As an established treasury instrument, investments in investment funds (hereinafter referred to as investment funds) are regularly considered in a wide variety of different cases. But what accounting considerations need to be taken into account when investing in investment funds in accordance with IFRS and what are the consequences of the respective forms of organisation?
Investments in investment funds are able to take into account the specific investment needs of an investor or a group of investors due to the individual structuring options. In the case of investment funds, a further distinction must be made as to whether the investment fund was set up specifically for one investor or for a group of investors. From the investors' perspective, accounting and tax considerations in particular play a significant role, which can have a considerable impact on the balance sheet ratios. The motives for investing in investment funds can be extremely heterogeneous and include, for example, the following issues:
- Investment of excess liquidity over a certain period of time;
- Pursuit of a selected risk/return profile over a specific period of time; or
- Investment vehicles for large-volume financing requirements.
Umbrella funds have established themselves as a common form of investment fund, particularly abroad. Umbrella funds are characterised by the fact that various individual funds with different investment strategies are combined under a common "umbrella". The umbrella fund as a whole, i.e. including the individual sub-funds, usually represents the legal entity, whereby the respective sub-funds are protected entities (protected-cell regime) and the assets of individual sub-funds cannot be used to fulfil the liabilities of other sub-funds (not even in the event of insolvency). The advantage of umbrella funds is that the investor(s) can generally switch between the various sub-funds without major economic disadvantages in the form of costs and can therefore adjust their investment strategy. Umbrella funds are regularly organised and managed in cooperation with external partners.
In addition to the operational issues relating to the structuring or determination of investments in investment funds, the effects on the investor's balance sheet structure and key figures must also be taken into account in the same context. The following questions can be cited as examples:
- Do the shares in investment funds have to be consolidated in the investor's consolidated financial statements in accordance with IFRS and thus result in on-balance sheet accounting or does the contractual arrangement allow off-balance sheet accounting without any major impact on the balance sheet ratios?
- According to which IFRS regulations are investments in investment funds to be recognised in the case of non-consolidation and which valuation standards are to be used?
- What specific disclosure options can be achieved for investments in investment funds?
Re 1: The assessment of an obligation to consolidate investment assets in IFRS financial statements is based on the so-called "delegated power" concept.1 Accordingly, there is an obligation to consolidate if control within the meaning of IFRS 10 exists. IFRS 10 exists. Control in accordance with IFRS 10 can be inferred if the following three criteria are cumulatively fulfilled: Control over the relevant activities, exposure or rights to variable returns and linkage between control and variability of returns. While the question of a consolidation obligation does not require a detailed analysis in some cases, contractual constellations for investment funds as special purpose vehicles (SPV) in particular may require a detailed analysis of the consolidation obligation. In this context, it should be noted that IFRS 10 does not provide any further differentiation for contractual arrangements in connection with special purpose vehicles and that more extensive guidelines on the question of the consolidation requirement have been established in practice.2
Re 2: If there is no consolidation or no proportionate consolidation (at equity) for investments in investment funds, these regularly fall within the scope of IFRS 9 "Financial Instruments". Investments in investment funds generally fulfil the definition of financial assets and must be further examined for classification as equity or debt instruments for measurement and accounting purposes. Typically, investments in investment funds are often classified as debt instruments and allocated to the "at fair value through profit or loss" (FVTPL) measurement category. Categorisation in another measurement category is usually ruled out as the return structure does not consist solely of interest and principal payments and the so-called cash flow criterion (SPPI criterion) is therefore not considered to be fulfilled. Classification as an equity instrument in the sense of a contractual arrangement as a puttable instrument from the issuer's perspective also does not allow classification as an equity instrument for the investor. IFRS 9.BC5.21 states that classification as an equity instrument based on a puttable instrument (IAS 32.16A-D) cannot be transferred to the investor's perspective.3 In this respect, investments in investment funds within the scope of IFRS 9 represent financial instruments in the "at fair value through profit or loss" (FVTPL) measurement category with corresponding effects on the income statement. Depending on the underlying investments, recognition through profit or loss can lead to corresponding fluctuations in the income statement if the underlying investments are highly volatile.
Re 3: As a rule, investments in investment funds under IFRS 9 represent financial instruments in the "at fair value through profit or loss" (FVTPL) measurement category, meaning that the regular disclosure requirements for financial instruments in this measurement category must be met under IFRS 7 (e.g. IFRS 7.8(a), IFRS 7.20(a), etc.).4 Depending on the structure of the investment fund and the underlying investments, they may also be recognised as cash and cash equivalents (IAS 7.6-7) if specific requirements are met. In principle, only investment funds whose assets have a short-term maturity (max. 3 months) and the investments in investment funds are used to invest surplus liquidity, for example, qualify for this recognition option. As a further requirement, the investments in investment funds must be taken into account in cash management or used to settle short-term debts. Furthermore, they must be highly liquid instruments that can be converted into cash at any time and are only exposed to insignificant fluctuations in value. In this context, threshold values have been established for the fund composition that must be met for classification as cash and cash equivalents.5 In addition to the (individual) analysis of the redemption modalities and the investment guidelines of the investment fund, it is also always necessary to analyse the actual instruments held in the investment fund, as these are of prominent importance for classification as cash and cash equivalents.
For upcoming investments in investment funds or questions regarding the conception of investment funds, please contact us to discuss the contractual structure and the accounting consequences.
Source: KPMG Corporate Treasury News, Issue 153, April 2025
Authors:
Ralph Schilling, CFA, Partner, Head of Finance and Treasury Management, Treasury Accounting & Commodity Trading, KPMG AG
Björn Beckmann, Senior Manager, Finance and Treasury Management, Treasury Accounting & Commodity Trading, KPMG AG
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1 The specific requirements for investment entities (IFRS 10.31-33) are not considered further in this context.
2 See KPMG Insights into IFRS (2024/2025), para. 2.5.350ff.
3 As puttable instruments do not constitute equity instruments from the investors' perspective, they cannot be recognised in accordance with the FVOCI (equity) measurement category.
4 In addition to the disclosure requirements for financial instruments in accordance with IFRS 7, the disclosure requirements for fair value in accordance with IFRS 13 must also be taken into account.
5 For example, see PwC MoA (2025), FAQ 7.6.1
