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An introduction to IFRS

for investment funds

Link n’ Learn

28 August 2014

© 2014 Deloitte & Touche

Presenters

Darren Griffin

Audit Director

Sang Eui Han

Audit Manager

An Instruction to IFRS for Investment Funds 2


Agenda

IFRS and Investments Funds 2

Introduction 1

Format of IFRS Financial Statements for Funds 3

4 IFRS for Investment Funds

An Introduction to IFRS for Investment Funds 3

IFRS and Investment Funds


IFRS Framework

• The IFRS Framework encompasses all standards and interpretations

approved by the IASC (IAS) and by the IASB (IFRS).

• IFRS is currently required or permitted in more than 120 countries (including

countries which adopted full IFRS equivalents).

• The Conceptual Framework sets out the concepts which are the basis of

preparation and presentation of financial statements for external users.

• New pronouncements and amendments may have a significant impact on

the financial statements of an investment fund.

• Terms that we will use in the presentation: • Presentation – how items are disclosed in the financial statements

• Recognition/(De)recognition - Incorporation or recording of the monetary effects of a

business transaction into books of account or financial statements.

• Measurement - Quantification of economic activities in terms of money.



What is useful about IFRS as applied to investment

funds…

Is IFRS beneficial for fund reporting?

Written

Guidance

Provide written detailed guidance (e.g. Trade date vs. Settlement date

accounting, how to fair value certain financial assets, amortisation of

discounts or premiums on debt instruments

Enhances worldwide comparability

Principles – based standards facilitate implementation

Constantly being reviewed and revised by representatives around the world

Enhances transparency (e.g. detailed disclosure on risk and related parties

and related transactions)

Comparability

Flexibility

Evolving

Transparency



What is useful about IFRS as applied to investment

funds…

Is IFRS beneficial for fund reporting?

Fund Industry

specificities

IAS/IFRS are accounting standards that are generic and do not recognise

different industries.

Critique that IFRS generally does not take fund investor needs into account

There is limited guidance on the application of IFRS to the fund industry

(as for example available in the US GAAP – Industry Guide for Investments

Companies)

Specific gaps have presented difficulties in the practical application of

IFRS to investment funds (see reports issued by EFAMA & ICI)

Investor

needs

Limited

guidance

Practical

application



Most relevant standards for investment funds reporting

under IFRS

IAS 1 Presentation of Financial Statements

IAS 7 Statement of Cash Flows

IAS 24 Related Party Disclosures

IAS 38 Intangible Assets

IAS 27 Separate Financial Statements

IFRS 10 Consolidated Financial Statements

IAS 32 Financial Instruments: Presentation

IAS 39 Financial Instruments: Recognition

IFRS 7 Financial Instruments: Disclosures

IFRS 9 Financial Instruments (to replace IAS 39 once effective)

IFRS 13 Fair Value Measurement


Format of IFRS Financial Statements for Funds


IAS 1 – Presentation of financial statements

• No specific industry guidance under IFRS for Funds

• Funds Apply IAS 1 “Presentation of Financial Statements”

A complete set of financial statements should include the following:

• Statement of financial position

• Statement of comprehensive income

• Statement of changes in equity

• Statement of cash flows

• A summary of accounting policies and other explanatory notes

Items not specifically required under IFRS but which may be required under

companies acts / listing rules / UCITS or NON-UCITS Regulations

• Directors’ report

• Investment Manager’s report

• Custodian’s report

• Schedule of investments / schedule of changes in portfolio



IAS 1 – Presentation of financial statements

Key concepts:

GOING CONCERN

ASSUMPTION

ACCRUALS BASIS

OFFSETTING COMPARATIVES

MATERIALITY AND

AGGREGATION

CONSISTENCY OF

PRESENTATION



Example: Statement of Financial Position

12 An Introduction to IFRS for Investment Funds

Assets

As at

30/06/14

CU’000

As at

30/06/13

CU’000

Current assets

Cash and cash equivalents 270 139

Interest receivable 387 677

Dividends receivable 370 541

Receivable from brokers 3 3

Financial assets at fair value through profit or loss 198,245 127,448

Financial assets at fair value through profit or loss

pledged as collateral 36,579 15,957

Total assets 235,854 144,765

Liabilities

Current liabilities

Accrued expenses 659 416

Due to brokers 13 8

Borrowings 25,227 10,005

Financial liabilities at fair value through profit or loss 1,411 2,064

Withholding tax payable 8 5

Total liabilities (excluding net assets attributable to holders of

redeemable shares) 27,318 12,498

Net assets attributable to holders of redeemable shares 208,536 132,267

Statement of financial position

As at 30 June 2014


Statement of comprehensive income

For the year ended 30 June 2014

Year ended

30/06/14

CU’000

Year ended

30/06/13

CU’000

Revenue

Interest income 3,327 909

Dividend income 909 1,631

Net realized gains/(losses) on financial assets and liabilities at fair value

through profit or loss (79,860) (24,480)

Net change in unrealized gains/(losses) on financial assets and liabilities

held at fair value through profit or loss 155,741 (244,301)

Net foreign currency gains/(losses) 993 3,551

Total operating income 81,110 (262,690)

Expenses

Interest expense (3) (2)

Management fees (1,998) (2,851)

Performance fees (88) (174)

Custodian fees (216) (443)

Administration fees (138) (76)

Transaction costs (107) (321)

Professional fees (7) (10)

Director’s fees (15) (15)

Other expenses (7) (1)

Total operating expenses (2,579) (3,893)

Operating profit/(loss) 78,531 (266,583)

Finance costs

Interest expense (386) (1,419)

Distribution to holders of redeemable shares (2,000) -

Profit/(loss) after distributions and before tax 76,145 (268,002)

Withholding taxes (87) (60)

Profit/(loss) after distributions and tax 76,058 (268,062)

Increase/(decrease) in net assets attributable to holders of

redeemable shares 76,058

(268,062)

Example: Statement of Comprehensive Income



The statement of cash flows analyses changes in cash and cash

equivalents during a period.

Cash and cash equivalents comprise cash on hand and demand deposits,

together with short-term, highly liquid investments that are readily convertible

to a known amount of cash, and that are subject to an insignificant risk of

changes in value.

IAS 7 - Statement of Cash Flows

The direct

method

shows each

major class

of gross cash

receipts and

gross cash

payments

The indirect

method

adjusts

accrual basis

net profit or

loss for the

effects of

non-cash

transactions

Operating cash flows generated from the main

revenue-producing activities

Financing activities cash flows used for

the activities that alter the equity

Investing cash flows used for the acquisition and disposal of

long-term assets



Statement of cash flows

For the year ended 30 June 2014

Year ended

30/06/14

CU’000

Year ended

30/06/13

CU’000

Cash flows from/(used in) operating activities:

Increase in net assets attributable to holders of redeemable shares 76,058 (268,062)

Adjustments for:

Interest income (3,327) (909)

Dividend income (909) (1,631)

Finance costs recognized in profit or loss 2,386 1,419

Withholding tax expense recognized in profit or loss 87 60

Net (increase)/decrease in financial assets at fair value through profit or loss (91,419) 275,835

Net (increase)/dercease in financial liabilities at fair value through profit or loss (653) 488

Net (increase)/decrease in receivables/payables from/to brokers 5 (5)

Net (increase)/decrease in accrued expenses 243 797

Cash (used in)/provided by operations (17,529) (7,992)

Interest received 3,617 868

Dividends received 1,080 1,090

Withholding taxes paid (84) (55)

Net cash (used in)/provided by operating activities (12,916) 9,895

Cash flows from financing activities

Proceeds from borrowings (excluding bank overdrafts) 35,720 50

Repayments of borrowings (excluding bank overdrafts) (28,415) -

Proceeds from issue of redeemable shares 2,814 -

Payment on redemption of redeemable shares (2,603) -

Distribution to holders of redeemable shares (2,000) -

Interest paid on borrowings (386) (1,419)

Net cash provided by/(used in) financing activities 5,130 (1,369)

Net (decrease)/increase in cash and cash equivalents (7,786) 8,526

Cash and cash equivalents at the beginning of the financial year (9,816) (18,342)

Cash and cash equivalents at the end of the financial year (17,602) (9,816)

Example: Statement of Cash Flows –Indirect method


Applicable IFRS for Investment Funds


IAS 24 – Related party disclosures

Objective : To draw attention to the possibility that an entity’s financial position and

profit or loss may have been affected by the existence of related parties and by

transactions and outstanding balances with such parties

Who Are Related Parties?

• Parties that have the ability to control or to exercise significant influence or joint

control over the other party in making financial and operating decisions.

• Key management of the entity and close family members to any of the above parties

are included in the definition, together with other entities controlled, jointly controlled,

or significantly influenced by these individuals.

A related party to a Fund is…

board of directors investment manager

auditor a minority investor

close family member of key mgmt a significant investor

regulator custodian

?

?



Most Significant IFRS Relating to Financial Instruments

IAS 39 Financial

Instruments:

Recognition &

Measurement

IAS 32 Financial

Instruments:

Presentation

IFRS 7 Financial

Instruments:

Disclosure

IFRS 13 Fair Value

Measurement



IAS 39 Financial Instruments: Classification

Financial Assets “Available for Sale”

Financial Assets “Loans & Receivables”

Financial Assets “Held to Maturity”

Financial Assets “At Fair Value Through Profit or Loss” (Held for Trading or Designated)



Available for sale

(AFS)

Held to maturity

(HTM) At fair value

through profit or

loss

Loans and

receivables

(L&R)

Fair value (IFRS 13)* Amortised cost

(*) Exception: investments in AFS equity instruments that do not have a quoted a market price in an active market and

whose fair value cannot be reliably measured shall be measured at cost (IAS39 AG81)

Fair value

in profit or loss

Fair value

in OCI

Amortization goes to

profit or loss (interests)

Measurement of financial instruments (IAS 39)

Financial Assets

IFRS 13 Fair Value Measurement


Summary of IFRS 13


On 12 May 2011 the IASB issued IFRS 13 Fair Value Measurement.

IFRS 13, which is effective from 1 January 2013, defines fair value,

sets out in a single IFRS a framework for measuring fair value and

requires disclosures about fair value measurements. IFRS 13 does

not determine when an asset, a liability or an entity’s own equity

instrument is measured at fair value. Rather, the measurement and

disclosure requirements of IFRS 13 apply when another IFRS

requires or permits the item to be measured at fair value (with limited

exceptions).

The fair value measurement project was part of the Memorandum of

Understanding between the IASB and the FASB. The joint work

resulted in IFRSs and US GAAP having the same definition and

meaning of fair value and the same disclosure requirements about

fair value measurements.


What is the scope of IFRS 13?

Scope of IFRS 13

Applies when another IFRS requires or

permits fair value measurements or

disclosures

Applies to both initial and subsequent

measurement as to how to determine fair

value

Disclosure applies on a recurring and non-

recurring basis, but not on initial

recognition

The scope

of IFRS 13

is

broad.

IFRS 13 does not address

which types of assets,

liabilities and items classified

as an entity’s own

shareholders’ equity should be

measured at fair value



Overview of IFRS 13

New IFRS Definition of Fair Value

Fair Value is the price that would be received to sell an asset or

paid to transfer a liability in an orderly transaction between market

participants at the measurement date

Key Items:

• Exit Price

• Not a forced sale or liquidation

• Market-based view

• Current price



Definition of fair value

Fair value is an

EXIT PRICE

In an orderly

transaction

Between market

participants

At measurement

date

Liability

Price that would be

paid to transfer the

liability

Asset

The price that would be

received to sell the

asset

• NOT based on how much the

reporting entity has to pay to

settle a liability

• Should be based on how

much the reporting entity has

to pay to a market participant

such that the market

participant is willing to take

over the liability



Overview of IFRS 13

Fair Value Measurement

Valuation techniques and inputs:

• When transactions not directly observable IFRS 13 describes

3 valuation techniques which an entity might use to determine

fair value:-

• The market approach: Using prices generated by market

transactions of comparable assets

• The income approach: Converting future cash flows or

income/expenses to current amounts by discounting

• The cost approach: The amount that would be required

currently to replace the service capacity of an asset

A valuation technique should be selected and consistently

applied to maximise the use of relevant observable inputs

(and minimize unobservable inputs)



Overview of IFRS 13

Fair Value Measurement (Continued)

Valuation techniques and inputs (Continued):

• Inputs based on bid and ask prices

• Price within bid-ask spread is most representative of fair

value

• Use of Bid for assets and Ask for liabilities is not

prohibited but not required

• IFRS 13 permits the use of Mid-Market Prices as a

practical expedient

Potential Outcome:

Removal of the bid-ask adjustment from financial statements



IFRS 13: Fair Value Measurement - Fair value hierarchy

Level 1

Quoted prices in active market for identical assets

or liabilities

Level 2 Observable inputs other than quoted prices in level 1, either directly or

indirectly

Level 3

Unobservable inputs

• The fair value hierarchy is

applicable to both financial and

non-financial items that are within

the scope of IFRS 13

• The fair value hierarchy gives the

highest priority to quoted prices in

active markets for identical assets

and liabilities and the lowest

priority to unobservable inputs

• The fair value measurement is

categorised in its entirety based

on the lowest level of significant

input

• Fair value hierarchy depends on

the inputs, not valuation

techniques.


Overview of IFRS 13

Fair Value Disclosures

Level 3 Fair Value Measurements

• Quantitative disclosure of the unobservable inputs and

assumptions used

• Description of the valuation process in place

• Discussion of the sensitivity of the fair value to changes in

unobservable inputs and inter-relationships between those inputs

that magnify or mitigate the effect on measurement



IFRS 7 - Financial Instruments: Disclosures

IFRS 7 deals exclusively with the disclosure of financial instruments in 2 broad

categories:

Information about the significance of financial instruments

• Categories of financial assets and financial liabilities;

• Reclassifications between categories;

• Derecognition;

• Collateral granted or received

• Items of income, expense, gains or losses

• Accounting policies

• Fair value disclosure and hierarchy (replaced by IFRS 13 effective January 1, 2013)

Information about the nature and extent of risks arising from financial instruments

• Qualitative and quantitative disclosures on each type of risk: credit, market, liquidity



IFRS 7 - Financial Instruments: Disclosures

Liquidity risk

Credit risk

Market risk

• Risk that the entity is unable to meet its financial obligations

• An entity must disclose:

− a maturity analysis

− a description of how it manages the risk

• Risk that the counterparty to a financial instrument will cause a loss to the

entity by not meeting its obligations


− Maximum exposure to credit risk

− A description of the collateral received

− Information about the credit quality of the financial instruments

− The carrying amount of financial assets that are past due or impaired

• Risk that the fair value or future cash flows of a financial instrument will

fluctuate because of changes in market prices. Market risk comprises three

types of risk: currency risk, interest rate risk and other price risk


− Sensitivity analysis for each type of market risk or value-at-risk

− Methods and assumptions used for such analysis

− Changes from previous periods in methods and assumptions


Offsetting


IFRS - Offsetting

© 2013 Deloitte & Touche 3

3

• Amendments to IAS 32

• Amendments to IFRS 7

• The above standards were issued as

part of a joint offsetting project.

• Effective for fiscal periods beginning on

or after 1 January 2013.



IAS 32 Financial Instruments: Presentation Offset application guidance

• “currently has a legally enforceable right to set off”

‒ Not contingent on a future event

‒ Legally enforceable in:

• normal course of business;

• event of default; and

• event of bankruptcy/insolvency

‒ Enforceable by entity and all counterparties

• “intends either to settle on a net basis or to realise the asset an settle the liability

simultaneously”

‒ gross settlement mechanism has features that eliminate or result in insignificant credit

and liquidity risk

‒ processes receivables and payables in a single settlement process or cycle



IFRS 7 Financial Instruments: Disclosures Offset Disclosures

Scope: “all recognised financial instruments that are subject to an enforceable master

netting arrangement or similar agreement”

Disclosures to show separately for financial assets and liabilities:

(a) Gross amounts of recognised financial assets and recognised financial

liabilities;

(b) Amounts set off in accordance IAS 32 (paragraph 42)

(c) Net amount presented in balance sheet

(d) Amounts subject to master netting (or similar) arrangement but not offset

(e) Net amount

Effective date: retrospective application for “annual periods beginning on or after 1

January 2013 and interim periods within those annual periods”



• Required disclosures

about rights of offset

and related

arrangements (such as

collateral posting

requirements) for

financial instruments

under an enforceable

master netting

agreement or similar

arrangement

Offsetting Financial Assets and Financial Liabilities


Investment Entities (Amendments to IFRS 10, IFRS 12, IAS 27)


Fundamental principle

• Consolidation is based on control

• IAS 27: control is the power to

govern the financial and

operating policies of an entity so

as to obtain benefits

• SIC 12: in an SPE, exposure to

the majority of risks and rewards

may be the determining factor in

establishing control

• Consolidation is based on control

• Control may be obtained in

various manners, and not solely

as a result of the power to direct

the financial and operating

policies

• Exposure to risks/rewards is one

of the factors necessary to the

existence of control, but it is

never the determining factor

IAS 27/SIC 12 IFRS 10

IFRS 10 requires extensive use of judgment

(IFRS 12 requires disclosure of areas of judgment)



39 An Instruction to IFRS for Investment Funds

Ability to use

power to affect

returns

Power over

the investee

Exposure, or

rights, to

variable

returns

Assessment of control is based on all facts and circumstances

Conclusion is reassessed if there is an indication of changes in those elements

A single consolidation model based on control,

irrespective of the nature of the investee

IFRS 10 deals with what you consolidate, not how



• Arises from substantive rights to direct relevant

activities

• Requires identification of relevant activities and how

decisions related to these activties are takendetails]

Power

• Broad defintion

• Any return that has the potential to vary as a result of

the investee‘s performance

Variable returns

• Assessment of whether a decision-maker is acting as

an agent or a principal details]

Ability to affect return

through power

Definition of control

Control is

• having exposure (rights) to variable returns from

involvement with the investee and

• having the practical ability to affect those returns

• through one‘s power over the investees]


Determination of whether control exists

Power = Substantive rights to direct relevant activities Exposure (rights) to

variable returns

What are the variable returns from

the investee?

Rights that are solely protective do not provide power and do not prevent another investor from having

the power

Ability of the investor to affect its returns through its power – professional judgment critical

Potential to vary as a result of the

investee’s performance

Broad definition

1. What are the relevant activities?

2. How are decisions over these relevant activities taken?

Votes Other

> 50% < 50%

Contractual rights

Practical ability

Special relationships

Significance of exposure

to variable returns

Rights of

minority

shareholders

De facto control

Potential voting

rights

Other

contractual

rights



Exemption for Investment Entities

Where an entity qualifies as an investment entity it does not consolidate its

subsidiaries but measures its investments at fair value

An investment entity shall be required to measure

subsidiaries at FVTPL

A parent shall determine whether it is an investment entity.

An investment entity is an entity that:

(a) obtains funds from one or more investors for the purpose

of providing those investor(s) with investment management

services;

(b) commits to its investor(s) that its business

purpose is to invest funds solely for returns from capital

appreciation, investment income, or both; and

(c) measures and evaluates the performance of substantially all

of its investments on a fair value basis.


Investment

Entity

Investment entities

Definition Commits that its business

purpose is

to invest funds for returns

from either capital

appreciation and/or

investment income

Measures and evaluates

substantially all of its

investments on a fair value

basis

Obtains funds from one or

more investors

to provide investment

management services

More than

one

investments

More than

one

investors

Ownership

interest in the

form of equity

Investors that

are not related

to the entity

Typical

Characteristics:

Expected, but

not required


Parents of investment entities

Investment entity parent Non-investment entity parent



Other requirements

Additional disclosures in IFRS 12 Disclosure of Interests in Other Entities

Additional disclosures and separate financial statement requirements in IAS 27

Separate Financial Statements

Retrospective application with limited transition reliefs (e.g. comparative relief)

Effective date 1 January 2014; early application permitted



IFRS 12 Disclosure Requirements

• Any investment entity that is to apply the exemption shall disclose the fact that they have availed of such exemption

Significant Judgements & Assumptions

• Nature of its interest in another entity/arrangement

• Type of Joint arrangement

• Does it meet the definition of an Investment Entity?

Application



IFRS 12 Disclosure Requirements

Interests In Unconsolidated

Subsidiaries

• Subsidiary’s name

• the principal place of business (and country of incorporation if different from the principal place of business) of the subsidiary;

• the proportion of ownership interest held by the investment entity and, if different, the proportion of voting rights held.

• Any significant restrictions on use of assets

• Any commitments/intentions to provide financial or other support to an unconsolidated subsidiary


IFRS 9 “Financial Instruments”


IFRS 9

• Most recent version of standard published Oct 2010

• ED proposing limited amendments published Nov 2012

• Amended standard in July 2014

Classification & Measurement

• Most recent ED published March 2013

• Final standard issued in July 2014 Impairment

• Published as final in November 2013 General Hedge

Accounting


Current status and timetable

Effective date set as 1 Jan 2018.


IFRS 9 – Classification and Measurement


Classification of financial assets

Reclassifications are required if change in business model


IFRS 9 – Classification and Measurement New category for debt instruments - FVTOCI

A gain or loss on a debt instrument measured at FVTOCI is recognised in other

comprehensive income except for:

Gains and losses recognised in other comprehensive income reclassified to

profit or loss on derecognition of the financial asset.

Foreign exchange gains and

losses Interest

calculated using effective interest rate

method

Impairment losses



IFRS 9 – Classification and Measurement Classification of financial liabilities – own credit

Classification of financial liabilities consistent with IAS 39

For liabilities designated as at FVTPL, IFRS 9(2010) requires that:

• The amount of change in the fair value of the financial liability that is attributable to

changes in the credit risk of that liability shall be presented in other

comprehensive; and

• the remaining amount of change in the fair value of the liability shall be presented

in profit or loss

unless the treatment of the effects of changes in the liability’s credit risk described in (a)

would create or enlarge an accounting mismatch in profit or loss.

If so an entity shall present all gains or losses on that liability (including the effects of

changes in the credit risk of that liability) in profit or loss.

IFRS 9(2013) permits the application of these requirements without the application of the other requirements of IFRS 9


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