Last update 28/01/2020
IFRS 10 Illustrative Examples IFRS 10 IE1 Investment entity Limited partnership
These examples accompany, but are not part of, the IFRS.
Example 1
IE1 An entity, Limited Partnership, is formed in 20X1 as a limited partnership with a 10-year life. The offering memorandum states that Limited Partnership’s purpose is to invest in entities with rapid growth potential, with the objective of realising capital appreciation over their life. Entity GP (the general partner of Limited Partnership) provides 1 per cent of the capital to Limited Partnership and has the responsibility of identifying suitable investments for the partnership. Approximately 75 limited partners, who are unrelated to Entity GP, provide 99 per cent of the capital to the partnership.
IE2 Limited Partnership begins its investment activities in 20X1. However, no suitable investments are identified by the end of 20X1. In 20X2 Limited Partnership acquires a controlling interest in one entity, ABC Corporation. Limited Partnership is unable to close another investment transaction until 20X3, at which time it acquires equity interests in five additional operating companies. Other than acquiring these equity interests, Limited Partnership conducts no other activities. Limited Partnership measures and evaluates its investments on a fair value basis and this information is provided to Entity GP and the external investors.
IE3 Limited Partnership has plans to dispose of its interests in each of its investees during the 10-year stated life of the partnership. Such disposals include the outright sale for cash, the distribution of marketable equity securities to investors following the successful public offering of the investees’ securities and the disposal of investments to the public or other unrelated entities.
Conclusion
IE4 From the information provided, Limited Partnership meets the definition of an investment entity from formation in 20X1 to 31 December 20X3 because the following conditions exist:
- Limited Partnership has obtained funds from the limited partners and is providing those limited partners with investment management services;
- Limited Partnership’s only activity is acquiring equity interests in operating companies with the purpose of realising capital appreciation over the life of the investments. Limited Partnership has identified and documented exit strategies for its investments, all of which are equity investments; and
- Limited Partnership measures and evaluates its investments on a fair value basis and reports this financial information to its investors.
IE5 In addition, Limited Partnership displays the following typical characteristics of an investment entity:
- Limited Partnership is funded by many investors;
- its limited partners are unrelated to Limited Partnership; and
- ownership in Limited Partnership is represented by units of partnership interests acquired through a capital contribution.
IE6 Limited Partnership does not hold more than one investment throughout the period. However, this is because it was still in its start-up period and had not identified suitable investment opportunities.
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