VENTURE CAPITAL
When an investment in an associate or a joint venture is held
by, or is held indirectly through, an entity that is a venture capital
organisation, a mutual fund, unit trust or similar entity including an
investment-linked insurance fund, the entity may elect to measure investments
in those associates and joint ventures at fair value through profit or loss in
accordance with IFRS 9 – Financial Instruments. [IAS 28.18].
This exemption is related to the fact that fair value measurement
provides more useful information for users of the financial statements than
application of the equity method. In the Basis for Conclusions to IAS 28, the
IASB clarified that this is an exemption from the requirement to measure
interests in joint ventures and associates using the equity method, rather than
an exception to the scope of IAS 28 for the accounting for joint ventures and
associates held by these entities. [IAS 28.BC12, BC13]
This exemption raises the question of exactly which entities
comprise ‘venture capital organisations, or mutual funds, unit trusts and
similar entities including investment linked insurance funds’, since they are
not defined in IAS 28. This was a deliberate decision by the IASB given the
difficulty of crafting a definition. [IAS 28.BC12]
A venture capital company which has a fund which is committed
for investment in early-stage companies. Venture capital is a form of private
equity and a type of financing that investors provide to start-up companies and
small businesses that are believed to have long-term growth potential. This
finance can also be loan based or in convertible debentures or even takes the
form of share capital in the business. In broader sense, venture capital refers
to the commitment of capital and knowledge for the formation and setting up of
companies particularly to those specialising in new ideas or new technologies.
Thus, it is not merely an injection of funds into a new firm but also a
simultaneous input of skills needed to set the firm up, design its marketing strategy,
organise and manage it.
Entity A has a number of separate activities. One segment’s
business is to partner with third-party investors to acquire all the shares of
companies with high growth potential. The business segment also defines a clear
exit strategy when it will dispose of its investment. Bank A’s portion of the
shares as a co-investor provides it with significant influence, but not
control. Entity A considers these activities to be in the nature of venture
capital. Even though Entity A is itself not a venture capital organisation, it
would be able to apply the exemption and account for its investments at fair value
under IFRS 9, with changes in fair value recognised in profit or loss in the
period of change.
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