Does the provision of services disqualify an entity from being an investment entity?
It depends. Part of an entity’s business purpose might be to provide investment-related services (including investment advisory services, investment management, and investment support and administrative services) either directly or through a subsidiary. These services could be provided to investors and/or third parties. Participating in such investment-related services does not disqualify an entity from being an investment entity, even if these services form a substantial part of its business; this is because such services are an extension of its operations.
As regards the provision of other services that are not investment-related services (such as providing strategic advice or financial support to investees), this is one of the factors that differentiates investment entities from other entities. These activities need to be undertaken to maximise investment returns (capital appreciation and/or investment income) from the entity’s investees; and they must not represent a separate substantial business activity or a separate substantial source of income. These are covered further in questions 2 and 3 below.
Which activities are included under management services for real estate structures?
The permitted activities are [IFRS 10 paras B85C, B85D, BC240]:
- providing management services and strategic advice to an investee; and
- providing financial support (such as a loan, capital commitment or guarantee) to an investee.
For real estate structures this would include the management of the structure and the properties within it, acquisitions, arranging external financing, market analysis, strategic decisions, and marketing of assets for lease or sale.
Typical structures would normally use third party service providers like property managers to manage and run the properties, and real estate agents for capital transactions and this would have no impact on whether the investment entities exemption is met. Other structures would have related service providers, especially in portfolio management, who are remunerated at arm’s length.
The amendment states that management services should not be a separate substantial business activity or a separate substantial source of income in order that the investment entities exemption is met.
Are there other services allowed other than management services?
For real estate structures it is often the case that financing or guarantees are made or granted to related holding or property companies within the structure. It is not uncommon to see investors provide finance both in the form of equity or loans.
In accordance with paragraph B85D of IFRS 10 an investment entity may also participate in the following investment related activities, either directly or through a subsidiary, if these activities are undertaken to maximise the investment return and do not represent a substantial business activity:
- Providing management services and strategic advice to an investee.
- Providing financial support to an investee, such as loan, capital commitment or guarantee.
- Other incidental services increasing or enhancing the value of investments.
- Other administrative services (that is, accounting at property level).