Investment Management: Similarities and differences*


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Investment Management: Similarities and differences*

  1. 1. Investment Management Similarities and differences* A comparison of International Financial Reporting Standards, US GAAP and Canadian GAAP for Investment Funds *connectedthinking
  2. 2. To Our Clients and Other Friends PricewaterhouseCoopers is the leading provider of business solutions to the investment management industry in Canada. Our clients include not only many of the largest retail mutual fund companies, but also numerous niche- driven asset managers that offer unique and diversified products to investors through alternate investment strategies such as hedge funds, structured products and private equity funds. Our strength in serving the investment management industry comes from our skills, our experience, and our seamless global network of dedicated professionals who focus their time on understanding the industry and working on solutions to investment management industry issues. For more information on how PricewaterhouseCoopers can assist you in managing value and reporting, please speak to your local engagement leader, or contact one of our industry experts. Raj Kothari, FCA Canadian Investment Management Industry Practice Leader
  3. 3. PricewaterhouseCoopers Investment Management Industry This PricewaterhouseCoopers publication is for those who wish to gain a broad understanding of the key similarities and differences between International Financial Reporting Standards (“IFRS”) , accounting principles generally accepted in the United States of America (“US GAAP”) and Canadian generally accepted accounting principles (“Canadian GAAP”) that are specifically applicable to investment funds. Neither IFRS nor Canadian GAAP provide industry specific standards for investment funds, whereas US GAAP provides investment funds with a set of industry specific accounting standards and practices, generally summarized in the AICPA Audit and Accounting Guide, Investment Companies. In Canada, although there is no equivalent in GAAP of the AICPA Audit and Accounting Guide, Accounting Guideline 8 provides some direction for the basis of accounting to be followed by investment funds. This publication does not intend to capture all similarities and differences between IFRS, US GAAP and Canadian GAAP, only the key similarities and differences specifically related to investment funds. When applying the standards, readers should also consult all the relevant accounting standards and, where applicable, their national and provincial laws and regulations. Such laws and regulations are not covered by this publication. Furthermore, this publication does not intend to cover the accounting by investment managers and general partners of investment funds. Additionally, National Instrument 8-06, released by the Canadian Securities Administrators, provides detailed regulatory requirements for financial statement disclosure and presentation of all reporting issuer and most non- reporting issuer funds. These additional requirements have been presented in italics where applicable. Similarities and differences August 2007 PricewaterhouseCoopers
  4. 4. Subject IFRS US GAAP Canadian GAAP Framework Accounting Standards / IFRS does not provide specific AICPA Accounting and Audit Accounting Guideline 8 Industry Practice standards / requirements for Guide, Investment Companies – Investment Companies investment funds, either registered or provides specific guidance provides guidance on how non-registered. on industry accounting investment funds that meet standards and practices for the definition of an investment All the standards in IFRS should be both SEC registered and non- company, as defined followed and an explicit and unreserved SEC registered investment therein, should account for statement of the compliance with IFRS funds. This document does investments. should be included in the notes to the not address the additional financial statements. National Instrument 81-106 regulatory reporting (NI 81-106) provides additional requirements of SEC- guidance on financial registered investment funds. statement presentation. Financial Statements Components of Financial Two years’ balance sheets, income Comparative financial Two years’ balance sheets, Statements statements, statements of changes in statements are not required income statements, equity (if any), cash flow statements for investment funds. statements of changes in net and notes (including the accounting Financial statements include assets, cash flow statements policies). a statement of assets and (if required), one year liabilities, a schedule of statement of investments and investments (or a condensed notes. schedule of investments, see below), a statement of operations, a statement of changes in net assets, a statement of cash flows (if required) and notes to the financial statements. Balance Sheet Does not prescribe a particular format The statement of assets and Does not prescribe a particular for an investment fund. The balance liabilities is non-classified and format for an investment fund. sheet can be presented in current / requires certain items to be Disclosure of certain items is non-current format, or using liquidity presented. Investments are required by NI 81-106 Part 3.1. presentation. usually presented as first line because of their importance to an investment fund. Schedule of Investments Not required, but is best practice to Investments should be Not required under GAAP. present a schedule of investments presented and disclosed either National Instrument 81-106 on a voluntary basis. If presented, on the face of the statement requires that a statement comparative information should be of net assets or in a schedule of investment portfolio be included. If a schedule of investments of investments. At a minimum, presented as at the end of the is not presented, a meaningful analysis a condensed schedule should reporting period. Comparative of investments should be provided so be provided, with specific information from prior years is that the reader has an understanding presentation and disclosure not presented. of the nature of the investments, given requirements. their significance. Similarities and differences August 2007 PricewaterhouseCoopers 2
  5. 5. Subject IFRS US GAAP Canadian GAAP Financial Statements (Cont.) Income Statement Does not prescribe a standard format, Specific items are required to Does not prescribe a particular although expenses are presented in be presented and disclosed format for an investment fund. one of two formats (function or nature). on the face of the statement of Disclosure of certain items is Certain minimum items are presented operations. required by NI 81-106 Part 3.2. on the face of the income statement. Statement of Changes in An investment fund (primarily a fund Specific items are required to Does not prescribe a particular Equity that issues puttable shares) might not be presented and disclosed format for an open-end have equity. In such case, a statement on the face of the statement of investment fund. Disclosure of changes in equity is not required. changes in net assets. of certain items is required However, it is best practice to present by CICA 240 for closed-end a statement of changes in net assets funds. attributable to holders of redeemable NI 81-106 Part 3.3 requires shares or interests. presentation of certain items. Statement of Cash Flows No Exemptions. If certain criteria are met, If certain criteria* are met, – Exemption an investment fund may be an investment fund may be exempted from presenting a exempted from presenting a statement of cash flows. statement of cash flows. *as outlined in CICA 540.02 Statement of Cash Flows Standard headings, but limited Similar to IFRS, but more Similar to both IFRS and US – Format and Standard guidance on contents. Either direct specific guidance for items GAAP. Either the direct or or indirect method can be used for included in each category. indirect method can be used. cash flows from operating activities. Purchases and sales of Specific guidance on IFRS encourages the use of the direct investments are included presentation is provided in NI method. in operating activities. The 81-106 Part 3.4. direct or indirect method can be used for cash flows from operating activities. Similarities and differences August 2007 PricewaterhouseCoopers
  6. 6. Subject IFRS US GAAP Canadian GAAP Consolidated Financial Statements Consolidation Model No exceptions for investment funds. An investment fund may only Accounting Guideline 8 Consolidation is based on the consolidate its subsidiaries provides that control does existence of control defined as the that are also investment funds. not usually preclude fair value power to govern the financial and However, if an investment measurement. Accordingly, operating policies of an entity so as to fund is a feeder fund within a so long as an investment obtain benefits. “master / feeder” structure, fund meets the definition the master fund should not of an investment company Control is presumed to exist when be consolidated but shown as defined in Accounting the parent owns, directly or indirectly using specific presentation Guideline 8, it is usually through subsidiaries, more than one requirements. Additionally, required to present its half of an entity’s voting power. Control if an investment fund is investment at fair value also exists when the parent owns half classified as a fund of funds, irrespective of whether or not or less of the voting power but has it would not consolidate it controls the entity. legal or contractual rights to control, or investee funds but show its de facto control (rare circumstances). Certain investments in investments using specific The existence of currently exercisable operating enterprises presentation requirements. potential rights is also taken into providing services to the consideration. Consolidation of operating investment company may companies is not appropriate need to be consolidated. When a feeder fund is not an SPE except in the case of operating and has control over its master fund Additionally, a non-investment subsidiaries providing services (such as through the ownership of company parent or equity to the investment fund. voting shares), the master fund should method investor in investment be consolidated into the feeder fund. companies may be required Should the feeder no longer have to measure the investment control, the master fund should be companies’ investments at deconsolidated. fair value, if certain criteria in Accounting Guideline 8 In some circumstances, where the paragraph 0 are met. feeder fund is only to invest in one particular master fund, the feeder and master funds may represent an integrated entity, in which case the integrated entity could be considered the reporting entity and one set of financial statements is prepared. Special Purpose Entity / Special purpose entities should be Investments accounted for at Variable interest entities are Variable Interest Entity consolidated when the substance of fair value in accordance with generally not consolidated the relationship indicates control. the specialized accounting effective on adoption of guidance in the AICPA Audit paragraph 5(a) of Accounting and Accounting Guide, Guideline 8. Certain VIE’s Investment Companies, are which provide services to the not subject to consolidation investment company may under FIN 46(R). need to be consolidated. Investments in Based on significant influence; Definition of an equity investee Similar to US GAAP. Associates presumed to have significant influence is similar to IFRS. if 20% or greater interest and not Investments in associates having control. If less than 20%, other held by an investment fund factors should be considered. are accounted for at fair value, Investments in associates should not under the equity method. be accounted for under the equity However, certain associates method, except when the investments that provide services to in associates are classified as financial the investment fund are instruments at fair value through profit accounted for under the equity or loss upon initial recognition (the method. “fair value option”) and accounted for accordingly. However, to use the fair value option, IFRS requires certain conditions to be met (see “financial Instruments – Classification” below). Similarities and differences August 2007 PricewaterhouseCoopers 4
  7. 7. Subject IFRS US GAAP Canadian GAAP Assets and Liabilities – Financial Instruments - Investments Financial Instruments A financial instrument should be Securities transactions are Similar to IFRS. – Initial Recognition recognized when an entity becomes a recorded on a trade date party to the contractual provisions of basis. the instrument. Regular way purchases of financial assets can be recorded either on a trade date or settlement date basis. Financial Instruments A financial asset should be Securities transactions are Similar to US GAAP. However, – Derecognition derecognized when the contractual recorded on a trade date regular way sales can be rights to the cash flow from the basis. recorded on either a trade financial asset have expired or are date or a settlement date transferred together with substantially basis. all of the risks and rewards of ownership of the asset. Regular way sales can be recorded either on a trade date or settlement date basis. Financial Instruments Classification as financial instruments All investments are valued at Investments are generally – Classification at fair value through profit or loss (held fair value. There is no specific valued at fair value through for trading or designated upon initial classification or guidance profit or loss, as required by recognition under the fair value option), similar to the one contained in Accounting Guideline 8. available for sale, held to maturity, and IFRS. loans and receivables. Held to maturity classification is generally not available to open-ended investment funds. The fair value option can be used in the following cases: () a financial instrument containing one or more embedded derivatives, (2) when it results in more relevant information because either it eliminates or significantly reduces a measurement or recognition inconsistency, or () a group of financial instruments is managed and its performance is evaluated on a fair value basis. An investment fund typically classifies its investments as financial instruments at fair value through profit or loss. Financial Instruments Investments are initially measured Cost (consideration received Investments are measured – Initial Measurement at fair value. In the case of financial or paid) typically represents at fair value upon initial instruments at fair value through profit the value of the investment at recognition. or loss, transaction costs, including the initial recognition. Transaction Transaction costs are bid/offer spreads, should be expensed costs and proceeds on sale recognized in net income through profit or loss. are included in the cost of immediately. investments and flow through unrealized gains and losses. Similarities and differences August 2007 PricewaterhouseCoopers 5
  8. 8. Subject IFRS US GAAP Canadian GAAP Assets and Liabilities – Financial Instruments – Investments (Cont.) Financial Instruments Financial instruments at fair value Investments are valued at Similar to US GAAP for – Subsequent through profit or loss are subsequently fair value. Unrealized gains investment funds meeting the Measurement measured at fair value and the change or losses on investments are definition of an investment in fair value is recognized in the profit recognized in the statement of company under Accounting and loss. operations. Guideline 8. Available for sale investments are subsequently measured at fair value. Investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured, can be measured at cost (rare circumstance). Any change in value of available for sale securities is recognized in equity except for impairment losses and foreign exchange gains and losses for debt securities. Interest calculated using the effective interest rate method is recognized in the income statement. Financial Instruments Long positions should be valued at the Can be valued at bid or Similar to IFRS. – Fair Value bid price and short positions should be asking price, last price, mean valued at the asking price. Assets and between bid and asking liabilities with offsetting markets risks price, or a valuation within the may be valued at mid-market prices range of bid and asking price. for the offsetting risk positions and at Neither use of asking price bid or asking price for net positions as to value long positions nor appropriate. use of bid price to value short positions is allowed. “Blockage factor”, which is the premium or discount based on the “Blockage factor” on relative size of positions (such as a unrestricted investments large proportion of the total trading traded on an active market is units of an instrument), is precluded not usually allowed. for instruments quoted in an active market. For those instruments the fair In the absence of an active market, the amounts value of the portfolio is the product of representing estimates of fair the number of units and the quoted values using methods applied bid/asking price. consistently and determined If the market for a financial instrument in good faith by the board of is not active, an entity establishes fair directors should be used. value by using a valuation technique. The chosen valuation technique shall make maximum use of market inputs and rely as little as possible on entity- specific inputs. Similarities and differences August 2007 PricewaterhouseCoopers 6
  9. 9. Subject IFRS US GAAP Canadian GAAP Assets and Liabilities – Financial Instruments – Investments (Cont.) Financial Instruments With the adoption of IFRS 7, Financial Specific disclosure Canadian GAAP disclosure will – Disclosure Instruments: Disclosure, disclosures requirements for investment be similar to IFRS subsequent should be made through the eyes funds. to the adoption of CICA of management to enhance users’ 862 – Financial Instruments Fair value of financial understanding of the risk exposure Disclosures, and CICA 86 instruments should be and the entity’s risk management. As – Financial Instruments disclosed. such, the disclosure requirements are Presentation. extensive. Similar to IFRS, the use of These standards are judgment, key assumptions IFRS 7 includes general disclosure applicable for fiscal years and sources of estimation requirements, which are not specifically beginning on or after October of uncertainty should be designed for investment funds. , 2007 for all entities. disclosed. Fair value of financial instruments should be disclosed. The use of judgment and key assumptions and other key sources of estimation uncertainty should be disclosed along with the nature of and the carrying amount of the affected assets and liabilities. Financial Instruments Offsetting is allowed only when there Similar to IFRS, except that Similar to IFRS. – Offsetting is a legally enforceable right to set off the fair value recognized for and there is intention to settle on a net derivative contracts under a basis or to realize the asset and settle master netting arrangement the liability simultaneously. can be assumed to meet the intention requirement and can There is no exception to the offsetting be offset if other requirements rules for master netting arrangements; are met. all the conditions for offset must be met. Fixed Income Securities Interest income and expense should be Premiums and discounts Interest income and expense – Discounts and recognized using the effective interest should be amortized using the should be recognized using Premiums method. effective interest method. the effective interest method. However, this does not apply to Interest revenue is required to instruments carried at fair value be shown separately on the through profit or loss since there is no statement of operations under obligation to disclose interest income NI 81-106 Part 3.2. / expense on the face of the income statement. Similarities and differences August 2007 PricewaterhouseCoopers 7
  10. 10. Subject IFRS US GAAP Canadian GAAP Balance Sheet Net Assets – In a typical open end investment fund, Classified as equity. However, Units of a fund that are Classification its shares or interests are redeemable the shares or interests that redeemable at the option of at the option of holders of such shares are redeemable on a fixed the holder, or at a specified or interests. The shares or interests date and fixed amount (or date, would generally meet should be classified as a financial determined by reference to an the definition of a financial liability regardless of their legal form. interest rate index, currency liability. Certain instruments index or another external may qualify for the exemption As a financial liability, their related index) should be classified as in CICA 86.6, as clarified distributions and dividends to holders a liability. by EIC 49 – Accounting for of redeemable shares should be Rectractable or Mandatorily recognized as expense in profit or loss. Distributions and dividends Redeemable Shares, in which are recognized as transactions case the instruments that in equity, not in profit or loss, would otherwise be classified if the shares or interests are as liabilities are to be classified classified as equity. as equity. Net Assets – Net assets represent the residual value Net assets represent the Similar to US GAAP. Measurement of the assets (net of liabilities). For residual value of the assets, puttable instruments, the liability is net of liabilities. remeasured at the balance sheet date if the holder exercised his right to put the instrument back. Income Statement Interest and Dividend Interest is recognized on an accrual Similar to IFRS. Similar to IFRS. Income – Recognition basis using the effective interest rate method. Dividends are recognized when the right to receive payment is established. Realized and Unrealized There is no requirement to disclose Net realized gains (losses) Similar to IFRS. Gains (Losses) net realized gains and losses and the and net change in unrealized Realized gains (losses) and on Investments net change in unrealized appreciation appreciation (depreciation) unrealized gains (losses) are – Presentation (depreciation) separately. should be disclosed required to be presented by NI separately. 81-106 Part 3.2. Net Gains (Losses) There is no requirement to disclose Distinction should be made Similar to IFRS for investments on Foreign Exchange net gains (losses) on foreign exchange between realized and carried at fair value through – Presentation separately. unrealized gains or losses on profit or loss. foreign exchange. The foreign currency element of gains or losses on investments may be presented separately or together with the local currency market gains or losses on investments. Similarities and differences August 2007 PricewaterhouseCoopers 8
  11. 11. Subject IFRS US GAAP Canadian GAAP Other Accounting and Reporting Topics Functional Currency / The functional currency is the currency Definition of functional Investment companies Reporting Currency of the primary economic environment in currency is similar to IFRS. determine their functional which an investment fund operates. currency based on facts The determination is similar and circumstances using The determination of the functional to IFRS except that US GAAP judgment. In certain cases an currency is based on a hierarchy of has no hierarchy. entity may choose a reporting indicators. For an investment fund, currency which differs the indicators are generally mixed from the entity’s functional and management is required to use currency. In such cases, the judgment to determine the functional translation method in EIC currency. 0 – Translation Method When the presentation currency is when the Reporting Currency different from the functional currency, Differs from the Measurement disclosure of the functional currency Currency or there is a Change and the presentation currency is in Reporting Currency, is used. required. The reason for having a different presentation currency should also be disclosed. Foreign Currency Foreign currency transactions are Similar to IFRS. Similar to IFRS. Transactions initially recorded using the exchange rate at the date of the initial transaction. Foreign Currency Assets and liabilities carried at fair Similar to IFRS. Similar to IFRS. Balances value through profit or loss are translated at the exchange rate in effect at the balance sheet date. NAV per Share Not required, but is common practice Required. Not required. to disclose NAV per redeemable Required by NI 81-106 Part security. 3.1. Earnings per Share Earnings per share information is not Not required. Required by Canadian GAAP required when the equity instruments for all publicity accountable of an investment fund are not publicly entities. traded. Increase (decrease) in net Also, if all the shares of the fund are asset value per unit is required classified as financial liabilities, there is to be disclosed under NI 81- no requirement to disclose earnings per 106. share. Financial Highlights Not required. Required and should Not required. follow specific calculation, Required to be presented presentation and disclosure in Management’s report on requirements. fund performance and should follow specific calculation, presentation and disclosure requirements outlined in NI 81-106. Related Party Amounts and nature of transactions, Similar to IFRS. Similar to IFRS. However, Transactions and balances due to / from related there are specific parties should be disclosed. measurement criteria for related party transactions under Section 840. Segment Reporting Required unless an investment fund’s Not required. Similar to IFRS, segmented shares or debt instruments are not reporting is required for publicly traded. publicly traded investment funds. Similarities and differences August 2007 PricewaterhouseCoopers 9
  12. 12. Contacts Toronto Vancouver Montreal Raj Kothari, FCA Paul Challinor Alain Dugal Canadian Investment Management (604) 806 – 728 (54) 205 - 509 Industry Practice Leader (46) 869 – 8678 Steve Wilson Kenneth Hotton (46) 806 - 7780 (46) 205 - 5292 Derek Hatoum (46) 869 – 8755 Ottawa Lyne Dufresne (46) 205 - 5298 Diane Woodruff Robin Madigan (46) 65 - 820 (6) 755 - 5978 Quebec Barry Myers, FCA London Raynald Lafrance (46) 869 – 244 (48) 69 – 2440 Chirag Shah (59) 640 – 794 Joe Pinizzotto Winnipeg (905) 897 - 4540 Calgary Chris Couture (204) 926 - 248 Stephen Wall Calvin Jacober (46) 94 - 882 (40) 509 - 75 Chris Pitts Edmonton (46) 947 – 8964 Gordon Keiller (780) 44 - 6840 Andrew Clarke (46) 947 - 896 James Slavens (46) 28 - 459