Financial Reporting · Ind AS 110 Consolidation Procedure for Subsidiaries

Investment Entities Exception to Consolidation (Ind AS 110)

Updated 5 October 2026 · Fact-checked

An investment entity under Ind AS 110 raises funds from investors for investment management services, commits to earn only capital appreciation, investment income or both, and measures substantially all investments at fair value. It does not consolidate its subsidiaries. It measures them at FVTPL under Ind AS 109. To solve, test the three conditions, then the typical characteristics.

Understand Investment Entities Exception to Consolidation

Normally a parent consolidates every subsidiary line by line. For most entities that gives useful information. For a fund or similar entity, it does not. Investors in a fund care about the value of its investments, not about the fund's investee's inventory, borrowings and revenue added together. So Ind AS 110 gives an exception: an investment entity does not consolidate its subsidiaries.

An entity is an investment entity only if it meets all three conditions of the definition:

It obtains funds from one or more investors to provide them with investment management services.
It commits to its investors that its business purpose is to invest funds solely for returns from capital appreciation, investment income or both.
It measures and evaluates the performance of substantially all its investments on a fair value basis.

Then you look at the typical characteristics. An investment entity usually has more than one investment, more than one investor, investors who are not its related parties, and ownership interests in the form of equity or similar interests. Having all four is not mandatory. Lacking one does not automatically disqualify the entity, but you must consider all facts and circumstances and explain the judgement. Ind AS 110 (paragraph 28) says this.

If the entity qualifies, paragraph 31 applies. It does not consolidate its subsidiaries and does not apply Ind AS 103 when it obtains control. It measures its investment in each subsidiary at fair value through profit or loss (FVTPL) under Ind AS 109. Fair value changes and dividends go to profit or loss.

Two points are often tested. First, if the investment entity has a subsidiary that provides services related to its investment activities (for example, fund management services), it consolidates that subsidiary and does not measure it at fair value. Second, a parent of an investment entity that is not itself an investment entity must consolidate all entities it controls, including those held through the investment entity subsidiary. The exception is not passed up the chain automatically. Each parent must pass the test on its own.

Key rules to remember

Definition of an investment entity (all three needed): Investment entity = (investor funds for investment management services) + (business purpose: returns solely from capital appreciation, investment income or both) + (substantially all investments measured and evaluated at fair value); Ind AS 110, paragraph 27. Fail any one condition and the entity is not an investment entity.
Typical characteristics: More than one investment + more than one investor + investors not related parties + ownership interests as equity or similar; Paragraph 28. Indicators only. Absence of one does not by itself disqualify, but needs a reasoned judgement.
Accounting for subsidiaries: Subsidiary of an investment entity: no consolidation, no Ind AS 103; measure at FVTPL under Ind AS 109; Paragraph 31. Fair value changes and dividends are recognised in profit or loss.
Services subsidiary: Subsidiary providing services related to investment activities: consolidate; Applies even to an investment entity. It is not measured at FVTPL.
Parent of an investment entity: Parent that is not an investment entity: consolidate all controlled entities, including those held via the investment entity; The fair value treatment applies only in the investment entity's own financial statements.

How to solve Investment Entities Exception to Consolidation questions

Use this order for any question on investment entities. It keeps your answer in provision-facts-conclusion form.

1Read the facts and list what the entity does: who gives it funds, what it promises investors, and how it measures and reports performance.
2Test the three definition conditions in paragraph 27 one by one. Write the fact against each condition. If any fails, conclude it is not an investment entity and consolidate normally.
3Check the typical characteristics in paragraph 28: number of investments, number of investors, related-party status of investors, and form of ownership interests. State which are present and which are missing.
4Weigh all facts together. A missing characteristic does not automatically disqualify, so give a reasoned conclusion, not a mechanical one.
5If the entity qualifies, identify each subsidiary. A subsidiary that provides investment-related services is consolidated. Other subsidiaries are measured at FVTPL under Ind AS 109.
6Compute the effect: opening fair value, closing fair value and dividends. The fair value change and dividends go to profit or loss.
7Consider the parent level. If the parent is not itself an investment entity, it consolidates everything it controls, including subsidiaries held through the investment entity.
8Write the conclusion with the paragraph reference and the resulting accounting.

Quickest way: Three conditions, then FVTPL

When to use it: Use for short MCQs and 4 to 5 mark questions asking whether an entity is an investment entity or how it accounts for its subsidiaries.

Ask: investor funds for management services? Returns-only purpose? Fair value performance measurement? All three must be yes.
Scan for red flags that fail a definition condition. Investments evaluated at cost fail the fair value condition. The entity or its group earning other benefits from investees, such as strategic synergies, fails the purpose condition. Related-party investors are only a missing typical characteristic. They need judgement and do not fail the entity automatically.
If yes: no consolidation, FVTPL. If the subsidiary provides services to the investment activities, consolidate it.
For the parent, ask whether it is itself an investment entity. If not, consolidate fully.

Common mistakes in Investment Entities Exception to Consolidation

Treating the four typical characteristics as mandatory conditions.
The list looks like a checklist, so students reject any entity missing one item.
Fix: The mandatory test is the three-part definition. The characteristics are indicators. Missing one needs judgement and disclosure, not automatic rejection.
Measuring a services subsidiary at fair value.
Students assume every subsidiary of an investment entity is measured at FVTPL.
Fix: A subsidiary that provides services related to the investment entity's investment activities is consolidated. Only the investment subsidiaries are measured at FVTPL.
Letting the parent also skip consolidation.
Students think the exception follows the subsidiary up the group.
Fix: A parent that is not itself an investment entity consolidates all entities it controls, including those held through the investment entity. Test each entity separately.
Taking fair value gains to OCI or ignoring dividends.
Confusion with FVOCI equity designation under Ind AS 109.
Fix: For subsidiaries of an investment entity, the measurement is FVTPL. Fair value changes and dividends go to profit or loss.
Applying Ind AS 103 and recognising goodwill when the investment entity gains control.
Obtaining control normally triggers acquisition accounting.
Fix: Paragraph 31 says the investment entity does not apply Ind AS 103. There is no goodwill or NCI. The investment is recorded and measured at FVTPL.
Accepting a fund as an investment entity when it earns returns beyond capital appreciation or investment income.
Students read only the funds-and-investors facts and skip the business purpose.
Fix: Check the purpose condition carefully. If the entity or its group gains other benefits from its investees, the 'solely for returns' condition is not met and the entity fails the definition (paragraphs B85I-B85J). This is different from a missing typical characteristic, which needs judgement.

Worked examples

Example 1

Case: Himalaya Growth Fund Ltd raises money from 40 unrelated investors and provides them with portfolio management. Its offer document says it will invest solely to earn capital appreciation and dividend income. It holds controlling stakes in three unlisted companies and minority stakes in five others. It reports all investments to its board and investors at fair value, and has no plans to hold any investee for strategic reasons. Is it an investment entity? How does it account for the three controlled companies?

Show the solution

Condition 1: it obtains funds from 40 investors and provides them with investment management services. Met.
Condition 2: it has committed to investors that its purpose is to invest solely for capital appreciation and investment income, and it has no strategic holding plans. Met.
Condition 3: it measures and evaluates substantially all investments, including the controlled ones, at fair value. Met.
Typical characteristics: eight investments, 40 investors, investors unrelated, ownership in equity. All present, which supports the conclusion.
Accounting: under paragraph 31, it does not consolidate the three controlled companies and does not apply Ind AS 103. It measures them at FVTPL under Ind AS 109, assuming none of them provides services related to its investment activities.

Answer: Himalaya Growth Fund Ltd meets all three conditions and all four typical characteristics, so it is an investment entity. It measures the three controlled companies at FVTPL and does not consolidate them.

Example 2

Case: Meru Investments Ltd, an investment entity, holds 100% of Alpha Ltd, an investee company, acquired for ₹10,00,00,000. Fair value was ₹12,00,00,000 at the start of the year and ₹15,50,00,000 at the end. Alpha paid a dividend of ₹40,00,000 to Meru during the year. Meru also holds 100% of Meru Advisors Ltd, which provides fund management services only to Meru. Meru's parent, Sikhar Holdings Ltd, controls Meru and is not an investment entity. No fee amounts are given for Meru Advisors. Show the effect on Meru's profit or loss for Alpha, the treatment of Meru Advisors, and the treatment in Sikhar's consolidated financial statements.

Show the solution

Alpha is an investment subsidiary of an investment entity. Measure at FVTPL, with no consolidation.
Fair value gain for the year = ₹15,50,00,000 − ₹12,00,00,000 = ₹3,50,00,000, recognised in profit or loss.
Dividend received ₹40,00,000 is recognised in profit or loss.
Total effect on Meru's profit or loss from Alpha = ₹3,50,00,000 + ₹40,00,000 = ₹3,90,00,000.
Meru Advisors provides services related to Meru's investment activities, so Meru consolidates it and does not measure it at fair value. This is the only subsidiary Meru consolidates. Fees between Meru and Meru Advisors are intragroup and are eliminated on consolidation. They do not change the ₹3,90,00,000 from Alpha.
Sikhar Holdings controls Meru and is not an investment entity, so it consolidates all entities it controls line by line. It controls Meru directly, and it controls Alpha and Meru Advisors through Meru. So it consolidates Meru, Alpha and Meru Advisors, and eliminates intragroup balances and transactions, including the fees. The fair value measurement of Alpha in Meru's own statements is not carried into Sikhar's consolidated statements.

Answer: Meru's profit or loss includes ₹3,90,00,000 from Alpha (fair value gain ₹3,50,00,000 plus dividend ₹40,00,000). Meru consolidates only Meru Advisors, eliminating intragroup fees. Sikhar Holdings controls Meru, and through Meru it controls Alpha and Meru Advisors, so it consolidates Meru, Alpha and Meru Advisors in full, with intragroup items eliminated.

Exam tips

Start every answer by quoting the three conditions and marking each as met or not met against the facts. This is where marks are given.
In case-scenario MCQs, look for the trap. A fund that gets strategic benefits from its investees fails the purpose condition (paragraphs B85I-B85J), so check that condition first. Related-party investors, or a single investor, are only missing typical characteristics under paragraph 28. They need a reasoned judgement and do not fail the definition automatically.
Remember the two exceptions to the exception: the services subsidiary is consolidated, and a non-investment-entity parent consolidates everything.
Link with Ind AS 109 and Ind AS 113. Mention FVTPL and the fair value hierarchy briefly if the question asks about measurement.
In numerical questions, show the fair value gain and dividend separately before adding. It makes marking easy.

Practice questions from Ind AS 110 Consolidation Procedure for Subsidiaries

Investment Entities Exception to Consolidation: frequently asked questions

What is an investment entity under Ind AS 110?

It is an entity that obtains funds from investors to provide them with investment management services, commits that its purpose is to invest solely for capital appreciation, investment income or both, and measures and evaluates substantially all its investments at fair value. All three conditions must be met.

Why does an investment entity not consolidate its subsidiaries?

Users of a fund's financial statements want to know the fair value of its investments and the returns from them. Line-by-line consolidation of investee assets and liabilities would hide that. So Ind AS 110 requires fair value through profit or loss instead.

Are the typical characteristics of an investment entity compulsory?

No. They are more than one investment, more than one investor, investors not being related parties, and ownership interests in equity or similar form. An entity lacking one may still qualify, but it must apply judgement on all facts and circumstances.

What is the difference between an investment entity and its parent?

The investment entity measures its subsidiaries at FVTPL. Its parent, if not itself an investment entity, must consolidate all entities it controls, including those held through the investment entity. Each entity must pass the definition on its own.