation of fair value, would these disclosure requirements be disregarded in such a case?

[Marek Muc]

I don't think specific disclosure requirements exist for such cases. Making up these disclosures wouldn't make sense. Instead, I'd disclose that you used cost as an approximation of fair value and provide the rationale behind this decision.

[hubertd]

I meant the existing disclosures for Level 3 investments.

Anyway...

I didn't specify in my original message that our equity-like investments are convertible preference shares and convertible loan notes. Cost exceptions in IFRS 9.B5.2.3-B5.2.6 seem to relate more to investments in unquoted equity. I'm not sure this exception could be applied to convertible instruments?

Furthermore, we're a financial institution and IFRS 9.BC5.18 states that "...the IASB also noted that those circumstances (i.e. mentioned in B5.23-B5.2.)6 would never apply to equity investments held by particular entities such as financial institutions and investment funds."

[Marek Muc]

When applying this exception, Level 3 disclosures aren't necessary since there's no fair value measurement recognised at the reporting date. Regarding the convertible instruments you're considering, would it be reasonable to assume that their cost approximates their fair value even after 12 months?

[hubertd]

No, definitely not. One is an investment in a commodity miner and the price of that mineral is highly volatile.