For fiscal years beginning on or after January 1, 2014, Investment Funds must adopt International Financial Reporting Standards (IFRS) for their interim and annual financial statements. This adoption may result in significant changes to an Investment Fund's financial statement presentation, classification and disclosure. It is very important that fund managers are aware of these changes and take the necessary steps to consult with their professional advisors to ensure a smooth transition. Here is a brief summary of some of the changes that can arise on adoption.
Fair value of investments
Investments Funds will need to select appropriate accounting policies for the measurement of their investments. Under IFRS 13 – Fair Value Measurement, investments are to be accounted for based on the point within the bid/ask spread that most represents their fair value in their principal market. Depending on the accounting policy chosen, this can result in the need for reconciliations between net assets and net asset value. For investments that are subject to restrictions on resale, management will need to consider whether or not the restrictions arise as a result of the instrument itself and the impact on fair value, if any.
Classification and presentation of puttable shares or units
Investment Funds typically issue units that are redeemable at the option of the holder for cash. Under previous Canadian GAAP these units were, under most circumstances, accounted for as equity. However, in accordance with IAS 32 – Financial Instruments: Presentation, these fund units will now likely meet the definition of a financial liability since they contain an obligation of the fund to deliver cash to the holder. Some circumstances do exist where the fund units may still meet the requirements for equity disclosure. A detailed analysis will be necessary to make this determination.
Consolidation for Investment Funds
Amendments to IFRS 10 – Consolidated Financial Statements have allowed for most Investment Funds to continue accounting for their subsidiary investments at fair value, and not on a consolidated basis. Under this standard, management must first determine if the fund controls an investment and should consider: (i) whether the fund has power over the investee, (ii) whether it has exposure or right to variable returns from its involvement with the investee and (iii) whether it has the ability to use power over the investee to affect the amount of the investors' returns. If control is established, management will then have to determine if the Investment Fund is an "investment entity". An "investment entity" obtains funds from one or more investors so that it is able to provide investment management services, has a business purpose of investing funds solely for returns from investment income and/or capital appreciation, and measures and evaluates the performance of substantially all of its investments on a fair value basis. If the Investment Fund qualifies under these guidelines, it will not consolidate its subsidiary investments but account for them at fair value.
Presentation of statement of financial position
Upon the first year of transition to IFRS, Investment Funds must disclose the Statement of Financial Position as at three dates – current year end, prior year end and transition date (usually the first day of the prior year). In addition, Investment Funds will now be required to present a Statement of Cash Flows. This was not obligatory under previous Canadian GAAP.
In this first year of transition it will also be necessary to incorporate certain retroactive restatements that stem from the accounting changes described above. Both the prior year and transition date Statements of Financial Position and the prior year Statements of Earnings, Retained Earnings and Cash Flows may all require restatement.
These are only some of the changes resulting from the transition to IFRS. Investment fund managers should consult with their professional advisor should they have questions regarding the transition.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
