Illustrative financial statements:
investment funds
International Financial Reporting Standards
About this publication
Content
The purpose of this publication is to assist you in preparing the financial statements of a...
References
The Illustrative Financial Statements for Investment Funds are contained on the odd-numbered pages of this
publ...
Contents
Reference                                                                                                        ...
2           IFRS Illustrative Financial Statements for Investment Funds
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Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
Illustrative financial statements: investment funds
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Illustrative financial statements: investment funds

  1. 1. Illustrative financial statements: investment funds International Financial Reporting Standards
  2. 2. About this publication Content The purpose of this publication is to assist you in preparing the financial statements of an investment fund in accordance with International Financial Reporting Standards (IFRSs). It illustrates one possible format of financial statements for fund-specific aspects, based on a fictitious off-shore investment company already reporting under IFRSs. The company illustrated in these financial statements is an open-ended fund where shareholders may purchase and / or redeem shares at their discretion. While under some jurisdictions certain fund structures may not be permitted to hold short positions or use external financing to leverage returns, it was assumed for the illustrative purposes of this publication, that no such restrictions apply to this investment company. This publication is based on IFRSs adopted by the International Accounting Standards Board (IASB) at 30 April 2004, which are often referred to as the “stable platform” and are applicable for annual periods beginning on or after 1 January 2005. Users of this publication should update themselves on the recent developments and decisions with regard to the status of the proposed amendments and apply the new requirements as appropriate. It should be noted that the IASB is still undertaking several projects. As a result, changes may be proposed to certain standards including IAS 32 Financial Instruments: Disclosure and Presentation and IAS 39 Financial Instruments: Recognition and Measurement which may have a significant impact on financial statements of an investment institution. When preparing financial statements in accordance with IFRSs, an entity should have regard to its local legal and regulatory requirements. However, in financial statements that state compliance with IFRSs it is not appropriate to depart from an IFRS standard or interpretation because it differs from local requirements. These Illustrative Financial Statements do not consider any requirements of a particular jurisdiction. Extensive accounting policies, which are more than required by IFRSs, have also been included in this publication to provide a fund with greater information regarding available accounting policies and optional disclosures. While these Illustrative Financial Statements provide a valuable demonstration of international reporting requirements, they should not be used as a substitute for referring to the standards and interpretations themselves, particularly where a specific requirement is not addressed in this publication or where there is uncertainty regarding the correct interpretation of an IFRS. To assist you in preparing financial statements in accordance with IFRSs, the following publications are also recommended: ● Insights into IFRS, dated August 2004; ● Accounting Checklist, dated June 2004; ● Disclosure Checklist, dated June 2004; ● Financial Instruments Accounting 2004, dated March 2004; ● IFRS Illustrative Financial Statements – First-time Adoption in 2005, dated November 2004; ● IFRS Illustrative Financial Statements for Investment Property Companies, dated November 2004; ● IFRS Illustrative Financial Statements for Banks, dated July 2001 (electronic copy only); and ● Global Accounting: various National GAAPs compared to IFRSs. Reference may also be made to KPMG International’s electronic research tool “Accounting Research Online” http://www.aro.kpmg.com a library of accounting, auditing and financial reporting guidance and literature. © 2005 KPMG IFRG Limited is a UK company, limited by guarantee. All rights reserved.
  3. 3. References The Illustrative Financial Statements for Investment Funds are contained on the odd-numbered pages of this publication. The even-numbered pages contain explanatory comments and notes that may be useful. However, these pages are not intended to be an exhaustive commentary. To the left of each item disclosed, reference has been made to the IFRS that requires or recommends that disclosure. For example, the reference IAS 1.8(b) means that the disclosure is required by paragraph 8(b) of IAS 1. The references generally relate to disclosure only. However, in the accounting policies section of the financial statements, references have also been made to relevant recognition and measurement requirements of IFRSs. Contact KPMG member firms Our member firms would be pleased to assist you further with the analysis and interpretation of IFRSs. Please speak to your usual KPMG member firm or visit (www.kpmg.com). © 2005 KPMG IFRG Limited is a UK company, limited by guarantee. All rights reserved.
  4. 4. Contents Reference Page Reporting by directors 3 IAS 1.44 Financial statements Income statement 5 Statement of changes in net assets attributable to holders of redeemable shares 7 Balance sheet 9 Statement of cash flows 11 Notes to the financial statements 13 ISA 700 Report of the independent auditors 57 Appendices 1. Schedule of investments – unaudited 59 2. Statement of cash flows – indirect method 63 3. Income statement, statement of changes in net assets attributable to holders of redeemable shares, balance sheet and selected illustrative notes for a fund classifying its investments as available-for-sale 65 4. Index and list of IFRSs and SIC interpretations at 30 June 2004 70 © 2005 KPMG IFRG Limited is a UK company, limited by guarantee. All rights reserved.
  5. 5. 2 IFRS Illustrative Financial Statements for Investment Funds March 2005 Note Reference Explanatory note 1. In many jurisdictions, entities are required to issue a directors’ report sometimes also called management’s discussion and analysis. For further guidance refer to the requirements within the jurisdiction the entity is reporting under and to related publications. In the case that the entity is a subsidiary, IAS 1.126(c) requires the disclosure of the name of the parent and the ultimate parent of the group. 2. The Fund may wish to provide additional information. For example, the average and / or highest and lowest net assets values of redeemable shares during the reporting period may be presented. In our view, such information should be part of the directors’ report. Additionally, the Fund may wish to disclose information on the risk and reward profile of the Fund. © 2005 KPMG IFRG Limited is a UK company, limited by guarantee. All rights reserved.
  6. 6. IFRS Illustrative Financial Statements for Investment Funds 3 March 2005 Reference Reporting by directors1 IFRSs do not prescribe information to be disclosed in a directors’ report. Local laws and regulations generally determine such requirements. IAS 1.9(a)-(c) Entities are encouraged to present, outside the financial statements, a financial review by management. This review for funds should describe and explain the main features of the fund’s financial performance and financial position, and the principal uncertainties it faces. Such a report may include a review of: ● the main factors and influences determining financial performance, including changes in the environment in which the fund operates, the fund’s response to those changes and their effect, and the fund’s investment policies undertaken to maintain and enhance financial performance, including its dividend policy; and ● the fund’s resources not recognised in the balance sheet in accordance with IFRSs. IAS 1.10 Entities are also encouraged to present additional statements, for example, environmental reports or value added statements, if management believes that they will assist users in making economic decisions. Based on general fund practice, the following principal subjects usually are included in a directors’ report and financial review by management: General Investment objectives and principal activities List of directors and officers, if any Chairman’s and chief executive officer’s statements or fund manager’s statement List of service providers including, for example, the investment manager, administrator and share registrar, custodian, trustee Corporate governance Investment Market review manager’s review2 Benchmark comparison Capital structure and financial position Operating results for the period Tables of financial data and key figures for the last five or ten years Future expectations Substantial interests Management’s policy for controlling risks (e.g., financial risk, settlement risk) Other items Events subsequent to the balance sheet date Agenda for the annual general meeting, if any Specific disclosures required by local laws and regulations IAS 1.126(a)-(c) The following disclosures normally are made outside the financial statements. If they are not, IAS 1 requires that this information is disclosed in the financial statements: ● country of incorporation; ● address of the registered office (or principal place of business); ● description of the nature of the entity’s operations and its principal activities; and ● the name of the parent and the domicile and legal form of the fund. © 2005 KPMG IFRG Limited is a UK company, limited by guarantee. All rights reserved.
  7. 7. 4 IFRS Illustrative Financial Statements for Investment Funds March 2005 Note Reference Explanatory note 1. IAS 1.32 Items of income and expense shall not be offset unless required or permitted by a standard or interpretation. IAS 1.29 Classes of similar items shall be aggregated and presented separately in the financial statements. An entity adopts the concept of materiality to determine separate presentation on the face of the balance sheet, income statement, statement of changes in net assets attributable to holders of redeemable shares and cash flow statement or in the notes. 2. IAS 33 8, 66 An entity should present basic and diluted earnings per share (EPS) on the face of the income statement for each class of ordinary shares. The requirement to disclose EPS applies only to those funds whose shares qualify as equity instruments. Nevertheless, some entities may wish or may be required by local regulations to present basic and / or diluted earnings per unit (EPU). If presented the financial statements should clearly explain how EPU was calculated. 3. IAS 32.94(h)(i) The amount of interest income and interest expense for interest-bearing financial assets and financial liabilities is determined using the effective interest method. IAS 18.30(c) Dividends are recognised when the shareholders’ right to receive payment is established. 4. IAS 1.35 Gains and losses from a group of similar transactions are reported on a net basis (e.g., foreign exchange gains and losses or gains and losses arising on financial instruments held-for- trading). Such gains and losses are, however, reported separately if they are material. 5. IAS 1.88, 91 The analysis of expenses should be presented based on either the nature of expenses, or their function within the entity. The analysis of expenses in these Illustrative Financial Statements is based on the nature of expenses, which usually would be the most appropriate way to present expenses for an investment fund. 6. IAS 1.81-84 This information must be presented on the face of the income statement. Additional line items are included on the face of the income statement and the descriptions used and ordering of items are amended when it is relevant to understanding the entity’s financial performance. Revenue, in the context of a fund, generally would comprise interest income, dividend income, net gains and losses on investments as well as on derivatives. 7. IAS 1.88, 91 IFRSs do not explicitly require disclosure of transaction costs incurred on acquisitions and disposals of financial instruments. In our view, transaction costs do not form part of the fair value change and should be recognised as an expense. A separate line item in the income statement may be required, if transaction costs are material. 8. IAS 32.35 Interest, dividends and gains / losses arising on financial liabilities shall be 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. 9. Withholding tax is usually withheld at the source of income on behalf of the income receiver. These Illustrative Financial Statements assume that the Fund is exempt from paying taxes on income and capital gains and therefore it cannot claim withholding tax. In such cases, withholding tax can be claimed by the holders of redeemable shares and should be viewed as distribution to holders of redeemable shares. It should be noted that tax treatment may differ by country and therefore this illustration may need to be tailored to comply with the relevant country’s legislation. © 2005 KPMG IFRG Limited is a UK company, limited by guarantee. All rights reserved.
  8. 8. IFRS Illustrative Financial Statements for Investment Funds 5 March 2005 Reference Income statement1, 2 For the year ended 31 December 2005 All amounts stated in euro Note 2005 2004 (restated) 3 IAS 32.94(h)(i) Interest income 1 602,940 429,982 3 IAS 18.35(b)(v) Gross dividend income 271,801 229,159 4 IAS 1.29, 35 Gains on investments 2 3,335,829 2,552,246 4 IAS 1.29, 35 Losses on investments 2 (213,546) (134,211) 4 IAS 1.35 Net gain / (loss) on derivatives 88,001 (37,022) 4 IAS 1.35, 88, 91 Net foreign exchange loss (18,842) (15,985) 4 IAS 1.81(a) Net investment income 4,066,183 3,024,169 5 IAS 1.88, 91 Investment management fees 7 (447,877) (478,158) 5 IAS 1.88, 91 Custodian fees 7 (112,583) (83,947) 5 IAS 1.88, 91 Administration fees (65,793) (61,635) 5, 7 IAS 1.88, 91 Transaction costs (63,865) (72,875) 5 IAS 1.88, 91 Professional fees (41,617) (37,892) 5 IAS 1.88, 91 Directors’ fees 7 (26,517) (15,443) 5 IAS 1.88, 91 Other operating expenses (50,000) (70,000) Operating expenses before finance costs (808,252) (819,950) IAS 1.83 Net income from operations before finance costs 3,257,931 2,204,219 8 IAS 32.40 Distributions to holders of redeemable shares (177,405) (91,156) 8, 9 Withholding tax paid on behalf of holders of redeemable shares (45,300) (39,775) 3 IAS 32.94(h)(i) Interest expense (75,036) (61,727) 6 IAS 1.81(b) Total finance costs (297 ,741) (192,658) IAS 32.IE32 Change in net assets attributable to holders of redeemable shares 2,960,190 2,011,561 © 2005 KPMG IFRG Limited is a UK company, limited by guarantee. All rights reserved.
  9. 9. 6 IFRS Illustrative Financial Statements for Investment Funds March 2005 Note Reference Explanatory note 1. IAS 1.6, 8(c) A complete set of financial statements includes a separate statement showing either all changes in equity or changes in equity other than those arising from capital transactions with owners and distributions to owners. However, as there is no equity in the Fund, no statement of changes in equity is prepared. 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, in our view, it provides users of the financial statements with relevant and useful information. © 2005 KPMG IFRG Limited is a UK company, limited by guarantee. All rights reserved.
  10. 10. IFRS Illustrative Financial Statements for Investment Funds 7 March 2005 Reference Statement of changes in net assets attributable to holders of redeemable shares1 For the year ended 31 December 2005 All amounts stated in euro Note 2005 2004 (restated) Balance at 31 December 2004 as previously reported - 18,695,377 Change in accounting policy – available-for-sale financial assets - (233,936) Balance at 31 December (2004 restated) 29,978,597 18,461,441 Change in net assets attributable to holders of redeemable shares for the year 2,960,190 2,011,561 Issue of redeemable shares during the year 3 6,668,239 15,505,199 Redemption of redeemable shares during the year 3 (6,977,669) (5,995,856) Change in the adjustment from mid-market prices to bid-market prices (4,012) (3,748) Balance at 31 December 32,625,345 29,978,597 © 2005 KPMG IFRG Limited is a UK company, limited by guarantee. All rights reserved.
  11. 11. 8 IFRS Illustrative Financial Statements for Investment Funds March 2005 Note Reference Explanatory note 1. IAS 1.51, 52 An entity may choose to classify its balance sheet by current and non-current assets and current and non-current liabilities. Alternatively, if a classification based on liquidity is considered to provide information that is reliable and more relevant, an entity may disclose assets and liabilities in broad order of their liquidity. Whichever method of presentation is adopted, the notes must disclose the amount of every asset or liability that is expected to be realised or settled after more than twelve months. Since most assets and liabilities in a fund can be realised or settled in the near future, the current / non-current classification generally is not chosen as the method of balance sheet presentation for funds. However, in jurisdictions where it is either required or is a common practice to distinguish current and non-current assets and liabilities, a fund may choose to make such a distinction. IAS 32.55 Financial instruments should be grouped into appropriate classes based on the characteristics of the instruments and taking into account their measurement basis. The descriptions used for categories of financial instruments in IFRSs are not required to be used as line items on the balance sheet. Generally however, assets with different measurement bases should not be classified together, but disclosed separately on the balance sheet. IAS 32.42, 50 Assets and liabilities are offset only when required or permitted by IFRSs. Financial assets and liabilities are offset when a current legal right to offset exists and there is intent to realise the asset and settle the liability simultaneously or on a net basis. A master netting arrangement generally does not provide a basis for offsetting because the right of offset in most agreements applies only in the event of default. 2. IAS 1.68 This information must be presented on the face of the balance sheet, if material. 3. IAS 1.68(d), (l) IAS 1 Presentation of Financial Statements requires the face of the balance sheet to include, at minimum, line items presenting financial assets and financial liabilities however; neither IAS 1 nor IAS 32 provides detailed guidance on how to present financial assets or financial liabilities at fair value through profit or loss. In our view, they should be shown as separate line items. Nevertheless, due to the fact that the majority of the Fund’s financial instruments are classified to this category and they constitute material balances, in our view, a further breakdown on the face of balance sheet into derivatives, equity investments, debt investments and securities sold short is appropriate. However, such breakdown is not required by IFRSs. 4. IAS 39.49, In accordance with IAS 39 the best measure of fair value of a financial asset and financial 39.AG72 liability is a quoted market price in an active market. The appropriate quoted market price for an asset held is usually the current bid price and for a liability held is the asking price. Financial liabilities arising from redeemable shares are carried at the present value of the redemption amount. In accordance with the Fund’s prospectus, the redeemable shares are redeemed at mid-market prices representing the Fund’s contractual obligation. As a result, net assets attributable to holders of redeemable shares at mid-market prices are adjusted to their bid-market prices to balance the statement. © 2005 KPMG IFRG Limited is a UK company, limited by guarantee. All rights reserved.
  12. 12. IFRS Illustrative Financial Statements for Investment Funds 9 March 2005 Reference Balance sheet1 As at 31 December 2005 All amounts stated in euro Note 2005 2004 Assets 2 IAS 1.68(i) Cash and cash equivalents 4 51,368 70,730 1 IAS 32.55 Balances due from brokers 5 8,118,777 12,620,923 1 IAS 32.55 Receivables from reverse repurchase agreements 5 4,743,460 3,990,133 1, 3 IAS 1.29, 32.55 Derivative financial instruments 6 544,791 435,203 3 IAS 1.29, 32.55 Debt investments 6 8,051,428 6,511,346 3 IAS 1.29, 32.55 Equity investments 6 19,025,581 11,871,486 2 IAS 1.68(h) Interest, dividends and other receivables 29,367 45,577 Total assets 40,564,772 35,545,398 Liabilities 1 IAS 32.55 Balances due to brokers 5 1,179,844 1,365,374 1 IAS 32.55 Payables under repurchase agreements 5 2,563,267 2,234,540 1, 3 IAS 32.55 Derivative financial instruments 6 2,836,820 1,234,241 3 IAS 32.55 Securities sold short 6 783,709 212,553 2 IAS 1.68(j) Accounts payable 7 341,220 314,690 IAS 1.69 Accrued expenses 7 234,567 205,403 Total liabilities (excluding net assets attributable to holders of redeemable shares) 7,939,427 5,566,801 IAS 1.6, 68(l) Net assets attributable to holders of redeemable shares 1 (bid-market prices) 32,625,345 29,978,597 Represented by: ● net assets attributable to holders of redeemable shares (mid-market prices) 32,646,970 29,996,210 4 ● adjustment from mid-market prices to bid-market prices (21,625) (17,613) Net assets value per share at mid-market prices, based on 259,212 (2004: 260,531) shares outstanding 125.95 115.13 © 2005 KPMG IFRG Limited is a UK company, limited by guarantee. All rights reserved.
  13. 13. 10 IFRS Illustrative Financial Statements for Investment Funds March 2005 Note Reference Explanatory note 1. IAS 7.18 In this statement of cash flows, the cash flows from operating activities are reported using the direct method, whereby major classes of gross cash receipts and gross cash payments are disclosed. As an alternative, cash flows from operating activities may be presented using the indirect method whereby the profit or loss for the year is adjusted for the effects of non-cash transactions, changes in operating assets, and items of income or expense associated with investing or financing cash flows. IAS 7.19 Entities are encouraged, but not required, to use the direct method as it provides information that may be useful in estimating future cash flows, which is not available under the indirect method. However, the indirect method is the method that is most commonly used in practice. Appendix 2 to this publication illustrates a statement of cash flows prepared under the indirect method. 2. IAS 7.31, 35 Interest received and paid and dividends received and paid are required to be separately disclosed. 3. IAS 7.21, 22 Major classes of gross cash receipts and gross cash payments should be disclosed separately, except the following that are specifically allowed to be reported on a net basis: ● cash receipts and payments on behalf of customers; ● cash receipts and payments for items in which the turnover is quick, the amounts are large and maturities are short. 4. IAS 7.16 For the purposes of these Illustrative Financial Statements, the Fund considers cash receipts from disposals and cash payments for acquisitions of equity and debt investments as investing activities in the cash flow statement. © 2005 KPMG IFRG Limited is a UK company, limited by guarantee. All rights reserved.
  14. 14. IFRS Illustrative Financial Statements for Investment Funds 11 March 2005 Reference Statement of cash flows1 For the year ended 31 December 2005 All amounts stated in euro Note 2005 2004 1 Operating activities 2 IAS 7.31, 33 Interest received 613,733 453,982 2 IAS 7.31, 33 Interest paid (67,087) (62,965) 2 IAS 7.31, 33 Dividends received 274,218 227 ,696 2 IAS 7.31, 33 Dividends paid (177,405) (91,156) 3 IAS 7.22(b) Net receipts / (payments) from derivative activities 1,635,725 (3,441) IAS 7.22(b) Net payments on securities sold short (47,393) (21,248) IAS 7.22(b) Net receipts from repurchase and reverse repurchase 3 agreements 415,646 299,172 IAS 7.14 Operating expenses paid (796,577) (848,356) IAS 7.10 Cash flows from operating activities 1,850,860 (46,316) Investing activities 4 IAS 7.16(d) Proceeds from sale of investments 8,462,968 8,271,599 4 IAS 7.16(c) Purchase of investments (10,023,023) (17,712,776) IAS 7.10 Cash flows from investing activities (1,560,055) (9,441,177) Financing activities 3 IAS 7.17(c) Proceeds from issue of redeemable shares 6,668,239 15,505,199 3 IAS 7.17(d) Payments on redemption of redeemable shares (6,977,669) (5,995,856) IAS 7.10 Cash flows from financing activities (309,430) 9,509,343 IAS 7.45 Net (decrease) / increase in cash and cash equivalents (18,625) 21,850 IAS 7.45 Cash and cash equivalents at 1 January 70,730 49,865 IAS 7.28 Effect of exchange rate fluctuations on cash and cash equivalents (737) (985) IAS 7.45 Cash and cash equivalents at 31 December 4 51,368 70,730 © 2005 KPMG IFRG Limited is a UK company, limited by guarantee. All rights reserved.
  15. 15. 12 IFRS Illustrative Financial Statements for Investment Funds March 2005 Note Reference Explanatory note 1. IAS 1.103 The notes to the financial statements should disclose: information about the basis of preparing the financial statements and the specific accounting policies used; information required by IFRSs that is not presented on the face of the balance sheet, income statement, statement of changes in equity or cash flow statement; and additional information that is not presented on the face of the balance sheet, income statement, statement of changes in equity or cash flow statement, but is relevant to an understanding of any of them. 2. IAS 1.126(c) While this is not relevant for an entity such as the Fund illustrated in this publication, an entity should also disclose the name of the parent of the entity and the ultimate parent of the group where applicable. However, this disclosure is required where the Fund is consolidated into another entity. 3. IAS 1.108, The accounting policies should describe each specific accounting policy that is necessary for a 32.60 proper understanding of the financial statements. For the purpose of these Illustrative Financial Statements an extended list of accounting policies has been included, many of which may not be relevant to individual entities. 4. IAS 1.14 Depending on the jurisdiction in which the entity is domiciled, it may be required to also state that the financial statements have been prepared in accordance with requirements of specific laws of that jurisdiction. However, it is not appropriate in financial statements that state compliance with IFRSs to depart from IFRSs because it differs from local requirements. The term IFRSs includes the following standards and interpretations: International Accounting Standards (IAS’s), new standards issued by the IASB described as IFRSs, Standing Interpretations Committee (SIC) interpretations and new interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC). 5. IAS 21.53, The financial statements may be presented in a currency different from the entity’s functional 55, 57 currency. If the presentation currency differs from the entity’s functional currency, that fact shall be disclosed together with the functional currency and the reason for using a different presentation currency. IAS 21.39, 42 There is a prescribed method for translating financial statements into a presentation currency. 6. IAS 1.38 When the presentation or classification of items in the financial statements is amended, comparative amounts shall be reclassified unless the reclassification is impracticable. When comparative amounts are reclassified, an entity shall disclose: ● nature of the reclassification; ● the amount of each item or class of items that is reclassified; and ● the reason for the reclassification. © 2005 KPMG IFRG Limited is a UK company, limited by guarantee. All rights reserved.
  16. 16. IFRS Illustrative Financial Statements for Investment Funds 13 March 2005 Reference Notes to the financial statements1 IAS 1.8(e) Significant accounting policies2, 3 IAS 1.126(a)-(c) [Name of entity] (the “Fund”) is an open-ended investment fund incorporated as a limited liability company under the [name the relevant legislation] of [name of country] on [date]. The Fund’s redeemable shares are listed on the [name of city] stock exchange. IAS 1.126(b) The objective of the Fund is to provide shareholders with above average returns over the medium to long-term through both capital growth and income. The Fund aims to deliver this objective mainly by investing in a highly diversified portfolio of Europe’s 1,000 largest listed companies, international derivatives and investment grade debt securities within strict risk management guidelines. In doing so, it applies techniques more fully defined in the Fund’s Offering Memorandum. IAS 1.126(a), (b) The investment activities of the Fund are managed by XYZ Capital Limited (the “Investment Manager”) and the administration of the Fund is delegated to ABC Fund Services Limited. The registered office of the Fund is [insert address of registered office]. IAS 10.17 The financial statements were authorised for issue by the directors on [date]. (a) Statement of compliance IAS 1.14 The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) and interpretations adopted by the International Accounting Standards Board (IASB).4 (b) Basis of preparation IAS 1.46(e), (d) The financial statements are presented in euro and rounded to the nearest euro.5 They are prepared on a fair value basis for financial assets and financial liabilities at fair value through IAS 1.108(a) profit or loss and derivative financial instruments. Other financial assets and financial liabilities are stated at amortised cost or redemption amount (redeemable shares). IAS 1.113, 116 The preparation of financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expense. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Judgements made by management in the application of IFRSs that have a significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in note 9. IAS 1.103(a) The accounting policies have been applied consistently by the Fund and are consistent with IAS 8.13 those used in the previous year, except for changes resulting from the amendments to IFRSs. The comparative figures for 2004 have been adjusted or extended to conform to changes in presentation in the 2005 financial statements as required by the amended IFRSs.6 IAS 8.14, 28 The Fund adopted the revised versions of IFRSs that were effective at 1 January 2005. The changes to the Fund’s accounting policies and their effect on the financial statements are described in note (l) of the Significant accounting policies section. © 2005 KPMG IFRG Limited is a UK company, limited by guarantee. All rights reserved.
  17. 17. 14 IFRS Illustrative Financial Statements for Investment Funds March 2005 Note Reference Explanatory note 1. As disclosed in the notes to the financial statements, the Fund is organised and operates as one segment; however, in certain circumstances funds may be required to provide segment reporting under IFRSs (e.g., funds with separate portfolios and managers whose performance is measured against different benchmarks). 2. IAS 21.8, 16, Monetary items include money held and assets and liabilities to be received or paid in fixed or 39.AG83 determinable number of units of currency. This definition is narrower than the definition of a financial instrument, which implies that not all financial instruments are monetary. Consequently, equity shares where the holder has no right to a fixed or determinable amount of money (e.g., exchange-traded equity investments where the holder must find a buyer in the market) are non-monetary items. Differences relating to foreign exchange movements arising from reporting a monetary or non-monetary item are reported in the income statement. IAS 21.52 The amount of foreign currency exchange differences included in net income or loss for the period must be disclosed except for those arising on financial instruments measured at fair value through profit or loss in accordance with IAS 39. 3. IAS 39.9, Financial instruments are classified into different categories for the purpose of their subsequent 45-47 measurement. Financial assets can be classified into four categories depending on their characteristics and the entity’s intentions at the date of purchase or origination: ● financial assets at fair value through profit or loss; ● held-to-maturity; ● loans and receivables; and ● available-for-sale financial assets. Financial liabilities are distinguished between financial liabilities at fair value through profit or loss and other liabilities. Financial assets and financial liabilities at fair value through profit or loss comprise two sub-categories: ● instruments classified as held-for-trading; and ● instruments designated by the entity at fair value through profit or loss upon initial recognition. Derivative financial assets and liabilities are deemed always to be held-for-trading, unless they are designated and effective hedging instruments. IAS 39.50 Designation of a financial instrument at fair value through profit or loss is made at inception and is irrevocable. An entity shall not reclassify a financial instrument into or out of this category while it is held or issued. 4. IAS 39.14, 38 All contractual rights or obligations under derivatives are recognised in the balance sheet as assets or liabilities when an entity becomes a party to the contractual provisions of the instrument. © 2005 KPMG IFRG Limited is a UK company, limited by guarantee. All rights reserved.
  18. 18. IFRS Illustrative Financial Statements for Investment Funds 15 March 2005 Reference Notes to the consolidated financial statements Significant accounting policies (continued) (b) Basis of preparation (continued) IAS 1.111 The Fund invests and distributes its shares on European markets. The Fund is organised and operates as one segment (both in terms of business and geography). Consequently, no segment reporting is provided in the Fund’s financial statements.1 IAS 1.111 (c) Foreign currency translation IAS 21. 21, 23, Transactions in foreign currencies are translated at the foreign currency exchange rate ruling at 25, 28, 30 the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated to euro at the foreign currency closing exchange rate ruling at the balance sheet date. IAS 39.55(b) Foreign currency exchange differences arising on translation and realised gains and losses on disposals or settlements of monetary assets and liabilities are recognised in the income statement. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated to euro at the foreign currency exchange rates ruling at the dates that the values were determined. Foreign currency exchange differences relating to investments at fair value through profit or loss and derivative financial instruments are included in gains and losses on investments and net gain / (loss) on derivatives, respectively. All other foreign currency exchange differences relating to monetary items, including cash and cash equivalents are presented separately in the income statement.2 IAS 1.111 (d) Financial instruments IAS 32.60(b) (i) Classification3 IAS 39.9, 45 At 1 January 2005, the Fund adopted the amended IAS 32 and IAS 39 and designated all its debt IAS 32.60(a) and equity investments into the financial assets at fair value through profit or loss category. The changes to the Fund’s accounting policies as a result of amendments to IAS 32 and IAS 39 and their effect on the financial statements are described in note (l) of Significant accounting policies section. The category of financial assets and financial liabilities at fair value through profit or loss comprises: ● Financial instruments held-for-trading. These include futures, forward contracts, options, interest rate swaps and liabilities from short sales of financial instruments. All derivatives in a net receivable position (positive fair value), as well as options purchased, are reported as financial assets held-for-trading. All derivatives in a net payable position (negative fair value), as well as options written, are reported as financial liabilities held-for-trading.4 ● Financial instruments designated at fair value through profit or loss upon initial recognition. These include financial assets that are not held for trading purposes and which may be sold. These are investments in European exchange-traded debt and equity instruments, unlisted off-shore open-ended investment funds, unlisted equity instruments and commercial paper. Financial assets that are classified as loans and receivables include balances due from brokers, receivables from reverse repurchase agreements and accounts receivable. IAS 32.60(a), 39.9 Financial liabilities that are not at fair value through profit or loss include balances due to brokers, payables under repurchase agreements, accounts payable and financial liabilities arising on redeemable shares. © 2005 KPMG IFRG Limited is a UK company, limited by guarantee. All rights reserved.
  19. 19. 16 IFRS Illustrative Financial Statements for Investment Funds March 2005 Note Reference Explanatory note 1. IAS 39.38, Where financial assets are recognised at the date the entity commits to purchase the assets, 39.AG53- this is referred to as trade date accounting. Where financial assets are recognised on the date AG56 they are transferred, this is referred to as settlement date accounting. In situations where there is a time frame established by a regulation or convention in the market place for the delivery of financial assets, the entity may choose to use either trade date or settlement date accounting. The method must be applied consistently for each category of financial assets, for purchases and sales. 2. IAS 32.90, Fair values are presumed to be able to be estimated reliably for all financial instruments, with 39.46, the possible exception of an unquoted equity instrument whose fair value cannot be reliably 39.AG66- measured, or a derivative instrument that is linked to and must be settled by delivery of such AG81 an unquoted equity instrument. These instruments are carried at cost, subject to review for impairment. A number of detailed disclosures are required in such cases. It should be noted, however, that this would be rare for an investment fund to invest in assets for which it cannot determine a fair value. 3. IAS 32.92 The accounting policy notes should describe the methods and significant assumptions applied in estimating fair values of financial assets and liabilities that are carried at fair value. This should be disclosed separately for significant classes of financial assets and liabilities. IAS 39.AG71, The best evidence of fair value normally is a quoted market price in an active market. For AG72, BC100 assets held or liabilities to be issued, this is usually the current bid price. For assets to be acquired or liabilities held, this is usually the current asking price. The use of mid-market prices to establish the fair values for financial assets and liabilities is acceptable only when an entity has assets and liabilities with offsetting market risks. An entity has offsetting market risks if it has locked in its cash flows from the asset and liability and potentially could sell the matched position without incurring the bid-ask spread. In our view, the Fund does not have assets and liabilities with offsetting market risks. 4. IAS 39.AG74- Price / earnings ratios are only one type of calculation that can be used. Other methods include AG82 for instance, price / cash flow ratios. © 2005 KPMG IFRG Limited is a UK company, limited by guarantee. All rights reserved.
  20. 20. IFRS Illustrative Financial Statements for Investment Funds 17 March 2005 Reference Notes to the consolidated financial statements Significant accounting policies (continued) (ii) Recognition1 IAS 32.61, The Fund recognises financial assets and financial liabilities on the date it becomes a party to 39.14, 38 the contractual provisions of the instrument. A regular way purchase of financial assets is recognised using trade date accounting. From this date any gains and losses arising from changes in fair value of the financial assets or financial liabilities are recorded. Financial liabilities are not recognised unless one of the parties has performed or the contract is a derivative contract not exempted from the scope of IAS 39. (iii) Measurement IAS 39.43, Financial instruments are measured initially at fair value (transaction price) plus, in case of a 39.AG64 financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability. Transaction costs on financial assets and financial liabilities at fair value through profit or loss are expensed immediately, while on other financial instruments they are amortised. IAS 39.46, 47 53 , Subsequent to initial recognition, all instruments classified at fair value through profit or loss are measured at fair value with changes in their fair value recognised in the income statement.2 IAS 39.46(a) Financial assets classified as loans and receivables are carried at amortised cost using the effective interest rate method, less impairment losses, if any. IAS 39.47 Financial liabilities, other than those at fair value through profit or loss, are measured at amortised cost using the effective interest rate. Financial liabilities arising from the redeemable shares issued by the Fund are carried at the redemption amount representing the investors’ right to a residual interest in the Fund’s assets. (iv) Fair value measurement principles3 IAS 39.AG69- The fair value of financial instruments is based on their quoted market prices at the balance AG82 sheet date without any deduction for estimated future selling costs. Financial assets are priced at current bid prices, while financial liabilities are priced at current asking prices. IAS 39.AG74 If a quoted market price is not available on a recognised stock exchange or from a broker / dealer for non-exchange-traded financial instruments, the fair value of the instrument is estimated using valuation techniques, including use of recent arm’s length market transactions, reference to the current fair value of another instrument that is substantially the same, discounted cash flow techniques, option pricing models or any other valuation technique that provides a reliable estimate of prices obtained in actual market transactions. IAS 39.AG74-AG82 Where discounted cash flow techniques are used, estimated future cash flows are based on management’s best estimates and the discount rate used is a market rate at the balance sheet date applicable for an instrument with similar terms and conditions. Where other pricing models are used, inputs are based on market data at the balance sheet date. Fair values for unquoted equity investments are estimated, if possible, using applicable price / earnings ratios for similar listed companies adjusted to reflect the specific circumstances of the issuer.4 © 2005 KPMG IFRG Limited is a UK company, limited by guarantee. All rights reserved.
  21. 21. 18 IFRS Illustrative Financial Statements for Investment Funds March 2005 Note Reference Explanatory note 1. This policy is appropriate for investments in unlisted funds which are redeemable at net asset values as calculated by the managers of such funds. Otherwise, adjustments need to be made so as to arrive at the value acceptable under IAS 39, or a quoted price should be used, if available. 2. IAS 39.58, A review for impairment indicators will be necessary for all financial assets that are carried at 63, 66 cost, amortised cost or at fair value with gains and losses recognised directly in equity. An impairment review will not be necessary for financial instruments remeasured to fair value where changes in fair value are recognised in the income statement. IAS 39.64 Impairment is measured and recognised individually for financial assets that are individually significant and individually or collectively for groups of similar assets that are not individually significant. 3. IAS 39.63 The carrying amount of an asset may be reduced either directly or through the use of an allowance account. An allowance account is presented as a deduction from the carrying amount of the related asset in the balance sheet. 4. IAS 39.65, 66 The amount of the reversal of an impairment loss is limited to an amount that does not result in the asset’s carrying amount exceeding the amortised cost at the date of reversal if the original impairment loss had not been recognised. Impairment losses incurred on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured (or derivatives linked to and that must be settled by delivery of such an unquoted equity instrument) shall not be reversed. 5. IAS 32.60(b) While IAS 39 is silent as to the method that should be used to determine the profit or loss on derecognition of financial assets (specific identification, first-in first-out, average, or weighted average) it is recommended that the basis is applied consistently and disclosed in the financial statements. © 2005 KPMG IFRG Limited is a UK company, limited by guarantee. All rights reserved.
  22. 22. IFRS Illustrative Financial Statements for Investment Funds 19 March 2005 Reference Notes to the consolidated financial statements Significant accounting policies (continued) (iv) Fair value measurement principles (continued) The fair value of derivatives that are not exchange-traded is estimated at the amount that the Fund would receive or pay to terminate the contract at the balance sheet date taking into account current market conditions (volatility, appropriate yield curve) and the current creditworthiness of the counterparties. Specifically, the fair value of a forward contract is determined as a net present value of estimated future cash flows, discounted at appropriate market rates on the valuation date; and the fair value of an option contract is determined by applying the Black-Scholes option valuation model. Investments in other unlisted open-ended investment funds are recorded at the net asset value per share as reported by the managers of such funds.1 (v) Impairment 2 IAS 39.58-66, Financial assets that are stated at cost or amortised cost are reviewed at each balance sheet 39.AG84-AG92 date to determine whether there is objective evidence of impairment. If any such indication exists, an impairment loss is recognised in the income statement as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate.3 IAS 39.65 If in a subsequent period the amount of an impairment loss recognised on a financial asset carried at amortised cost decreases and the decrease can be linked objectively to an event occurring after the write-down, the write-down is reversed through the income statement.4 IAS 39.16, 17 (vi) Derecognition The Fund derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire or it transfers the financial asset and the transfer qualifies for derecognition in accordance with IAS 39. IAS 32.60(b) The Fund uses the weighted average method to determine realised gains and losses on derecognition.5 IAS 39.39, A financial liability is derecognised when the obligation specified in the contract is discharged, 39.AG57 cancelled or expired. © 2005 KPMG IFRG Limited is a UK company, limited by guarantee. All rights reserved.
  23. 23. 20 IFRS Illustrative Financial Statements for Investment Funds March 2005 Note Reference Explanatory note 1. IAS 7 7 .6, In the context of an investment fund, short-term instruments such as commercial paper which is held for investment purposes, rather than as a part of the cash management, usually will not qualify as cash equivalents. © 2005 KPMG IFRG Limited is a UK company, limited by guarantee. All rights reserved.
  24. 24. IFRS Illustrative Financial Statements for Investment Funds 21 March 2005 Reference Notes to the consolidated financial statements Significant accounting policies (continued) IAS 1.111 (vii) Specific instruments Cash and cash equivalents IAS 7.6, 7 Cash comprises current deposits with banks. Cash equivalents are short-term highly liquid investments that are readily convertible to known amounts of cash, are subject to an insignificant risk of changes in value, and are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes.1 IAS 39.15-23, Repurchase and reverse repurchase transactions 39.AG36-AG52 Securities sold subject to a simultaneous agreement to repurchase these securities at a certain later date at a fixed price (repurchase agreements) are retained in the financial statements and are measured in accordance with their original measurement principles. The proceeds of the sale are reported as liabilities and are carried at amortised cost. Securities purchased under agreements to resell (reverse repurchase agreements) are reported not as purchases of the securities, but as receivables and are carried in the balance sheet at amortised cost. IAS 18.30(a) Interest earned on reverse repurchase agreements and interest incurred on repurchase agreements is recognised as interest income or interest expense, over the life of each agreement using the effective interest method. Securities sold short and associated securities borrowing IAS 39.AG15 Securities sold short are those positions where the Fund has sold a security that it does not own in anticipation of a decline in the market value of the security and are classified as liabilities held-for-trading. To enter a short sale, the Fund may need to borrow the security for delivery to the buyer. On each day obligations to deliver securities borrowed by the Fund to fulfil its short sale contracts are marked-to-market and an unrealised gain or loss is recorded in gains and losses on investments in the income statement. While the transaction is open the Fund will also incur an expense for any dividends or interest that will be paid to the lender of the securities. © 2005 KPMG IFRG Limited is a UK company, limited by guarantee. All rights reserved.
  25. 25. 22 IFRS Illustrative Financial Statements for Investment Funds March 2005 Note Reference Explanatory note 1. IAS 18.35(b), For interest-bearing financial instruments at fair value through profit or loss, a split between 32.94(h)(i) interest income and the fair value change is not required by IFRSs. However, in our view, an entity may choose to present interest income separately from other fair value changes, if it is the entity’s accounting policy and the fact is disclosed in the notes to the financial statements. 2. IAS 18.30(c), Dividends received on equity instruments are reported as dividend income. Dividends are 35(a) recognised when the shareholders’ right to receive payment is established. In the case of quoted equity investments, the shareholders’ right to receive payment is normally established on the security’s ex-dividend date. At this date the fair value of such a security is adjusted by approximately the dividend amount, and therefore recognition of a dividend on the ex-dividend date will not result in double counting. In the case of unquoted equity investments, income should be regarded as earned when the dividend is approved, or if approval is not required, when dividends are declared. When determining the fair value of such securities, care should be taken not to include the amount of recognised dividends in the fair value estimate. In some cases, the Fund may receive or choose to receive dividends in the form of additional shares rather than cash. These may be referred to as scrip, stock or share dividends. In our view, the substance of stock dividends with the cash alternative is the payment of a cash dividend, with reinvestment of the cash in additional shares. Therefore, in our view, that dividend income should be recognised for the amount of the cash dividend alternative. The corresponding debit should be treated as an additional investment. In other cases the Fund may receive bonus shares with no cash alternative. If all shareholders receive bonus shares in proportion to their shareholdings, the fair value of each shareholder’s interest should be unaffected by the bonus issue. If only certain shareholders are granted additional shares, the fair value of the interests of those shareholders will increase. In this case, in our view, it is most appropriate to measure the shares received at their fair value and recognise a corresponding amount of dividend income. © 2005 KPMG IFRG Limited is a UK company, limited by guarantee. All rights reserved.
  26. 26. IFRS Illustrative Financial Statements for Investment Funds 23 March 2005 Reference Notes to the consolidated financial statements Significant accounting policies (continued) (e) Interest income IAS 18.30(a), Interest income and expense is recognised in the income statement as it accrues, using the 35(a)-(b) original effective interest rate of the instrument calculated at the acquisition or origination date. IAS 32.94(h)(i) Interest income includes the amortisation of any discount or premium, transaction costs or other differences between the initial carrying amount of an interest-bearing instrument and its amount at maturity calculated on an effective interest rate basis. Interest income on debt instruments at fair value through profit or loss is accrued using the original effective interest rate and classified to the Interest income line item within the income statement.1 Interest income is recognised on a gross basis, including withholding tax, if any. IAS 18.30(c), (f) Dividend income2 35(a), (b) Dividend income relating to exchange-traded equity investments is recognised in the income statement on the ex-dividend date. In some cases, the Fund may receive or choose to receive dividends in the form of additional shares rather than cash. In such cases the Fund recognises the divided income for the amount of the cash dividend alternative with the corresponding debit treated as an additional investment. Income distributions from private equity investments and other investment funds are recognised in the income statement as dividend income when declared. (g) Expenses IAS 1.78, 88 All expenses, including management fees and custodian fees, are recognised in the income statement on an accrual basis. Included in other operating expenses are securities lending fees paid by the Fund, legal, advisory and audit fees. (h) Foreign exchange gains and losses Foreign exchange gains and losses on financial assets and financial liabilities at fair value through profit or loss are recognised together with other changes in the fair value. Included in the profit or loss line item Net foreign exchange loss are net foreign exchange gains and losses on monetary financial assets and financial liabilities other than those classified at fair value through profit or loss. IAS 1.110 (i) Taxation Under the current system of taxation in [inset name of the country of domicile] the Fund is exempt from paying taxes on income, profits or capital gains. The Fund has received an undertaking from [insert name of the relevant government body] of [insert name of the country of domicile] exempting it from tax for a period of [insert number of] years. Dividend and interest income received by the Fund may be subject to withholding tax imposed in the country of origin. Investment income is recorded gross of such taxes and the withholding tax is recognised as finance costs. © 2005 KPMG IFRG Limited is a UK company, limited by guarantee. All rights reserved.
  27. 27. 24 IFRS Illustrative Financial Statements for Investment Funds March 2005 Note Reference Explanatory note 1. IAS 10.12, 13 Dividends proposed and approved by the board of directors subsequent to year end should not be recognised as a liability at the balance sheet date. Dividends that are subject to shareholders’ approval also should not be recognised as liabilities. The amount of dividends proposed or declared before the financial statements were authorised for issue but not recognised as a distribution to holders of redeemable shares during the period should be disclosed in accordance with IAS 1. IAS 32.35, 36 Dividends on shares classified as liabilities (e.g., redeemable shares) are recognised in the income statement as finance costs. Even if the legal form of the payment is a dividend, it is not recorded directly in equity. 2. IAS 32.35 In certain jurisdictions a fund may be required to distribute all its net income from operations (before finance costs) less unrealised gains and losses to the holders of redeemable shares. If such obligation exists at the balance sheet date, distributions to holders of redeemable shares should be accrued at that date. 3. IAS 32.96, An entity shall apply the amended IAS 32 and IAS 39 for annual periods beginning on or after 39.103, 104 1 January 2005. Earlier application is permitted. The amended IAS 32 and IAS 39 shall be applied retrospectively with certain exceptions. The opening balance of retained earnings for the earliest prior period presented and all other comparative amounts shall be adjusted as if the standard had always been in use, unless impracticable. IAS 39.105- Exceptions from the retrospective application of the amended IAS 39 include: 108 ● an entity is permitted to designate a previously recognised financial asset or financial liability as a financial asset or financial liability at fair value through profit or loss or available-for-sale despite the requirement to make such designation upon initial recognition; ● an entity shall apply the derecognition requirements prospectively or retrospectively from a date of the entity’s choosing, if the information needed to apply IAS 39 to financial assets and financial liabilities derecognised as a result of past transactions was obtained at the time of initially accounting for those transactions; and ● an entity shall not adjust the carrying amount of non-financial assets and non-financial liabilities to exclude gains and losses related to cash flow hedges that were included in the carrying amount before the beginning of the financial year in which the standard is first applied. © 2005 KPMG IFRG Limited is a UK company, limited by guarantee. All rights reserved.
  28. 28. IFRS Illustrative Financial Statements for Investment Funds 25 March 2005 Reference Notes to the consolidated financial statements Significant accounting policies (continued) (j) Redeemable shares IAS 32.16, All redeemable shares issued by the Fund provide the investors with the right to require 18(b), 64 redemption for cash at the value proportionate to the investor’s share in the Fund’s net assets at the redemption date. In accordance with IAS 32 such instruments give rise to a financial liability for the present value of the redemption amount. In accordance with the issue prospectus the Fund is contractually obliged to redeem shares at mid-market prices. Due to the fact that in accordance with IAS 39 the best measure of fair value of a financial asset is usually the current bid price, the redeemable shares need to be adjusted to bid-market prices to balance the balance sheet. (k) Finance costs1 (dividends payable)2 IAS 32.35, 36 Dividends payable on redeemable shares are recognised in the income statement as finance costs. IAS 1.38, 8.28 (l) Changes in accounting policies3 In December 2003 and March 2004, the IASB approved amendments to a number of existing standards as a result of the Improvements project and issued several new standards. The objectives of the Improvements project were to reduce or eliminate alternatives, redundancies and conflicts within the standards, to deal with some convergence issues and to make other improvements. As part of the Improvements project IAS 32 and IAS 39 were significantly amended. As a result, the Fund changed some of its accounting policies as described below. The amendments became effective on 1 January 2005. Comparative information was adjusted in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors to ensure the appropriate accounting policies are applied within each period. IAS 39.105 Reclassification of financial assets The amended IAS 39 introduced a new category of financial instruments (i.e., financial assets and financial liabilities at fair value through profit or loss). Under the amended IAS 39, designation of any financial assets or financial liability at fair value through profit or loss is made upon initial recognition at the Fund’s discretion. The Fund shall not reclassify a financial instrument into or out of the fair value through profit or loss category while it is held or issued. However, transitional provisions to IAS 39 allowed the Fund a one time opportunity to designate a previously recognised financial asset or financial liability as a financial asset or financial liability at fair value through profit or loss despite the requirement to make such designation upon initial recognition. At 1 January 2005, all debt and equity investments held by the Fund with the carrying amount and fair value of €18,382,832 were designated at fair value through profit or loss. In the financial statements for the year ended 31 December 2004 these investments were classified as held-for- trading or available-for-sale (their carrying amounts and fair values amounted to €10,532,170 and €7 ,850,662, respectively). At 31 December 2004, all investments classified in the available-for-sale category were carried at fair value with fair value changes recognised directly in equity. Designation of all debt and equity investments at fair value through profit or loss at 1 January 2005 did not result in any adjustment to their carrying amounts. However, an amount of €233,936 attributable to the net change in the fair value of available-for-sale instruments was reclassified from the Fair value reserve to the income statement and increased Gains on investments by €262,120 and Transaction costs by €28,184. © 2005 KPMG IFRG Limited is a UK company, limited by guarantee. All rights reserved.
  29. 29. 26 IFRS Illustrative Financial Statements for Investment Funds March 2005 Note Reference Explanatory note 1. This listing of notes to the financial statements is to aid readers in finding notes and information. It is not required by IFRSs. IAS 1.104 Notes to the financial statements should, as far as practicable, be presented in a systematic manner. Usually this means in the order of items presented in the financial statements. Each item on the face of the balance sheet, income statement, statement of changes in net assets attributable to holders of redeemable shares and statement of cash flows should be cross- referenced to the related notes. © 2005 KPMG IFRG Limited is a UK company, limited by guarantee. All rights reserved.
  30. 30. IFRS Illustrative Financial Statements for Investment Funds 27 March 2005 Notes to the financial statements1 Page 1. Interest income 29 2. Gains and losses on debt and equity investments 29 3. Share capital 31 4. Cash and cash equivalents 33 5. Balances due from / to brokers, receivables from reverse repurchase agreements and payables under repurchase agreements 33 6. Financial instruments and associated risks 35 7. Related parties 51 8. Fair value information 53 9. Accounting estimates and judgements 55 10. Value at risk 55 © 2005 KPMG IFRG Limited is a UK company, limited by guarantee. All rights reserved.
  31. 31. 28 IFRS Illustrative Financial Statements for Investment Funds March 2005 Note Reference Explanatory note 1. IAS 1.86, 87 Neither IAS 1 nor IAS 32 requires disclosure as presented in note 2. However, when items of income and expense are material, their nature and amount shall be disclosed separately. Alternative methods of disclosure are possible. © 2005 KPMG IFRG Limited is a UK company, limited by guarantee. All rights reserved.
  32. 32. IFRS Illustrative Financial Statements for Investment Funds 29 March 2005 Reference Notes to the financial statements IAS 18.30(a), 1. Interest income 35(b)(iii) All amounts stated in euro 2005 2004 IAS 32.94(h)(i) Interest income arises from: Cash and cash equivalents 2,106 35,315 Receivables from reverse repurchase agreements 237,173 211,477 Commercial paper 235,067 142,744 Investments in other debt securities 128,594 40,446 602,940 429,982 Interest income on receivables from reverse repurchase agreements represents interest earned on securities purchased under agreement to sell these securities at a future date, at an agreed price. IAS 1.35 2. Gains and losses on debt and equity investments1 All amounts stated in euro 2005 2004 Net gains and losses on debt investments 118,060 73,996 Net gains and losses on equity investments 3,004,223 2,344,039 Net gains and losses on debt and equity investments 3,122,283 2,418,035 Realised gains 353,455 119,716 Unrealised gains 2,982,374 2,432,530 Total gains on investments 3,335,829 2,552,246 Realised losses (91,379) (56,019) Unrealised losses (122,167) (78,192) Total losses on investments (213,546) (134,211) © 2005 KPMG IFRG Limited is a UK company, limited by guarantee. All rights reserved.
  33. 33. 30 IFRS Illustrative Financial Statements for Investment Funds March 2005 Note Reference Explanatory note 1. The illustrative Fund does not issue equity shares as defined in IAS 32. In some jurisdictions it may be a legal requirement for a fund to issue a certain minimum amount of equity shares. © 2005 KPMG IFRG Limited is a UK company, limited by guarantee. All rights reserved.

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