Illustrative IFRS consolidated nancial statements Investment property Illustrative IFRS nancial statements 2011 Investment funds Stay informed. Visit www.pwcinform.com Illustrative IFRS financial statements 2011 Investment funds Illustrative IFRS financial statements 2011 – Investment funds This publication provides an illustrative set of financial statements, prepared in accordance with International Financial Reporting Standards (IFRS), for a fictional open-ended investment fund (‘ABC Fund’ or 'the Fund’). Areas in which we have made significant changes to presentation since the prior publication have been highlighted in pink. Significant changes result predominantly from the early adoption of IFRS 13 referred to below. ABC Fund is an existing preparer of IFRS financial statements; IFRS 1, ‘First-time adoption of IFRS’, is not applicable. It does not have any subsidiaries, associates or joint ventures. ABC shares are not traded in a public market. This publication is based on the requirements of IFRS standards and interpretations for the financial year beginning on 1 January 2011, with early adoption of IFRS 13, ‘Fair value measurement’, which is not effective until annual periods beginning on or after 1 January 2013. IAS 1 (amendment), ‘Presentation of items of other comprehensive income’, effective for annual periods beginning on or after 1 July 2012, IFRS 7 (amendment), ‘Disclosures – transfer of financial assets’, effective for annual periods beginning on or after 1 July 2011, IFRS 9, ‘Financial instruments’, effective for annual periods beginning on or after 1 January 2015, IFRS 10, ‘Consolidated financial statements’ and IFRS 12, ‘Disclosures of interests in other entities’, effective for annual periods beginning on or after 1 January 2013, have not been early adopted by the Fund, as they would have no significant effect. The impact of early adoption of the IAS 1 amendment is illustrated in Appendix IV. The main objective of IFRS 13, ‘Fair value measurement’ (effective for annual periods beginning on or after 1 January 2013) is to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs. The requirements, which are largely aligned between IFRSs and US GAAP, do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRS. If an asset or a liability measured at fair value has a bid price and an ask price, the standard requires valuation to be based on a price within the bid-ask spread that is most representative of fair value. The standard allows the use of mid-market pricing or other pricing conventions that are used by market participants as a practical expedient for fair value measurements within a bid-ask spread. This provision may have the effect of eliminating the net asset value (NAV) valuation adjustment on many funds where the trading price of the fund’s shares is based on investments valued between the bid-ask spread. These financial statements present a fund where early adoption has eliminated the NAV valuation adjustment that existed in the prior year. In the appendices, the main change resulting from the amendments to IAS 1, ‘Presentation of items of other comprehensive income’ (effective for annual periods beginning on or after 1 July 2012) is a requirement for entities to group items presented in other comprehensive income based on whether these items can potentially be reclassified to profit or loss subsequently (reclassification adjustments). This would only have an impact on funds with elements of other comprehensive income, such as funds that hold available-for-sale investments. Appendix IV illustrates the impact on a fund with available-for-sale investments. A new appendix (Appendix IX) has been added, outlining the accounting considerations and disclosures around tax uncertainty in investment funds. IFRS 9, ‘Financial instruments’, addresses the classification, measurement and recognition of financial assets and financial liabilities. IFRS 9 was issued in November 2009 and October 2010. The standard is now effective for annual periods beginning on or after 1 January 2015. IFRS 9 replaces the parts of IAS 39 that relate to the classification and measurement of financial instruments and requires financial assets to be classified into two measurement categories: those measured as at fair value and those measured at amortised cost. The determination is made at initial recognition. The classification depends on the entity’s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the IAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change relating to an entity’s own credit risk is recorded in other comprehensive income rather than the income statement, unless this creates an accounting mismatch. As many investment funds currently designate non-derivative financial assets at fair value through profit or loss (FVTPL) on inception, the impact of IFRS 9 is expected to be minimal. Investment funds that have financial assets designated as available-for-sale or loans and receivables will be impacted. These categories have been restricted so more assets may need to be measured at FVTPL. PwC – Illustrative IFRS financial statements 2011 – Investment funds i IFRS 9 has no major impact on the fictional fund presented in the main body of these illustrative financial statements. While no illustrative disclosures for IFRS 9 are set out in this publication, Appendix V to the Illustrative corporate consolidated financial statements for 2011 year ends contains extracts of illustrative disclosures for the adoption of IFRS 9. These disclosures can be adjusted to the facts and circumstances of an investment fund that holds financial assets impacted by IFRS 9. IFRS 10, ‘Consolidated financial statements’ (effective for annual periods beginning on or after 1 January 2013), builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess. At the time of going to print, the exposure draft had not been finalised. IFRS 10 has not been adopted early by the fictional fund, as it is not expected to impact it. An exposure draft (ED) published by the IASB in August 2011 proposes that an investment entity (as defined in the ED) should be required to measure investments in entities that it controls at FVTPL, rather than consolidating such investments. Thus, the ED proposes to create an exception to the principle of consolidation in IFRS 10. The ED also proposes specific disclosure requirements to be made by investment entities. We have attempted to create a realistic set of financial statements for an open-ended investment fund. However, by necessity we illustrate disclosures that for many entities may be immaterial. Determining the level of disclosure is a matter of judgement, and naturally disclosure of immaterial items is not required. Certain types of transaction have been excluded as they are not relevant to the Fund’s operations. The example disclosures, if material, for some of these additional items have been included in appendices. The illustrative disclosures should not be considered the only acceptable form of presentation. The form and content of each reporting entity’s financial statements are the responsibility of the entity’s management. Alternative presentations to those proposed in this publication may be equally acceptable if they comply with the specific disclosure requirements prescribed in IFRS. These illustrative financial statements are not a substitute for reading the standards and interpretations themselves or for professional judgement as to the fairness of presentation. They do not cover all possible disclosures that IFRS requires, nor do they take account of any specific legal framework. Further specific information may be required in order to ensure fair presentation under IFRS. We recommend that readers refer to our publication IFRS disclosure checklist 2011. Additional accounting disclosures may be required in order to comply with local laws and/or stock exchange regulations. Format The references in the left-hand margin of the financial statements represent the paragraph of the standard in which the disclosure appears – for example, ‘8p40’ indicates IAS 8 paragraph 40. The reference to IFRS appears in full – for example, ‘IFRS13p66’ indicates IFRS 13 paragraph 66. The designation ‘DV’ (disclosure voluntary) indicates that the relevant IAS or IFRS encourages, but does not require, the disclosure. Additional notes and explanations are shown in footnotes. Commentary boxes have been added which include discussions on the main updates made from the Illustrative IFRS financial statements 2009 – investment funds as a result of adoption of new standards and amendments to standards. ii PwC – Illustrative IFRS financial statements 2011 – Investment funds ABC Fund financial statements 31 December 2011 PwC – Illustrative IFRS financial statements 2011 – Investment funds iii iv PwC – Illustrative IFRS financial statements 2011 – Investment funds Contents Note Page Statement of financial position 1 Statement of comprehensive income – by nature of expense 2 Statement of changes in net assets attributable to holders of redeemable shares 4 Statement of cash flows 5 Notes to the financial statements: 1 General information 6 2 Summary of significant accounting policies 6 2.1 Basis of preparation 6 2.2 Foreign currency translation 7 2.3 Financial assets and financial liabilities at fair value through profit or loss 8 2.4 Offsetting financial instruments 9 2.5 Due from and due to brokers 9 2.6 Cash and cash equivalents 10 2.7 Accrued expenses 10 2.8 Redeemable shares 10 2.9 Interest income and dividend income 10 2.10 Transaction costs 10 2.11 Distributions payable to holders of redeemable shares 10 2.12 Increase/decrease in net assets attributable to holders of redeemable shares from operations 11 2.13 Taxation 11 2.14 Collateral 11 3 Financial risks 11 3.1 Financial risk factors 11 3.1.1 Market risk 11 3.1.2 Credit risk 15 3.1.3 Liquidity risk 16 3.2 Capital risk management 18 3.3 Fair value estimation 18 4 Critical accounting estimates and judgements 26 4.1 Critical accounting estimates and assumptions 26 4.2 Critical judgements 26 5 Interest income 26 6 Financial assets at fair value through profit or loss 27 7 Financial liabilities at fair value through profit or loss 28 8 Financial instruments by category 28 9 Derivative financial instruments 29 10 Margin accounts 29 11 Cash and cash equivalents 30 12 Redeemable shares 30 13 Distribution payable 30 14 Related-party transactions 30 Independent auditor’s report 32 Appendices Appendix I Statement of cash flows – indirect method 33 Appendix II Fund without puttable instruments 34 Appendix III Fund with puttable instruments reclassified from liabilities to equity 38 Appendix IV Available-for-sale securities including early adoption of IAS 1 amendment 43 Appendix V Funds that invest in other investment funds 47 Appendix VI Funds with significant leverage 52 Appendix VII Segment reporting – multiple segments 54 Appendix VIII Segment reporting – single segment 57 Appendix IX An investment fund with tax uncertainty 58 PwC – Illustrative IFRS financial statements 2011 – Investment funds v vi PwC – Illustrative IFRS financial statements 2011 – Investment funds [...]... adopted IFRS1 3, effective 1 January 2011, which requires the Fund to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements This is consistent with the previous requirement of IFRS7 p27A, which was replaced upon adoption of IFRS 13 18 PwC – Illustrative IFRS financial statements 2011 – Investment funds Notes to the financial statements. .. classes may be needed for Level 3 due to the degree of uncertainty and subjectivity [IFRS1 3p94] 2 This table follows the illustrative guidance in IFRS1 3pIE60 PwC – Illustrative IFRS financial statements 2011 – Investment funds 19 Notes to the financial statements (All amounts in e thousands unless otherwise stated) IFRS1 3p93(a), (b) Level 1 Level 2 Level 3 Total balance 8,741 8,500 4,650 4,800 3,250... This is the same requirement that existed under IFRS 7 prior to IFRS 13 IFRS 13 has simply clarified the requirement by specifying that this disclosure should include only unrealised gains and losses 24 PwC – Illustrative IFRS financial statements 2011 – Investment funds Notes to the financial statements (All amounts in e thousands unless otherwise stated) IFRS1 3p97 Assets and liabilities not carried at... [IFRS1 3p93(h)(i)] This is a new requirement 22 PwC – Illustrative IFRS financial statements 2011 – Investment funds Notes to the financial statements (All amounts in e thousands unless otherwise stated) IFRS1 3p93(c), (e) The following table presents the transfers between levels for the year ended 31 December 2011 Level 1 Transfers between Levels 1 and 2: US equities securities Financial sector Consumer discretionary... notes on pages 6 to 32 are an integral part of these financial statements PwC – Illustrative IFRS financial statements 2011 – Investment funds 5 Notes to the financial statements (All amounts in e thousands unless otherwise stated) Notes to the financial statements 1 General information 1p138(a) 1p51(a)(b) ABC Fund (‘the Fund’) is an open-ended investment fund domiciled and incorporated as a limited liability... (IFRS7 B11D(d)) There is no explicit requirement to disclose the corresponding inflow; however, IFRS7 B11E requires an entity to disclose a maturity analysis of financial assets it holds for managing liquidity risk if that information is necessary to enable users of its financial statements to evaluate the nature and extent of liquidity risk PwC – Illustrative IFRS financial statements 2011 – Investment funds. .. Paragraph (b) ‘Foreign exchange risk’ below sets out how this component of price risk is managed and measured 1 Refer to Appendix IX for investment funds with tax uncertainty PwC – Illustrative IFRS financial statements 2011 – Investment funds 11 Notes to the financial statements (All amounts in e thousands unless otherwise stated) The Fund’s policy is to manage price risk through diversification and selection... position in the financial services sector at 31 December 2011 was at the expense primarily of the ‘consumer staples’ and ‘utilities’ sectors which, while being in an overweight position during most of the period, moved to an underweight position at 31 December 2011 PwC – Illustrative IFRS financial statements 2011 – Investment funds Notes to the financial statements (All amounts in e thousands unless otherwise... analysis, which is based on valuation inputs, does not meet the requirement to present a market sensitivity analysis PwC – Illustrative IFRS financial statements 2011 – Investment funds 13 Notes to the financial statements (All amounts in e thousands unless otherwise stated) IFRS7 p40 IFRS7 IG36 The table below summarises the sensitivity of the Fund’s monetary and non-monetary assets and liabilities to changes... timing of transfers include the following [IFRS1 3p95]: The date of the event or change in circumstances that caused the transfer The beginning of the reporting period The end of the reporting period PwC – Illustrative IFRS financial statements 2011 – Investment funds 23 Notes to the financial statements (All amounts in e thousands unless otherwise stated) IFRS1 3p93(e) The following table presents the . www.pwcinform.com Illustrative IFRS financial statements 2011 Investment funds Illustrative IFRS financial statements 2011 – Investment funds This publication. Illustrative IFRS financial statements 2011 – Investment funds ABC Fund financial statements 31 December 2011 PwC – Illustrative IFRS financial statements 2011 – Investment