Similarities and differences*

Transcription

1 Investment Management & Real Estate Similarities and differences* Global Reporting Revolution June 2007 *connectedthinking

2 Contents How to use this publication 01 Summary of Similarities and Difference 02 Key differences 08 Framework 08 Financial Statements 09 Consolidated Financial Statements 18 Assets & Liabilities - Financial Instruments - Investments 22 Balance Sheet - Net Assets 32 Income Statement 34 Other Accounting and Reporting Topics 35 Contacts 40

3 01 How to use this publication This 1 publication is for those who wish to gain a broad understanding of the key similarities and differences between International Financial Reporting Standards ("") and accounting principles generally accepted in the United States of America ("") specifically applicable to investment funds. However, this publication is not applicable to investment funds registered with Securities and Exchange Commission ("SEC") since they are required to follow the specific guidance issued by the SEC. does not provide industry specific standards for investment funds, whereas under investment funds follow a set of industry specific accounting standards and practices, generally summarised in the AICPA Audit and Accounting Guide, Investment Company. The first part of this document provides a summary of the similarities and differences between and. It refers to subsequent sections of the document where key differences are highlighted and explained in more detail. In conjunction with reading this document, users may want to refer to International Financial Reporting Standards Illustrative Financial Statements Investment Funds, also published by. This publication does not intend to capture all similarities and differences between and, only the key similarities and differences specifically related to investment funds. When applying the standards, readers should also consult all the relevant accounting standards and, where applicable, their national laws and regulations. Such laws and regulations are not covered by this publication. Furthermore, this publication does not intend to cover the accounting by investment managers and general partners of investment funds. 1 '' refers to the network of member firms of International Limited, each of which is a separate and independent legal entity. This publication generally excludes new requirements of and standards and interpretations for financial years beginning on or after January 1, However, it does include the disclosures required by the two following standards, 7, Financial Instruments: Disclosure and IAS 1 Amendment - Presentation of Financial Statements: Capital Disclosures, which apply for annual periods beginning on or after January 1, 2007 and were early adopted for the purpose of this publication. We have also noted certain relevant developments, including the Statement of Financial Accounting Standards No. 157 Fair Value Measurement which shall be effective for fiscal years beginning on or after November 15, 2007, within the detailed text; however, not all recent developments or exposure drafts have been included.

4 02 Summary of Similarities and Differences Subject Framework Accounting Standards / Industry Practice Financial Statements Components of Financial Statements Page does not provide specific standards / requirements for investment funds, either registered or non-registered. All the standards in should be followed and an explicit and unreserved statement of the compliance with should be included in the notes to the financial statements. Two years' balance sheets, income statements, statements of changes in equity (if any), cash flow statements and notes (including the accounting policies). AICPA Accounting & Audit Guide, Investment Companies provides specific guidance on industry accounting standards and practices for both SEC registered and non-registered investment funds. This document will focus solely on non SECregistered investment funds. Comparative financial statements are not required for investment funds. Financial statements include a statement of assets and liabilities*, a schedule of investments (or a condensed schedule of investments, see below), a statement of operations, a statement of changes in net assets, a statement of cash flows (if required), notes to the financial statements * Or a statement of net assets with the schedule of investments included therein. Balance Sheet Does not prescribe a particular format for an investment fund. The balance sheet can be presented in current/non-current presentation or liquidity presentation. The statement of assets and liabilities is nonclassified and requires specific items to be presented. Investments are usually presented as first line because of their importance to an investment fund. 10 Schedule of Investments Not required but it is best practice to present a schedule of investments on a voluntary basis. If presented, comparative information should be included. If a schedule of investments is not presented, a meaningful analysis of investments should be provided so that the reader has an understanding of the nature of the investments, given their significance. Investments should be presented and disclosed either on the face of the statement of net assets or in a schedule of investments. At a minimum, a condensed schedule should be provided, with specific presentation and disclosure requirements. 11 Income Statement Does not prescribe a standard format, although expenses are presented in one of two formats (function or nature). Certain minimum items are presented on the face of the income statement. Specific items are required to be presented and disclosed on the face of the statement of operations. 12 Statement of Changes in Equity An investment fund (primarily a fund that issues puttable shares) might not have equity. In such case, a statement of changes in equity is not required. However, it is best practice to present a statement of changes in net assets attributable to holders of redeemable shares or interests. No exemptions. Specific items are required to be presented and disclosed on the face of the statement of changes in net assets. 14 Statement of Cash Flows - Exemptions If certain conditions are met, an investment fund may be exempted from presenting a statement of cash flows. 15

5 03 Subject Page Financial Statements (continued) Statement of Cash 15 Flows - Format and Standard Statement of Cash Flows - Definition of Cash and Cash Equivalents Consolidated Financial Statements Consolidation Model Special Purpose Entity Investments in Associates Standard headings, but limited guidance on contents. Either direct or indirect method can be used for cash flows from operating activities. encourages the use of direct method. May include cash equivalents with maturities of three months or less from the date of acquisition and may include bank overdrafts. No exceptions for investment funds. Consolidation is based on the existence of control defined as the power to govern the financial and operating policies of an entity so as to obtain benefits. Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries, more than one half of an entity's voting power. Control also exists when the parent owns half or less of the voting power but has legal or contractual rights to control, or de facto control (rare circumstances). The existence of currently exercisable potential rights is also taken into consideration. When a feeder fund is not an SPE and has control over its master fund (such as through the ownership of voting shares), the master fund should be consolidated into the feeder fund. Should the feeder no longer have control, the master fund should be deconsolidated. In some circumstances, where the feeder fund is only to invest in one particular master fund, the feeder and master funds may represent an integrated entity, in which case the integrated entity could be considered the reporting entity and one set of financial statements is prepared. Special purpose entities should be consolidated when the substance of the relationship indicates control. Based on significant influence; presumed to have significant influence if 20% or greater interest. If less than 20%, other factors should be taken into considerations. Investments in associates should be accounted for under the equity method, except when the investments in associates are classified as financial instruments at fair value through profit or loss upon initial recognition (the "fair value option") and accounted for accordingly. However, to use the fair value option, requires certain conditions to be met (see "Financial Instruments - Classification" below) Similar to, but more specific guidance for items included in each category. Purchases and sales of investments are included in operating activities. The direct or indirect method can be used for cash flows from operating activities. Similar to, except bank overdrafts are excluded. Movements in bank overdrafts should be shown as financing activities. An investment fund should only consolidate its subsidiaries that are also investment funds. However, if an investment fund is a feeder fund within a "master / feeder" structure, the master fund should not be consolidated but shown using specific presentation requirements. Additionally, if an investment fund is classified as a fund of funds, it would not consolidate investee funds but show its investments using specific presentation requirements. Consolidation of operating companies is not appropriate except in the case of operating subsidiaries providing services to the investment fund. Not consolidated due to the deferral of the application of FIN 46R to investment funds. Investments in variable interest entities, if any, should be accounted for at fair value. Definition of an equity investee is similar to. Investments in associate held by an investment fund are accounted for at fair value, not under the equity method. However, certain associates that provide services to the investment fund are accounted for under the equity method

6 04 Subject Page Assets & Liabilities - Financial Instruments - Investments Financial Instruments - Initial Recognition A financial instrument should be recognised when an entity becomes a party to the contractual provisions of the instruments. Regular way purchases of financial assets can be recorded either on a trade date or settlement date basis. Securities transactions are recorded on the trade date basis. 22 Financial Instruments - Derecognition Financial Instruments - Classification Financial Instruments - Initial Measurement Financial Instruments - Subsequent Measurement A financial asset should be derecognised when the contractual rights to the cash flow from the financial asset have expired or are transferred together with substantially all the risks and rewards of the asset. Regular way sales can be recorded either on a trade date or settlement date basis. Classified as financial instruments at fair value through profit or loss (held for trading or designated upon initial recognition under the fair value option), available for sale, held to maturity, and loans and receivables. Held to maturity classification is generally not possible for open ended investment funds. The fair value option can be used in the following cases: (1) a financial instrument containing one or more embedded derivatives, (2) when it results in more relevant information because either it eliminates or significantly reduces a measurement or recognition inconsistency or (3) a group of financial instruments is managed and its performance is evaluated on a fair value basis. An investment fund typically classifies its investments as financial instruments at fair value through profit or loss. Investments are initially measured at fair value. In case of financial instruments at fair value through profit or loss, transaction costs, including the bid/offer spreads, should be expensed through profit and loss. Financial instruments at fair value through profit or loss are subsequently measured at fair value and the change in value is recognised in profit and loss. Available-for-sale investments are subsequently measured at fair value. Investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured, can be measured at cost (rare instances). Any change in value of available for sale securities is recognised in equity except for impairment losses and foreign exchange gains and losses for debt securities. Interest calculated using the effective interest rate method is recognised in the income statement. Securities transactions are recorded on the trade date basis. All investments are valued at fair value. There is no specific classification or guidance similar to the one contained in. Cost (consideration received or paid) typically represents the value of investments at initial recognition. Transaction costs are included in the cost of investments and flow through the statement of operations through unrealised gain/loss. Investments are valued at fair value. Unrealised gains or losses on investments are recognised in the statement of operations

7 05 Subject Page Assets & Liabilities - Financial Instruments - Investments (continued) Financial Instruments 26 - Fair Value Financial Instruments - Disclosure Finanical Instruments - Offsetting Fixed Income Securities - Discounts and Premiums Long positions should be valued at the bid price and short positions should be valued at the asking price. Assets and liabilities with offsetting market risks may be valued at mid-market prices for the offsetting risk positions and at bid or asking price for net position as appropriate. "Blockage factor", which is the premium or discount based on the relative size of positions (such as a large proportion of the total trading units of an instrument), is precluded for instruments quoted in an active market. For those instruments the fair value of the portfolio is the product of the number of units and the quoted bid/asking price. If the market for a financial instrument is not active, an entity establishes fair value by using a valuation technique. The chosen valuation technique shall make maximum use of market inputs and rely as little as possible on entity-specific inputs. With the adoption of 7, Financial Instruments: Disclosure, disclosures should be made through the eyes of management to enhance users' understanding of the risk exposure and the entity's risk management. As such, the disclosure requirement is extensive. 7 includes general disclosure requirements, which are not specifically designed for investment funds. Fair value of financial instruments should be disclosed. The use of judgment and key assumptions and other key sources of estimation uncertainty should be disclosed along with the nature of and the carrying amount of the affected assets and liabilities. Offsetting is allowed only when there is a legally enforceable right to set off and there is intention to settle on a net basis or to realise the asset and settle the liability simultaneously. There is no exception to the offsetting rules for master netting arrangements; all the conditions for offset must be met. Interest income and expense should be recognised using effective interest method. However this does not apply to instruments carried at fair value though profit or loss since there is no obligation to disclose interest income / expense on the face of the income statement. Can be valued at bid or asking price, last price, mean between bid and asking price, or a valuation within the range of bid and asking price. Neither use of asking price to value long positions nor use of bid price to value short positions is allowed. "Blockage factor" on unrestricted investments traded on an active market is not usually allowed. In the absence of an active market, the amounts representing estimates of fair values using methods applied consistently and determined in good faith by the board of directors should be used. Specific disclosure requirements for investment funds. Fair value of financial instruments should be disclosed. Similar to, the use of judgment, key assumptions and sources of estimation of uncertainty should be disclosed. Similar to, except that the fair value recognised for derivative contracts under a master netting arrangement can be assumed to meet the intention requirement and can be offset if other requirements are met. Premiums and discounts should be amortised using the effective interest method

8 06 Subject Balance Sheet Net Assets - Classification 1 Net Assets - Measurement Income Statement Interest and Dividend Income Recognition Realised and Unrealised Gains (Losses) on Investments - Presentation Net Gains (Losses) on Foreign Exchange - Presentation Page In a typical open end investment fund, its shares or interests are redeemable at the option of the holders of such shares or interests. The shares or interests should be classified as a financial liability regardless of their legal form. As a financial liability, their related distributions and dividends to holders of redeemable shares should be recognised as expenses in profit and loss. Net assets represent the residual value of the assets (net of liabilities). For puttable instruments, the liability is remeasured at the amount payable at the balance sheet date if the holder exercised his right to put the instrument back. Interest is recognised on an accrual basis and using the effective interest method. Dividends are recognised when the right to receive payment is established. There is no requirement to disclose net realised gains (losses) and net change in unrealised appreciation (depreciation) separately. There is no requirement to disclose net gains (losses) on foreign exchange separately. Other Accounting and Reporting Topics Functional Currency The functional currency is the currency of the primary economic environment in which an investment fund operates. The determination of the functional currency is based on a hierarchy of indicators. For an investment fund, the indicators are generally mixed and management is required to use judgment to determine the functional currency. When the presentation currency is different from the functional currency, disclosure of the functional currency and the presentation currency is required. The reason for having a different presentation currency should also be disclosed. Classified as equity. However, the shares or interests that are redeemable on a fixed date and fixed amount (or determined by reference to an interest rate index, currency index or another external index) should be classified as a liability. Distributions and dividends are recognised as transactions in equity, not in profit and loss, if the shares or interest are classified as equity. Net assets represent the residual value of the assets, net of liabilities. Similar to. 34 Net realised gains (losses) and net change in unrealised appreciation (depreciation) should be disclosed separately. Distinction should be made between realised and unrealised gains or losses on foreign exchange. The foreign currency element of gains or losses on investments may be presented separately or together with the local currency market gains or losses on investments. Definition of functional currency is similar to. The determination is similar to except that US GAAP has no hierarchy On June 22, 2006, the IASB issued an exposure draft to amend IAS 32. Under the exposure draft, the definition of a financial liability will be amended. Please see the discussion in "Net Assets - Classification".

9 07 Subject Page Other Accounting and Reporting Topics (continued) Foreign Currency Transactions Foreign currency transactions are initially recorded using the exchange rate at the date of the transactions. Subsequently at each balance sheet date, foreign currency monetary items and balances shall be translated using the closing rate and non-monetary items shall be translated using the historical exchange rates. Non-monetary items that are measured at fair value in a foreign currency shall be translated using the exchange rates at the date when the fair value was determined. Similar to. 36 Foreign Currency Translation NAV per Share Earnings per Share When translating the financial statements of an entity from the functional currency into the presentation currency assets and liabilities shall be translated at the closing rate and income statement items shall be translated at exchange rates at the dates of the transactions. The resulting exchange differences shall be recognised as a separate component of equity. Not required but it is common practice to disclose NAV per share. Earnings per share information is not required when the equity instruments of an investment fund are not publicly traded. Also if all the shares of an investment fund are classified as financial liabilities, there is no requirement to disclose the earnings per share information. Similar to. 36 Required. 37 Not required. 37 Financial Highlights Not required. Required and should follow specific calculation, disclosure and presentation requirements. Related Party Transactions Segment Reporting Amounts and nature of transactions, and balances due to / from related parties should be disclosed. Required unless an investment fund's shares or debt instruments are not publicly traded. Similar to. 38 Not required

10 08 Key differences Framework For the overall comparison of and, please see our publication "Similarities and Differences - A Comparison of and ". The following is only a comparison of areas specifically related to non-sec registered investment funds. Accounting Standards / Industry Practice, as a set of principle-based accounting standards, does not provide accounting standards or guidance specific to the investment fund industry. As such, investment funds follow the same financial reporting standards, which are developed for general enterprises. The objective of general purpose financial statements is to provide information about the financial position, financial performance and cash flows of an entity so that users can make informed economic decisions. Financial statements also show the results of management's stewardship of the resources entrusted to it (IAS 1). includes International Financial Reporting Standards, International Accounting Standards and interpretation originated by IFRIC or former SIC (IAS 1.11). Investment funds are required to follow all such standards in order to be in compliance with and an explicit and unreserved statement of such compliance should also be made in the notes to the financial statements (IAS 1.14). provides industry specific accounting standards and guidance, in addition to the general authoritative accounting pronouncements. AICPA Audit and Accounting Guide, Investment Companies ("AAG-Inv") details the investment fund industry specific guidance and standards. The overall objective of financial statements, including financial highlights, of investment funds is to present net assets, results of operations, changes in net assets, and financial highlights resulting from investment activities and, if applicable, from capital transactions (AAG-Inv 7.01).

11 09 Financial Statements Components of Financial Statements The financial statements are comparative (IAS 1.36) and include (IAS 1.8): 1) A balance sheet; 2) An income statement; 3) A statement of changes in equity; 4) A cash flow statement; and 5) Notes, comprising a summary of significant accounting policies and other explanatory notes. When an investment fund has voting non-participating shares in addition to the redeemable shares or when it has investments classified as available for sale securities or other balances classified under equity, the fund needs to present a statement of changes in equity. An investment fund, whose redeemable shares are classified as a financial liability and which does not have any other transaction classified under equity, is not required to present a statement of changes in equity since it does not have equity. Alternatively, it is best practice to present a statement of changes in net assets attributable to holders of the redeemable shares. The date of authorisation to issue financial statements, and who authorises them for issue, should be disclosed. For a non-registered investment fund, comparative financial statements are not required. AAG-Inv specifies the requirements for financial statements, which should include: 1) A statement of assets and liabilities with a schedule of investments or a statement of net assets, which includes a schedule of investments therein as of the close of the latest period. At a minimum a condensed schedule of investments should be provided for each statement of assets and liabilities. (balance sheet); 2) A statement of operations (income statement); 3) A statement of changes in net assets; 4) A statement of cash flows (see below for exemptions); 5) Notes to the financial statements, including the summary of accounting policies; and 6) Financial highlights, either presented as a separate schedule or disclosed in the notes to the financial statements. The disclosure of the authorisation of financial statements for issue similar to is not required, unless required by local laws and regulations.

12 10 Balance Sheet does not prescribe a specific format. At a minimum, the face of balance sheet should include (IAS 1.68): 1) Investment property; 2) Financial assets; 3) Investments accounted for using the equity method; 4) Trade and other receivables; 5) Cash and cash equivalents; 6) Trade and other payables; 7) Financial liabilities; 8) Tax assets and liabilities; 9) Provisions; 10) Minority interest; and 11) Issued capital and other components of shareholders' equity. (The above are the items applicable to a typical investment fund. Please see paragraph 68 of IAS 1, Presentation of Financial Statements for the complete list.) An investment fund can present additional line items, headings and subtotals on the face of the balance sheet when such presentation is relevant to an understanding of its financial position (IAS 1.69). An entity should present current and non-current assets, and current and non-current liabilities on the face of balance sheet except when a presentation based on a liquidity, in which assets and liabilities are presented in the order of liquidity, provides information that is reliable and more relevant. Due to the nature of an investment fund, where typically all or substantially all of its assets and liabilities are current, the liquidity presentation may be more relevant and is generally followed in practice (IAS 1.51). However, management should assess which format will provide more relevant and reliable information to the users of the financial statements. If the liquidity presentation is selected, assets and liabilities with maturities greater than 12 months should be identified in the notes. For a typical investment fund whose shares are redeemable at the option of its holders, it might not have shareholders' equity at all or only a nominal amount representing its voting, non-participating shares (please see "Net Assets - Classification" for detailed discussion). Although there is no specific format, IE 32 and IE 33 of IAS 32, Financial Instruments: Disclosure and Presentation provide examples of balance sheets for entities with no equity or some equity. However, IE 31 and IE 33 specifically state that other formats are possible. International Financial Reporting Standards Illustrative Financial Statements Investment Funds also provides an example for reference.

13 11 For an investment fund, a balance sheet is called a statement of assets and liabilities when there is a separate schedule of investments, or a statement of net assets which includes a schedule of investments therein (AAG-Inv 7.01). The format of the balance sheet is well developed and most investment funds follow the format of the illustrative financial statements in the AAG-Inv (7.87). AAG-Inv specifies the major categories of assets and liabilities to be reported on the face of the balance sheet (AAG-Inv 7.20 to 7.36): 1) Investment in securities; 2) Cash; 3) Receivables; 4) Other assets; 5) Accounts payable; 6) Call or put options written, futures contracts sold, and securities sold short; 7) Accrued liabilities; 8) Notes payable and other debt; 9) Other liabilities; and 10) Net Assets. As in, additional line items can be presented. Under, the balance sheet is non-classified since all assets and liabilities of an investment fund are presumed to be current. Furthermore, the general practice of the industry is to present investments as the first asset because of their relative importance to total assets (AAG-Inv 7.21). Schedule of Investments A schedule of investments or a condensed schedule of investments is not required under. However it is best practice to include such schedule. Illustrative Financial Statements Investment Funds also provides an example for reference. Since the financial statements are comparative, the schedule of investments or condensed schedule of investments, if presented, should be comparative as well. If a schedule of investments is not presented, a meaningful analysis of investments should be provided so that the reader has an understanding of the nature of the investments, given their significance.

14 12 At a minimum, a condensed schedule of investments is required (AAG-Inv 7.01). An investment fund may alternatively present a full schedule of investments, which details all its individual positions and investments. The format and minimum disclosure requirements of the condensed schedule of investments and the schedule of investments are specified in AAG-Inv. Investments should be categorised by the following (AAG-Inv 7.16): 1) Type; 2) Country or geographic region; and 3) Industry. For investment funds classified as "investment partnerships", the name, share or principal amount, value and type should be disclosed for each investment constituting more than 5% of net assets and for investments from the same issuer if their aggregate is more than 5% of net assets. For derivatives whose fair value exceeds 5% of net assets, the range of expiration dates and fair value of a particular underlying asset should be disclosed. For investment in another investment fund whose fair value exceeds 5% of net assets, the investment objective and restrictions on redemptions should be disclosed (AAG-Inv 7.16). For private investment funds that are not "investment partnerships", the above criteria are measured at the 1% level rather than the 5% level, and at least the 50 largest investments must be identified even if certain investments do not exceed 1% of net assets (AAG-Inv 7.14). Furthermore, for investments in other investment funds, if the reporting fund's proportionate share of any security owned by an investee investment fund exceeds 5% of the reporting fund's net assets, such security should be disclosed (the "look-through" provision) (AAG-Inv 7.17). Detailed specific disclosure and presentation requirements and guidance can be found in AAG-Inv, Statement of Position ("SOP") No. 95-2, Financial Reporting by Nonpublic Investment Partnerships, and SOP 03-4, Reporting Financial Highlights and Schedule of Investments by Nonpublic Investment Partnerships. If comparative financial statements are presented, a schedule of investments for each period should be presented (AAG-Inv 7.01). Income Statement does not prescribe a specific format. IE 32 and IE 33 of IAS 32 provide examples of income statements for entities with no equity or some equity. Illustrative Financial Statements Investment Funds also provides an example for reference. Expenses should be classified according to nature or function (IAS 1.88). If the classification by function is used, additional information on the nature of expenses should be disclosed.

15 13 Income received net of withholding taxes should be included gross in the income statement. The withholding taxes should be presented as a separate component of income tax for the period. The portion of the profit and loss attributable to the minority interest is disclosed separately in the income statement (IAS 1.82). An investment fund can present additional line items, headings and subtotals on the face of the income statement when such presentation is relevant to an understanding of its financial performance (IAS 1.83). The minority portion of net income is presented after the "net income" line as an allocation of "net income". An income statement is usually called a statement of operations. The objective of the statement of operations is to present the increase or decrease in net assets resulting from all of a fund's investment activities. As such, format and disclosure requirements are specified and included in AAG-Inv as follows: 1) Investment income; a. Dividend income; b. Interest income; c. Other income; 2) Expenses; a. Investment advisory fees; b. Administration fees; c. Shareholder service costs; d. Distribution expenses; e. Custodian fees; f. Federal and state income taxes; g. Other taxes; h. Interest; i. Dividends on securities sold short; j. Professional fees; k Directors' or trustees' fees; l. Registration fees and expenses; 3) Net investment income (total of No. 1 and 2 above); 4) Net realised gain or loss from investments and net realised gains or losses from foreign currency transactions (please see "Gain on Foreign Exchange" below for further discussion); 5) Net increase (decrease) in unrealised appreciation or depreciation on investments and net unrealised gains (losses) on foreign exchange (please see "Gain on Foreign Exchange" below for further discussion); 6) Net realised and unrealised gain or loss from investments and foreign currency (total of No. 4 and 5 above); and 7) Net increase or decrease in net assets / partners' capital from operations (net income).

16 14 Other common and major specific format / presentation requirements under AAG-Inv and applicable to non-registered investment funds are: 1) Withholding taxes - Withholding taxes should be deducted from the relevant income item (e.g., dividends) and disclosed parenthetically or shown as a separate contra item in the income section (AAG-Inv 7.43); 2) Incentive allocation - If organised as a limited partnership, an investment fund's incentive allocation (e.g., an allocation from limited partners to the general partner) should be presented in the statement of changes in partners' capital, rather than as an expense item in the statement of operations (AAG-Inv 7.49); and 3) Fees and expenses waived or reimbursed - Fees and expenses waived and reimbursed, both voluntarily and involuntarily, should be disclosed on the face of the income statement as a reduction of total expenses (AAG-Inv 7.45). If there is minority interest, unlike, the minority interest portion is a deduction to calculate the net increase or decrease in net assets / partners' capital from operations. Statement of Changes in Equity does not prescribe a specific format. The general presentation and disclosure requirements are detailed in IAS 1.96 and For an investment fund with no equity (i.e., all the shares are classified as a liability under IAS 32 and the fund does not have any other equity reserves), the statement of changes in equity is not required. However, investment funds generally present a statement of changes in net assets attributable to holders of redeemable shares since it provides relevant and useful information to the reader corresponding to the requirements of IAS 1 and is considered to be best practice. Illustrative Financial Statements Investment Funds also provides an example for reference. A statement of changes in net assets summarises results from operations, net equalisation credits or debits, dividends or distributions to shareholders, capital share transactions, and capital contributions (AAG-Inv 7.62). In addition to beginning and ending net assets, AAG-Inv specifies the items to present as the increase and decrease in net assets (AAG-Inv 7.63): 1) Net change in net assets resulting from operations - Net investment income or loss, net realised gains or losses from investments and foreign currency transactions, and changes in unrealised appreciation or depreciation on investments and foreign exchange, as shown in the statement of operations, should be presented separately to arrive at the net change in net assets resulting from operations;

17 15 2) Net equalisation debits or credits; 3) Distributions to shareholders; 4) Capital share transactions (issuance, redemption and repurchase) for each class of shares / series, which can be either presented in the statement or in the notes; and 5) Capital contributions. Statement of Cash flows - Exemption does not provide exemptions for the presentation of a statement of cash flows. A statement of cash flows is required unless meeting all of the following conditions (FAS 102.7): 1) Substantially all investments are liquid; 2) Substantially all investments are carried at fair value; 3) There is little or no debt, based on average debt outstanding during the period in relation to average total assets; and 4) A statement of changes in net assets is presented. Statement of Cash flows - Format and Standard does not prescribe a specific format. A statement of cash flows should report cash flows classified by operating, investing and financing activities (IAS 7.10). The cash flows from operating activities can be presented using either the direct or indirect method (IAS 7.18) although encourages the use of the direct method (IAS 7.19). Unlike, regardless whether the direct and indirect method is used, cash flows from interest and dividends received and paid should be disclosed separately within the statement of cash flows and classified consistently as either operating, investing or financing activities (IAS 7.31). Cash flows from taxes should also be disclosed separately and classified as operating activities unless specifically identified with financing or investing activities (IAS 7.35). In accordance with IAS 7.16.c and 7.16.d, purchases and sales of investments should be considered investing activities. However, IAS 7 is not designed specifically for an investment fund. Due to the fact that an investment fund's operations consist entirely of investing in securities, the cash flows from the purchases and sales of investments are generally classified as operating activities instead.

18 16 Purchases and sales of investments can be shown separately (IAS 7.16.c and 7.16.d) on a gross basis. Alternatively, they can be shown on a net basis (IAS 7.22.b and IAS 7.24) if the turnover is quick, the amounts are large and the maturities are short. Non-cash transactions should be excluded from the statement of cash flows and should be disclosed in the notes to the financial statements (IAS 7.43). Similar to, the statement classifies cash receipts and cash payments as resulting from operating, investing, and financing activities. Similar to, the cash flows from operating activities can be presented using either the direct or indirect method. However, also requires the statement to include a reconciliation of net cash provided by and used for operating activities to net increase or decrease in net assets from operating activities (AAG-Inv 7.67). As such, the indirect method is more commonly used. Since it is more commonly used (AAG-Inv 7.68), the below discussion focuses solely on the indirect method. Purchases and sales of investments should be included in operating activities (AAG-Inv 7.68). As such, an investment fund typically does not have cash flows from investing activities in its statement of cash flows. Also, purchases and sales of investments should be presented on a gross basis, rather than on a net basis. AAG-Inv specifies the items to be included for each type of activity. 1) Operating activities (AAG-Inv 7.70), which represents the reconciliation of net cash provided or used for operating activities to net increase or decrease in net assets from operating activities; a. Purchases and sales of investments; b. Changes in non-investment asset and liability accounts; c. Non-cash income and expense items; d. Realised and unrealised gains on investments; 2) Financing activities (AAG-Inv 7.69); a. Issuance and redemption of fund shares; b. Proceeds from and repayment of debt; c. Dividends and distributions to shareholders; and d. Bank overdrafts. Information about non-cash investing and financing activities should be disclosed (AAG-Inv 7.72). If the indirect method is used, interest paid and income taxes paid should be disclosed as supplemental disclosure (FAS 95.29).

19 17 Statement of Cash flows - Definition of Cash and Cash Equivalents Cash comprises cash on hand, demand deposits and cash equivalents which are short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of change in value (IAS 7.6). Usually, an investment qualifies as a cash equivalent when it has a maturity of three months or less from the date of acquisition (IAS 7.6). Bank overdrafts can be included as a component of cash and cash equivalents if they are repayable on demand and form an integral part of an entity's overall cash management (IAS 7.8). There is no requirement to disclose the amounts of cash and cash equivalents denominated in foreign currencies and their acquisition cost under in the statement of cash flows. However foreign currency information is generally part of the financial instrument disclosures. Cash and cash equivalents not available for use of a fund should be disclosed (IAS 7.48). Cash and cash equivalents subject to withdrawal or usage restrictions should be presented separately from other cash amounts (IAS 7.23). Similar to, cash comprises cash on hand and demand deposits (Footnote 1 of FAS 95). Also similar to, cash equivalents are defined as short-term (usually three months or less), highly liquid investments that are both readily convertible to known amounts of cash and so near maturity that they represent insignificant risk of changes in value (FAS 95.8). Unlike, the definition of cash and cash equivalents under FASB Statement ("FAS") No. 95, Cash Flow Statements, does not include bank overdrafts. Furthermore, AAG-Inv specifically requires bank overdrafts to be included in financing activities. As such, bank overdrafts should not be included as a component of cash and cash equivalents. Amounts held in foreign currencies should be disclosed separately at value, with acquisition cost shown parenthetically on the face of the balance sheet.

20 18 Consolidated Financial Statements Consolidation Model The accounting standards on consolidation are set forth in IAS 27, Consolidated and Separate Financial Statements, which does not provide a scope exception for an investment fund. An investment fund should consolidate all its investments in which it has control (IAS 27.4). Control is defined as the power to govern the financial and operating policies of an entity so as to obtain control: 1) Control is presumed to exist if a fund owns more than half of voting power of another entity; 2) If a fund owns half or less than half of voting power, control also exists if it has: a. Power over more than half of voting rights by virtue of an agreement with other investors; b. Power to govern the financial and operating policies of the entity under a statute or an agreement; c. Power to appoint or remove the majority of the members of the board of directors or equivalent governing body and control of the entity is by that board or body; or d. Power to cast the majority of votes at meetings of the board of directors or equivalent governing body and control of the entity is by that board or body. The existence of currently exercisable potential rights, such as warrants, call options or convertible instruments, should also be taken into consideration under the consolidation model. As a result of the consolidation model in IAS 27, the accounting practice can be significantly different from. An investment fund should consolidate any investments, which are deemed to be subsidiaries under IAS 27. A subsidiary is defined as an entity, including an unincorporated entity such as a partnership, that is controlled by another entity (IAS 27.4). For example, a feeder fund that is not an SPE, which has the majority of voting shares of the master fund in a "master / feeder" structure, will need to consolidate the master fund. In cases where the feeder fund only owns non-voting participating shares of a master fund, other criteria, such as whether the feeder fund has the power to govern by virtue of an agreement (such as a control agreement between the feeder fund and the master fund) or laws should be considered. In some circumstances, where a feeder fund is only to invest in one particular master fund, the feeder and master funds may represent an integrated entity.

21 19 In such case, the integrated entity could be considered the reporting entity and only one set of financial statements is prepared. Furthermore, a fund of funds or a private equity fund may need to consolidate the investments in other investment funds or investee companies, for which it has control as defined in IAS 27. Such control exists when the fund of funds or the private equity fund owns more than half of voting shares or interests in another investment fund or investee company. However if the fund of funds only holds non-voting shares and the holders of the voting shares have the ability to direct the financial and operating policies of the fund, the fund of funds should not consolidate the investee fund. A private equity fund typically purchases investments, including controlling interests, in investee companies with a view to resale. However, unless qualified as a disposal group held for sale at acquisition under the criteria in 5, Non-Current Assets Held for Sale and Discontinued Operations, such investee companies should be consolidated. The criteria include that the assets should be available for immediate sale and such sale should be highly probable, including the requirement of completion the sale within one year ( 5.7 and 5.8). An investment fund should only consolidate subsidiaries which are also investment funds (subject to industry practice, please see below for further discussion). The investment fund should not consolidate a non-investment fund investee, unless such investee is an operating company that provides services to the investment fund (AAG-Inv 7.04 and 7.05). According to industry practice, a feeder fund within a master / feeder structure will not consolidate its master fund even if it owns the majority of the master fund's voting shares. The feeder fund should either present the master fund's financial statements together with its own, or report on the investment in the master fund as indirect portfolio investments under paragraph 11 of SOP 95-2, as amended (AAG-Inv 7.07). Additionally, if an investment fund is classified as a fund of funds, it would not consolidate investee funds but show its investments using specific presentation requirements (AAG-Inv ). Given industry practice in and unlike, private equity or venture capital funds do not consolidate their investee companies even if there is control over the investee companies.

22 20 Special Purpose Entity Similar to IAS 27 discussed above, SIC-Interpretation ("SIC") No. 12, Consolidation of Special Purpose Entities, does not provide a scope exception to an investment fund. An investment fund should consolidate any special purpose entity ("SPE"), which is an entity created to accomplish a narrow and well-defined objective (SIC 12.1), when the substance of the relationship indicates that the SPE is controlled by the investment fund (SIC 12.8). To establish control, the control criteria under IAS 27 (see "Consolidation Model") should be considered. Furthermore, the following circumstances may indicate control (SIC 12): 1) In substance, the activities of the SPE are being conducted on behalf of an entity according to its business need so that the entity obtains benefits from the SPE's operations; 2) In substance, the entity has the decision-making powers to obtain the majority of the benefits of the activities of the SPE or, by setting up an autopilot mechanism, the entity has delegated these decision-making powers; 3) In substance, the entity has rights to obtain the majority of the benefits of the SPE and therefore may be exposed to risks incident to the activities of the SPE; or 4) In substance, the entity retains the majority of the residual or ownership risks related to the SPE or its assets in order to obtain benefits from its activities. As a result of the provisions under SIC 12, an investment fund should consolidate an investee entity that is qualified as an SPE. In cases where an investment fund may not have control as defined in IAS 27 over its investee entity, the provisions under SIC 12 should also be considered. SPEs are referred to as "Variable Interest Entities" ("VIE") under. FASB Interpretation ("FIN") No. 46, Consolidation of Variable Interest Entities, as revised, requires the consolidation of variable interest entities ("VIE"). Under paragraph 36 of FIN 46R, the effective date of the application of FIN 46R for investment funds has been deferred. However, this deferral does not extend to investments made after March 27, 2002, that are held by an investment fund that is not a separate entity, unless those investments were acquired pursuant to an irrevocable binding commitment that existed prior to March 28, FIN 46 also requires disclosure about any VIE that the investment fund is not required to consolidate. As a result of the deferral, investments in VIE should be accounted for at fair value under.