Reminders Key considerations for your first Annual IFRS statements · 2015-02-25 · Classification...

RemindersKey considerations for your first Annual IFRS statements

Deloitte Asset Management SeminarDecember 11, 2014Toronto

© Deloitte LLP and affiliated entities.

Agenda

• OSC CD Review of Interim IFRS financial statements

• Key accounting issues

• Financial statement presentation

• Disclosure reminders

1 Reminders: Key considerations for your first IFRS statements


OSC CD Review of Interim IFRS FS



OSC CD Review

• OSC focused on compliance with regulations (NI 81-106)• No comments on application of IFRS in other areas• Comments mostly related to

– Transition adjustment disclosures for all periods– IFRS opening balance sheet for new funds set up in prior year (2013)– Basis of classification of unitholders equity as liability or equity– Statement of compliance with IAS 34 – Interim financial statements– Notice to accompany FS that auditor has not reviewed FS– Non-disclosure of accounting principles used in preparing highlights

table in the MRFP• OSC has published 2 staff notices on IFRS deficiencies and another is

expected shortly. OSC position is that materiality does not apply to a regulatory requirement

• For the 2014 year end we expect a similar CD review with more emphasis on the application of IFRS in other areas



OSC Staff Notice 33-743



OSC Staff Notice 33-743

• Notice deals with allocation of fund expenses to investment funds• IFMs should be able to demonstrate allocation is not inconsistent with

their duty of care and they are not putting their interests ahead of investors

• Conflicts of interest matters to be brought before IRC– In sufficient detail for IRC to evaluate– Fund expense allocation policy to provide detailed types of expenses

to be allocated including contentious items, related party service provider, or unique items.

Any expenses allocated should relate to the daily operation of the funds and be reasonable and justifiable.



OSC Staff Notice 33-743 (Contd)

• Allocation models should deal with appropriate expense and using a sound methodology.

• Expenses relating to the operations and conduct of the IFM should be borne by the IFM.

• Expenses relating to the daily operations of the investment funds should be borne by the investment funds.

• Once appropriate expenses are identifies the IFM must establish a process to allocate expenses to the funds

• The staff notice provides guidance on what are expenses of the IFM and what are expenses of the investment funds.

• Guidance is also provided on one or more factors that are used by the industry to allocate expenses.

• Guidance also provides Q&A that deals with most common issues and questions asked of the regulators.



Key accounting issues



Liability versus equity for units/shares

• This must be assessed for each Fund – treatment under Part V GAAP may not align with treatment under IFRS.


Are the units/shares puttable?

Is the holder entitled to a pro-rata share of entity’s net assetsupon liquidation?

Is the instrument in a class that is the most subordinate class?

Do all instruments in this subordinate class have identical features?

Other than redemption, are there any other contractual obligations?

Is total cash flow attributable to the instrument based substantially on profit or loss , changes in recognized net assets, or changes in FV?

Yes

Yes

Yes

Yes

Equity

LiabilityNo

LiabilityNo

LiabilityNo

LiabilityNo

LiabilityNo

No other instruments or contracts that have a) total cash flows based substantially on profit or loss , changes in recognized net assets, or

changes in FV and b) effect of substantially restricting residual return?

Yes

LiabilityNo

Yes


Liability versus Equity

• Funds have classified unitholders equity as a liability mainly due to:– The existence of Multi-series or Multi-classes– The existence of an explicit requirement to distribute taxable income

in cash at the option of the unitholders• Have you reviewed all relevant documentation to identify these issues?

Consider:– Trust indentures?– Subscription agreements?– Offering memorandums?• Ensure you have disclosed the reasons why the unitholders equity is

classified as a liability or equity as it is also a regulatory requirement.



Measurement of share/unit liability

• “Normal” financial liability measurement choices:– FVTPL– Amortized cost

• Considerations– Does the fund have equity? What is the financial statement

presentation approach?– Does the redemption amount approach FV of the units/shares?– Model financial statements tend to report units/shares as being at

redemption amount



Classification of investments – IAS 39


Classification Measurement Gain/Loss Classification

FVTPL(held-for-trading)

Fair value Profit or loss

FVTPL (designated)

Fair value Profit or loss

Available-for-sale Fair value

Other comprehensive income

Loans and receivables

Amortized cost N/A

Held-to-maturity

Amortized cost N/A

REMINDERS

• Acquired principally for the purpose of selling or repurchasing it in the near term; or

• evidence of a recent actual pattern of short-term profit-taking; or

• derivative

• must be a designation at initial recognition because it:

• it eliminates or significantly reduces a measurement or recognition inconsistency; or

• performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information is provided internally on that basis to the entity's key management personnel

NOT an accounting

policy choice


IFRS 9

• IFRS 9 which replaces IAS 39 is now finalized and issued in 2014 effective Jan 1, 2018. Early adoption permitted.

• IFRS 9 uses the business model and contractual cash flow characteristics approach to classify financial instruments into:– Subsequently measured at FV OR– Subsequently measured at amortized cost

• The IFRS 9 criteria to classify financial instruments is more suitable for investment funds because of the business model test – business model for managing the financial assets. Business model test is not an accounting choice.

• IFRS 9 says that a portfolio of assets that is managed and whose performance is evaluated on a FV basis is not held to collect contractual cash flows



IFRS 12 – Disclosure of Interests in Other Entities

• Requirement : The objective of this standard IFRS is to require an entity to disclose information that enables users of its financial statements to evaluate:

(a) the nature of, and risks associated with, its interests in other entities; and(b) the effects of those interests on its financial position, financial performance and cash

flows.

• To be able to meet the objective an entity shall disclose:

(a) the significant judgments and assumptions it has made in determining:• the nature of its interest in another entity or arrangement;• the type of joint arrangement in which it has an interest (paragraphs 7–9);• that it meets the definition of an investment entity, if applicable (paragraph 9A); and

(b) information about its interests in:• subsidiaries (paragraphs 10–19);• joint arrangements and associates (paragraphs 20–23); and• structured entities that are not controlled by the entity (unconsolidated structured entities)

(paragraphs 24–31).



IFRS 12 – Disclosure of Interests in Other Entities (cont’d)• IFRS 12 shall be applied by an entity that has an interest in any of the following:

(a) subsidiaries(b) joint arrangements (ie joint operations or joint ventures)(c) associates(d) unconsolidated structured entities.



Fair value measurement

• IFRS 13, Fair Value Measurement sets out a single IFRS framework for measuring fair value and the required disclosures


Fair valueNAV

Reminder

Level Input Typical examples 1 Quoted (unadjusted) prices in

an active market for identical assets or liabilities

• Listed equity securities• Listed debt securities

2 Other than quoted prices that are observable for the asset or liability, either directly or indirectly

• Foreign currency forward contract• Interest rate swaps• Redeemable preferred shares• Unlisted debt securities

3 Unobservable inputs for the asset or liability

• Private equity investments• Unlisted debt securities


Q&A – Published Net Asset Values For open-ended Investment Funds As Level 1 Inputs

• Some open-ended investments funds not listed on a stock exchange may publish daily quotations of their net asset values (NAVs) at which redemptions or purchases of units occur without any adjustments to the published NAV. The redemptions and unit purchases may take place regularly and there is no secondary market for the units because they are not transferrable (i.e., the sole transactions are issuances and redemptions of the units by the fund).

Question• In the circumstances described, is it possible that the quoted NAVs may

meet the definition of a Level 1 input?



Q&A IFRS 13 – Published Net Asset Values For open-ended Investment Funds As Level 1 Inputs (cont’d)

AnswerYes, provided that all of the elements of the definition of Level 1 inputs in IFRS 13.76 are met. Consequently, the following criteria must be satisfied: • the price must be quoted in an active market;• The price must be unadjusted;• The price must be for an asset or liability that is identical to the asset or liability being

measured; and • The entity must have access to the price at the measurement date. For the price to be classified as a Level 1 input, it is not required that there be an active market between the holders of the financial instrument and other potential holders that are not the issuer of the financial instrument; it is possible that the financial instrument does not have an active market other than between the holders of the financial instrument and the issuer of the financial instrument. Careful analysis is required when assessing whether such prices meet the definition of a Level 1 input. In particular, the assessment should include: (1) whether quoted prices are readily and regularly available, (2) whether transactions occur regularly, and (3) whether the regularly occurring transactions take place at the quoted (unadjusted) price on an arm’s length basis.



Fair value measurement (cont’d)


Reminder – Additional Disclosure Requirements for

Level 3

Level 3• Inputs to valuation technique that are not observable• Examples of instruments that might be Level 3

– Long dated currency swap – observable market data might not exist for longer periods

– Options on exchange traded shares when the options themselves don’t trade – use of historical volatility of the shares makes the value Level 3

Level 1

• Quoted market prices in active markets; independent pricing(e.g., broker quotes) may not be Level 1.

• When both bid and ask prices exist, price within bid-ask that is most representative of FV should be used.

• IFRS 13 has practical expedient to use ‘mid-market’ pricing

Level 2

• Observable inputs that are not Level 1• Definition includes quoted market prices for “similar’ assets or

liabilities, but ‘similar’ is not defined, so judgment is required. Consider terms such as: timing of cash flows, calculation of cash flows, timing and conditions of options in the contract, protection rights, etc.

IFRS 13: 71-1

IFRS 13: 71-2

IFRS 13: 76-1

IFRS 13: 91-1 IFRS 13: 77-1 IFRS 13: 73-1Other Q&As

IFRS 13: 82-1

Valued with a model –Difference is the inputs


Financial statement presentation



Financial statement presentation

• IFRS 1 requirements– Disclosures – IFRS 1 – Example:

• These Consolidated Financial Statements are our first annual financial statements prepared in accordance with IFRS. Previously, our Consolidated Financial Statements were prepared under Canadian generally accepted accounting principles (GAAP). IFRS 1, First-time Adoption of International Reporting Standards (IFRS 1), has been applied. The accounting policies outlined in Note 2 have been consistently applied to all periods presented, including our consolidated balance sheet as at November 1, 2010 (the Transition date) for the purpose of transition to IFRS as required by IFRS 1.

– Statements and periods to be presented


*

* OSC’s IFRS Release No. 1 noted that some entities did not include an opening SFP. This is a requirement even in interim financial statements (although not an IFRS requirement in interims, it is a NI 52-107 requirement).

Statements of financial position December 31, 2014 December 31, 2013 January 1, 2013

Statements of cash flows Year ended 2014 Year ended 2013

Statements of comprehensive income Year ended 2014 Year ended 2013

Statements of changes in net assets attributable to holders of redeemable units

Year ended 2014 Year ended 2013


Financial statement presentation (cont’d)

• IFRS 1 requirements (cont’d)– Reconciliations – Annual Statements

Reconciliation of equity and comprehensive income as previously reported under Canadian GAAP to IFRS


Equity December 31, 2013 January 1, 2013Equity as reported under Canadian GAAP XX XX

Revaluation of investments at FVTPL XX XX

Net assets attributable to holders of redeemable units XX XX

Comprehensive Income Year ended December 31, 2013Comprehensive income as reported under Canadian GAAP XX

Revaluation of investments at FVTPL XX

Increase (decrease) in net assets attributable to holders of redeemable units XX



• IFRS 1 requirements (cont’d)– Reconciliations – Interim Statements

Reconciliation of equity and comprehensive income as previously reported under Canadian GAAP to IFRS


OSC’s IFRS Release No. 1 noted that some entities did not include all these reconciliations in their first interim F/S.

Equity December 31, 2013 June 30, 2013 January 1, 2013Equity as reported under Canadian GAAP XX XX XX

Revaluation of investments at FVTPL XX XX XX

Net assets attributable to holders of redeemable units

XX XX XX

Comprehensive Income Year ended December 31, 2013

Period ended June 30, 2013

Comprehensive income as reported under Canadian GAAP XX XX

Revaluation of investments at FVTPL XX XX

Increase (decrease) in net assets attributable to holders of redeemable units

XX XX



• ‘Statement of Investment Portfolio’ MUST be referred to as a ‘Schedule of Investment Portfolio’ and it is NOT part of the financial statements. It is part of the notes to the financial statements.

• Financial statements MUST contain an explicit statement of compliance with all IFRSs.– Remember: in selecting accounting policies that are in compliance with IFRSs, entities must use the

same accounting policies in its opening IFRS statement of financial position and throughout all periods presented in its first IFRS financial statements. These policies must comply with the IFRSs in effect at the end of its first IFRS reporting period.


We have audited the accompanying financial statements of [Company Name], which comprise the statements of financial position as at [Period End Date] and [Previous Period End Date], and the income statements, statements of comprehensive income, statements of changes in equity, schedule of investments and statements of cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information

See accompanying notes which are an integral part of these financial statements.

Auditor’s Report

Schedule

X

X



• Statement of Financial Position (‘SFP’)– Should NOT be classified and SHOULD be in order of liquidity. – Offsetting

• Financial assets and liabilities must be offset in the SFP when and only when:• Currently has a legally enforceable right to set off the recognised amounts; and • Intends either to settle on a net basis, or to realize the asset and settle the liability

simultaneously.


Normal business practice

Requirements of financial market

Circumstances that limit ability to settle

netRisk management

policies

Must be legally enforceable in

all of the following:

Normal course of business Event of default

Event of insolvency or bankruptcy

Disclosure requirements are different!



• Statement of Comprehensive Income– Interest income (if presented)* MUST be recorded and

measured using the effective interest method, if not, MUSTbe referred to as ‘Interest for Distribution Purposes’ with additional disclosure provided


* This is not an IFRS requirement but an NI 81-106

requirement

– Some flexibility in order and line items – income items would tend to be at the top, including gains/losses, followed by expenses

– Taxes, reminders:• Mutual fund trusts are able to receive a full deduction in computing income when

they make sufficient qualifying distributions to their unitholders• Mutual fund corporations can avoid paying income tax in respect of capital gains by

paying qualifying dividends to its shareholders. As a result, it may be appropriate for a mutual fund corporation to not account for taxes related to capital gains as long as it expects to continue to pay such dividends

• Withholding taxes should NOT be netted against revenue, but rather should be a separate line item on the F/S



• Statement of Cash Flows– Required separate presentation of:

• Interest received• Dividends received• Taxes paid

– Consider netting, this is only permitted when:• Cash receipts and payments on behalf of customers when the cash flows reflect

the activities of the customer rather than those of the entity; and • Cash receipts and payments for items in which the turnover is quick, the amounts

are large, and the maturities are short.


There are also very

specific NI 81-106

requirements that should be captured



• Statement of Cash Flows (cont’d)– Definition of ‘cash and cash equivalents’

• Cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes. For an investment to qualify as a cash equivalent it must be readily convertible to a known amount of cash and be subject to an insignificant risk of changes in value. Therefore, an investment normally qualifies as a cash equivalent only when it has a short maturity of, say, three months or less from the date of acquisition.Equity investments are excluded from cash equivalents unless they are, in substance, cash equivalents, for example in the case of preferred shares acquired within a short period of their maturity and with a specified redemption date.

– E.G.,– The Fund purchased a two-year bond in the market when the bond only has two

months remaining before its redemption date. The purchase is made for investment purposes. Would it be ‘cash equivalents’?• No – it is not held for the purpose of meeting short-term commitments, therefore regardless of the

3 month maturity period, it is excluded.

– The Fund has a ‘bank overdraft’ should this be included in ‘cash equivalents’?• Generally no – the definition makes no reference to the inclusion of bank borrowings. However, if

the overdraft is repayable on demand it may form an integral part of the Fund’s cash management, in which case it would be a component of cash equivalents.



Disclosure reminders



Disclosure reminders

• Related parties disclosures (IAS 24)– Identification – based on the IAS 24 definition, some examples

• Manager• Custodian• Administrator• Board of directors

– Disclosure of compensation of key management personnel• As part of the 2010-2012 AIP process, an amendment was made to IAS 24, clarifying

that an entity or any member of a group of which it is a part of that provides key management personnel services is a related party

• Therefore disclosures are required for such entities, however, the detailed disclosure requirements of IAS 24.17 are not required for amounts that the management entity pays to the management entity’s employees or directors

Note: Not effective until annual periods beginning on or after July 1, 2014, but earlier application is permitted.



Disclosure reminders (cont’d)

• Offsetting disclosures (included in IFRS 7)– Required for all recognised financial instruments that are set off in

accordance with paragraph 42 of IAS 32. – Also, applies to recognised financial instruments that are subject to

an enforceable master netting arrangement or similar agreement, irrespective of whether they are set off in accordance with paragraph 42 of IAS 32.



Offsetting disclosure – Illustrative guidance (excerpt)

Illustrating the application of paragraph 13C(a)-(e) by type of financial instrument• Financial assets subject to offsetting, enforceable master netting arrangements and similar agreements


CU million

As at31 December20XX

(a) (b) (c)=(a)-(b) (d) (e)=(c)-(d)

Related amounts not set off in the statement of financial position

Gross amounts of recognized

financial assets

Gross amounts of recognized

financial liabilities set off in the statement of

financial position

Net amounts of financial assets presented in the

statement of financial position

(d)(i), (d)(ii)Financial

instruments

(d)(ii)Cash collateral

received

Net amount

Description

Derivatives 200 (80) 120 (80) (30) 10

Reverse repurchase, securities borrowing and similar agreements 90 - 90 (90) - -

Other financial instruments - - - - - -

Total 290 (80) 210 (170) (30) 10


Disclosure reminders (cont’d)

• Operating segments (IFRS 8)– These disclosures are required when:

• An entity’s debt or equity instruments are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets), or

• An entity files, or is in the process of filing, its financial statements with a securities commission or other regulatory organization for the purpose of issuing any class of instruments in a public market



Financial instruments liquidity risk disclosure (excerpt)


As part of the liquidity risk note –Funds should discuss the fact (if applicable) that their units are puttable by the holder at any time.• How do they

manage this risk?


Interest rate risk disclosures (excerpt)



Significant judgments and estimates

• Has a note been included?• Have you considered whether the following should be included:

– Functional currency • Judgment may be required in determining the currency which most faithfully

represents the economic effects of underlying transactions, events and conditions

– Fair value of securities that are not quoted in an active market• Judgment is required in selecting appropriate valuation techniques• Classification and measurement of investments and designation as ‘FVTPL’


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Reminders Key considerations for your first Annual IFRS statements · 2015-02-25 · Classification...

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