Plugin Ifrs Investment Funds Issue 1b 686

7/27/2019 Plugin Ifrs Investment Funds Issue 1b 686

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IFRS FOR INVESTMENT FUNDS November 2011, Issue 1

Introducing theseriesOur series o IFRS for Investment Funds publicationsaddresses practical applicationissues that investment undsmay encounter when applyingIFRS. It discusses the keyrequirements and includes

interpretative guidance andillustrative examples. Theupcoming issues will coversuch topics as air value,IFRS 9 Financial Instruments ,consolidation and disclosureo operating segments.

This series considersaccounting issues romcurrently e ective IFRS as well

as orthcoming requirements.Further discussion andanalysis about IFRS is includedin our publication Insights into IFRS .

In this issue: Presentation and measuremento fnancial assets carried at air valueThis issue covers the presentation and measurement o nancial assets carried at

air value subsequent to initial recognition and classi ed as:

at air value through pro t or loss, which are nancial assets held or trading ordesignated as at air value through pro t or loss; and

available or sale.

These are the nancial asset classi cations most requently used by investmentunds. This issue illustrates the related calculations and explores disclosure options

applied by investment unds, by considering the ollowing questions.

1. How do you calculate e ective interest rate (EIR) and amortised cost?

2. How do you apply the EIR method to calculate interest income rom a foatingrate instrument?

3. How do you present gains and losses on nancial assets at air value throughpro t or loss in the statement o comprehensive income?

4. How do you determine and present gains and losses on available- or-sale debtinvestments?

5. How do you determine and present gains and losses on available- or-saleequity instruments?

6. Can realised gains and losses on nancial assets at air value through pro t orloss be disclosed separately rom unrealised ones?

The impact o IFRS 9 on nancial assets will be discussed in a uture issue.

This issue covers only nancial assets that are not a part o a quali ying hedgingrelationship.


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2 | IFRS or Investment Funds

2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.

1. How do you calculate EIR and amortisedcost?

An EIR needs to be calculated to determine interest income or all debt investment measured at amortised cost or classi edas available or sale. In addition, investment unds that voluntarily present interest income or expense rom debt investmentsat air value through pro t or loss separately rom other gains and losses also use the EIR method to calculate interest (seeQuestion 3 or more detail).

EIR is calculated or a nancial instrument (or a group o nancial instruments) as ollows

The EIR exactly discounts the estimated stream o uture cash payments and receipts over the expected li e to the netcarrying amount on initial recognition.

The calculation takes into account allcontractual cash fows, but excludesany uture credit losses.

When purchasing distressed debtinvestments whose purchase pricerefects credit losses that havealready occurred, uture cash fowsare estimated inclusive o such creditlosses.

Only in rare cases when it is notpossible to determine estimated cashfows or the expected li e o a nancialinstrument or a group o similar

nancial instruments, are contractualcash fows over the ull contractualterm used.

Example 1 Calculating EIR

On 30 June 2011 Fund X purchased debt investments or 450,000 including broker ees. The notional is 500,000. A xedsemi-annual coupon o 8,000 is receivable on 30 June and 31 December. The securities mature on 30 June 2013.

The EIR or six months is 4.3796%, calculated by solving x in the ollowing equation.

450,000 = 8,000 + 8,000 + 8,000 + (500,000 + 8,000)(1 + x) (1+ x) 2 (1 + x) 3 (1 + x) 4

The EIR is calculated or six months because the und recognises interest and updates amortised cost every six months.

Assuming that the instrument is not impaired, the amortised cost or each period is calculated as ollows.

Reporting date Interest incomeCoupon received during

the period Amortised cost

30 June 2011 450,000

31 December 2011 19,708 8,000 461,708

30 June 2012 20,221 8,000 473,929

31 December 2012 20,756 8,000 486,685

30 June 2013 21,315 8,000 500,000

Total 82,000 32,000


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IFRS or Investment Funds | 3


The e ective interesto 19,708 or the rstsix months is calculated as:

Amortisedcost at the

beginning othe period o

450,000

EIR o4.3796%

The amortised cost atthe end o the period iscalculated as:

Amortisedcost at the

beginning o

the period

Interest orthe period

Couponreceived

during the

period


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2. How do you apply the EIR method tocalculate interest income rom a foating rateinstrument?

The EIR o a foating rate instrument changes as a result o periodic re-estimation o determinable cash fows to refectmovements in market interest rates. However, i the instrument is recognised at an amount equal to the principal receivableor payable on maturity, then this periodic re-estimation does not have a signi cant e ect on its carrying amount. There ore,

or practical reasons, in such cases the carrying amount is usually not adjusted at each repricing date, because the impact isgenerally insigni cant.

For foating rate assets, the ollowing method is used to calculate interest income or the period.

Current rateor the period

Principalreceivable on

maturity

Amortisationo a discount

Amortisationo transaction

costs

Interestincome

The treatment o an acquisition discount or premium on a foating rate instrument depends on the reason or that discount orpremium. For example:

Premium or discount refects changes inmarket rates since the last repricing date

Premium or discount results rom a changein the credit spread over the foating rate as

a result o a change in credit risk

Amortised to the next repricing date

Amortised over the expected li e o theinstrument

IAS 39 Financial Instruments: Recognition and Measurement does not prescribe any speci c methodology or how transactioncosts should be amortised or a foating rate instrument, except as discussed in IAS 39.AG6. In our view, any consistentmethodology that would establish a reasonable basis or amortisation o the transaction costs may be used. For example, itwould be reasonable to determine an amortisation schedule o the transaction costs based on the interest rate in e ect atinception.

In our view, this approach also could be applied or a foating rate instrument with embedded derivatives that are not separated,e.g. an instrument on which the interest rate is subject to market indices such as infation.


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3. How do you present gains and losses onnancial assets at air value through pro t

or loss in the statement o comprehensiveincome?

The entire air value change on debt and equity instruments at air value through pro t or loss may be presented on a net basis

as a single line item in the statement o comprehensive income. As an alternative, an investment und can present oreignexchange gains and losses and interest income separately rom other air value changes. The selected presentation method,once it is adopted, is applied consistently and disclosed in the nancial statements.

I interest income is presented separately, then it is measured on an e ective interest basis. See Question 1 or urtherin ormation on calculating amortised cost and determining the EIR.


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4. How do you determine and present gains andlosses on available- or-sale debt investments?

The table below summarises the requirements on determination and presentation o income and expense on available- or-saledebt investments. It also shows when oreign exchange gains and losses and interest income rom debt investments at airvalue through pro t or loss are presented as separate line items, segregated rom other air value changes.

Where

presented

What is recognised in the reporting period?

Interest income Pro t or loss Interest calculated using the EIR method in the currency o denomination o theinstrument.

Interest income is recorded in the unctional currency at the rate o exchange at the dateo the transaction, or at rates that approximate the actual exchange rates, e.g. an averageexchange rate or a speci c period when exchange rates do not fuctuate signi cantly.

Once a nancial asset has been written down as a result o an impairment loss,interest income or assets at amortised cost is recognised therea ter using the rateo interest used to discount the uture cash fows or the purpose o measuringimpairment loss. For xed rate assets measured at amortised cost, this rate isgenerally the original EIR. In our view, or an available- or-sale nancial asset, a undmay use a new EIR computed based on the air value at the date o impairment.

Foreignexchange gainsand losses

Pro t or loss Calculated as the di erence between:

amortised cost in the oreign currency at the end o the period translated into theunctional currency at the spot exchange rate at that date; and

amortised cost in the unctional currency at the beginning o the period adjusted or theunctional currency amounts o interest income and any receipts during the period.

Interest income and any receipts are recorded in the unctional currency at the rateo exchange at the date o the transaction, or at rates that approximate the actualexchange rates, e.g. an average exchange rate or a speci c period when exchangerates do not fuctuate signi cantly.

Impairmentlosses

Pro t or loss Calculated as the di erence between acquisition cost (net o any principalimpairment and amortisation) and current air value, less any impairment losspreviously recognised in pro t or loss.

There is no speci c guidance on how to measure impairment losses or monetarynancial assets denominated in a oreign currency. In our view, the air value is rst

determined in the oreign currency and is then translated into the unctional currencyusing the exchange rate o the date on which the impairment is recognised.

Reversal oimpairment

Pro t or loss In our view, determining the amount o the impairment loss that is reversed throughpro t or loss depends on the unds accounting policy.

In our view, the reversal should be recognised at the spot exchange rate o the date

on which the reversal is recognised.See 7.6.610 in the 8th Edition 2011/12 o our publication Insights into IFRS ormore detail.


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Wherepresented

What is recognised in the reporting period?

Other gainsand losses onremeasurementto air value

Othercomprehensiveincome

The cumulative gain or loss is recognised in other comprehensive income, and is thedi erence at the end o the period between: air value in the unctional currency (being the air value in the oreign currency

translated at the spot rate); and

amortised cost in the unctional currency (being the amortised cost in the oreigncurrency translated at the spot rate).

Example 2 Accounting or available- or-sale debt investments with a xed coupon

On 30 June 2011 Fund X purchased debt investments or 450,000 including broker ees. A xed semi-annual coupon o 8,000is receivable on 30 June and 31 December. The securities mature on 30 June 2013. The notional is 500,000. The air value othe securities on 31 December 2011 is 470,000. The six-monthly EIR calculated in oreign currency is 4.3796%.

The exchange rate rom the oreign currency to Xs unctional currency was 1 to 1.5 on 30 June 2011, and is 1 to 1.7 on31 December 2011.

X concludes that an average rate or the period approximates the exchange rates on the dates o transactions. The averageoreign currency to unctional currency exchange rate or the period is 1 to 1.6.

1. Accounting entries on 30 June 2011 (in oreign currency)

Purchase o debt investments Debit Credit

Asset Available- or-sale nancial assets 450,000

Asset Cash 450,000

2. Accounting entries on 31 December 2011 (in oreign currency)

Coupon received Debit Credit

Asset Cash 8,000


Interest income Debit Credit


Pro t or loss Interest income 19,708

The interest income amount is sourced from Example 1.


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3. Accounting entries on 31 December 2011 (in unctional currency)

a. Foreign exchange gains and losses

The oreign exchange gain on 31 December 2011 is calculated as ollows.

In oreigncurrency

In unctionalcurrency

Amortised cost on 30 June 2011 converted at spot rate o 1.5 450,000 675,000

Interest income or 6 months to 31 December 2011 converted at average rate o 1.6 19,708 31,533

Coupon received on 31 December 2011 converted at spot rate o 1.7 (8,000) (13,600)

Amortised cost on 31 December 2011 (the total) 461,708 692,933

Amortised cost in oreign currency converted at spot rate o 1.7 (784,904)

Foreign exchange gain (91,971)

The accounting entries or the oreign exchange gain are as ollows.

Foreign exchange gains and losses In unctional currency

Debit Credit


Pro t or loss Foreign exchange gain 91,971

b. Other gains and losses on remeasurement to air value

The cumulative gains and losses recognised in other comprehensive income are calculated as the di erence betweenamortised cost and air value on 31 December 2011 in Xs unctional currency converted rom oreign currency at spot rate.

Amortised cost Fair value

Di erencebetween

amortised costand air value/other gains or

losses

Available- or-sale nancial assets in oreign currency 461,708 470,000

Available- or-sale nancial assets in unctional currencyconverted at spot rate o 1.7 784,904 799,000 14,096

The amortised cost in the oreign currency o 461,708 is sourced rom Example 1.

The amortised cost in the unctional currency o 784,904 is calculated by applying the period end spot exchange rate o 1.7to the amortised cost in the oreign currency o 461,708.

The air value in the unctional currency o 799,000 is calculated by applying the period end spot exchange rate o 1.7 to theair value in the oreign currency o 470,000.


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Other gains and losses in the unctional currency include the change in air value in the oreign currency as well as theoreign exchange gain or loss on re-translation o the opening balance in other comprehensive income.

The accounting entries or other gains and losses on remeasurement to air value are as ollows.

Other gains and losses on remeasurement to air value In unctional currency

Debit Credit

Asset Available- or-sale fnancial assets 14,096

Other comprehensive

income

Other gains and losses on remeasurement to air value 14,096

c. Movement in the available- or-sale fnancial assets account in 2011

The entries in the unctional currency can be summarised as ollows.

In unctional currency

Debit Credit

Purchase price, including transaction costs 675,000

Interest income or 2011 31,533

Coupon received on 31 December 2011 13,600Other gains and losses on remeasurement to air value 14,096

Foreign exchange gain 91,971

Total 812,600 13,600

Balance at 31 December 2011 799,000


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5. How do you determine and present gainsand losses on available- or-sale equityinstruments?

The table below summarises the determination and presentation requirements or gains and losses on available- or-sale equityinvestments.

Where What is recognised in the reporting period?presented

Dividend Proft or loss Generally, equals the amount declared.income

See 7.6.760 in the 8th Edition 2011/12 o our publication Insights into IFRS or moredetail on recognition o dividend income.

Impairment Proft or loss The di erence between the acquisition cost and the current air value measured in thelosses unctional currency, less any impairment loss previously recognised in proft or loss.

Other gains Other Cumulative gains and losses recognised in other comprehensive income is theand losses comprehensive di erence between the air value at the beginning and the end o the reporting(including income period measured in the unctional currency.

reversal ofimpairment) Foreign exchange gains and losses are not separated rom the total air value

changes.

Example 3 Accounting entries for the available-for-sale equity investment

On 30 September 2009 Fund X purchased shares in Company C or 3,000.

Debit Credit

Asset Available- or-sale fnancial assets 3,000

Asset Cash 3,000

C declared a dividend o 200 on 31 December 2009.

Debit Credit

Asset Dividend receivable 200

Proft or loss Dividend income 200

On 31 December 2009 the air value o the shares was 3,500, representing an increase o 500 rom 30 September 2009. Theair value o 3,500 is determined based on the quoted ex-dividend price.

Debit Credit

Asset Available- or-sale fnancial assets 500

Other comprehensive Other gains and losses on remeasurement to air value 500income


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A dividend o 200 was paid on 15 January 2010.

Debit Credit

Asset

Asset

Cash

Dividend receivable

200

200

On 31 December 2010 the air value o the shares decreased by 1,500 to 2,000. X determined that this investment wasimpaired at that date.

The accounting entries as at 31 December 2010 are set out below. The shares are frst revalued to air value in other

comprehensive income.

Debit Credit

Other comprehensiveincome

Asset

Other gains and losses on remeasurement to air value

Available- or-sale fnancial assets

1,500

1,500

A ter the revaluation, the amount o losses in the other comprehensive income is as ollows.

Cumulative balance in other comprehensive income Debit Credit

Other gains and losses on remeasurement to air value,2009

Other gains and losses on remeasurement to air value,2010

500

1,500

Balance on 31 December 2010 1,000

As X has established that the security is impaired, the cumulative related balance in other comprehensive income o 1,000 isreclassifed to proft or loss on 31 December 2010.

Debit Credit

Proft or loss


Impairment loss

Impairment loss

1,000

1,000

On 31 December 2011 the air value o the shares increased by 1,300 to 3,300. The ull revaluation amount is recognised inother comprehensive income.

Debit Credit

Asset


Available- or-sale fnancial assets

Other gains and losses on remeasurement to air value

1,300

1,300


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6. Can realised gains and losses on nancialassets at air value through pro t or loss bedisclosed separately rom unrealised ones?

Disclosure o realised gains and losses on nancial assets at air value through pro t or loss is not required by IFRS, butis requently made by investment unds. In general, realised gains and losses can be measured by comparing the salesproceeds with:

the air value at the beginning o the period (method 1 in the example below); or the original purchase price (method 2 in the example below).

Example 4 Calculating realised gains and losses

On 30 September 2010 Fund X purchased shares in Company C or 3,000. The shares are classi ed as nancial assets at airvalue through pro t or loss.

The air value o the shares on 31 December 2010 was 3,500.

The shares were sold on 31 March 2011 or 3,150.

There are two possible ways o calculating realised gains and losses or the purpose o disclosure.

Disclosures as at31 December 2011 Method 1 How calculated Method 2 How calculated

(350) The sales price o 3,150 lessthe air value on 31 December

2010 o 3,500

(350) The sales price o 3,150 lessthe air value on 31 December

2010 o 3,500

- 500 The air value on 31 December2010 o 3,500 less the

purchase price o 3,000

Total realised gains orlosses

(350) 150

I realised gains and losses are disclosed, then the measurement method should be disclosed in the accounting policy sectiono the nancial statements and applied consistently.


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Other KPMG publicationsA more detailed discussion o the general accounting issues that arise rom the application o IFRS can be ound in ourpublication Insights into IFRS . In addition, we have a range o publications that can assist you urther, including:

Illustrative nancial statements: Investment unds

Illustrative nancial statements or interim and annual periods

IFRS compared to US GAAP

IFRS Handbooks, which include extensive interpretative guidance and illustrative examples to elaborate or clari y thepractical application o a standard, including IFRS Handbook: First-time adoption o IFRSs

New on the Horizon publications, which discuss consultation papers

First Impressions publications, which discuss new pronouncements

Newsletters, which highlight recent accounting developments

IFRS Practice Issue publications, which discuss speci c requirements o pronouncements

Disclosure checklist.

IFRS-related technical in ormation also is available at kpmg.com/i rs .

For access to an extensive range o accounting, auditing and nancial reporting guidance and literature, visit KPMGsAccounting Research Online. This web-based subscription service can be a valuable tool or anyone who wants to stay in ormedin todays dynamic environment. For a ree 15-day trial, go to aro.kpmg.com and register today.

KPMGs Global Investment Management practiceOur member rms combine their depth o local knowledge with our global networks cross-border experience to deliver practical,e ective and insight ul advice to our global investment management clients. Our pro essionals in Audit, Tax and Advisory arespecialists in their elds and have deep experience in the issues and needs o investment management businesses.

We o er pro essional services to a wide range o industry participants at a local, national and global level. Our clients includeinvestment managers, wealth managers, und administrators and service providers who ocus on retail/mutual unds, hedge

unds, private equity unds, real estate unds, in rastructure unds and other alternative investment unds (such as distresseddebt and environmental assets), as well as sovereign wealth unds and pension unds.
http://www.kpmg.com/ifrshttp://www.aro.kpmg.com/http://www.aro.kpmg.com/http://www.kpmg.com/ifrs


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ContactsGlobal investment management contacts

Wm David SeymourGlobal Head Americas regionKPMG in the UST: +1 212 872 5988E: [email protected]

Bonn LiuASPAC regionKPMG in Hong KongT: +852 2826 7241E: [email protected]

Tom BrownEMA regionKPMG in the UKT: +44 20 7694 2011E: [email protected]

Neale JehanFund Centres Group

KPMG in the Channel IslandsT: +44 1481 741 808E: [email protected]

Tony RockerIn rastructure FundsKPMG in the UKT: +44 20 7311 6369E: [email protected]

Jonathan ThompsonReal Estate Funds

KPMG in the UKT: +44 20 7311 4183E: [email protected]

Mikael JohnsonHedge FundsKPMG in the UST: +1 212 954 3789E: [email protected]

Rustom KharegatPrivate Equity FundsSovereign Wealth FundsKPMG in the UKT: +44 20 7311 8847E: [email protected]

John HubbePensionsKPMG in the UST: +1 212 872 5515E: [email protected]

Gerold Hornschu

AuditKPMG in GermanyT: +49 69 9587 2504E: [email protected]

Hans-Jrgen FeyerabendTaxKPMG in GermanyT: +49 69 9587 2348E: h [email protected]

Alain PicquetAdvisoryKPMG in LuxembourgT: +352 22 51 51 7910E: [email protected]

James SugliaAdvisoryKPMG in the UST: +1 617 988 5607E: [email protected]

Mireille VoysestGlobal Executive Investment Management

KPMG in the UKT: +44 20 7311 1892E: [email protected]
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Fund Centres IFRS Working GroupAndrew StepaniukLeader Fund Centres IFRS Working Group

Manoj Kumar VijaiKPMG in India

KPMG in the Cayman Islands T: +91 22 3090 2493T: +1 345 914 4315E: [email protected]

E: [email protected]

Frank GannonPaul Reid KPMG in IrelandKPMG in Australia

T: +353 1410 1552T: +61 2 9335 7829E: [email protected]


Victor Chan YinCraig BridgewaterKPMG in Bermuda

KPMG in LuxembourgT: +352 22 51 51 6514

T: +1 441 295 5063E: [email protected]


Winand PaulissenLino Junior KPMG in the NetherlandsKPMG in Brazil T: +313 06 58 24 31T: +55 213 515 9441E: [email protected]


Peter HayesLlewellyn SmithKPMG in South Africa

KPMG in Canada T: +27 21 408 7346T: +1 416 777 3939E: [email protected]


Patricia BielmannVivian Chui KPMG in SwitzerlandKPMG in Hong Kong T: +41 44 249 4884T: +85 22 978 8128E: [email protected]


Gareth HornerKPMG in the UK

T: +44 131 527 6951E: [email protected]

kpmg.com/ifrs


KPMG International Standards Group is part o KPMG IFRG Limited.

Publication name: IFRS for Investment Funds

Publication number: Issue 1

Publication date: November 2011

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