Ifrs Investment Funds Issue 2 4019

7/27/2019 Ifrs Investment Funds Issue 2 4019

1/11

IFRS FOR INVESTMENT FUNDS December 2011, Issue 2

Welcome to theseriesOur series o IFRS or Investment Funds publicationsaddresses practical applicationissues that investment undsmay encounter when applyingIFRS. It discusses the key

requirements and includesinterpretative guidance andillustrative examples. Theupcoming issues will coversuch topics as classifcationo redeemable shares, airvalue and IFRS 9 Financial Instruments .

This series considers

accounting issues romcurrently e ective IFRSas well as orthcomingrequirements. Furtherdiscussion and analysisabout IFRS is included in ourpublication Insights into IFRS .

In this issue: Segment reportingIFRS 8 Segment Reporting introduced segmental disclosure requirements based onthe in ormation that management uses to make decisions about operating matters.The application o the standard by investment unds may require a signifcantamount o judgement. This issue covers the ollowing IFRS 8 requirements.

1. How does a und determine whether it alls within the scope o IFRS 8?

2. How is traded in a public market defned?

3. What steps should you go through to determine reportable segments underIFRS 8?

4. How do you identi y the chie operating decision maker (CODM) or a und?

5. How do you identi y operating segments?

6. When may a und aggregate operating segments?

IFRS 8 requires segment disclosure based on the components (operating segments)o the und that management monitors in making decisions about operating matters(the management approach). The adoption o the management approach results inthe disclosure o in ormation or segments in substantially the same manner as theyare reported internally and used by the unds CODM or the purpose o evaluatingper ormance and making resource allocation decisions. In that way, fnancialstatement users are able to see the entity through the eyes o management.

The application o the through the eyes o management concept in IFRS 8 canimpact the comparability o disclosures rom entity to entity when two undswith similar asset composition have di erent operating segments. However,the requirements provide an opportunity or investment unds to communicatewith investors, regulators and other stakeholders so that they obtain a betterunderstanding o how a specifc und operates.


2/11

2 | IFRS or Investment Funds

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

1. How does a und determine whether it allswithin the scope o IFRS 8?

A und that prepares IFRS fnancial statements alls within the scope o IFRS 8 i it meets one o the ollowing criteria: its debt or equity is traded in a public market; or

it fles or is in the process o fling its fnancial statements with a regulator (e.g. securities commission) or the purpose oissuing a class o instruments in a public market.

When considering the latter, in our view segment in ormation is required only when the entity has taken active steps to obtaina listing, rather than simply planning to obtain it. When an entity prepares fnancial statements or inclusion in a prospectus inpreparation or a listing, segment in ormation should be included in those fnancial statements.

To determine whether consolidated fnancial statements all within the scope o IFRS 8, it is necessary to review theinstruments issued by the parent, as shown below.

Parent has issued debt or equity instrumentsthat are traded in a public market or is in the

process o doing so

Consolidated fnancial statements arewithin the scope o IFRS 8

Parent has no debt or equity instruments that aretraded in a public market or is not in the processo issuing them, but has a listed non-controllinginterest or a subsidiary that has issued debt orequity instruments that are traded in a public

market or is in the process o doing so

Consolidated fnancial statements arenot within the scope o IFRS 8


3/11

IFRS or Investment Funds | 3


2. How is traded in a public market defned?

Investment unds issue units that are classifed either as equity or as a fnancial liability. These units are requently bought andsold, normally between investors in the und or between investors and the und. The question arises whether such transactionsare considered to be traded in a public market.

IFRS 8 does not defne traded in a public market. In our view, determining what it means depends on acts and circumstances,and can vary based on local requirements rom securities commissions and/or regulators.

Public markets include: a domestic or oreign stock exchange; and

over-the-counter markets, including local and regional markets.

We believe that i a buyer or a seller can contact a broker and obtain a quoted price, then this is an indicator that the debt orequity instruments are publicly traded. The requency o trading is not relevant or the analysis.

The ollowing actors may indicate that a und is not traded in a public market.

The und is listed at an exchange as a convenience listing or marketing purposes only and cannot be traded on the stockmarket.

The unds shares are exchanged through a und agent/administrator only, i.e. subscriptions and redemptions o units are

handled by a trans er agent/administrator directly associated with the und. Subscription and redemption prices are based on the und prospectus valuation principles and there ore would not be

established by market trading.

The actors mentioned above are not exhaustive and judgement is required when assessing whether a und is traded in apublic market.

Example 1 Convenience listing

Fund X is an open-ended und listed on an exchange as a convenience listing. The shares are issued and redeemed on aregular basis through an administrator, who is directly associated with the und. Transactions cannot take place directlybetween investors. Subscription and redemption prices are based on the unds prospectus valuation principles.

Is X within the scope o IFRS 8?

X does not all within the scope o IFRS 8 because its issued instruments are not traded in a public market.

Example 2 Exchange traded

Fund Y is a closed-ended und listed and traded on an exchange. Transactions can take place directly between investors. Theshares are traded at a market price that may be di erent rom the net asset value per share o Y.

Is Y within the scope o IFRS 8?

Y does all within the scope o IFRS 8 because its issued instruments are traded in a public market.


4/11



3. What steps should you go through todetermine reportable segments under IFRS 8?

Once a und has established that it alls within the scope o IFRS 8, it should apply the core principle o IFRS 8 in determiningits segment disclosures. The core principle requires the disclosure o in ormation to enable users o fnancial statements toevaluate the nature and fnancial e ects o the business activities in which it engages and the economic environment in which itoperates. The core principle is considered when orming a judgement about what in ormation is disclosed and the ormat o thedisclosure.

The practical approach to determining reportable segments under IFRS 8 includes the ollowing our steps.

1. Identi y the CODM

2. Identi y the operating segments

3. Aggregate the operating segments

4. Determine the reportable segments

The analysis is per ormed rom the reporting entitys perspective, because the standard applies to separate, individual andconsolidated fnancial statements. For example, i an umbrella und structure per orms the analysis or the purpose o itsconsolidated fnancial statements, then the analysis is per ormed at the consolidated fnancial statements level. However, i theanalysis is per ormed or the purpose o the fnancial statements o an individual sub- und in an umbrella und structure, thenthe analysis is per ormed at the sub- und level.


5/11



4. How do you identi y the CODM or a und?

The CODM is the highest level o management at which resource allocation decisions and per ormance assessments aremade, rather than a supervisory body established as a governance oversight.

Identi ying the CODM may be di fcult. It could be chie executive, board o directors, executive committee or even an externalparty, such as the investment manager o a particular und. The unction o the CODM may be per ormed by a single individualor a group.

The CODM has the ollowing general characteristics: it is a unction, rather than a manager with a specifc title;

it is usually the highest level o management; and it allocates resources o an entity to the operating segments and assesses their per ormance.

An entity cannot have more than one CODM.

In our view, the mere existence o an executive committee, management committee or other high-level committee does notnecessarily mean that one o those committees constitutes the CODM.

Also, it is important to distinguish between the CODM and the lower levels o management. The latter may make decisionsabout resource allocation that relate to part o the entity, while the CODM allocates resources and assesses per ormance

or the whole entity. These lower levels o management cannot be the entitys CODM; however, they may be the segmentmanager or an operating segment.


6/11



5. How do you identi y operating segments?

An operating segment is a component o a und with the ollowing characteristics: it engages in activities rom which it may earn revenues and incur expenses;

its operating results are reviewed regularly by the CODM to assess per ormance and allocate resources; and

discrete fnancial in ormation is available in respect o it.

The standard does not require expenses incurred to be allocated to the component o an entity in order or it to meet thedefnition o an operating segment.

Identi ying the appropriate operating segments is not always obvious. Entities are required to consider all types o in ormationprovided to the CODM when identi ying operating segments. For some unds, the characteristics described above wouldclearly identi y the operating segments. However, some unds organise and report fnancial in ormation to the CODM in morethan one way; as a result, operating segments might not be evident.

For example, in ormation reviewed by the CODM o a und can be analysed by investment strategy, geography, legal entity,types o investments etc. The CODM may review more than one set o fnancial in ormation or review fnancial in ormation withdi erent levels o supporting documentation. Judgement is necessary in determining the single set o operating segments,and will depend on the individual acts and circumstances o the und. In such situations the und determines which set ocomponents constitutes the operating segments by re erence to the core principle o IFRS 8 (see Question 3).

When multiple types o segment in ormation exist, the ollowing additional actors can be considered in determining theappropriate operating segments: the nature o the business activities o each component; the existence o managers responsible or the components; in ormation presented to the board o directors; in ormation provided to external fnancial analysts and on the entitys website; and

in ormation presented in the ront/end o the fnancial statements, e.g. the management report.

The biggest question or a und in applying IFRS 8 is whether it has one or more operating segments. Funds may argue thatthey are involved in only a single business activity or industry, i.e. investment management. However, determination o the

industry in which a business component o an entity operates generally is not decisive or the purpose o identi ying all o theoperating segments under IFRS 8.

Depending on the acts and circumstances, an investment und may have a single or multiple operating segments. The tablebelow sets out example indicators to help with this judgement.

Indicators o a single operatingsegment

Indicators o multiple operatingsegments

Operating results monitoring by theCODM

Operating results are monitored by theCODM or the entity as a whole

Per ormance is monitored by theCODM per segment

Asset allocation by CODMResource (e.g. asset) allocation is pre-determined in the prospectus

The CODM decides on resource (e.g.asset) allocation to the sub-port olios

Discrete fnancial in ormation Available or the entire und only Available or each segment


7/11



Indicators o a single operatingsegment

Indicators o multiple operatingsegments

Management team One or the whole und Separate management team or eachsegment

Investment strategy Single, narrowly defned strategy Multi-strategy. Broad investmentmandate

As a result o the through the eyes o management approach adopted by the standard, the comparability o disclosuresbetween unds with similar investment strategies and asset composition may be reduced, because they may be manageddi erently.

Example 3 Focus on managing asset pools within one strategy

Fund K pursues a global macro strategy by investing in equities, debt and commodities. The CODM reviews the operatingresults o each investment type and allocates unding to the pools (equities, debt and commodities) based on the returnsgenerated and uture per ormance expectations. Operating results or equities, debt and commodities are presentedseparately in the monthly investor reports.

How many segments does K identi y?

Despite having one investment strategy, K concludes that it has multiple segments and each o the three pools/investment

types is an operating segment under IFRS 8.Frequently, per ormance-related in ormation reviewed by the CODM will be driven by the investment strategy adopted.Nevertheless, operating results reviewed by the CODM are key when identi ying operating segments.

Example 4 Focus on investment strategy as one asset pool

Fund L pursues a global macro strategy by investing in equities, debt and commodities with a narrow pre-determined ratio oasset allocation per category. The CODM reviews the unds operating results on an overall basis.

How many segments does L identi y?

L concludes that it has one operating segment.

Example 5 Fund o unds

Fund M invests in three hedge unds, each having a di erent investment strategy, as ollows: equity long/short, emergingmarkets and discretionary trading. The CODM o M receives in ormation about the operating results o the investments ineach hedge und. Based on the operating results o each und, the CODM decides whether to retain the investor-investeerelationship.

How many segments does M identi y?

M concludes that each hedge und is an operating segment.


8/11



6. When may a und aggregate operatingsegments?

Once the operating segments have been identifed, the next step is to determine whether the identifed segments may beaggregated or reporting purposes.

Operating segments may be aggregated only i all o the ollowing criteria are met: the aggregation is consistent with IFRS 8s core principle on disclosing in ormation that enables users o the fnancial

statements to evaluate the nature and fnancial e ects o the business activities in which the und engages and the economic

environment in which it operates; the segments have similar economic characteristics; and

the segments are similar in respect o the nature o products, services and processes, and the type o customers,distribution and, i applicable, nature o the regulatory environment; or an investment und, the key criterion is the nature oproducts.

In determining whether operating segments have similar economic characteristics, IFRS 8 gives only an example o similarlong-term average gross margins. However, in our view it may be appropriate to use other economic actors to determinewhether two or more operating segments have similar economic characteristics. Those actors should be und-specifc andshould be based on the primary actors that the CODM uses in assessing the per ormance o and allocating resources toindividual segments.

I a und has very ew operating segments, then it may be evident that the operating segments also are reportable segments.

Example 6 Aggregating segments

Fund S has per ormed an analysis and concludes that it has two operating segments: investment grade bonds and high-yieldbonds. S considers aggregating the two operating segments into one segment, fxed income securities.

Is it possible to aggregate these operating segments into one or reporting purposes?

Investment grade bonds and high-yield bonds have di erent expected returns and credit risks and there ore S concludes thatthese two segments do not have similar characteristics. These segments cannot be aggregated or reporting purposes.


9/11



Other KPMG publicationsSegment reportingExample disclosures o segment reporting or a multiple segment und are illustrated in Appendix II o our publication Illustrative fnancial statements: Investment unds , published in December 2010 (the next edition is due out in the next ew weeks).

We released The Application o IFRS: Segment reporting in September 2010. Although this publication is not specifc to theinvestment management sector, it discusses a number o practical application issues across di erent industries and may beuse ul in considering entity-specifc issues.

See also chapter 5.2 in the 8 th Edition 2011/12 o our publication Insights into IFRS or more detail on segment reporting.

General 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 help you urther, including:

Illustrative fnancial statements: Investment unds

Illustrative fnancial 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 Issues publications, which discuss specifc 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 fnancial 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 frms 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 felds 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, hedgeunds, 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.

AcknowledgementsWe would like to acknowledge the principal contributors to this publication. They are Ewa Bialkowska and Arina Tomiste o theKPMG International Standards Group and Steve Hubbard o the Department o Pro essional Practice in the UK.
http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/IFRS-illustrative-financial-statements/Documents/ifrs-illustrative-financial-statements-investment-funds-december-2010.pdfhttp://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/IFRS-illustrative-financial-statements/Documents/ifrs-illustrative-financial-statements-investment-funds-december-2010.pdfhttp://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/ILine-of-Business-publications/Documents/The-Application-of-IFRS-Segment-reporting-(Full-publication-2010).pdfhttp://www.kpmg.com/ifrshttp://www.aro.kpmg.com/http://www.aro.kpmg.com/http://www.kpmg.com/ifrshttp://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/ILine-of-Business-publications/Documents/The-Application-of-IFRS-Segment-reporting-(Full-publication-2010).pdfhttp://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/IFRS-illustrative-financial-statements/Documents/ifrs-illustrative-financial-statements-investment-funds-december-2010.pdfhttp://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/IFRS-illustrative-financial-statements/Documents/ifrs-illustrative-financial-statements-investment-funds-december-2010.pdf


10/11



ContactsGlobal investment management contacts

Wm David SeymourGlobal HeadAmericas 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 Jehan

Fund Centres GroupKPMG in the Channel IslandsT: +44 1481 741 808E: [email protected]

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

Jonathan Thompson

Real Estate FundsKPMG 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 HornschuAuditKPMG 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 Suglia

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

Mireille VoysestGlobal Executive InvestmentManagementKPMG in the UKT: +44 20 7311 1892E: [email protected]
mailto:dseymour%40kpmg.com?subject=mailto:bonn.liu%40kpmg.com.hk?subject=mailto:tom.brown%40kpmg.co.uk?subject=mailto:njehan%40kpmg.guernsey.gg?subject=mailto:antony.rocker%40kpmg.co.uk?subject=mailto:jonathan.thompson%40kpmg.co.uk?subject=mailto:majohnson%40kpmg.com?subject=mailto:rustom.kharegat%40kpmg.co.uk?subject=mailto:jhubbe%40kpmg.com?subject=mailto:ghornschu%40kpmg.com?subject=mailto:hfeyerabend%40kpmg.com?subject=mailto:alain.picquet%40kpmg.lu?subject=mailto:jsuglia%40kpmg.com?subject=mailto:mireille.voysest%40kpmg.co.uk?subject=mailto:mireille.voysest%40kpmg.co.uk?subject=mailto:jsuglia%40kpmg.com?subject=mailto:alain.picquet%40kpmg.lu?subject=mailto:hfeyerabend%40kpmg.com?subject=mailto:ghornschu%40kpmg.com?subject=mailto:jhubbe%40kpmg.com?subject=mailto:rustom.kharegat%40kpmg.co.uk?subject=mailto:majohnson%40kpmg.com?subject=mailto:jonathan.thompson%40kpmg.co.uk?subject=mailto:antony.rocker%40kpmg.co.uk?subject=mailto:njehan%40kpmg.guernsey.gg?subject=mailto:tom.brown%40kpmg.co.uk?subject=mailto:bonn.liu%40kpmg.com.hk?subject=mailto:dseymour%40kpmg.com?subject=


11/11

Fund Centres IFRS Working Group

Andrew StepaniukLeader Fund Centres IFRS Working GroupKPMG in the Cayman IslandsT: +1 345 914 4315E: [email protected]

Paul Reid

KPMG in AustraliaT: +61 2 9335 7829E: [email protected]

Craig BridgewaterKPMG in BermudaT: +1 441 295 5063E: [email protected]

Lino JuniorKPMG in BrazilT: +55 213 515 9441E: [email protected]

Peter HayesKPMG in CanadaT: +1 416 777 3939E: [email protected]

Vivian ChuiKPMG in Hong KongT: +85 22 978 8128E: [email protected]

Manoj Kumar VijaiKPMG in IndiaT: +91 22 3090 2493E: [email protected]

Frank GannonKPMG in Ireland

T: +353 1410 1552E: [email protected]

Victor Chan YinKPMG in LuxembourgT: +352 22 51 51 6514E: [email protected]

Winand PaulissenKPMG in the NetherlandsT: +313 06 58 24 31E: [email protected]

Llewellyn SmithKPMG in South A ricaT: +27 21 408 7346E: [email protected]

Patricia BielmannKPMG in SwitzerlandT: +41 44 249 4884E: [email protected]

Gareth HornerKPMG in the UK

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

kpmg.com/i rs


The KPMG name, logo and cutting through complexity are registered trademarks or trademarks o KPMG International.

Publication name: IFRS or Investment Funds

Publication number: Issue 2

Publication date: December 2011

KPMG International Standards Group is part o KPMG IFRG Limited.

KPMG International Cooperative (KPMG International) is a Swiss entity t hat serves as a coordinating entity or a network oindependent frms operating under the KPMG name. KPMG International provides no audit or other client services. Such servicesare provided solely by member frms o KPMG International (including sublicensees and subsidiaries) in their respective geographicareas. KPMG International and its member frms are legally distinct and separate entities. They are not and nothing contained hereinshall be construed to place these entities in the relationship o parents, subsidiaries, agents, partners, or joint venturers. No memberfrm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any other member frm, nordoes KPMG International have any such authority to obligate or bind KPMG International or any other member frm, nor does KPMGInternational have any such authority to obligate or bind any member frm, in any manner whatsoever.

The in ormation contained herein is o a general nature and is not intended to address the circumstances o any particular individualor entity. Although we endeavour to provide accurate and timely in ormation, there can be no guarantee that such in ormation isaccurate as o the date it is received or that it will continue to be accurate in the uture. No one should act upon such in ormationwithout appropriate pro essional advice a ter a thorough examination o the particular situation.
mailto:mkumar%40kpmg.com?subject=mailto:mkumar%40kpmg.com?subject=mailto:paulissen.winland%40kpmg.nl?subject=mailto:[email protected]://www.kpmg.com/ifrsmailto:[email protected]:paulissen.winland%40kpmg.nl?subject=mailto:mkumar%40kpmg.com?subject=http://www.kpmg.com/ifrs