2. Critical accounting estimates and judgments
The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that have an effect on the amounts reported in the consolidated financial statements and in the notes. Actual outcomes may differ from these estimates. Furthermore, judgment is needed in the application of accounting policies. Estimates and assumptions made by management are based on historical experience and forecasts for the future and are continually evaluated.
Application of the investment entity exception
The management of Finnish Industry Investment has determined that FII is an investment entity as defined in IFRS 10, because it meets the criteria of an investment entity. The business purpose of FII is to invest solely for returns from capital appreciation and investment income. Even though the operations of FII are also driven by the development of and support for business activity in Finland, this objective is pursued solely by means of investing in venture capital and private equity, and thus the Company’s earnings are obtained from capital appreciation and other investment income. Venture capital and private equity funds have, even based on the nature of the funds and the life cycle model, an exit strategy for their investments. There is also a documented exit strategy for each direct investment. Management monitors the development of investments on the basis of fair values, and fair values are determined at least once in every six months. According to the assessment by the management, the following characteristics support the classification of FII as an investment entity: It has more than one investment, and its ownership interests are in the form of equity interests. An investment entity ordinarily has more than one investor. As FII is concerned, its principal investor is the Finnish Government, representing the interests of a wider group of investors. Furthermore, FII manages funds where pension funds are acting as investors. The pension funds are unrelated to FII, which is one of the typical characteristics of an investment entity.
Determination of fair value
The most critical area in the financial statements that involves uncertainty relating to estimates and assumptions is the determination of the fair value of venture capital and private equity investments. Because of the degree of uncertainty involved in the measurement and the stability of values of non-liquid venture capital and private equity investments, the fair values of those investments are not necessarily representative of the price that would be obtained from the realisation of the investments. The fair values of venture capital and private equity investments are described in more detail in note 5 Determination of fair value.
Deferred tax assets and liabilities are recognised for temporary differences arising between the carrying amounts of assets and liabilities in the balance sheet and their tax bases. The most significant temporary differences relate to the difference between the fair value and tax bases of venture capital and private equity investments and financial securities. Other temporary differences arise, for example, from tax losses carried forward, for which the Company assesses opportunities for utilisation against future taxable profits. Assumptions about the future used in this assessment involve uncertainty relating to matters such as the exit values of investments, the timing of the exits and final tax effects. Further information is presented in note 9 Income taxes in note 12 Deferred taxes.