printmgr file - Templeton

Franklin Templeton Investments Funds
NOTES TO FINANCIAL STATEMENTS For the periods ended December 31, 2012 and 2011 (Continued)
2. Summary of Significant Accounting Policies (Continued)
sale proceeds are adjusted by the amount of the premium. When an option is closed, the difference between the premium and
the cost to close the position is included in income (loss) from derivatives on the Statement of Operations, as is the premium for
options written or purchased when an option expires.
(iii) Equity-linked notes — Certain Funds may invest in equity-linked securities. Equity-linked notes are hybrid financial instruments
that generally combine both debt and equity characteristics into a single security. Income received from equity-linked notes is
recorded in dividends received in the Statement of Operations and may be based on the performance of an underlying security,
an equity index, or an option position.
(iv) Credit default swaps — Certain Funds may enter into credit default swap contracts, primarily to manage and/or gain exposure to
credit risk. A credit default swap is an agreement between the fund and a counterparty whereby the buyer of the contract receives
credit protection and the seller of the contract guarantees the credit worthiness of a referenced debt obligation. The underlying
referenced debt obligation may be a single issuer of corporate or sovereign debt, a credit index, or a tranche of a credit index. In the
event of a default of the underlying referenced debt obligation, the buyer is entitled to receive the notional amount of the credit default
swap contract from the seller in exchange for the referenced debt obligation, a net settlement amount equal to the notional amount of
the credit default swap less the recovery value of the referenced debt obligation, or other agreed upon amount.
Over the term of the contract, the buyer pays the seller a periodic stream of payments, provided that no event of default has
occurred. Such periodic payments paid or received are accrued daily and are included in the Statement of Operations in Income
(loss) from derivatives. The change in value of a credit default swap contract is included in the Statement of Net Assets as unrealized
gain (loss) on derivatives. When the credit default swap contracts are closed out, gains or losses are realized and included in
the Statements of Operations in Net Realized Gain (Loss) on investments and derivatives. Pursuant to the terms of the credit
default swap contract, cash or securities may be required to be deposited as collateral.
(d) Payment-in-kind bonds — Certain Funds may invest in Payment-in-kind (PIK) bonds. PIK securities are bonds or preferred shares
where income may be received in the form of additional bonds or preferred shares. The coupon rate shown represents the rate at
period end. These bonds typically have interest receivable included in the price quotation obtained each day. Accordingly, that portion
of the quote representing interest income has been identified and reclassified as interest income on the Statement of Operations. In
the event that interest income from the additional bonds is not expected to be realized, a reserve against income is established.
(e) Participatory notes — Certain Funds may invest in Participatory Notes (P-Notes). P-Notes are promissory notes that are designed to
offer a return linked to the performance of a particular underlying equity security or index. P-Notes are issued by banks or brokerdealers
and allow the fund to gain exposure to common stocks in markets where direct investment is not allowed. P-Notes are not
listed and are valued utilizing the price of the underlying equity security based upon the terms of the P-Notes. Income received from
P-Notes is recorded in dividend income in the Statement of Operations.
(f) Valuation of series — A separate net assets per unit is calculated for each series of units in each Fund. The net assets of a series is
computed by calculating the series’ proportionate share of the assets and liabilities of the Fund common to all series, adjusted for the
assets and liabilities of the Fund attributable only to that series. Expenses directly attributable to a series are charged to that series.
Other expenses, investment income, realized and unrealized capital and foreign exchange gains and losses are allocated
proportionately to each series based upon the relative net assets of each series, except for items that can be specifically attributed to
one or more series.
(g) Transaction costs — Transaction costs, such as brokerage commissions, incurred on the purchase and sale of a security are charged
as an expense for the period and shown as transaction costs on the Statements of Operations.
The Funds that invest in Underlying Funds do not incur transaction costs on those transactions.
(h) Security transactions, investment income, expenses and distributions — Security transactions are recorded on the trade date. Realized
and unrealized gains or losses on security transactions are determined on an average cost basis. Interest income and estimated
expenses are accrued daily. Dividend income, distributions received from Underlying Funds and distributions to unitholders are
recorded on the ex-dividend date.
Franklin Templeton Investments Funds 209