IFRS Illustrative financial statements: Investment funds December 2011 kpmg.com/ifrs Contents Financial statements Statement of financial position 3 Statement of comprehensive income 5 Statement of changes in net assets attributable to holders of redeemable shares 7 Statement of cash flows 9 Notes to the financial statements 11 Appendices I Example disclosures for entities that early adopt IFRS 9 Financial Instruments (October 2010) 79 II Example disclosures of segment reporting – multiple segment fund 91 III Example disclosures of open-ended fund with puttable instruments classified as equity 99 IV Example disclosures of schedule of investments – unaudited 109 V Example disclosures of exposure to market risk – Value-at-Risk analysis 113 Technical guide 116 Contact us 118 © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. What’s new? Major changes from the December 2010 edition of Illustrative financial statements: Investment funds are highlighted by a double line border running down the left margin of the text within this document. The major change from the December 2010 edition is example disclosures for the early adoption of IFRS 9 Financial instruments issued in October 2010. About this publication These illustrative financial statements have been produced by the KPMG International Standards Group (part of KPMG IFRG Limited), and the views expressed herein are those of the KPMG International Standards Group. Content The purpose of this publication is to assist you in preparing annual financial statements of an investment fund in accordance with IFRSs. It illustrates one possible format of financial statements for fund-specific entities based on a fictitious tax-exempt open-ended single-fund investment company, which does not form part of a consolidated entity nor holds investments in any subsidiaries, associates or joint venture entities. The company’s redeemable shares are classified as financial liabilities and the management shares meet the definition of equity; the company is outside the scope of IFRS 8 Operating Segments. The company is not a first-time adopter of IFRSs (see Technical guide). Appendix I illustrates example disclosures for the early adoption of IFRS 9. Appendix II provides an example of disclosures for a fund within the scope of IFRS 8 with multiple reportable segments. Appendix III provides an example of disclosures for a fund whose puttable instruments are classified as equity. This publication reflects IFRSs in issue at 20 December 2011 that are required to be applied by an entity with an annual period beginning on 1 January 2011 (’currently effective’ requirements). IFRSs that are effective for annual periods beginning after 1January 2011 (’forthcoming’ requirements) have not been adopted early in preparing these illustrative financial statements. However, example disclosures for the early adoption of IFRS 9 are included in Appendix I. This publication focuses on disclosure requirements that are specific to funds’ activities. For other disclosures that might be relevant, please refer to our publications Illustrative financial statements and Illustrative financial statements: Banks. This publication illustrates only the financial statements component of a financial report. However, typically a financial report will include at least some additional commentary by management, either in accordance with local laws and regulations or at the election of the fund (see Technical guide). When preparing financial statements in accordance with IFRSs, a fund should have regard to its local legal and regulatory requirements. This publication does not consider any requirements of a particular jurisdiction. In response to the Financial Stability Board report Enhancing Market and Institutional Resilience the IASB established an Expert Advisory Panel (the panel) to assist the IASB in reviewing best practices in the area of valuation techniques and formulating any necessary additional guidance on valuation methods for financial instruments and related disclosures when markets are no longer active. The panel issued its final report Measuring and disclosing the fair value of financial instruments in markets that are no longer active on 31 October 2008. Part 2 of the report contains guidance on disclosures. This publication does not illustrate these disclosures, unless they are also required by IFRS 7. For an illustrative example of disclosures in the panel’s report and explanatory notes see our publication Illustrative financial statements: Banks published in July 2011. IFRSs and their interpretation change over time. Accordingly, these illustrative financial statements should not be used as a substitute for referring to the standards and interpretations themselves. References The illustrative financial statements are contained on the odd-numbered pages of this publication. The even-numbered pages contain explanatory comments and notes on the disclosure requirements of IFRSs. The illustrative examples, together with the explanatory notes, however, are not intended to be seen as a complete and exhaustive summary of all disclosure requirements that are applicable under IFRSs. For an overview of all disclosure requirements that are applicable under IFRSs, see our publication Disclosure checklist. To the left of each item disclosed, a reference to the relevant currently effective standard is provided; generally the references relate only to disclosure requirements, except that note 3 highlights some accounting requirements in relation to significant accounting policies. These illustrative financial statements also contain references to our publication Insights into IFRS (8thEdition). 2 | Illustrative financial statements: Investment funds © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. Explanatory note 1. IAS 1.55, 58 Additional line items, headings and subtotals are presented separately in the statement of financial position when such presentation is relevant to an understanding of the entity’s financial position. The judgement used is based on an assessment of the nature and liquidity of the assets, the function of assets within the entity, as well as the amounts, nature and timing of liabilities. Additional line items may include, e.g. prepayments. IAS 1.57 IAS 1 does not prescribe the order or format in which an entity presents items. Additional line items are included when the size, nature or function of an item or aggregation of similar items is such that separate presentation is relevant to an understanding of the entity’s financial position and the descriptions used, and the ordering of items or aggregation of similar items may be amended according to the nature of the entity and its transactions to provide information that is relevant to an understanding of an entity’s financial position. 2. IAS 1.60, 61 In these illustrative financial statements we have presented assets and liabilities broadly in order of liquidity. An entity also may present its assets and liabilities using a current/non-current classification if such presentation provides reliable and more relevant information. For each asset and liability line item that combines amounts expected to be recovered or settled within (1) no more than 12 months after the end of the reporting period, and (2) more than 12 months after the end of the reporting period, an entity discloses in the notes the amount expected to be recovered or settled after more than 12 months. 3. IFRS 7.8 The carrying amounts of each of the categories of financial assets and financial liabilities are required to be disclosed in either the statement of financial position or the notes. In these illustrative financial statements this information is presented in the notes. 4. It has been assumed for the purpose of these illustrative financial statements that management shares issued by the Fund meet the definition of equity. Determination of whether an instrument meets the definition of equity can be complex and is further discussed in our publication Insights into IFRS (7.3.50 – 310). 5. IAS 32 IE32 In these illustrative financial statements presentation of the statement of financial position follows the Example 7 in IAS 32. 6. IAS 39.48A, AG72 In accordance with IAS 39 the best measure of fair value of a financial asset and financial liability is a quoted price in an active market. The quoted price for an asset held is usually the current bid price and for a liability held is the asking price. On the other hand, in accordance with the Fund’s prospectus, the redemption amounts of the redeemable shares are calculated using the mid-market prices of the Fund’s underlying investments/securities sold short. Owing to the differences in the measurement bases of the Fund’s underlying investments/ securities sold short and the redemption amounts of the redeemable shares, a mismatch results in the statement of financial position giving rise to a presentation issue. In our view, one solution may be to present the net assets attributable to holders of redeemable shares in a two-line format. The first line would be the amount of the net assets attributable to holders of redeemable shares measured in accordance with the prospectus, which reflects the actual redemption amount at which the redeemable shares would be redeemed at the reporting date, and the next line would include an adjustment for the difference between this and the amount recognised in the statement of financial position. This reflects the fact that for a fund with no equity all recognised income and expense is attributed to holders of redeemable shares, which also means that if all the shares are redeemed, then a dilution levy of such amount would be required. This issue is discussed in our publication Insights into IFRS (7.6.220.60 – 75). The treatment in a fund with no equity is applied in these illustrative financial statements to a fund with minimal equity as equity holders are entitled to a minimal fixed monetary amount on liquidation and the remaining net assets are attributed to holders of redeemable shares. Illustrative financial statements: Investment funds | 3 © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. Statement of financial position 1, 2, 3, 4, 5 IAS 1.10(a), 113 31 December 31 December In thousands of euro Note 2011 2010 Assets IAS 1.54(i) Cash and cash equivalents 51 71 IAS 1.54(d) Balances due from brokers 10 4,619 3,121 IAS 1.54(d) Receivables from reverse repurchase agreements 11 4,744 3,990 IAS 1.54(h) Other receivables 29 46 IAS 1.54(d) Non-pledged financial assets at fair value through profit or loss 12 26,931 24,471 IAS 1.54(d), 39.37(a) Pledged financial assets at fair value through profit or loss 12 2,691 2,346 Total assets 39,065 34,045 Equity 5 Share capital 13 10 10 Total equity 10 10 Liabilities IAS 1.54(m) Balances due to brokers 10 143 275 IAS 1.54(m) Payables under repurchase agreements 11 2,563 2,234 IAS 1.54(k) Other payables 103 101 IAS 1.54(m) Financial liabilities at fair value through profit or loss 12 3,621 1,446 Total liabilities (excluding net assets attributable to holders of redeemable shares) 6,430 4,056 IAS 1.6, 54(m), Net assets attributable to holders of redeemable 32.IE32 shares 6 14 32,625 29,979 Represented by: Net assets attributable to holders of redeemable shares (valued in accordance with prospectus) 6 32,647 29,996 Adjustment from mid-market prices to bid/ask-market prices 6 14 (22) (17) 32,625 29,979 The notes on pages 11 to 77 are an integral part of these financial statements. 4 | Illustrative financial statements: Investment funds © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. Explanatory note 1. IAS 1.81 Total comprehensive income is the changes in equity during a period other than those changes resulting from transactions with owners in their capacity as owners, which is presented either in: • one statement, i.e. a statement of comprehensive income; or • two statements, i.e. a separate income statement and a statement beginning with profit or loss and displaying components of other comprehensive income. IAS 1.81(a) This illustration is based on a single statement of comprehensive income as the Fund has no other components of other comprehensive income other than profit or loss for the period. For an example of the two statements approach, please refer to our publication Illustrative financial statements. IAS 32.IE32 In these illustrative financial statements presentation of the statement of comprehensive income follows the Example 7 in IAS 32. IFRS 7.20 Items of income and expense are offset only when required or permitted by an IFRS. IFRS 7 allows the net presentation of certain gains and losses on financial assets and financial liabilities. This issue is discussed in our publication Insights into IFRS (4.1.170). IAS 1.85 An entity presents additional line items, headings and subtotals when this is relevant to an understanding of its financial performance. 2. IAS 1.99 An entity presents an analysis of expenses based on function or nature. Items are classified in accordance with their nature or function regardless of materiality. In these illustrative financial statements, this analysis is based on the nature of expenses. IAS 1.87 No items of income or expense may be presented as extraordinary. The nature and amounts of material items are disclosed as a separate line item in the statement of comprehensive income or in the notes. This issue is discussed in our publication Insights into IFRS (4.1.84 – 86). 3. IAS 1.82(a) IFRSs do not specify whether revenue should be presented only as a single line item in the statement of comprehensive income, or whether an entity also may include the individual components of revenue in the statement of comprehensive income, with a subtotal for revenue from continuing operations. In these illustrative financial statements, the most relevant measure of revenue is considered to be the sum of interest income, dividend income, net foreign exchange loss and net gain from financial instruments at fair value through profit or loss. However, other presentations are possible. 4. IFRS 7.20(c)(ii) Fee income and expense arising from trust and other fiduciary activities that result in the holding or investing of assets on behalf of individuals, trusts, retirement benefit plans and other institutions are required to be disclosed. In these illustrative financial statements this disclosure has been given in the statement of comprehensive income. Alternatively, it may be given in the notes. 5. IAS 32.35, 40 Interest, dividends, gains and losses relating to a financial instrument or a component that is a financial liability are recognised as income or expense in profit or loss. Because redeemable shares are classified as financial liabilities, any distributions on these shares are presented as finance costs. Interest expense and dividends payable on securities sold short have been classified as operating expense, but, depending on the facts and circumstances, presentation as part of finance cost is also possible. 6. IAS 12.2 In our view, withholding taxes attributable to investment income (e.g. dividends received) should be recognised as part of tax expense, with the investment income recognised on a gross basis. This issue is discussed in our publication Insights into IFRS (3.13.420.30). 7. IAS 33.2, 3 An entity with publicly traded ordinary shares or in the process of issuing ordinary shares that are to be publicly traded, should present basic and diluted earnings per share (EPS) in the statement of comprehensive income. The requirements to present EPS only apply to those funds whose ordinary shares are classified as equity. Nevertheless, some funds may wish to or may be required by local regulations to present EPS. When an entity voluntarily presents EPS data, that data should be calculated and presented in accordance with IAS 33. This issue is discussed in our publication Insights into IFRS (5.3.370). Illustrative financial statements: Investment funds | 5 © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. Statement of comprehensive income 1, 2 IAS 1.10(b), 81(a) For the year ended 31 December In thousands of euro Note 2011 2010 Interest income 3 7 603 429 IAS 18.35(b)(v) Dividend income 3 272 229 IAS 1.35 Net foreign exchange loss 3 (19) (16) IFRS 7.20(a) Net gain from financial instruments at fair value through profit or loss 3 8 3,251 2,397 IAS 1.82(a) Total revenue 3 4,107 3,039 IAS 1.99 Investment management fees 4 (478) (447) IAS 1.99 Custodian fees 4 (102) (115) IAS 1.99 Administration fees 4 (66) (62) IAS 1.99 Directors’ fees (26) (15) IAS 1.99 Transaction costs (54) (73) IAS 1.99 Audit and legal fees (74) (67) IFRS 7.20(b) Interest expense 5 (75) (62) Dividend expense on securities sold short 5 (45) (19) IAS 1.99 Other operating expenses (8) (41) Total operating expenses (928) (901) IAS 1.85 Operating profit before finance costs 3,179 2,138 IAS 32.40 Dividends to holders of redeemable shares 5 14 (178) (91) IAS 1.82(b) Total finance costs (178) (91) IAS 1.85 Increase in net assets attributable to holders of redeemable shares before tax 3,001 2,047 IAS 1.82(d) Withholding tax expense 6 9 (45) (39) IAS 1.6, 1.82(f), Increase in net assets attributable to holders of 32.IE32 redeemable shares 2,956 2,008 The notes on pages 11 to 77 are an integral part of these financial statements. 6 | Illustrative financial statements: Investment funds © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. Explanatory note 1. IAS 1.106 A complete set of financial statements comprises, as one of its statements, a statement of changes in equity. However, as equity in the Fund is minimal and there were no changes in equity balances, no statement of changes in equity is presented. Instead, a statement of changes in net assets attributable to holders of redeemable shares is presented. Although IFRSs do not require presentation of this statement, it may provide users of the financial statements with relevant and useful information with respect to the components underlying the movements in the net assets of the Fund attributable to the holders of redeemable shares during the year. 2. IAS 1.110 When a change in accounting policy, either voluntarily or as a result of the initial application of a standard, has an effect on the current period or any prior period, an entity presents the effects of retrospective application or retrospective restatement recognised in accordance with IAS 8 in the statement of changes in equity. These illustrative financial statements do not demonstrate example of IAS 8 disclosures; for an example of such disclosures, please refer to our publication Illustrative financial statements. Illustrative financial statements: Investment funds | 7 © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. Statement of changes in net assets attributable to holders of redeemableshares 1 IAS 1.106 For the year ended 31 December In thousands of euro Note 2011 2010 Balance at 1 January 14 29,979 18,461 Increase in net assets attributable to holders of redeemable shares 2,956 2,008 Contributions and redemptions by holders of redeemable shares: Issue of redeemable shares during the year 6,668 15,505 Redemption of redeemable shares during the year (6,978) (5,995) Total contributions and redemptions by holders of redeemable shares (310) 9,510 Balance at 31 December 14 32,625 29,979 The notes on pages 11 to 77 are an integral part of these financial statements. 8 | Illustrative financial statements: Investment funds © 2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. Explanatory note 1. IAS 7.18, 19 In these illustrative financial statements cash flows from operating activities are presented using the direct method, whereby major classes of cash receipts and payments related to operating activities are disclosed. An entity also may present operating cash flows using the indirect method, whereby profit or loss is adjusted for the effects of non-cash transactions, accruals and deferrals, and items of income or expense associated with investing or financing cash flows. For an example statement of cash flows presenting operating cash flows using the indirect method see our publications Illustrative financial statements or Illustrative financial statements: Banks. IAS 7.43 When applicable, an entity discloses investing and financing transactions that are excluded from the statement of cash flows because they do not require the use of cash or cash equivalents in a way that provides all relevant information about these activities. 2. IAS 7.33, 34 Interest paid and interest and dividends received are usually classified as operating cash flows for a financial institution. Dividends paid may be classified as a financing cash flow as they represent a cost of obtaining financial resources. The Fund has adopted this classification for dividends paid to the holders of redeemable shares. In these illustrative financial statements dividends paid on securities sold short are classified as operating cash flows as they result directly from holding short positions as part of the operating activities of the Fund. 3. IAS 7.14(g), 15 In these illustrative financial statements gross receipts from the sale of, and gross payments to acquire, investment securities have been classified as components of cash flows from operating activities as they form part of the Fund’s dealing operations. IAS 7.16(g), (h) Receipts from and payments for futures, forwards, options and swap contracts are presented as part of either investing or financing activities, provided that they are not held for dealing or trading purposes, in which case they are presented as part of operating activities. However, when a hedging instrument is accounted for as a hedge of an identifiable position, the cash flows of the hedging instrument are classified in the same manner as the cash flows of the positions being hedged. This issue is discussed in our publication Insights into IFRS (2.3.60.10). If hedge accounting is not applied to a derivative instrument that is entered into as an economic hedge, then in our view derivative gains and losses may be shown in the statement of comprehensive income as either operating or financing items depending on the nature of the item being economically hedged. In our view, the possibilities for the presentation in the statement of comprehensive income also apply to the presentation in the statement of cash flows. This issue is discussed in our publication Insights into IFRS (7.8.220 – 225). 4. IAS 7.22 Cash flows from operating, investing or financing activities may be reported on a net basis if the cash receipts and payments are on behalf of customers and the cash flows reflect the activities of the customer, or when the cash receipts and payments for items concerned turn over quickly, the amounts are large and the maturities are short. [...]... inancial statements: Investment funds This page has been left blank intentionally © 2011 KPMG IFRG Limited, a UK company, limited by guarantee All rights reserved Illustrative inancial statements: Investment funds | 21 Notes to the inancial statements 3 Significant accounting policies (continued) (h) Financial assets and financial liabilities (continued) IAS 39.48 (iv) Fair value measurement (continued) IFRS. .. Illustrative inancial statements: Investment funds | 29 Notes to the inancial statements 4 Financial risk management (continued) (a) Introduction and overview (continued) (i) IFRS 7 31 Risk management framework The Fund maintains positions in a variety of derivative and non-derivative financial instruments in accordance with its investment management strategy [Insert description of the Fund’s investment strategy... instruments outside the scope of IFRS 7 B1–B3 IFRS 7 IG21– IG29 The IFRS 7 implementation guidance provides additional guidance on the disclosures without specifying a minimum standard disclosure © 2011 KPMG IFRG Limited, a UK company, limited by guarantee All rights reserved Illustrative inancial statements: Investment funds | 31 Notes to the inancial statements 4 Financial risk management (continued)... inancial statements: Investment funds Explanatory note 1 IAS 1.7 The notes include narrative descriptions or break-downs of amounts disclosed in the primary statements They also include information about items that do not qualify for recognition in the inancial statements © 2011 KPMG IFRG Limited, a UK company, limited by guarantee All rights reserved Illustrative inancial statements: Investment funds. .. investment strategy as outlined in the Fund’s prospectus] The Fund’s investment portfolio comprises listed and unlisted equity and debt securities, derivative financial instruments and investments in unlisted investment funds The Fund’s investment manager has been given a discretionary authority to manage the assets in line with the Fund’s investment objectives Compliance with the target asset allocations... an illustrative example of the early adoption of IFRS 9 ● In December 2010 the IASB issued Deferred Tax: Recovery of Underlying Assets – Amendments to IAS 12 with an effective date of 1 January 2012 In May 2011 the IASB issued IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other Entities and IFRS 13 Fair Value Measurement, which all have an... note 11) (viii) Concentration of credit risk2 IFRS 7 34(c) The investment manager reviews credit concentration of debt securities held based on counterparties and industries [and geographical location] © 2011 KPMG IFRG Limited, a UK company, limited by guarantee All rights reserved 34 | Illustrative inancial statements: Investment funds Explanatory note 1 IFRS 7 37(a) An entity discloses an ageing analysis... IFRG Limited, a UK company, limited by guarantee All rights reserved 14 | Illustrative inancial statements: Investment funds Explanatory note 1 2 When a change in accounting policy is the result of the adoption of a new, revised or amended IFRS, an entity applies the speciic transitional requirements in that IFRS However, in our view an entity nonetheless should comply with the disclosure requirements... inancial statements: Investment funds Explanatory note 1 IFRS 7 36(a) An entity discloses information about the nature and extent of its exposure to credit risk The disclosure of the maximum exposure to credit risk ignores any collateral held or other credit enhancement This disclosure is not required for inancial instruments whose carrying amount best represents the maximum exposure to credit risk IFRS. .. effect on the measurement of the amounts recognised in the financial statements of the Fund However, IFRS 9 will change the classification of financial assets © 2011 KPMG IFRG Limited, a UK company, limited by guarantee All rights reserved 26 | Illustrative inancial statements: Investment funds Explanatory note 1 IFRS 7 31 1, An entity discloses information that enables users of its inancial statements to . IFRS Illustrative financial statements: Investment funds December 2011 kpmg.com /ifrs Contents Financial statements Statement. references to our publication Insights into IFRS (8thEdition). 2 | Illustrative financial statements: Investment funds © 2011 KPMG IFRG Limited, a UK company,