IFRS FOR INVESTMENT FUNDS

November 2011, Issue 1

Introducing the
series
Our series of IFRS for
Investment Funds publications
addresses practical application
issues that investment funds
may encounter when applying
IFRS. It discusses the key
requirements and includes
interpretative guidance and
illustrative examples. The
upcoming issues will cover
such topics as fair value,
IFRS 9 Financial Instruments,
consolidation and disclosure
of operating segments.
This series considers
accounting issues from
currently effective IFRS as well
as forthcoming requirements.
Further discussion and
analysis about IFRS is included
in our publication Insights
intoIFRS.
In this issue: Presentation and measurement
of nancial assets carried at fair value
This issue covers the presentation and measurement of nancial assets carried at
fair value subsequent to initial recognition and classied as:
at fair value through prot or loss, which are nancial assets held for trading or
designated as at fair value through prot or loss; and
available for sale.
These are the nancial asset classications most frequently used by investment
funds. This issue illustrates the related calculations and explores disclosure options
applied by investment funds, by considering the following questions.
1. How do you calculate effective interest rate (EIR) and amortised cost?
2. How do you apply the EIR method to calculate interest income from a oating
rate instrument?
3. How do you present gains and losses on nancial assets at fair value through
prot or loss in the statement of comprehensive income?
4. How do you determine and present gains and losses on available-for-sale debt
investments?
5. How do you determine and present gains and losses on available-for-sale
equity instruments?
6. Can realised gains and losses on nancial assets at fair value through prot or
loss be disclosed separately from unrealised ones?
The impact of IFRS 9 on nancial assets will be discussed in a future issue.
This issue covers only nancial assets that are not a part of a qualifying hedging
relationship.
2 | IFRS for Investment Funds
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1. How do you calculate EIR and amortised
cost?
An EIR needs to be calculated to determine interest income for all debt investment measured at amortised cost or classied
as available for sale. In addition, investment funds that voluntarily present interest income or expense from debt investments
at fair value through prot or loss separately from other gains and losses also use the EIR method to calculate interest (see
Question 3 for more detail).
EIR is calculated for a nancial instrument (or a group of nancial instruments) as follows
The EIR exactly discounts the estimated stream of future cash payments and receipts over the expected life to the net
carrying amount on initial recognition.
The calculation takes into account all
contractual cash ows, but excludes
any future credit losses.
When purchasing distressed debt
investments whose purchase price
reects credit losses that have
already occurred, future cash ows
are estimated inclusive of such credit
losses.
Only in rare cases when it is not
possible to determine estimated cash
ows or the expected life of a nancial
instrument or a group of similar
nancial instruments, are contractual
cash ows over the full contractual
term used.
Example 1 Calculating EIR
On 30 June 2011 Fund X purchased debt investments for 450,000 including broker fees. The notional is 500,000. A xed
semi-annual coupon of 8,000 is receivable on 30 June and 31 December. The securities mature on 30June 2013.
The EIR for six months is 4.3796%, calculated by solving x in the following 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 for six months because the fund recognises interest and updates amortised cost every six months.
Assuming that the instrument is not impaired, the amortised cost for each period is calculated as follows.
Reporting date Interest income
Coupon 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
IFRS for Investment Funds | 3
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The effective interest
of 19,708 for the rst
sixmonths is calculated as:

Amortised
cost at the
beginning of
the period of
450,000

EIR of
4.3796%
The amortised cost at
the end of the period is
calculatedas:
Amortised
cost at the
beginning of
the period

Interest for
the period

Coupon
received
during the
period
4 | IFRS for Investment Funds
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2. How do you apply the EIR method to
calculate interest income from a oating rate
instrument?
The EIR of a oating rate instrument changes as a result of periodic re-estimation of determinable cash ows to reect
movements in market interest rates. However, if the instrument is recognised at an amount equal to the principal receivable
or payable on maturity, then this periodic re-estimation does not have a signicant effect on its carrying amount. Therefore,
for practical reasons, in such cases the carrying amount is usually not adjusted at each repricing date, because the impact is
generally insignicant.
For oating rate assets, the following method is used to calculate interest income for the period.
Current rate
for the period

Principal
receivable on
maturity

Amortisation
of a discount

Amortisation
of transaction
costs

Interest
income
The treatment of an acquisition discount or premium on a oating rate instrument depends on the reason for that discount or
premium. For example:

Premium or discount reects changes in
market rates since the last repricing date

Premium or discount results from a change
in the credit spread over the oating rate as
a resultof a change in credit risk
Amortised to the next repricing date

Amortised over the expected life of the
instrument
IAS 39 Financial Instruments: Recognition and Measurement does not prescribe any specic methodology for how transaction
costs should be amortised for a oating rate instrument, except as discussed in IAS 39.AG6. In our view, any consistent
methodology that would establish a reasonable basis for amortisation of the transaction costs may be used. For example, it
would be reasonable to determine an amortisation schedule of the transaction costs based on the interest rate in effect at
inception.
In our view, this approach also could be applied for a oating 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 ination.
IFRS for Investment Funds | 5
2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
3. How do you present gains and losses on
nancial assets at fair value through prot
or loss in the statement of comprehensive
income?
The entire fair value change on debt and equity instruments at fair value through prot or loss may be presented on a net basis
as a single line item in the statement of comprehensive income. As an alternative, an investment fund can present foreign
exchange gains and losses and interest income separately from other fair value changes. The selected presentation method,
once it is adopted, is applied consistently and disclosed in the nancial statements.
If interest income is presented separately, then it is measured on an effective interest basis. See Question1 for further
information on calculating amortised cost and determining the EIR.
6 | IFRS for Investment Funds
2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
4. How do you determine and present gains and
losses on available-for-sale debt investments?
The table below summarises the requirements on determination and presentation of income and expense on available-for-sale
debt investments. It also shows when foreign exchange gains and losses and interest income from debt investments at fair
value through prot or loss are presented as separate line items, segregated from other fair value changes.
Where
presented
What is recognised in the reporting period?
Interest income Prot or loss Interest calculated using the EIR method in the currency of denomination of the
instrument.
Interest income is recorded in the functional currency at the rate of exchange at the date
of the transaction, or at rates that approximate the actual exchange rates, e.g. an average
exchange rate for a specic period when exchange rates do not uctuate signicantly.
Once a nancial asset has been written down as a result of an impairment loss,
interest income for assets at amortised cost is recognised thereafter using the rate
of interest used to discount the future cash ows for the purpose of measuring
impairment loss. For xed rate assets measured at amortised cost, this rate is
generally the original EIR. In our view, for an available-for-sale nancial asset, a fund
may use a new EIR computed based on the fair value at the date of impairment.
Foreign
exchange gains
and losses
Prot or loss Calculated as the difference between:
amortised cost in the foreign currency at the end of the period translated into the
functional currency at the spot exchange rate at that date; and
amortised cost in the functional currency at the beginning of the period adjusted for the
functional currency amounts of interest income and any receipts during the period.
Interest income and any receipts are recorded in the functional currency at the rate
of exchange at the date of the transaction, or at rates that approximate the actual
exchange rates, e.g. an average exchange rate for a specic period when exchange
rates do not uctuate signicantly.
Impairment
losses
Prot or loss Calculated as the difference between acquisition cost (net of any principal
impairment and amortisation) and current fair value, less any impairment loss
previously recognised in prot or loss.
There is no specic guidance on how to measure impairment losses for monetary
nancial assets denominated in a foreign currency. In our view, the fair value is rst
determined in the foreign currency and is then translated into the functional currency
using the exchange rate of the date on which the impairment is recognised.
Reversal of
impairment
Prot or loss In our view, determining the amount of the impairment loss that is reversed through
prot or loss depends on the funds accounting policy.
In our view, the reversal should be recognised at the spot exchange rate of the date
on which the reversal is recognised.
See 7.6.610 in the 8th Edition 2011/12 of our publication Insights into IFRS for
moredetail.
IFRS for Investment Funds | 7
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Where
presented
What is recognised in the reporting period?
Other gains
and losses on
remeasurement
to fair value
Other
comprehensive
income
The cumulative gain or loss is recognised in other comprehensive income, and is the
difference at the end of the period between:
fair value in the functional currency (being the fair value in the foreign currency
translated at the spot rate); and
amortised cost in the functional currency (being the amortised cost in the foreign
currency translated at the spot rate).
Example 2 Accounting for available-for-sale debt investments with a xed coupon
On 30 June 2011 Fund X purchased debt investments for 450,000 including broker fees. A xed semi-annual coupon of 8,000
is receivable on 30 June and 31 December. The securities mature on 30 June 2013. The notional is 500,000. The fair value of
the securities on 31 December 2011 is 470,000. The six-monthly EIR calculated in foreign currency is 4.3796%.
The exchange rate from the foreign currency to Xs functional currency was 1 to 1.5 on 30 June 2011, and is 1 to 1.7 on
31December 2011.
X concludes that an average rate for the period approximates the exchange rates on the dates of transactions. The average
foreign currency to functional currency exchange rate for the period is 1 to 1.6.
1. Accounting entries on 30 June 2011 (in foreign currency)
Purchase of debt investments Debit Credit
Asset Available-for-sale nancial assets 450,000
Asset Cash 450,000
2. Accounting entries on 31 December 2011 (in foreign currency)
Coupon received Debit Credit
Asset Cash 8,000
Asset Available-for-sale nancial assets 8,000
Interest income Debit Credit
Asset Available-for-sale nancial assets 19,708
Prot or loss Interest income 19,708
The interest income amount is sourced from Example 1.
8 | IFRS for Investment Funds
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3. Accounting entries on 31 December 2011 (in functional currency)
a. Foreign exchange gains and losses
The foreign exchange gain on 31 December 2011 is calculated as follows.
In foreign
currency
In functional
currency
Amortised cost on 30 June 2011 converted at spot rate of 1.5 450,000 675,000
Interest income for 6 months to 31 December 2011 converted at average rate of 1.6 19,708 31,533
Coupon received on 31 December 2011 converted at spot rate of 1.7 (8,000) (13,600)
Amortised cost on 31 December 2011 (the total) 461,708 692,933
Amortised cost in foreign currency converted at spot rate of 1.7 (784,904)
Foreign exchange gain (91,971)
The accounting entries for the foreign exchange gain are as follows.
Foreign exchange gains and losses In functional currency
Debit Credit
Asset Available-for-sale nancial assets 91,971
Prot or loss Foreign exchange gain 91,971
b. Other gains and losses on remeasurement to fair value
The cumulative gains and losses recognised in other comprehensive income are calculated as the difference between
amortised cost and fair value on 31 December 2011 in Xs functional currency converted from foreign currency at spot rate.
Amortised cost Fair value
Difference
between
amortised cost
and fair value/
other gains or
losses
Available-for-sale nancial assets in foreign currency 461,708 470,000
Available-for-sale nancial assets in functional currency
converted at spot rate of 1.7 784,904 799,000 14,096
The amortised cost in the foreign currency of 461,708 is sourced from Example 1.
The amortised cost in the functional currency of 784,904 is calculated by applying the period end spot exchange rate of 1.7
to the amortised cost in the foreign currency of 461,708.
The fair value in the functional currency of 799,000 is calculated by applying the period end spot exchange rate of 1.7 to the
fair value in the foreign currency of 470,000.
IFRS for Investment Funds | 9
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Other gains and losses in the functional currency include the change in fair value in the foreign currency as well as the
foreign exchange gain or loss on re-translation of the opening balance in other comprehensive income.
The accounting entries for other gains and losses on remeasurement to fair value are as follows.
Other gains and losses on remeasurement to fair value In functional currency
Debit Credit
Asset Available-for-sale nancial assets 14,096
Other comprehensive
income
Other gains and losses on remeasurement to fair value 14,096
c. Movement in the available-for-sale nancial assets account in 2011
The entries in the functional currency can be summarised as follows.
In functional currency
Debit Credit
Purchase price, including transaction costs 675,000
Interest income for 2011 31,533
Coupon received on 31 December 2011 13,600
Other gains and losses on remeasurement to fair value 14,096
Foreign exchange gain 91,971
Total 812,600 13,600
Balance at 31 December 2011 799,000
10 | IFRS for Investment Funds
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5. How do you determine and present gains
and losses on available-for-sale equity
instruments?
The table below summarises the determination and presentation requirements for gains and losses on available-for-sale equity
investments.
Where What is recognised in the reporting period?
presented
Dividend Prot or loss Generally, equals the amount declared.
income
See 7.6.760 in the 8th Edition 2011/12 of our publication Insights into IFRS for more
detail on recognition of dividend income.
Impairment Prot or loss The difference between the acquisition cost and the current fair value measured in the
losses functional currency, less any impairment loss previously recognised in prot orloss.
Other gains Other Cumulative gains and losses recognised in other comprehensive income is the
and losses comprehensive difference between the fair value at the beginning and the end of the reporting
(including income period measured in the functional currency.
reversal of
impairment)
Foreign exchange gains and losses are not separated from the total fair value
changes.
Example 3 Accounting entries for the available-for-sale equity investment
On 30 September 2009 Fund X purchased shares in Company C for 3,000.
Debit Credit
Asset Available-for-sale nancial assets 3,000
Asset Cash 3,000
C declared a dividend of 200 on 31 December 2009.
Debit Credit
Asset Dividend receivable 200
Prot or loss Dividend income 200
On 31 December 2009 the fair value of the shares was 3,500, representing an increase of 500 from 30 September 2009. The
fair value of 3,500 is determined based on the quoted ex-dividend price.
Debit Credit
Asset Available-for-sale nancial assets 500
Other comprehensive Other gains and losses on remeasurement to fair value 500
income
IFRS for Investment Funds | 11
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A dividend of 200 was paid on 15 January 2010.
Debit Credit
Asset
Asset
Cash
Dividend receivable
200
200
On 31 December 2010 the fair value of the shares decreased by 1,500 to 2,000. X determined that this investment was
impaired at that date.
The accounting entries as at 31 December 2010 are set out below. The shares are rst revalued to fair value in other
comprehensive income.
Debit Credit
Other comprehensive
income
Asset
Other gains and losses on remeasurement to fair value
Available-for-sale nancial assets
1,500
1,500
After the revaluation, the amount of losses in the other comprehensive income is as follows.
Cumulative balance in other comprehensive income Debit Credit
Other gains and losses on remeasurement to fair value,
2009
Other gains and losses on remeasurement to fair 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 of 1,000 is
reclassied to prot or loss on 31 December 2010.
Debit Credit
Prot or loss
Other comprehensive
income
Impairment loss
Impairment loss
1,000
1,000
On 31 December 2011 the fair value of the shares increased by 1,300 to 3,300. The full revaluation amount is recognised in
other comprehensive income.
Debit Credit
Asset
Other comprehensive
income
Available-for-sale nancial assets
Other gains and losses on remeasurement to fair value
1,300
1,300
12 | IFRS for Investment Funds
2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
6. Can realised gains and losses on nancial
assets at fair value through prot or loss be
disclosed separately from unrealised ones?
Disclosure of realised gains and losses on nancial assets at fair value through prot or loss is not required by IFRS, but
is frequently made by investment funds. In general, realised gains and losses can be measured by comparing the sales
proceedswith:
the fair value at the beginning of 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 for 3,000. The shares are classied as nancial assets at fair
value through prot or loss.
The fair value of the shares on 31 December 2010 was 3,500.
The shares were sold on 31 March 2011 for 3,150.
There are two possible ways of calculating realised gains and losses for the purpose of disclosure.
Disclosures as at
31December 2011 Method 1 How calculated Method 2 How calculated
(350) The sales price of 3,150 less
the fair value on 31December
2010 of 3,500
(350) The sales price of 3,150 less
the fair value on 31December
2010 of 3,500
- 500 The fair value on 31December
2010 of 3,500 less the
purchase price of 3,000
Total realised gains or
losses
(350) 150
If realised gains and losses are disclosed, then the measurement method should be disclosed in the accounting policy section
of the nancial statements and applied consistently.
IFRS for Investment Funds | 13
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Other KPMG publications
A more detailed discussion of the general accounting issues that arise from the application of IFRS can be found in our
publication Insights into IFRS. In addition, we have a range of publications that can assist you further, including:
Illustrative nancial statements: Investment funds
Illustrative nancial statements for interim and annual periods
IFRS compared to US GAAP
IFRS Handbooks, which include extensive interpretative guidance and illustrative examples to elaborate or clarify the
practical application of a standard, including IFRS Handbook: First-time adoption of 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 specic requirements of pronouncements
Disclosure checklist.
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Publication name: IFRS for Investment Funds
Publication number: Issue 1
Publication date: November 2011
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