Associates and joint ventures at fair value: the venture capital exemption

DFIs routinely take 20% to 40% stakes with a board seat, veto rights over business plans and active involvement in governance, which usually gives significant influence and sometimes joint control. Without an election, each such stake must be equity-accounted: the DFI picks up its share of the investee's profit, needs the investee's IFRS financial statements on a timely basis with uniform accounting policies, and tests the whole investment for impairment. A DFI that is a venture capital organisation or similar entity may instead elect, investee by investee at initial recognition, to measure these stakes at fair value through profit or loss. The election changes reported profit, removes the need for equity-method information that frontier-market investees often cannot deliver, and aligns accounting with how the DFI manages its portfolio. Missing the initial-recognition window means equity accounting cannot later be switched off for that stake.

Does the DFI have significant influence or joint control over the investee (board representation, participation in policy decisions, veto rights over budgets or business plans, provision of essential technical information), regardless of whether the holding is above or below 20%? Is the DFI a venture capital organisation or similar entity: does it make investments with the aim of realising returns through capital growth and exit, manage and evaluate them on a fair value basis and have a defined holding horizon, or does it hold long-term strategic stakes with no exit plan? Was the election made and documented for each associate or joint venture at the date of initial recognition? Is part of the holding held through a subsidiary that is itself a venture capital organisation, so that the partial election applies to that portion only? If the DFI is an investment entity, has it applied the election to all associates and joint ventures as part of demonstrating the fair value element?

1. Assess significant influence or joint control on all facts, treating the 20% threshold as a rebuttable presumption and considering currently exercisable potential voting rights (such as conversion rights in a convertible loan).
2. Determine whether the DFI, or the subsidiary that holds the stake, is a venture capital organisation or similar entity, based on its business model, exit orientation and fair value management, and document the conclusion.
3. At initial recognition of each associate or joint venture, decide whether to elect fair value through profit or loss under IFRS 9 and record the decision; the election is made separately for each investee.
4. Where only part of the stake is held through a venture capital organisation subsidiary, measure that portion at fair value through profit or loss and apply the equity method to the remainder.
5. If the DFI is an investment entity, measure associates and joint ventures at fair value through profit or loss.
6. Where the election is not available or not taken, apply the equity method from the date significant influence or joint control arises, including impairment testing of the whole carrying amount.

Under the election, the stake is measured at fair value under IFRS 13 at each reporting date, with changes and dividends in profit or loss; there is no share of investee profit, no embedded goodwill and no separate impairment test. Under the equity method, the investment starts at cost, including goodwill, and is adjusted for the DFI's share of post-acquisition profit or loss and OCI, less dividends, with fair value adjustments from the acquisition date and uniform accounting policies, and is tested as a single asset for impairment when there is objective evidence. Shareholder loans that are not part of the equity-method net investment are measured under IFRS 9 first.

Disclose: (1) the judgments made in concluding that the DFI has significant influence or joint control, including where it holds less than 20% or does not have significant influence despite holding 20% or more; (2) for each material associate and joint venture, its name, nature of the relationship, principal place of business, ownership interest and whether it is measured at fair value or using the equity method; (3) the accounting policy for the venture capital election and the basis on which the DFI qualifies; (4) summarised financial information for material associates and joint ventures, which may be based on the investee's own financial statements where preparing IFRS information would be impracticable or cause undue cost; (5) the IFRS 13 disclosures for fair-valued stakes; (6) commitments relating to joint ventures and restrictions on fund transfers.

• Treating every stake below 20% as a simple financial asset without assessing board rights and policy participation
• treating the venture capital election as an accounting policy applied to all investees rather than a decision per investee at initial recognition
• trying to switch an existing equity-accounted stake to fair value in a later year
• claiming the election for long-term strategic or policy stakes with no exit orientation
• claiming investment entity status while equity-accounting associates
• equity-accounting a frontier-market investee using unadjusted local GAAP accounts with a reporting date more than three months apart
• omitting IFRS 12 disclosures for fair-valued associates on the assumption that IFRS 9 disclosures are enough