Financial Reporting by Investment Funds - Second Edition

CICA Research ReportFINANCIAL REPORTING BY INVESTMENT FUNDSSecond EditionJuly 2009

OTHER RESEARCH REPORTS AND RESEARCH STUDIES* Limited Audit Engagements and the Expression of Negative Assurance (1980)* Extent of Audit Testing (1980)* Accounting for Pension Costs and Liabilities (1980)* Analytical Review (1983)* Accounting for Portfolio Investments (1984)Financial Statements for Pension Plan Participants (1984)* Pension Plan Auditing (1984)* Financial Reporting by Credit Unions (1984)* Materiality: the Concept and its Application to Auditing (1985)* Local Government Financial Reporting (1985)* Accounting and Financial Reporting by Agricultural Producers (1986)* Accounting and Reporting by Venture Capital Organizations (1987)* Professional Judgment in Financial Reporting (1988)* Incorporating the Time Value of Money within Financial Accounting (1988)* Accounting and Financial Reporting by Junior Mining Companies (1988)* Accounting and Reporting Physical Assets by Governments (1989)* The Financial Statement Presentation of Corporate Financing Activities (1989)Approaches to Dealing with Risk and Uncertainty (1990)Reporting the Effects of Changing Prices: A Review of the Experience with Section 4510 (1990)The “Going Concern” Assumption: Accounting and Auditing Implications (1991)Interim Financial Reporting: A Continuous Process (1991)* Information to be Included in the Annual Report to Shareholders (1991)* Value-for-Money Audit Evidence (1991)Environmental Auditing and the Role of the Accounting Profession (1992)* Financial Reporting for Segments (1992)Environmental Costs and Liabilities: Accounting and Financial Reporting Issues (1993)Using Ratios and Graphics in Financial Reporting (1993)Professional Judgment and the Auditor (1995)Accounting and Reporting for Enterprises in the Development Stage (1996)Financial Reporting by Canadian School Boards (1996)Indicators of Government Financial Condition (1997)Financial Reporting by Investment Funds (1997)Full Cost Accounting from an Environmental Perspective (1997)Costing Government Services for Improved Performance Measurement and Accountability (1999)Continuous Auditing (1999)Financial Reporting by Small Business Enterprises (1999)* The Impact of Technology on Financial and Business Reporting (1999)Use of Specialists in Assurance Engagements (2000)Assessing Risks & Controls of Investment Funds (2000)Audit Enquiry: Seeking More Reliable Evidence from Audit Enquiry (2000)Financial Reporting by Rate-Regulated Enterprises (2002)Accounting for Infrastructure in the Public Sector (2002)Electronic Audit Evidence (2003)Stakeholder Relationships, Social Capital & Business Value (2003)Accounting Bases Used in Canadian Government Budgeting (2004)* Electronic Filing and Reporting: Emerging Technologies and Their Implications (2005)Secure IT Infrastructure for E-commerce (2005)* Interactive Data — Building XBRL Into Accounting Information Systems (2007)* Corporate Reporting to Stakeholders (2008)Using Graphics in Corporate Reporting (2008)Accrual Budgeting by Canadian Federal, Provincial and Territorial Governments (2009)*Research Study

Notice to ReaderThe Knowledge Development Group of the Canadian Institute of Chartered Accountants (CICA) commissionedthis Research Report as part of its continuing research program. The views and conclusions expressed in this publicationare those of the Study Group. They have not been adopted, endorsed, approved, disapproved or otherwise actedupon by a Board, Committee, the governing body or membership of the CICA or any provincial Institute / Ordre.The CICA Research Report Financial Reporting by Investment Fundsis available on the Internet (www.cica.ca).Library and Archives Canada Cataloguing in PublicationFinancial reporting by investment funds [electronic resource]. -- 2nd ed.(CICA research report)“July 2009”.Includes bibliographical references and index.Electronic monograph in PDF format.ISBN 978-1-55385-453-11. Mutual funds--Canada--Accounting. 2. Financial statements--Canada.3. Accounting--Standards--Canada. I. Canadian Institute of CharteredAccountants II. Series: Research report (Canadian Institute of CharteredAccountants)HF5686.I58F56 2009 657’.8333030971 C2009-906891-5Copyright ©2009The Canadian Institute of Chartered Accountants277 Wellington Street WestToronto, CanadaM5V 3H2Disponible en françaiswww.icca.ca

FOREWORDThe Canadian Institute of Chartered Accountants(CICA) published Financial Reporting by InvestmentFunds in 1997. That Research Report was promptedby concerns about the Canadian investment fundsindustry cited in Regulatory Strategies for the Mid-90s(also known as the Stromberg Report). Since then, theinvestment funds industry has gone through a period ofrapid change and continues to evolve, both in Canadaand internationally.In 2006, after consulting with the industry, regulatorsand auditors, the CICA decided to update the 1997Research Report to reflect changes in accounting standards,regulatory requirements and industry practices.A Study Group was set up to address accounting andfinancial reporting matters for Canadian investmentfunds, as well as the consequences of changing fromCanadian generally accepted accounting principles(GAAP) to IFRS.The Study Group’s terms of reference were to:1. Summarize relevant pronouncements and regulatoryrequirements for investment fund reporting inCanada and internationally (for example, UnitedStates, United Kingdom and Australia).2. Review current literature to identify major trendsand issues facing the investment funds industry inCanada and internationally.3. Survey current investment fund reporting practicesin Canada and internationally. To the extent possible,use any surveys conducted by securities commissionsand others.4. Identify the primary users of investment fund informationand assess their information needs.5. Identify financial reporting issues peculiar to, orlikely to be encountered by, investment funds regardingpresentation, measurement, recognition6.7.8.9.10.and disclosure. Evaluate alternative means of resolvingissues and develop illustrative examples, asneeded.Assess whether the pronouncements currently set outin the CICA Handbook-Accounting, EIC Abstractsand other authoritative sources adequately deal withinvestment fund financial reporting issues.Consider whether, and if so what, additional implementationguidance on financial reporting issuesmight be provided to meet the special needs of usersof investment funds.Identify financial reporting issues that may arisefrom existing and proposed regulatory and industry-relatedrequirements in Canada and internationally.Consider whether, and if so what, additional implementationguidance on regulatory and industryrelatedrequirements might help meet the specialneeds of users of investment funds.Identify financial reporting issues that may arise inthe migration of the CICA Handbook-Accounting toInternational Financial Reporting Standards.The CICA expresses its appreciation to Barry J. Myers,FCA, and the Study Group members listed on the nextpage for the considerable amount of time and effortspent on this project. Equally appreciated is the work ofDonald E. Jeffreys, CA, consultant and researcher, whoassisted in drafting the report, and J. Paul-Émile Roy,CA, who directed the project.The CICA also acknowledges the contribution bythe Investment Funds Institute of Canada (IFIC)Accounting Advisory Committee and the followingindividuals: CLHIA — Ronald Sanderson andJames Wood; Investors Group — Douglas Saprowich,CMA; KPMG — Peter Hayes, CA, Laura Macdonald,

Financial Reporting by Investment FundsCA, and Richard Reading; PricewaterhouseCoopers— Christopher Wood, CA; and TD Bank FinancialGroup — Anthony Baskaran, Brad F. Ciccarelli,CGA, and Selva Rajaratnam.The views expressed in this publication are those of theStudy Group and have not been formally endorsed byeither the CICA or the organizations represented by theStudy Group members. Comments are welcome andshould be addressed to J. Paul-Émile Roy, CA, Principal,Research Studies Department, CICA (research.studies@cica.ca).Toronto, May 2009CICA Research StudiesFINANCIAL REPORTING BY INVESTMENT FUNDSSTUDY GROUP MEMBERSBarry J. Myers, FCA (Chair)(retired, formerly PricewaterhouseCoopers LLP,TorontoStacey Z. Barker, CAOntario Securities Commission, TorontoJerry K. Beniuk, CATD Bank Financial Group, TorontoTim Deacon, CAManulife Financial, TorontoRaj K. Kothari, FCAPricewaterhouseCoopers, LLP TorontoJames P. Loewen, CAKPMG LLP, TorontoB.J. Reid, CAInvestors Group, WinnipegHeidi R. Ruttimann, CAStandard Life, MontréalMarion Kirsh, CAOntario Securities Commission, TorontoCICADonald E. Jeffreys, CAConsultant and ResearcherJ. Paul-Émile Roy, CAResearch Studies DepartmentKnowledge Development Group

TABLE OF CONTENTSPageEXECUTIVE OVERVIEW...................................................................................................................................... xiChapter 1INTRODUCTION.................................................................................................................................................... 1Outline of the Report........................................................................................................................................................................ 1Research Process............................................................................................................................................................................... 1Gaap and Regulatory Requirements....................................................................................................................................... 4Definitions.............................................................................................................................................................................................. 5Investment Fund......................................................................................................................................................................................... 5Financial Reporting and Financial Statements......................................................................................................................... 5Conclusion............................................................................................................................................................................................. 6Chapter 2FINANCIAL STATEMENTS OF INVESTMENT FUNDS................................................................................. 7Introduction.......................................................................................................................................................................................... 7Statement of Net Assets................................................................................................................................................................. 8Assets............................................................................................................................................................................................................... 9Liabilities.......................................................................................................................................................................................................... 10Net Assets...................................................................................................................................................................................................... 11Transition to IFRS — Presentation of Assets and Liabilities (IAS 1)............................................................................... 12Statement of Investment Portfolio ............................................................................................................................................ 12Transition to IFRS — Statement of Investment Portfolio (IAS 1)..................................................................................... 14Statement of Operations................................................................................................................................................................ 15Investment Income.................................................................................................................................................................................... 16Expenses......................................................................................................................................................................................................... 16Net Investment Income.......................................................................................................................................................................... 17Realized / Unrealized Gains and Losses ....................................................................................................................................... 17Income Tax Considerations.................................................................................................................................................................. 17Statement of Changes in Net Assets ........................................................................................................................................ 17Changes in Net Assets from Operations...................................................................................................................................... 18Distributions to Investors....................................................................................................................................................................... 18Capital Unit / Share Transactions..................................................................................................................................................... 18Capital Contributions............................................................................................................................................................................... 18Changes in Net Assets............................................................................................................................................................................ 18Statement of Cash Flows................................................................................................................................................................ 18Transition to IFRS — Cash Flow Statements (IAS 7) ............................................................................................................. 19Conclusion............................................................................................................................................................................................. 20

PageChapter 3FINANCIAL STATEMENT DISCLOSURES AND SPECIFIC MATTERS..................................................... 21Introduction.......................................................................................................................................................................................... 21Financial Statement Disclosures ................................................................................................................................................ 21Regulatory Disclosures.................................................................................................................................................................... 21Foreign Currency Translation ....................................................................................................................................................... 22Transition to IFRS — Presentation and Functional Currency (IAS 21).......................................................................... 22Segment Disclosures........................................................................................................................................................................ 24Transition to IFRS — Segment Reporting (IFRS 8)................................................................................................................. 24Related Party Transactions............................................................................................................................................................ 26Transition to IFRS — Related Party Disclosures (IAS 24).................................................................................................... 26Business Combinations .................................................................................................................................................................. 29Transition to IFRS — Business Combinations and Mergers (IFRS 3)............................................................................ 30Consolidation by Investment Funds.......................................................................................................................................... 31Transition to IFRS — Consolidation by Investment Funds (IAS 27).............................................................................. 31Income Taxes........................................................................................................................................................................................ 32Transition to IFRS — Income Taxes (IAS 12)................................................................................................................................ 32Investor Equity..................................................................................................................................................................................... 33Transition to IFRS — Classification of Investor Equity (IAS 1 and IAS 32) ................................................................. 33Earnings Per Share (EPS) .............................................................................................................................................................. 33Transition to IFRS — Earnings Per Share (IAS 33).................................................................................................................. 36Performance Fees.............................................................................................................................................................................. 37Interim Financial Statements........................................................................................................................................................ 37Conclusion ............................................................................................................................................................................................ 38Chapter 4ACCOUNTING FOR INVESTMENTS................................................................................................................. 39Introduction.......................................................................................................................................................................................... 39Canadian Generally Accepted Accounting Principles (GAAP)..................................................................................... 39Accounting Guideline 18, Investment Companies (AcG-18)........................................................................................... 39Section 3855, Financial Instruments – Classification of Investments......................................................................... 40Transition to IFRS — Classification of Investments (IAS 39)............................................................................................. 40Section 3855, Financial Instruments - Recognition............................................................................................................ 45Transition to IFRS — Revenue Recognition (IAS 18 and IAS 39)..................................................................................... 48Section 3855, Financial Instruments - Measurement ........................................................................................................ 52Transition to IFRS — Fair Value Measurement and Disclosure (IAS 39)..................................................................... 54Section 3861, Financial Instruments – Disclosure and Presentation........................................................................... 58Terms, Conditions and Risk-Related Information about Investments Held.............................................................. 58Risk Management Policies and Hedging...................................................................................................................................... 58Fair Value Disclosures.............................................................................................................................................................................. 58Section 3862, Financial Instruments – Disclosures ............................................................................................................ 59Section 3863, Financial Instruments – Presentation.......................................................................................................... 59Conclusion............................................................................................................................................................................................. 61

PageChapter 8TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS....................................... 87Introduction.......................................................................................................................................................................................... 87First Time Adoption and Transition (IFRS 1).......................................................................................................................... 89Overview......................................................................................................................................................................................................... 89Authoritative Guidance........................................................................................................................................................................... 90Current Practices........................................................................................................................................................................................ 90Study Group Views................................................................................................................................................................................... 91Future IFRS Developments.................................................................................................................................................................. 93Publicly Accountable Enterprises............................................................................................................................................... 93Overview......................................................................................................................................................................................................... 93Authoritative Guidance........................................................................................................................................................................... 94Current Practices........................................................................................................................................................................................ 94Study Group Views................................................................................................................................................................................... 95Conclusion............................................................................................................................................................................................. 95Appendix AOVERVIEW OF THE INVESTMENT FUNDS INDUSTRY............................................................................. 97Appendix BEXAMPLES OF FINANCIAL STATEMENT PRESENTATION AND DISCLOSURE................................ 103Appendix CACCOUNTING FOR SPECIFIC TYPES OF SECURITIES AND TRANSACTIONS.................................. 117Appendix DSELECTED CANADIAN ACCOUNTING STANDARDSAND COMPARABLE IFRS APPLICABLE TO INVESTMENT FUNDS....................................................... 127Appendix ECONSOLIDATION BY INVESTMENT FUNDS UNDER IFRS (IAS 27)...................................................... 135Appendix FCLASSIFICATION OF INVESTOR EQUITY UNDER IFRS (IAS 1 and IAS 32) ...................................... 149GLOSSARY.............................................................................................................................................................. 163SELECTED BIBLIOGRAPHY............................................................................................................................... 187

EXECUTIVE OVERVIEWThe objective of this Research Report is to provide guidanceon accounting and financial reporting by Canadianinvestment funds. The Report addresses current requirementsand practices in Canada, and the consequences ofchanging from Canadian generally accepted accountingprinciples (GAAP) to International Financial ReportingStandards (IFRS).Because the investment funds industry is experiencingrapid change, both in Canada and internationally, theStudy Group decided on a two-step approach to preparingthis Report:•y Address current financial reporting requirements,including applicable Canadian accounting standardsand regulatory requirements;•y Consider the implications of moving from CanadianGAAP to IFRS, which take effect for financialperiods commencing on or after January 1, 2011.The Study Group discussed relevant Canadian GAAPand the requirements of National Instrument 81-106,Investment Fund Continuous Disclosure (NI 81-106)according to specific topics. It did not discuss the applicationof all generally accepted accounting principlesrelevant to the preparation of the financial statementsof investment funds. Instead, it dealt primarily withaspects that are unique to investment funds or that areconsidered particularly significant to them.In the Study Group’s view, investment funds shouldstress understandability and comparability in theirfinancial reporting. As well, emphasis should be placedon satisfying the information needs of the primaryusers: current and prospective investors (includingshareholders, unitholders and policyholders), financialadvisers, financial analysts, industry regulators and, incertain cases, creditors. Such an approach would alsoaccommodate the information needs of other interestedparties.By 2011, publicly accountable entities in Canada willneed to make the transition to IFRS. Regarding thattransition, the Study Group identified 15 matters forconsideration:1. First time adoption and transition (IFRS 1);2. Publicly accountable enterprises;3. Balance sheet presentation and schedule ofinvestments (including comparatives) (IAS 1);4. Cash flow statements (IAS 7);5. Segment reporting (IFRS 8);6. Presentation and functional currency (IAS 21);7. Related party disclosures (IAS 24);8. Business combinations and mergers (disclosuredifferences) (IFRS 3);9. Consolidation by investment funds under IFRS(IAS 27);10. Income taxes (IAS 12);11. Classification of investor equity (IAS 1 and IAS32);12. Earnings per share (IAS 33);13. Classification of investments (IAS 39);14. Revenue recognition (IAS 18 and IAS 39);15. Fair value measurement and disclosure (IAS 39).The first two matters for consideration — first timeadoption and transition (IFRS 1), and publicly accountableenterprises — are examined in Chapter 8. Implementationguidance is provided on all the other mattersin the “Transition to IFRS” sections of Chapter 2,Chapter 3 and Chapter 4, supplemented by AppendixD, Appendix E and Appendix F.To monitor ongoing developments during the IFRStransition period and to provide timely guidance onxi

Financial Reporting by Investment Fundsemerging IFRS issues affecting investment funds,an Investment Funds Standing Committee has beenestablished. It is anticipated that the Committee willalso develop a vision for the future of financial reportingby investment funds and provide guidance on theevolution of risk management.The Study Group decided that this Research Reportwould be available primarily as an electronic document(PDF format) so that it can be readily updated throughoutthe period of transition to IFRS. The companionCICA Research Report, Assessing Risks & Controls ofInvestment Funds: Guidance for Directors, Auditors andRegulators, May 2009 (which was originally publishedin 2000), is also available primarily as an electronicdocument (PDF format).xii

Chapter 1INTRODUCTIONOUTLINE OF THE REPORTThe purpose of this Research Report is to provideguidance on accounting and financial reporting forCanadian investment funds. The report addressescurrent requirements and practices in Canada, and theconsequences of the transition from Canadian generallyaccepted accounting principles (GAAP) to InternationalFinancial Reporting Standards (IFRS), which willbecome effective for financial periods commencing onor after January 1, 2011.This Report contains eight chapters. This chapter explainsthe process the Study Group followed in developing thisResearch Report and, in the context of financial reporting,briefly discusses users and their information needs.Based on those needs, Chapter 2 considers the contentof investment fund financial statements: the statementof net assets, the statement of investment portfolio, thestatement of operations, the statement of changes in netassets and the statement of cash flows.Chapter 3 reviews financial statement disclosures andspecific matters such as fund mergers and interim reporting.Chapter 4 addresses accounting for investments inaccordance with Canadian GAAP and identifies theprinciples involved. Chapter 5 considers the nature andcontent of both the management report and the auditor’sreport. Chapter 6 discusses National Instrument81-106, Investment Fund Continuous Disclosure (NI81-106), with particular emphasis on the managementreport of fund performance (MRFP). Chapter 7 identifiessignificant accounting and financial reporting issuesfaced by special types of investment funds. Chapter 8considers the general implications of moving fromCanadian GAAP to IFRS, which take effect for financialperiods commencing on or after January 1, 2011.Appendix A provides an overview of the investmentfunds industry in Canada. Appendix B presents examplesof financial statement presentation and disclosure.Appendix C describes various types of securities andtransactions, and includes notes on pertinent accounting,disclosure and fair value considerations.Appendix D identifies the CICA Handbook-AccountingSections, Guidelines and Emerging Issues CommitteeAbstracts (EICs) that particularly apply to investmentfunds. To make it easier to access the Study Group’sdiscussion of issues, this Appendix contains hyperlinksto pertinent sections of this Research Report. Therelated matters for consideration during the transition toIFRS are also hyperlinked to pertinent sections of thisResearch Report. In addition, hyperlinks are providedto the IASB website for IFRS and IAS Summariesof accounting standards and, where applicable, to theprojects on the IASB Work Plan as at April 30, 2009.Appendix E provides guidance on consolidation byinvestment funds under IFRS and Appendix F providesguidance on the classification of investor equity underIFRS. A glossary of terms and a selected bibliographycomplete the Research Report.RESEARCH PROCESSIn 1997, the CICA published Financial Reporting byInvestment Funds in response to concerns expressedabout the Canadian investment funds industry, suchas those cited in Regulatory Strategies for the Mid-90s(the Stromberg Report), which resulted from a review ofthe industry initiated by the Ontario Securities Commission(OSC), supported by the Canadian SecuritiesAdministrators (CSA).1

Financial Reporting by Investment FundsSince then, much has changed and continues tochange in the investment funds industry. For example,in Canada, the industry has been dealing with newaccounting standards for financial instruments. In addition,significant new Canadian regulatory requirementshave been added in the last few years. Internationally,the industry has been challenged by the requirements ofadopting IFRS, now or in the near future. A chronologyof events affecting the investment funds industry from1997 to 2008 is set out in Exhibit 1.1.Exhibit 1.1Chronology of EventsDateMay 1997May 1, 1998February 1, 2000March 3, 2000June 2003October 1, 2003January 2004EventCICA Research Report “Financial Reporting by Investment Funds” published.NI 81-105, Mutual Fund Sales Practices, came into force.NI 81-101, Mutual Fund Prospectus Disclosure, came into force. NI 81-102, Mutual Funds, came into force.EIC-107, Application of CICA 3465 to Mutual Fund Trusts, Real Estate Investment Trusts, Royalty Trusts and IncomeTrusts, issued.AcG-15, Consolidation of Variable Interest Entities, issued. Effective for annual and interim periods beginning on orafter November 1, 2004.Section 1100, Generally Accepted Accounting Principle, became effective. Limited the use of “industry” GAAP.AcG-18, Investment Companies, issued. Effective for financial years beginning on or after July 1, 2004 (exceptparagraph 12 effective on or after July 1, 2005).April 2005 Section 3855, Financial Instruments – Recognition and Measurement, and Section 3861, Financial Instruments –Disclosure and Presentation, published April 2005. Effective for financial periods beginning on or after October 1,2006. The basis of calculating NAV for financial statements was changed to “bid” from “closing market”.June 1, 2005September 2006October 1, 2006December 2006January 2007June 2007October 1, 2007March 2008May 30, 2008September 8, 2008NI 81-106, Investment Fund Continuous Disclosure, came into force. This requires the use of Canadian GAAP forstriking the NAV.CSA granted relief regarding the calculation of NAV for purposes other than financial statements, effectivelyallowing the continued use of “closing market” for non-financial statement purposes (not “bid” as requiredby Section 3855). The exemption was granted for the period to September 2007 (subsequently extended toSeptember 2008).Sections 3855 and 3861 effective for financial periods beginning on or after this date.Section 3862, Financial Instruments – Disclosures, and Section 3863, Financial Instruments – Presentation werepublished in December 2006 effective for financial periods beginning on or after October 1, 2007. The effect is tochange the nature and level of disclosure.Amendments to AcG-15 and AcG-18 issued, effective for annual and interim periods ending on or after September30, 2007. The effect is to permit under Canadian GAAP the exemption afforded US investment funds re VIEs reconsolidation.CSA released proposals for revisions to NI 81-106 to require the calculation of NAV using the fair value (as definedin NI 81-106) of the investment fund’s assets and liabilities.Sections 3862 and 3863 effective for financial periods beginning on or after this date.AcSB announced its decision adopt IFRS, effective for interim and annual financial statements for financialperiods beginning on or after January 1, 2011. IFRS, without modification, will replace Canadian GAAP for publiclyaccountable enterprises.OSC Staff Notice 81-709 “Report on Staff’s Continuous Disclosure Review of Investment Funds (2008), published.Revised NI 81-106 (as published on June 20, 2008) came into force.2

IntroductionThe Study Group’s mandate was to address accountingand financial reporting matters for Canadian investmentfunds, including current requirements and practices,and the consequences of the transition from CanadianGAAP to IFRS. To identify the pertinent issues toaddress, the Study Group:•y reviewed investment fund financial statements inCanada and internationally;•y held discussions with the industry, regulators,accounting standard setters and auditors;•y surveyed informed participants in the investmentfunds industry in Canada (the industry, regulators,auditors);• y reviewed the CICA Handbook-Accounting (includingSections, Guidelines and EICs) to identifymaterial relevant to investment funds;•y•y•yreviewed material prepared by the CanadianAccounting Standards Board and its staff on thetransition to IFRS (including a detailed comparisonof the CICA Handbook-Accounting and IFRS);reviewed securities regulations relevant to investmentfunds (with particular emphasis on revisedNI 81-106 which came into force on September 8,2008); andreviewed material published by a variety of organizations(for example, industry associations,accounting firms and the American Institute ofCertified Public Accountants).Exhibit 1.2 lists the key issues identified as a result ofthis process.Exhibit 1.2Key Issues on Financial Reporting and Continuous Disclosure1. Consolidation by Investment Fund CompaniesIssue: How should accounting principles for consolidation be meaningfully applied to investment fund companies (for example: fund offunds; segregated funds; related funds and implicit interests)?References: CICA Handbook – Accounting Section 1590, Subsidiaries; Section 1600, Consolidated Financial Statements; Section 3840,Related Party Transactions; AcG-15, Consolidation of Variable Interest Entities; EIC 157, Implicit Variable Interests Under AcG-15.2. Financial Instruments – Measurement, Recognition and DisclosureIssue: How should accounting principles for financial instruments be meaningfully applied to investment fund companies (for example,bid, ask, closing price; held-for-trading versus available-for-sale; transaction costs, risk disclosures; use of amortized cost for moneymarket funds)?References: CICA Handbook – Accounting Section 3855, Financial Instruments — Recognition and Measurement; Section 3861, FinancialInstruments — Disclosure and Presentation; National Instrument 81-106, Investment Fund Continuous Disclosure.3. Income TaxesIssue: How should investment fund companies deal with the differences between generally accepted accounting principles (GAAP) andincome tax accounting treatment (for example, fund mergers — S.1581); corporate actions; mutual fund corporations — S.3465)?References: CICA Handbook – Accounting Section 1581, Business Combinations; Section 3465, Income Taxes.4. MRFP and Continuous DisclosureIssue: How should investment fund companies prepare financial statements in accordance with generally accepted accounting principles(GAAP) and, at the same time, take into consideration MRFP and continuous disclosure requirements (for example, management feebreakdown; reconciliation with GAAP; compensation and expense of independent review committee; itemized financial disclosure such assoft dollar costs)?References: National Instrument 81-106, Investment Fund Continuous Disclosure, Part 4, Management Reports of Fund Performance(MRFP).5. Earnings per ShareIssue: How should accounting principles for earnings per share be meaningfully applied to investment fund companies (for example,increase/decrease in net asset value per unit/share; calculation and disclosure in financial statements and management report on fundperformance)?References: CICA Handbook – Accounting Section 1100, Generally Accepted Accounting Principles; Section 3500, Earnings Per Share;National Instrument 81-106, Investment Fund Continuous Disclosure.3

Financial Reporting by Investment FundsExhibit 1.2 (cont.)Key Issues on Financial Reporting and Continuous Disclosure6. Statement of Cash FlowsIssue: How should accounting principles for cash flow disclosures be meaningfully applied to investment fund companies (for example,what constitutes “little or no debt”)?References: CICA Handbook – Accounting Section 1540, Cash Flow Statements.7. Ongoing Analysis of Issues and CommunicationsIssue: Should the CICA establish a standing committee to address, as they arise, new financial reporting and continuous disclosure issuesaffecting the investment funds industry?References: CICA Handbook – Accounting; National Instruments; International Financial Reporting Standards (IFRS).Because the investment funds industry is experiencingrapid change, both in Canada and internationally, theStudy Group decided on a two-step approach to preparingthis Report:•y Address current financial reporting requirements,including applicable Canadian accounting standardsand regulatory requirements;•yConsider the implications of moving from CanadianGAAP to IFRS, which take effect for financialperiods commencing on or after January 1, 2011.To monitor developments during the IFRS transitionperiod and to provide timely guidance on current andemerging IFRS issues affecting investment funds, anInvestment Funds Standing Committee has been established.It is anticipated that the Committee will alsoprovide guidance on the evolution of risk managementand develop a vision for the future of financial reportingby investment funds in Canada.GAAP AND REGULATORYREQUIREMENTSThis Research Report looks at financial reporting forinvestment funds. All investment funds are subject toCanadian GAAP as promulgated by the CICA Handbook-Accounting.Although financial reporting for thisindustry is primarily based on GAAP, it is also shapedby securities and financial regulatory requirements.Securities and financial regulators enforce the useof GAAP and have established additional reportingrequirements that they believe are useful and relevantto investors.The Canadian investment fund industry is diverse andsubject to oversight by multiple parties. Investmentfunds governed by the Canadian Securities Administrators(CSA) comprise the largest segment of this industry.National Instrument 81-106, Investment Fund ContinuousDisclosure dictates financial reporting for these funds.Individual segregated funds are subject to GuidelineG-2, Individual Variable Insurance Contracts Relating toSegregated Funds published by the Canadian Life andHealth Insurance Association Inc. (CLHIA). 1While not all investment funds are bound by the requirementsof NI 81-106, it influences the entire industrybecause it regulates the financial reporting of a largesegment of it. This Research Report makes extensivereference to NI 81-106. For life insurers, the Reportmakes reference to the CLHIA Guideline G-2. Fundsnot subject to these requirements should consider themas best practice guidance. For example, if an investmentfund which is not subject to NI 81-106 chooses not tofollow certain requirements of NI 81-106, it should look1 CLHIA Guideline G2 is a regulation under the Insurance Act (Ontario)and an industry guideline in the other Canadian provinces.4

Introductionfor alternative presentations that will ensure there willnot be a departure from GAAP.This Research Report addresses relevant CanadianGAAP and/or NI 81-106 requirements according tospecific topics. It does not discuss the application of allgenerally accepted accounting principles relevant to thepreparation of the financial statements of investmentfunds. It is directed primarily to aspects that are uniqueto investment funds or that are considered particularlysignificant to them.On June 20, 2008, the Canadian Securities Administratorsissued an amended NI 81-106, which came intoforce on September 8, 2008. References contained inthis Research Report are to the amended version of NI81-106.Appendix B of this Research Report provides illustrativeexamples of financial statement presentation and disclosurefor a typical open-ended investment fund. Theexamples provide context for the discussion of accountingmatters in Chapters 2, 3, 4 and 7, and Appendix E.They may need to be modified to fit the requirementsof other types of investment funds. Beyond the specificrequirements of GAAP and NI 81-106, there is variationin the presentation of specific items in the financialstatements and there may be several acceptable ways topresent these items.DEFINITIONSInvestment FundThis Research Report defines an “investment fund” asan entity that offers its shares or units for sale to variousinvestors. The capital raised is invested in accordancewith the fund’s investment policies and objectives.Income is earned primarily through interest, dividendsand capital gains. Operating on a pooled basis on behalfof individual investors, policyholders and institutions,investment funds provide a means for people to obtainprofessional investment management services anddiversified investments.CICA Handbook-Accounting, Accounting Guideline 18(AcG-18) Investment Companies (paragraph 2) statesthat “An investment company’s primary business activityis buying, holding and selling investments.” AcG-18(paragraph 8) states that “An investment company iseither: (a) an investment fund as defined by the Canadiansecurities regulatory authorities in National Instrument81-106, Investment Fund Continuous Disclosure; or (b) aseparate legal entity whose primary business activity forthe period is investing.” AcG-18 (paragraph 9) sets out alist of criteria that must apply for an enterprise’s primarybusiness activity to be investing.There are various types of investment funds. Institutionsand high-net-worth investors invest in “pooled funds,”while life insurance companies manage “segregatedfunds.” “Closed-end funds” are generally listed on a recognizedstock exchange. “Open-end mutual funds” arehighly regulated and governed by simplified prospectusor other constating documents such as declarations oftrust. “Partnerships” and “limited partnerships” carryon the business of pooled investing on behalf of thepartners. There are also some special types of investmentfunds, such as commodity pools, labour-sponsoredinvestment fund corporations, mortgage funds andhedge funds. (Refer to Appendix A for an overview ofthe investment funds industry in Canada.)Financial Reporting and Financial StatementsAs previously noted, the purpose of this ResearchReport is to provide guidance on accounting andfinancial reporting for Canadian investment funds.The CICA Handbook-Accounting defines financialreporting as a process of communicating information tointerested parties. While the success of the communicationdepends on the appropriateness of the accounting5

Financial Reporting by Investment Fundsprinciples followed and, ultimately, on how well readersof financial statements understand the informationpresented, it also depends on the quality of the financialstatement disclosure.The continuous process of financial reporting encompassesthe issuance of both annual and interim financialreports. These reports, which investment funds distributeto external parties, contain both the financial statementsas well as information outside the financial statements.The term “financial statements” refers to a complete setof financial statements intended to present an entity’sfinancial position, results of operations, changes infinancial position and notes to the financial statements.Financial reporting encompasses more than financialreports. It may include financial information presentedin many forms, for example, in a prospectus, in a pressrelease, in sales and marketing material, in a broker’sreport and as data made available on a website. Nonetheless,the mandate for this Research Report focuses onfinancial reporting designed to meet the common informationneeds of external users of financial information.CONCLUSIONThe purpose of this Research Report is to review thecurrent practices of Canadian investment funds and toprovide guidance on accounting and financial reportingmatters. The aim is to establish a framework for financialreporting by the investment funds industry.In the Study Group’s view, investment funds shouldstress understandability and comparability in theirfinancial reporting. As well, emphasis should be placedon satisfying the information needs of the primaryusers: current and prospective investors (includingshareholders, unitholders and policyholders), financialadvisers, financial analysts, industry regulators and, incertain cases, creditors. Such an approach would alsoaccommodate the information needs of other interestedparties.Section 1000 of the CICA Handbook-Accounting statesthat qualitative characteristics — such as understandability,comparability, relevance, reliability and timeliness— define and describe the attributes of informationthat make it useful to investors and other users. 2 Comparabilityis important when comparing the financialstatements of two different funds and when comparingthe financial statements of the same fund over twoperiods or at two different points in time. Althoughcertain trade-offs may be necessary, the above-notedcharacteristics apply equally to interim and annualfinancial statements.2 CICA Handbook-Accounting, Financial Statement Concepts, paragraphs1000.18 to 1000.24.6

Financial Statements of Investment FundsRelated Party Transactions. (Chapter 3 provides furtherguidance on related party disclosures.)Payables denominated in foreign currencies should betranslated into Canadian dollars at the exchange ratesprevailing on the reporting date and may be categorizedwith the corresponding Canadian dollar payables.Portfolio liabilitiesPortfolio liabilities, such as short sales and certainderivatives, should be recorded at the last asking price.(See Chapter 4 for an explanation of this price.)Notes payable, other debt and other liabilitiesIf significant, notes payable to banks (including bankoverdrafts) and others, other debt and other liabilitiesshould be reported as a separate classification, withadequate note disclosure about their nature and terms.Information on unused lines of credit, conditions ofcredit agreements and long-term debt maturities shouldbe disclosed in the notes to the financial statements.Generally accepted accounting principles (CICAHandbook – Accounting Section 3855, Financial Instruments– Recognition and Measurement) allow a choicefor measuring these liabilities at fair value or amortizedcost. The Study Group prefers the use of fair value.If amortized cost is used, however, it is necessary toanalyze whether there is an embedded derivative thatrequires the determination of fair value and, if so, tobifurcate the liability and record the embedded derivativeat fair value.Payables denominated in foreign currencies should betranslated into Canadian dollars at the exchange ratesprevailing on the reporting date and may be categorizedwithin the corresponding Canadian dollar payables.Other liabilities could include amounts due to counterpartiesfor cash received as collateral on return ofsecurities lent, any liability set up at fair value for aguarantee and any dividends and distributions payable.Incentive fees and performance fees are accrued onlywhen it is more likely than not that the amounts will bepaid. For certain types of funds, it may be necessary toconsider whether a contingent liability exists.Split corporations have term-preferred shares that areclassified as a liability, as explained in Chapter 7.Net AssetsNet assets, which represent investors’ equity, include anyamounts contributed by unitholders, shareholders andpolicyholders, any undistributed net investment incomeor accumulated investment loss, any undistributed netrealized gains or accumulated net realized losses, andany net unrealized appreciation or depreciation in thevalue of investments and other assets and liabilitiesdenominated in foreign currencies.NI 81-106 specifically requires line item disclosure andnote disclosure of the items set out in Exhibit 2.1.In accordance with CICA Handbook – Accounting,Financial Instruments - Disclosure and Presentation,paragraph 3862.16, certain types of legal equity (forexample, term-preferred shares and equity warrants) maybe classified as a liability, depending on their terms. (Seealso Chapter 7 for a discussion of split corporations.)In accordance with CICA Handbook – Accounting,Section 3240, Share Capital, and Section 3251, Equity,open-ended funds are not required to separately disclosethe component parts of investors’ equity (see Chapter 3).Nonetheless, in the Study Group’s view, the statementof net assets or the notes to financial statements shoulddisclose information about units of capital, includingthe title and par value of each class of capital units/shares, the number authorized, the number outstandingand the number issued and redeemed in the period.11

Financial Reporting by Investment FundsClosed-end funds normally disclose the componentparts of investors’ equity: capital, contributed surplusand retained earnings. Retained earnings compriseinvestment income less expenses, undistributed netrealized gains and accumulated net realized losses, andunrealized gains and losses. Although some funds showthese components separately, in the Study Group’s view,it is acceptable to combine these three components.Multiple series and multiple class fundsIn Canada, some investment companies adopt capitalstructures to increase flexibility and access to alternativedistribution channels for their units/shares. NI 81-106calls for specific financial statement disclosures whenmore than one class of shares or units is outstanding, asexplained in Chapter 3.Multiple-series funds issue more than one series of units/shares. Each series may have different attributes, such asa different type of sales charge (for example, front-endload, contingent-deferred charge, level load or no load)and may be charged for expenses that relate specificallyto that series.Some mutual fund corporations reference each unit/share class to its own portfolio and each class may havemultiple series. Under Canadian securities regulation,each class of these corporations is a separate entity forfinancial reporting purposes.Transition to IFRS — Presentationof Assets and Liabilities (IAS 1)Under IFRS, assets and liabilities are generally presentedin current and non-current format. Liabilitiesthat are held primarily for the purpose of short-termtrading, or for which the company does not have anunconditional right to defer settlement for at leasttwelve months after the balance sheet date, are requiredto be presented as current.The statement of net assets for investment funds typicallydoes not separately classify current and long-termassets and liabilities, as the assets are usually highlyliquid and the capital is typically redeemable on demand– i.e. long-term assets and liabilities are generally absentfrom an investment fund’s balance sheet. IFRS allowspresentation of all assets and liabilities broadly in orderof liquidity in circumstances where such presentationwould provide information that is more relevant andreliable. This presentation would differ from currentpractice for investment funds, which is to present itemsaccording to their significance, for example, by presentinginvestments as the first asset on the balance sheet.In the Study Group’s view, where investment fundsdo not have clearly identifiable operating cycles, it ispossible that presentation of the balance sheet on aliquidity basis would provide more relevant and reliableinformation and, therefore, may be more appropriatethan a current and non-current presentation to reportassets and liabilities.Nonetheless, when the assets of an investment fund arehighly liquid and the fund’s capital is redeemable ondemand (precluding the fund from having long-termassets and liabilities), the Study Group believes thatpresentation of statement items according to their significanceis appropriate.STATEMENT OFINVESTMENT PORTFOLIONI 81-106 requires the preparation of a detailed statementof investment portfolio as at the end of eachfinancial year, but does not require comparative figuresfor the immediately preceding year. The specific requirementsare set out in Section 3.5, which is reproducedin Exhibit 2.2. 11 In addition, Section 3.6(1)1 requiresthat the notes to the financial statements disclose the11 CLHIA Guideline G2 provides guidance for segregated funds. Itrequires a detailed statement of investment portfolio as of the periodend.12

Financial Reporting by Investment FundsThe statement of investment portfolio provides a listingof the investment fund’s holdings at the statement date.When investors buy units of an investment fund, theyare buying the expertise of a portfolio manager in selectingsecurities. From a regulatory perspective, investorsare entitled to know which securities have been boughtand make up a particular portfolio. Since the portfoliomanager is managing other people’s money, there shouldbe as much transparency as possible to permit investorsto understand the risks associated with their investments.The Study Group maintains that investors could makebetter decisions if they received summarized portfolioinformation because they could then focus on the risksand opportunities associated with a portfolio’s types ofinvestment and the geographic area or industry involved.Current events surrounding an industry, or a significantinvestment holding or country, are more likely to havean impact on a fund’s performance than the individualsecurities it holds.Accordingly, the Study Group believes that, absentregulatory requirements, the statement of investmentportfolio should:•y provide a fund’s profile of securities, summarizedby type and/or other groupings considered the mostmeaningful to users, for example, by asset type, 12industry sector, country or geographic region,investment objective, currency, etc. (which wouldalso meet the objectives of the disclosure requirementsof CICA Handbook – Accounting Section3862, Financial Instruments – Disclosures);•y report the percentage of each grouping of securitiesto the total portfolio;•y report comparative amounts for summarized datagroupings; and12 Investments by asset type may include, for example, common shares,preferred shares, convertible securities, fixed income securities, governmentsecurities, options purchased, options written, warrants, futures,loan participations, short-term securities, asset-backed securities,repurchase agreements, short sales, other investment companies, and soforth.•ybe accompanied by notes to the financial statements,as appropriate, for related disclosure of information(see Chapter 4 on, for example, the requirements ofSection 3862).Additional disclosure may be required for investments inother investment funds, affiliated companies, restrictedsecurities and securities subject to call options.Transition to IFRS — Statementof Investment Portfolio (IAS 1)Requirement to present astatement of investment portfolioIFRS does not require that an entity present a scheduleof investments. However, it is best practice to do so andinvestment funds already applying IFRS in other jurisdictionsaround the world generally include a schedulein their financial statements. Similarly, Canadian GAAPat present does not require the presentation of such aschedule (although NI 81-106 does).Requirement to present comparative informationNI 81-106 does not require that comparative informationbe presented on an investment fund’s schedule of investments.By contrast, IAS 1, Presentation of FinancialStatements, paragraphs 38-44 require that comparativeinformation be presented for all amounts presented inthe financial statements unless specifically not requiredby another standard within IFRS, with the exception ofnarrative and descriptive information for which comparativeinformation is irrelevant. Paragraph 38 reads asfollows:“Except when IFRSs permit or require otherwise,an entity shall disclose comparative informationin respect of the previous period for all amountsreported in the current period’s financial statements.An entity shall include comparative information fornarrative and descriptive information when it is14

Financial Statements of Investment Fundsrelevant to an understanding of the current period’sfinancial statements.”IFRS does not specifically contemplate the need for aschedule of investments and therefore, no standardexists within IFRS that would otherwise specificallyexempt the need for presentation of comparative informationon such a statement if included in the financialstatements.In the Study Group’s view, investment funds arenot required to present such a schedule under IFRS(although it is required by NI 81-106). The schedule ofinvestments is not included in the definition of completefinancial statements, as defined by IAS 1, paragraph10 13 and therefore, the Study Group believes that it representsadditional descriptive information rather thana financial statement. It follows that investment funds,depending on the relevant facts and circumstances, maydetermine that the comparative information for priorperiods is not relevant, in which case disclosure of suchcomparative information may not be required.It should be noted that detailed disclosures regardingfinancial instruments are required under IFRS 7, whichrequires comparative figures. Additionally, IFRS 7.B3states that financial information should be presented ina manner that does not overburden users with excessivedetail that may not assist users of financial statementsand may obscure important information. The StudyGroup believes that users of financial statements will beprovided with sufficient comparative information under13 A complete set of financial statements comprises:• a statement of financial position as at the end of the period;• a statement of comprehensive income for the period;• a statement of changes in equity for the period;• a statement of cash flows for the period;• notes, comprising a summary of significant accounting policies andother explanatory information; and• a statement of financial position as at the beginning of the earliestcomparative period when an entity applies an accounting policyretrospectively or makes a retrospective restatement of items in itsfinancial statements, or when it reclassifies items in its financialstatements.IFRS 7 for decision making purposes without the needfor comparative figures for the schedule of investments.STATEMENT OF OPERATIONSAn investment fund’s financial statements shouldinclude a statement of operations that reports all income,expenses, realized gains or losses and unrealized appreciationor depreciation in the value of investments. Theobjective is to present the increase or decrease in netassets resulting from an investment fund’s activities.It achieves this by reporting:•y investment income from dividends;•y interest and other income, less expenses;•y realized gains or losses from investment and foreigncurrency transactions; and•y changes in unrealized appreciation or depreciationin the value of investments and foreign-currencydenominatedinvestments and other assets andliabilities for the period.That format helps readers understand what each aspectof investment activity has contributed to the fund’soverall operations.NI 81-106 requires the preparation of a statement ofoperations in comparative form. It sets out specific disclosurerequirements, as described in Exhibit 2.3. If aninvestment fund is responsible for a particular expense,it must be disclosed in accordance with Exhibit 2.3. Ifthe manager of an investment fund is responsible for aparticular expense in return for a fee, only the fee wouldbe disclosed.15

Financial Reporting by Investment FundsExhibit 2.3Statement of OperationsNI 81-106, Section 3.2The statement of operations of an investment fund mustdisclose the following information as separate line items:1. dividend revenue.2. interest revenue.3. income from derivatives.4. revenue from securities lending.5. management fees, excluding incentive or performance fees.6. incentive or performance fees.7. audit fees.8. directors’ or trustees’ fees.8.1 independent review committee fees.9. custodial fees.10. legal fees.10.1 commissions and other portfolio transaction costs.11. securityholder reporting costs.12. capital tax.13. amounts that would otherwise have been payable by theinvestment fund that were waived or paid by the manager ora portfolio adviser of the investment fund.14. provision for income tax.15. net investment income or loss for the period.16. realized gains or losses.17. unrealized gains or losses.18. increase or decrease in net assets from operations and, ifapplicable, for each class or series.19. increase or decrease in net assets from operations persecurity or, if applicable, per security of each class or series.Investment IncomeIn addition to interest and dividend income (seeChapter 4), investment income includes other incomeand foreign withholding taxes. Other income includesfee income from securities loaned, income from incometrusts after deduction for return of capital (sometimespresented as a separate item) and income from miscellaneoussources, such as repurchase agreements. Forthe most part, foreign withholding taxes should bededucted from the relevant income item and disclosedparenthetically or shown as a separate contra item inthe income section. Taxable funds could include foreignwithholding taxes with income tax provisions.ExpensesIn addition to the disclosure of specific line items, NI81-106 requires separate note disclosure in the financialstatements (to the extent the amount is ascertainable)of the soft dollar portion of the total commissions andother portfolio transaction costs that an investmentfund has paid or needs to pay to dealers where the softdollar portion is the amount paid or payable for researchservices other than order execution.For non NI 81-106 funds, although expenses (eitherindividually or in the aggregate) are seldom material inrelation to net assets or to changes in net assets, the StudyGroup believes that any expenses that help to providea clearer understanding of a fund should be disclosedas separate items. At a minimum, the following itemsshould be shown separately:•y management fees, excluding incentive or performancefees;•y incentive fees and performance fees; and•y amounts that an investment fund would otherwisehave to pay but that were waived or paid for by thefund’s manager or a portfolio adviser.If a distribution plan provides for the carryover ofunreimbursed costs to subsequent periods, the terms ofreimbursement and the unreimbursed amount shouldbe disclosed.Related party transactions should be disclosed inaccordance with CICA Handbook - Accounting Section3840, Related Party Transactions. (Further guidance isprovided in Chapter 3.)Presentation of transaction costsIn accordance with CICA Handbook-Accounting Section3855, Financial Instruments – Recognition and Measurement,transaction costs can no longer be includedas part of the cost of portfolio investments or in theproceeds of sale of portfolio investments, and must beincluded in the statement of operations. Neither theHandbook nor NI 81-106 specifies, however, where thesecosts are to be presented in the statement of operations,nor is there a consensus on this in practice. (See Chapter4 for further explanation.)16

Financial Reporting by Investment Fundsit does require preparation of a statement of cash flowsunless the investment fund meets certain criteria(including preparation of a statement of changes in netassets, as explained below in this chapter). The StudyGroup believes, however, that a reconciliation of operationsto closing balances provides critical informationfor investment funds and that a statement of changes innet assets should be prepared in all cases.Changes in Net Assets from OperationsNI 81-106 requires that the total of net investmentincome or loss, net realized gains or losses from investmentsand foreign currency transactions, and changesin unrealized appreciation or depreciation on investmentsand translation of assets and liabilities in foreigncurrencies, as shown in the statement of operations, bepresented as a separate line item to reflect the increaseor decrease in net assets from operations for each classor series.Distributions to InvestorsDistributions or dividends for each class or series shouldbe disclosed, showing separately the amount distributedfrom net investment income and from realized gains onportfolio assets sold, as well as return of capital.Capital Unit / Share TransactionsThe following transactions should be disclosed:•y proceeds from the issuance of securities of theinvestment fund;•y aggregate amounts paid on redemption of securitiesof the investment fund; and•y securities issued on reinvestment of distributions.In the Study Group’s view, for non NI 81-106 funds, thenumber of units/shares of each class or series involved inthe above transactions should be disclosed in the notesto the financial statements.Capital ContributionsCapital contributions to a fund where units or sharesare not issued should be disclosed on the face of thestatement and cross-referenced to a note to the financialstatements explaining the reasons for the capital contributions.For example, a capital contribution may bemade to maintain the per unit/share net asset value of amoney market fund at a constant amount. Such capitalcontributions should be disclosed in accordance withCICA Handbook – Accounting Section 3840, RelatedParty Transactions. (Further guidance on related partydisclosures is provided in Chapter 3.)Changes in Net AssetsNet assets should be disclosed at both the beginningand ending of the reporting period, as required by NI81-106. The beginning and ending balances shouldagree with the comparable amounts shown in the statementof net assets and the difference should reflect theaggregate changes in net assets (increase or decrease) forthe period.STATEMENT OF CASH FLOWSCICA Handbook-Accounting Section 1540, Cash FlowStatements, paragraph 1540.02 states that Section 1540need not be applied to an investment fund that meets allof the following criteria:•y during the period, substantially all of the investmentfund’s investments were highly liquid;•y substantially all the investment fund’s investmentsare carried at fair value (as defined in Section 3855,Financial Instruments — Recognition and Measurement);•y the investment fund has little or no debt based onaverage debt outstanding during the period, in relationto total assets; and•y the investment fund provides a statement of changesin net assets.18

Financial Statements of Investment FundsIt also states that an investment fund that does present acash flow statement would follow Section 1540.Although NI 81-106 provides some detailed guidanceon what might be included in such a statement, theStudy Group believes that the statement of changes innet assets is the more informative presentation for aninvestment fund without significant debt.NI 81-106 requires the preparation of a statement ofcash flows in comparative form unless it is not requiredby Canadian GAAP and requires disclosure of the followingas separate line items:•y net investment income or loss;•y proceeds of disposition of portfolio assets;•y purchase of portfolio assets;•y proceeds from the issuance of securities of theinvestment fund;•y aggregate amounts paid on redemption of securitiesof the investment fund; and•y compensation paid in respect of the sale of securitiesof the investment fund.Consequently, if an investment fund does not satisfythe exemption criteria in Section 1540, it will need toprepare both a statement of cash flows and a statementof changes in net assets.Transition to IFRS — Cash flow statements(IAS 7)Requirement to prepare a statement of cash flowsIAS 7, Statement of Cash Flows, requires that all entitiespresent a statement of cash flows when preparingfinancial statements in accordance with IFRS.In the Study Group’s view, investment funds will berequired to present a statement of cash flows uponadoption of IFRS, without exception. In the StudyGroup’s view, investment funds that currently prepare astatement of cash flows under Canadian GAAP are notexpected to experience significant structural differenceswith respect to presentation and format, in preparingstatements of cash flows under IFRS.Statement of cash flows – presentation and formatThe presentation and format of a statement of cash flowsis similar under IFRS to Canadian GAAP. Cash flowsare classified according to the nature of the transactiongiving rise to them, which may include operating, investingor financing activities. Either the direct or indirectmethod 15 can be used. However, IFRS does encouragethe use of the direct method.Investment funds generally hold securities for thepurpose of trading, which is similar to inventoryacquired for the purpose of resale. Accordingly, cashflows associated with acquiring, holding or tradingthese securities will generally be classified as operatingactivities in the statement of cash flows. Subscriptionsto, and redemptions from, an investment fund representfinancing activities and associated cash flows should beclassified as such.Future IFRS developmentsIn October 2008, the IASB issued a Discussion Paper,Preliminary Views on Financial Statement Presentation.The Discussion Paper was issued as partof a joint project with the FASB and proposes, amongother things, to eliminate the option to use the indirectmethod in preparing statements of cash flows, and toexclude cash equivalents while allowing net presentationin certain circumstances. The example in Exhibit2.5 is based on the direct method.15 The IASB’s October 2008 Discussion Paper, Preliminary Views onFinancial Statement Presentation, proposes to eliminate this optionand mandate the application of the direct method.19

Financial Reporting by Investment FundsExhibit 2.5Example of a statement of cash flows of an investmentfund – direct methodYear-ended December 312008 2007Cash flows from operating activitiesPurchase of financial assetsand settlement of financial liabilities -120 -150Proceeds from sale of investments 90 130Proceeds from derivatives 50 25Amounts paid to brokers -30 -35Amounts received from brokers 25 10Dividends received 11 31Interest received 5 3Operating expenses paid -22 -18Net cash from operating activities 9 -4Cash flows from financing activitiesDistributions paid to holdersof redeemable shares -80 -45Proceeds from redeemable shares 130 85Redemptions of redeemable shares -40 -35Net cash from financing activities 10 5Net increase in cash and cashequivalents 19 1Cash – beginning of year 16 15Cash – end of year 35 16CONCLUSIONIn the Study Group’s view, an investment fund’s financialstatements comprise the following:•y a statement of net assets at the current and priorfinancial year end;•y a statement of investment portfolio at the currentand prior financial year end;•y a statement of operations for the current and priorfinancial year;•y a statement of changes in net assets (or, if appropriate,a statement of changes in cash flows) for thecurrent and prior financial year; and•y notes to the financial statements.The statement of net assets should report on a comparativebasis all assets and liabilities at the end of theaccounting period, segregated by main classification.The bases for determining the reported amounts ofassets and liabilities should be applied consistentlyand should be disclosed in the significant accountingpolicies note to the financial statements. In addition, netasset value per unit/share should be disclosed for eachclass of units/shares.The statement of investment portfolio must include theinformation set out in Exhibit 2.2 to meet regulatoryrequirements. In the Study Group’s view, however, summarizeddata would highlight the risks and opportunitiesassociated with the types of investment and bettermeet user needs.The statement of operations should separately classifynet investment income or loss and net income or lossfrom operations for the accounting period. It shouldreport all income, expenses, realized gains or lossesand unrealized appreciation or depreciation in thevalue of investments. The statement of changes in netassets should summarize the changes in net assets fromoperations, dividends and distributions to investors,capital unit/share transactions and capital contributions.Disclosures in notes to the financial statementsare discussed in Chapter 3.20

Financial Reporting by Investment Fundsreporting issuer mutual funds that would otherwisehave to file financial statements with a securities regulatorbut are relying on the filing exemption. They stillmust prepare financial statements in accordance withPart 3 of NI 81-106.FOREIGN CURRENCY TRANSLATIONCanadian GAAP provides guidance for determining thefunctional currency of an entity, to facilitate the accountingfor foreign currency denominated transactions andbalances, and the method for translating financial statementsinto the presentation currency. That guidance isset out in Section 1651, Foreign Currency Translationand EIC 130, Translation Method When the ReportingCurrency Differs from the Measurement Currency orThere is a Change in the Reporting Currency. The firstparagraph of EIC 130 defines measurement currency as“The currency of measurement for each of the entity’sdomestic and foreign operations, commonly referred toas the operation’s functional currency, is not a matter offree choice but a determination based on the facts in theparticular circumstances.”Transition to IFRS — Presentation andFunctional Currency (IAS 21)Under IFRS, an investment fund is required to determineits functional currency and presentation currencyfor financial reporting. The presentation currency of afund is the currency in which the financial statementsare presented, which is typically specified in the fund’soffering document.IAS 21, The Effects of Changes in Foreign ExchangeRates, offers the following definitions:• y Functional currency is the currency of the primaryeconomic environment in which the entity operates.[IAS 21.8]• y Presentation currency is the currency in which thefinancial statements are presented. [IAS 21.8]In order to determine the appropriate method ofaccounting for foreign currency transactions, an investmentfund must first determine the currency that representsits functional currency. A reporting currency isthe currency that the financial statements are presentedin, which may or may not be the same currency as theentity’s functional currency. In circumstances where theentity’s reporting currency is not the same as its functionalcurrency, a translation method will need to beapplied in order to translate balances and transactionsinto the reporting currency.IAS 21 (paragraphs 9 to 14) provides a hierarchy ofprimary and secondary indicators. Application of theprimary indicators may lead to varying results thatrequire consideration of secondary indicators for investmentfunds.Where the indicators are mixed, management will needto apply its judgment to determine the currency that“most faithfully represents the economic effects of theunderlying transactions, events and conditions.”Mixed indicators will generally result for investmentfunds and therefore, management will need to exercisejudgment in determining the functional currency.Additional disclosures are required under IFRS wherethe measurement currency of an entity is determined tobe different from its reporting currency.Exhibit 3.1 presents the applicable guidance in IAS21 (paragraphs 9-14). The current guidance underCanadian GAAP does not contain primary and secondaryindicators and is largely based on management’sjudgment in assessing qualitative factors. Under bothCanadian GAAP and IFRS, the functional currencyof an investment fund is generally viewed to be thecurrency in which the units or shares of the fund areredeemable.22

Financial Statement Disclosures and Specific MattersExhibit 3.1IAS 21, The Effects of Changes in Foreign Exchange Rates, paragraphs 9-149 The primary economic environment in which an entity operates is normally the one in which it primarily generates and expendscash. An entity considers the following factors in determining its functional currency:a) the currency:i) that mainly influences sales prices for goods and services (this will often be the currency in which sales prices for itsgoods and services are denominated and settled); andii) of the country whose competitive forces and regulations mainly determine the sales prices of its goods and services.b) the currency that mainly influences labour, material and other costs of providing goods or services (this will often be thecurrency in which such costs are denominated and settled).10 The following factors may also provide evidence of an entity’s functional currency:a) the currency in which investment funds from financing activities (i.e. issuing debt and equity instruments) are generated.b) the currency in which receipts from operating activities are usually retained.11 The following additional factors are considered in determining the functional currency of a foreign operation, and whether itsfunctional currency is the same as that of the reporting entity (the reporting entity, in this context, being the entity that has theforeign operation as its subsidiary, branch, associate or joint venture):a) whether the activities of the foreign operation are carried out as an extension of the reporting entity, rather than beingcarried out with a significant degree of autonomy. An example of the former is when the foreign operation only sellsgoods imported from the reporting entity and remits the proceeds to it. An example of the latter is when the operationaccumulates cash and other monetary items, incurs expenses, generates income and arranges borrowings, all substantiallyin its local currency.b) whether transactions with the reporting entity are a high or a low proportion of the foreign operation’s activities.c) whether cash flows from the activities of the foreign operation directly affect the cash flows of the reporting entity and arereadily available for remittance to it.d) whether cash flows from the activities of the foreign operation are sufficient to service existing and normally expecteddebt obligations without investment funds being made available by the reporting entity.12 When the above indicators are mixed and the functional currency is not obvious, management uses its judgement to determinethe functional currency that most faithfully represents the economic effects of the underlying transactions, events andconditions. As part of this approach, management gives priority to the primary indicators in paragraph 9 before consideringthe indicators in paragraphs 10 and 11, which are designed to provide additional supporting evidence to determine an entity’sfunctional currency.13 An entity’s functional currency reflects the underlying transactions, events and conditions that are relevant to it. Accordingly,once determined, the functional currency is not changed unless there is a change in those underlying transactions, events andconditions.14 If the functional currency is the currency of a hyperinflationary economy, the entity’s financial statements are restated inaccordance with IAS 29 Financial Reporting in Hyperinflationary Economies. An entity cannot avoid restatement in accordancewith IAS 29 by, for example, adopting as its functional currency a currency other than the functional currency determined inaccordance with this Standard (such as the functional currency of its parent).Measurement when the reporting currency isother than the measurement currencyUnder Canadian GAAP, EIC 130 provides guidanceto be applied in situations where an entity’s functionalcurrency is not the same as its reporting currencyand requires that the current rate method be used totranslate balances into the reporting currency in suchcircumstances.Under IFRS, all monetary items are translated using thespot rate at the reporting date. Non-monetary items aretranslated at the historical exchange rate unless the itemsare carried at fair value, in which case they are translatedusing the exchange rates at the date when the fair valuewas determined. [IAS 21.23(c)]Study Group ViewsRegarding the determination of functional currency, themethod of assessment under IAS 21 differs from CanadianGAAP at present due to the presence of primaryand secondary indicators. Nonetheless, it is expected thatindicators will be mixed in most instances. Therefore,paragraph IAS 21.12 will require the use of judgmentby management in determining the functional currency23

Financial Statement Disclosures and Specific Mattersexample, start-up operations may be operating segmentsbefore earning revenues.Generally, interpretation of this definition has led to theconclusion that investment funds do not have operatingsegments (and therefore do not have reportable segments)since a sub-group of portfolio investments is notdetermined to be an operating segment that engages inbusiness activities from which revenues may be earnedand expenses incurred.IFRS 8, paragraph 5 is consistent in its definition of anoperating segment.An operating segment is a component of an entity:(a) that engages in business activities from whichit may earn revenues and incur expenses(including revenues and expenses relating totransactions with other components of thesame entity),(b) whose operating results are regularly reviewedby the entity’s chief operating decision maker tomake decisions about resources to be allocatedto the segment and assess its performance, and(c)for which discrete financial information isavailable.An operating segment may engage in businessactivities for which it has yet to earn revenues, forexample, start-up operations may be operating segmentsbefore earning revenues.Additionally, the guidance under each standard forreportable segments, including the quantitative thresholdsfor determining which segments require disclosure,is consistent.Under Canadian GAAP at present, any entity that filesfinancial statements with a securities commission isrequired to apply segment reporting. By contrast, entitiesare only within the scope of IFRS 8 16 if they haveissued securities that are traded in a public market, orif the entity files financial statements with a securitiescommission for the purpose of issuing securities in apublic market. 17 Units of many investment funds are notpublicly traded (i.e. they are subscribed to and redeemeddirectly with the fund itself, but not traded) and therefore,it may be argued that such investment funds willnot be subject to the requirements of IFRS 8.One view is that there does not appear to be any significantdifference between the reporting frameworksthat would otherwise require amendments to currentpractices for segment reporting by investment funds.Alternatively, strict interpretation of IFRS 8 may leadto the conclusion that segments within a portfolio mayrepresent operating segments if the quantitative thresholdsin IFRS 8 are exceeded, and if the results of suchsegments are reviewed regularly by the chief operatingdecision maker.In the Study Group’s view, investment funds will berequired to present segment disclosures only where thesecurities of the fund are exchange-traded. In caseswhere segment reporting does apply, little deviationfrom current practice is expected given the consistencybetween IFRS 8 and Section 1701.16 Refer also to Chapter 3, Earnings Per Share.17 IFRS 8 paragraph 2 states, in part, that: This IFRS shall apply to:(a) the separate or individual financial statements of an entity:(i) whose debt or equity instruments are traded in a publicmarket (a domestic or foreign stock exchange or an over-thecountermarket, including local and regional markets), or(ii) that files, or is in the process of filing, its financial statementswith a securities commission or other regulatory organisationfor the purpose of issuing any class of instruments in apublic market; and... .25

Financial Statement Disclosures and Specific MattersThe most significant differences between CanadianGAAP and IFRS in relation to related party disclosuresare set out below.Scope1. Under IAS 24, Related Party Disclosures, there areno scope exemptions. In contrast, under CanadianGAAP, Section 3840, Related Party Transactions,the guidance does not apply to managementcompensation arrangements, expense allowancesand other similar payments to individuals in thenormal course of operations.Disclosure RequirementsThe disclosure requirements of IAS 24 and Section3840 are broadly similar, except as noted in items 2, 3,and 4 below.2. IAS 24 requires disclosure of control relationshipseven when there have been no transactions betweenthe related parties. Section 3840 does not requiresuch disclosure.3. IAS 24 requires disclosure of the name of an entity’sparent and its ultimate controlling entity/individual.Section 3840 does not require such disclosure.4. IAS 24 requires disclosure of key managementpersonnel compensation in total and for certainspecific categories. These matters are not within thescope of Section 3840.Measurement5. As outlined above, IAS 24 does not deal with themeasurement of related party transactions. Section3840 contains requirements for measuring relatedparty transactions and guidance on the resultingtreatment of any gains or losses resulting from thesetransactions. Under Section 3840, related partytransactions that are in the normal course of businessand that have commercial substance are generallymeasured at fair value. Otherwise, related partytransactions are measured at the carrying amount ofthe item transferred, or cost of services provided, asrecognized in the accounts of the transferor unlesscertain criteria are met.Authoritative Guidance•y IASBIAS 24, Related Party Disclosures•y Canadian GAAPSection 3840, Related Party TransactionsEIC-79, Gain Recognition in Arm’s Length andRelated Party Transactions When the ConsiderationReceived Includes a Claim on the Assets SoldEIC-83, Identification of Related Party Transactionsin the Normal Course of Operations•y United States GAAPFAS 57, Related Party DisclosuresCurrent Practice•y CanadaSection 3840 includes requirements for measuringrelated party transactions but does not requiredisclosures related to management compensation.•y International (e.g., UK, Australia)Countries that already adopted IFRS are using theIFRS disclosure requirements. Others are similar toIFRS, except that the compensation of key managementpersonnel is not disclosed.•y United StatesSimilar to IFRS, except that disclosure of compensationof key management personnel is not required.Discussion and Analysis (including illustrativeexamples)In determining the applicable related party transactiondisclosures to provide in a set of investment fund statementsunder IFRS, there are several key questions to beasked/decisions to be made.•y Is the fund manager a related party? Likely yes, bymanagement agreement.•y Is disclosure of compensation of directors necessaryif not material? Likely not – see the Westpacexample below.27

Financial Reporting by Investment Funds•y•yTwo funds managed by the same manager. Disclosecompensation of manager’s staff? Only if determinedto be related and if material.Disclose compensation to IRC members? Only ifmaterial.Examples of note disclosure under IFRSa. All Star Fund pays a fixed fee of $2,000 each forfour directors (totaling $8,000) to the directors ofthe investment management company XYZ Ltd(investment manager). Under IAS 24, this transactionrequires disclosure detailing the nature of therelationship, terms, name of the directors, anddollar amounts paid and outstanding at the yearend. Section 3840 does not require this disclosureif the compensation was within the normal courseof the operations of All Star Fund.terms and dollar amounts, regardless of whether thereis a transaction or not.Determining the related party under IFRS is generallybased on whether or not direct or indirect control existsor whether there is significant influence of one partyover another. Additional disclosure is required whencontrol or significant influence exists.With regard to the disclosure of management compensation,the Study Group believes that, in most instances,providing disclosure of related party transactions at therelevant fair value is a sufficient measurement basis inCanada. Furthermore, there is a mandated IndependentReview Committee (IRC) which is required to act in thebest interests of unitholders in situations where there is apotential conflict of interest.PwC Illustrative Financial Statements for Invest-ment Funds for 2008, Note 14 “Related-partytransactions” (pages 33-34). This note includesreference to Management fee, Custodian fee, Secretarialand administration fee, Board of Directors’remuneration, and Key Management personnelshare holdings. It does not include reference tocompensation of key management personnel.b.c.Financial Statements of Westpac Australian TaxEffective Share Fund, June 30, 2006, Note 11.“Key management personnel remunerationKey management personnel are paid by WestpacBanking Group. Payments made from the Fund toWestpac Financial Services Limited do not includeany amounts directly attributable to key managementpersonnel remuneration.”The management expense ratio (MER) required by NI81-106 and measuring related party transactions at fairvalue hold the most relevance for unitholders. Otherrelated party disclosures regarding management compensation,such as senior management and CEO salaries,are generally immaterial when apportioned acrossthe number of funds managed. The same argument istrue regarding an IRC member’s compensation.If such amounts are immaterial, there are twoalternatives:1. no reference to such compensation arrangements inthe investment fund statements under IFRS; or2.include disclosure such as that provided in Note 11to the financial statements of Westpac AustralianTax Effective Share Fund for June 30, 2006 (seeabove).Study Group ViewsInvestment funds will need to identify all related partiesand transactions and keep a record of their nature,If there are no related party transactions, no disclosureis necessary. If a transaction occurs, disclose the relatedparties and the nature, terms and dollar amounts.28

Financial Statement Disclosures and Specific MattersFuture IFRS DevelopmentsIn February 2007, the IASB issued an exposure draftentitled “State-controlled Entities and the Definitionof a Related Party - Proposed amendments to IAS 24,Related Party Disclosures.” It dealt with two specificaspects of IAS 24 (not the whole IAS):•y disclosures required of state-controlled entities inrelation to other state-controlled entities; and•y the definition of a related party.The first item is not relevant to mutual funds in Canada.On December 11, 2008, the IASB re-released the exposuredraft (re-exposure), now titled “Relationships withthe State - Proposed amendments to IAS 24” (commentswere due by March 13, 2009). Respondents to the 2007exposure draft generally supported the new definitionof a related party and the IASB intends to adopt it, afterseeking comment on one further amendment which isset out in the December 2008 exposure draft.BUSINESS COMBINATIONSIn accordance with its terms of reference, the StudyGroup discussed business combinations, specifically,fund mergers (Business Combinations, Section 1581). Itconsidered the need for disclosures, the basis for identifyingan acquirer and the method of accounting for, andreporting on, fund mergers in the financial statements.In a fund merger, units or shares of one investment fundare exchanged for substantially all of the net assets ofanother fund. One of the combining funds is usuallythe surviving fund, retaining its name and investmentobjectives. In the Study Group’s view, a summary of theessential elements of the fund merger should be disclosedin a note to the financial statements. This would includethe effective date, the number and value of units orshares issued by the surviving fund, the exchange ratio,tax status and basis used to identify the acquirer.Although it may sometimes be difficult to identify anacquirer in a fund merger, the identification shouldbe based on a comparison of the surviving fund andthe predecessor fund(s) using a combination of criteriasuch as:•y investment advisers;•y principal investment objectives and policies;•y portfolio composition;•y asset size;•y expense structures and expense ratios; and•y overall management and corporate governancearrangements.Section 1590, Subsidiaries, requires the purchasemethod to be used in accounting for fund mergers. Thismeans that the assets acquired and liabilities assumedare accounted for at their cost to the acquiring fund,which would include any unrealized appreciation. Theassets are effectively rolled in at their fair values.The tax treatment for the fund merger might be differentif the merger were done on a tax-deferred basis.The reported income of the acquiring fund includes theresults of operations of the acquired fund from the dateof acquisition only. In addition, the comparative (previousperiod) statements of net assets, operations andchanges in net assets (and cash flows if applicable) are notrestated. Appendix B, Exhibit B1 provides an example ofdisclosure in the notes to the financial statements.The Study Group also considered the issue of “conversions,”whereby an investment fund corporation isconverted on a tax-efficient basis to an investment fundtrust structure. In the Study Group’s view, conversionsare essentially a change in form, rather than a change insubstance. It is sufficient, therefore, to disclose the detailsof the conversion in a note to the financial statements.29

Financial Reporting by Investment FundsTransition to IFRS — Business Combinationsand Mergers (IFRS 3)Under IFRS, there is no guidance equivalent to AcG-18,Investment Companies, which requires that investmentfunds reporting under Canadian GAAP account for allinvestments at fair value through profit or loss. It followsthat, in circumstances where an investment fund obtainscontrol over an investee, an investment fund may berequired to account for the transaction as a businesscombination using the purchase method, in accordancewith IFRS 3, Business Combinations. Additionally,significant disclosures may be required in periods duringwhich a business combination arises. The most commonapplication of business combinations for retail mutualfunds is likely to be fund-to-fund mergers.Study Group ViewsAccounting for mergers of investment funds is expectedto be substantially the same under IFRS. The transactionwill be accounted for using the purchase methodand it is expected that the acquirer will be identifiable.There are additional disclosures required in the year ofthe merger (see below) under IFRS.Generally, investment funds do not hold controllinginterests in the entities in which they invest — referto Transition to IFRS — Consolidation by InvestmentFunds (IAS 27). However, some investment funds (e.g.private equity or venture capital investment funds) mayacquire controlling interests in investees. In such cases,the investment funds may be required to account for theacquisition using the purchase method, to the extentthe acquired entity is considered to be a “business” inaccordance with IFRS 3.•y•y•y•y•y•y•y•yprimary reasons for the business combination andhow the acquirer obtained control of the acquiree;acquisition date fair value of the total considerationtransferred and the acquisition date fair value ofeach major class of consideration;amounts, description and range of outcomes relatedto contingent consideration;fair value of receivables acquired including bestestimate of amounts that will not be collected;amounts recognized in respect of the acquiree’sassets and liabilities including the pre-acquisitioncarrying amounts thereof;factors giving rise to goodwill;amount of profit or loss of the acquiree since acquisitionthat has been included in the calculation ofnet income for the period (note: it is expected thatthis information will be impracticable for fundmergers and therefore the acquirer would have todisclose this fact and explain why the disclosure isimpracticable); andamount of profit or loss of the combined entity forthe current reporting period as though the acquisitiondate for all business combinations had been asof the beginning of the current period.Future IFRS DevelopmentsIn January 2008, the IASB issued revisions to IFRS 3,Business Combinations. The revised standard is effectivefor entities reporting under IFRS as of July 1, 2009.Early adoption is permitted and the revised standardwill apply to Canadian investment funds on adoption ofIFRS on January 1, 2011. (See Business Combinations,Section 1582 which supercedes Business Combinations,Section 1581.)There are extensive disclosure requirements for businesscombinations which include:•y name and description of the acquiree;•y acquisition date;•y percentage of the voting interests obtained;30

Financial Statement Disclosures and Specific MattersCONSOLIDATION BYINVESTMENT FUNDSGenerally, investment funds cannot apply consolidation,proportionate consolidation or equity accountingprinciples to their investments because of the exemptionscontained in AcG-15, Consolidation of Variable InterestEntities, paragraph 4(e), and AcG-18, Investment Companies,paragraph 5. The Study Group agrees that fairvalue accounting for an investment fund’s investmentsis the most relevant for users of investment fund financialstatements. It should be noted that paragraph 5 ofAcG-18 does provide for two situations where somethingother than fair value accounting is appropriate.The first scenario occurs where an investment fundholds an investment in an operating company thatprovides services to the investment fund (for example,an investment adviser). Such an investment should beconsolidated, or accounted for using proportionateconsolidation or the equity method, as appropriate.The second scenario occurs where an investment fund(the parent investment fund) has a controlling interestin another investment fund (the investment fundsubsidiary) and the parent does not meet the requirementsof paragraph 10 of AcG-18 to account for theinvestment fund subsidiary’s investments at fair value.Conceptually, the parent would meet the requirementsof paragraph 10 unless it is involved in the day-to-daymanagement of the investment fund subsidiary, or theparent is able to obtain benefits from the subsidiary thatare not available to other investors in the subsidiary.Transition to IFRS — Consolidation byInvestment Funds (IAS 27)Appendix E to this Research Report provides a comprehensiveanalysis of the matters to be consideredregarding consolidation by investment funds underIFRS. In the Study Group’s view, the consolidationcriteria under IFRS do not provide a useful frameworkfor evaluating whether an investment fund should berequired to consolidate its underlying investments.Most open-ended retail investment funds in Canada bytheir very nature do not tend to involve themselves inthe operating policies and strategies of their underlyinginvestments and, in instances of fund-on-fund relationships,generally have no influence over the financingpolicies of the underlying fund, namely, the subscriptionsand redemptions of the underlying unit holders.Further, most open-ended retail funds in Canada arerestricted by securities regulation from investing in orholding more than 10% of the voting interests of anissuer or other investment fund 18 . This restriction typicallywill prevent a retail investment fund from controllinganother entity, and therefore it is anticipated thatmost retail investment funds in Canada (those governedby NI 81-102, Mutual Funds) will not consolidate theirunderlying investments.Equally, the Study Group believes that most non retailfunds will generally not be required to consolidate theirunderlying investments under IFRS as they typically donot hold more than 50% of the votes and do not typicallyhave the ability to direct the investing and financingoperations of their underlying investments. However,a detailed analysis of the facts and circumstances isrequired when there is a fund on fund arrangement,where the top fund owns greater than 50% of the outstandingunits of the bottom fund as the benefits and/or votes conferred to each unit in the underlying fundmay provide evidence of control.Notwithstanding the consolidation requirements underIFRS, the Study Group believes that fair value is the mostrelevant and useful measure for reflecting an investmentfund’s underlying investments. This view is shared bymost other recognized investment fund organizationsincluding the European Fund and Asset Management18 National Instrument 81-102, part 2.2. Exemptions to this ownershipthreshold are permitted, however the investment fund is not permittedto actively control the underlying investment.31

Financial Reporting by Investment FundsAssociation (“EFAMA”) and the Investment CompanyInstitute (“ICI”) in the United States. Further, this principleis supported by the guidance under the AmericanInstitute of Certified Public Accountants (AICPA) Auditand Accounting Guide for Investment Companies whichrequires that all investments be carried at fair value.The Study Group believes that preparation of consolidatedfinancial statements for an investment fund(particularly for investments in other mutual fundswhose number of units outstanding on any given daywill fluctuate and whose minority interest will thereforefluctuate) will not provide useful and relevant financialinformation to investors and users of financial statementsif such results are consolidated on a line-by-line basisin the top fund’s financial statements. The accountingrequirements for consolidation under IFRS are currentlyunder development by the IASB and are expected to berevised prior to the date of adoption of IFRS in Canada.Further explanation of the IASB’s proposals and theStudy Group’s views are provided in Appendix E.INCOME TAXESInvestment funds are not typically required to pay taxesbecause sufficient taxable income and capital gains aredistributed to their investors. Because of their flowthroughnature, investment funds structured as mutualfund trusts do not recognize future income tax assets orliabilities on temporary differences in the trust as longas the criteria in EIC 107, Application of Section 3465to Mutual Fund Trusts, Real Estate Investment Trusts,Royalty Trusts and Income Trusts, are met. Effectively,the criteria relate to the investment fund’s continuingability to meet the Income Tax Act (Canada) rules.Although investment funds structured as mutual fundcorporations are not able to apply EIC 107 and mustfollow the requirements of Section 3465, Income Taxes,the Study Group notes that it is rare for a mutual fundcorporation to recognize a future income tax asset orliability in its statement of net assets. Refer to AppendixB, Exhibit B2 for an example of income tax disclosuresfor a multi-class mutual fund corporation, includingdiscussion of refundable taxes.One tax matter that all investment funds need to considerconcerns corporate actions such as stock splits andshare consolidations made by a fund’s investments. Theissue is that the accounting and tax treatment of corporateactions can be different (e.g., capital treatmentversus income) and should be tracked by investmentfunds and, where material, financial reporting shouldreflect the accounting treatment. Some typical taxversus GAAP differences related to corporate actionsare included in Chapter 4, Exhibit 4.1.Transition to IFRS — Income Taxes (IAS 12)The objective of IAS 12 is to prescribe the accountingtreatment for income taxes. The focus of the standard isto provide guidance on how to account for the currentand future tax consequences of:•y the future recovery (settlement) of the carryingamount of assets (liabilities) that are recognized inan entity’s balance sheet; and•ytransactions and other events of the current periodthat are recognized in an entity’s financial statements.Authoritative guidance sources include the following:•y IASBIAS 12, Income TaxesIASB ED Income Tax – March 2009•y Canadian GAAPSection 3465, Income TaxesEIC 107, Application of Section 3465 to MutualFund Trusts, Real Estate Investment Trusts,Royalty Trusts and Income Trusts•y United States GAAPFAS 109, Accounting for Income Taxes32

Financial Statement Disclosures and Specific MattersIn March 2009, the IASB issued an exposure draft onincome taxes which will amend IAS 12. It is anticipatedthat an analysis of matters for consideration will beundertaken by the CICA Investment Funds StandingCommittee after the July 31, 2009 comment period.INVESTOR EQUITYUnder Share Capital, paragraph 3240.01 and Equity,paragraph 3251.02, open-ended investment funds(which continuously issue and redeem securities) arenot required to bifurcate their net assets into sharecapital and retained earnings components. Closed-endinvestment funds are, however, required to presentshare capital and retained earnings. Investment fundsmust apply EIC-94, Accounting for Corporate TransactionCosts, which states that share issue costs should betreated as a capital transaction when the share issuanceis completed. It should be noted that, in practice, fundsexpense prospectus renewal costs.Section 3.6(1)2 of NI 81-106 requires investment fundswith more than one class or series of securities to makecertain disclosures, including securities issued andredeemed during the period.Transition to IFRS — Classification of InvestorEquity (IAS 1 and IAS 32)Appendix F to this Research Report provides a comprehensiveanalysis of the matters to be considered regardingthe classification of investor equity under IFRS andfuture IFRS developments. In the Study Group’s view,the presentation of residual security holder interestsshould be consistent from fund to fund. The preferenceis for equity treatment as holders are entitled to a prorata share of the net assets which represents the residualinterest of the entity. (Similar language is in the amendmentsto IAS 32, Financial Instruments: Presentation,paragraph BC57.)However, the presentation of net assets bifurcatedbetween share capital and retained earnings is irrelevantand immaterial from a qualitative perspective. Usersmay misinterpret the information (i.e., information maybe misleading). Furthermore, determining the actualhistorical average cost for share capital is cost-prohibitiveand in some cases impossible to do because reliablehistorical information is not available. If bifurcationof equity is required for open-ended investment funds,IFRS 1 amendments might assist in limiting the effortrequired to bifurcate and roll forward the componentparts of equity.EARNINGS PER SHARE (EPS)Canadian GAAP requires disclosure of earnings pershare for entities with publicly-traded common shares.According to Section 3500, Earnings Per Share:.02 An enterprise should present earnings per shareinformation when it has:(a) issued common shares or potential commonshares that are traded in a public market (adomestic or a foreign stock exchange or in anover-the-counter market, including local andregional markets); or(b) made a filing or is in the process of filing witha securities commission in preparation forthe sale of those securities in a public market.[JAN. 2001]In the Study Group’s view, it is arguable that openendedinvestment funds do not meet the requirementof having units or shares “traded in a public market”under paragraph 3500.02(a). For open-ended investmentfunds, the issuance and redemption of units orshares is between security holders and the fund, asissuer. Security holders do not trade between themselvesas they would on a stock exchange.33

Financial Reporting by Investment FundsFurthermore, the value attributable to the issuance orredemption is not based on what the parties to the transactionsmight agree to among themselves, as it would beon an exchange, but it is based on the stated valuationpolicies of the issuing fund (net asset value or NAV).From this perspective, EPS would not be required underCanadian GAAP for investment funds that do not tradeon an exchange or in an over-the-counter market.Moreover, the purpose of providing EPS for traditional,publicly-traded enterprises does not extend to openendedinvestment funds. For publicly-traded entities,EPS is a useful financial ratio that investors and analystswidely use to assess the fair value of issued stock to beexchanged in the open market. In contrast, most investmentfunds issue and redeem at the NAV, negating thevalue of the disclosure. In addition, publicly-tradedentities generally have minimal changes to issuedcapital in the period, in contrast to open-ended investmentfunds, which can have extreme changes in issuedcapital, significantly limiting the meaningfulness of theresulting values.NI 81-106 requires the disclosure in the statement ofoperations of the “increase or decrease in net assets fromoperations per security.” As the method of calculationfor this amount is not prescribed, the investment fundindustry currently uses several practices.1.Follow Section 3500, Earnings Per Share:.04 Any enterprise that is not required by this Sectionto present earnings per share information in itsfinancial statements but chooses to do so shouldapply all of the Recommendations of this Section.[JAN. 2001]This method presumes that the regulatory disclosureis meant to be an EPS ratio. This appears to besubstantiated by the “Summary of Comments and2.3.CSA Responses” in Appendix B of the Notice ofNational Instrument 81-106, published in March2005. That summary indicates that the line itemwas added in response to two commentators whosuggested, perhaps inaccurately, that GAAP wouldrequire EPS for investment funds. As noted above,one could argue that Canadian GAAP does notprescribe EPS for all investment funds.This method would attempt to disclose the “interestsof each common share in the performance ofan enterprise over the reporting period.” Due tothe constant fluctuation of issued capital for openendedfunds, however, the use of a weighted averagenumber of units/shares can produce per securityamounts that are not the same as actual results, andthe differences could be material. In Exhibit 3.2,the loss following this method of calculation wouldbe 0.45 per unit.Follow Form 81-106 F1, Part B, Item 3, “FinancialHighlights.”Similar disclosure is found in the MRFP’s financialhighlights table (“total increase (decrease) fromoperations,” which is the product of the per unit/share values for total revenue, total expenses, realizedgains (losses) and unrealized gains (losses) forthe period). Instructions for compiling this tablestate that the increase/decrease from operations perunit/share, and its component parts, should be basedon the weighted average number of units/sharesoutstanding over the financial period. In Exhibit3.2, the loss following this method of calculationwould be 0.33 per unit or 0.45 per unit. As noted inChapter 6, there are potential complications to thesecalculations that warrant additional consideration.Disclose the actual change in value per security as aresult of operations for the period.34

Financial Statement Disclosures and Specific MattersThis method would disclose the impact of theresults of operations for the period on one unit/share held throughout the period. This methodwould reconcile with the change in value experiencedby security holders who have been in thefund the entire period (that is, performance of thefund). In an environment where fund performanceis attributed to each security on a periodic (usuallydaily) basis for determining pricing NAV, the sumof the unitized performance attributed to one unit/share held throughout the period has logical meritas a per security representation of the net increase/decrease from operations. This performance wouldnot, however, reflect the results of operations onthe average security issued by the fund during theperiod. In Exhibit 3.2, the earnings per share followingthis method of calculation would be 0.56.In the Study Group’s view, any one of the methodsabove is permissible under current GAAP and regulatoryrequirements. The fundamental difference amongthe methods is whether the ratio is intended to reflectthe impact of financial results on one unit held over theentire period or the impact of financial results on theaverage unit outstanding during the period. The largerquestion is whether such a ratio is relevant and meaningfulfor most investment funds. The Study Group wouldencourage the regulators to reconsider the relevance ofthe disclosure and/or provide additional guidance toimprove consistency in methodology.Exhibit 3.2EPS attributable to units issued/ in issue for month1 2 3 4 5 6 7 8 9 10 11 12 Total AverageEPS per month 1 0.222 0.40 0.403 0.91 0.91 0.914 0.42 0.42 0.42 0.42change 5 0.19 0.19 0.19 0.19 0.19in unit6 0.07 0.07 0.07 0.07 0.07 0.07value7 0.27 0.27 0.27 0.27 0.27 0.27 0.27over8 (0.31) (0.31) (0.31) (0.31) (0.31) (0.31) (0.31) (0.31)9 (0.29) (0.29) (0.29) (0.29) (0.29) (0.29) (0.29) (0.29) (0.29)period10 (0.44) (0.44) (0.44) (0.44) (0.44) (0.44) (0.44) (0.44) (0.44) (0.44)11 (0.26) (0.26) (0.26) (0.26) (0.26) (0.26) (0.26) (0.26) (0.26) (0.26) (0.26)12 (0.60) (0.60) (0.60) (0.60) (0.60) (0.60) (0.60) (0.60) (0.60) (0.60) (0.60) (0.60)Cumulative monthlyEPS 0.56 0.34 (0.06) (0.97) (1.38) (1.58) (1.65) (1.91) (1.60) (1.31) (0.86) (0.60)Incremental units 9,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 20,000Outstanding units 9,000 10,000 11,000 12,000 13,000 14,000 15,000 16,000 17,000 18,000 19,000 20,000 14,500Earningsattributable toincremental units$ 5,077 $ 342 $ (58) $ (967) $ (1,384) $ (1,576) $ (1,648) $ (1,914) $ (1,602) $ (1,308) $ (863) $ (600) $ (6,500) $ (6,500)(0.33) (0.45)35

Financial Reporting by Investment FundsIn the above example (Exhibit 3.2), 9,000 units were inissue at the beginning of the period. In each subsequentmonth, a further 1,000 units were issued (on the firstday of the month), for a total of 20,000 by the endof the year. Losses for the year amounted to $6,500.During the first seven months, however, the fund madea profit (positive per unit amounts). Due to the increasein number of units and, therefore, assets, losses in thesecond half exceeded early gains in dollar terms, butnot in per unit terms (i.e., overall, the fund experienceda positive return for the period of 0.56 per unit, basedon one unit held throughout the period). Half theunitholders experienced gains (9,000 earned 0.56 perunit; 1,000 earned 0.34 per unit); half experiencedlosses (ranging from 0.06 to 1.91 per unit) over theperiod. Calculating the weighted average earnings pershare based on the monthly cumulative earnings attributableto those units ([9,000 x 0.56] + [1,000 x 0.34]+ [1,000 x (0.06)] + etc.) = $(6,500)/20,000) producesan average per unit loss of 0.33. An average of the lossfor the period divided by the weighted average unitsoutstanding ($(6,500)/14,500) produces an average lossof 0.45 per unit.Transition to IFRS — Earnings Per Share (IAS33)The objective of IAS 33, Earnings per Share, is toprescribe the principles used to calculate and discloseearnings per share in order to improve comparabilitybetween reporting entities. The focus of the standard ison how to determine the denominator.Open-ended investment funds issue and redeem unitsor shares daily, resulting in significant changes in issuedcapital and limiting the relevance of earnings per share(EPS) calculations. In addition, investment funds issueand redeem units or shares at the NAVPS, thereforeNAV per share and change in NAV per share are moremeaningful measures for investors.Presuming that the shares or units of redeemable fundsare treated as equity under IAS 32, Financial Instruments:Presentation, are investment funds required todisclose earnings per share as per IAS 33?IAS 33 applies to entities whose ordinary shares arepublicly traded. Paragraph 2 states:This standard shall apply to(a) the separate or individual financial statementsof an entity:(i) whose ordinary shares or potential ordinaryshares are traded in a public market ( a domesticor foreign stock exchange or an over-the-countermarket, including local and regional markets) or(ii) that files or is in the process of filing, itsfinancial statements with a securities commissionor other regulatory organization for thepurpose of issuing ordinary shares in a publicmarket; and(b) the consolidated financial statements of a groupwith a parent:(i) whose ordinary shares or potential ordinaryshares are traded in a public market ( a domesticor foreign stock exchange or an over-the-countermarket, including local and regional markets) or(ii) that files, or is in the process of filing, itsfinancial statements with a securities commissionor other regulatory organization for thepurpose of issuing ordinary shares in a publicmarket.In the Study Group’s view, most investment funds donot meet the requirement of having units or shares“traded in a public market”. For open-ended investmentfunds, the issuance and redemption of units or sharesis between the security holder and the fund, as issuer.Security holders do not trade between themselves as theywould on a stock exchange. The value attributable to the36

Financial Statement Disclosures and Specific Mattersissuance or redemption is not based on what the partiesto the transactions might agree to between themselves,as it would be on an exchange; it is based on the statedvaluation policies of the issuing fund (NAV). From thisperspective, EPS would not be required under IFRS forinvestment funds that do not trade on an exchange orin an over-the-counter market.Investment funds that do trade on an exchange or inan over-the counter market should follow the IAS 33guidelines. This is consistent with the Study Group’sview of disclosure of earnings per share under CanadianGAAP.The IASB has issued an exposure draft proposing toamend IAS 33 and expects to publish a revised IAS 33during the second half of 2010. The objective of the proposedchanges is to clarify and simplify the calculationsof EPS and to converge with the US standard (FAS 128,Earnings Per Share). The proposals “…aim to achieveconvergence of the denominator of the earnings pershare (EPS) calculation” and do not change the scopeof the standard.PERFORMANCE FEESIn the Study Group’s view, performance or incentive feesearned by a fund manager and paid by the investmentfund should be accrued at the time that performance isrecognized. Determining when to record a performancefee may sometimes be difficult, for example, where legalagreements state that performance fees are not earneduntil an investment is sold or until the fund is wound up(the latter being the case for many flow-through limitedpartnerships). Performance fees should be recorded onthe recognition of the associated fund performance,rather than when a discrete event (such as the onesnoted above) occurs.INTERIM FINANCIAL STATEMENTSInvestment funds that have to apply NI 81-106 arerequired, under Section 2.3, to prepare interim financialstatements on a semi-annual basis. Investment fundsalso have to follow the recommendations of Section1751, Interim Financial Statements, in preparing theirsemi-annual or other interim financial statements.Canadian GAAP and securities regulation are alignedwhen it comes to interim financial statements.Specifically, interim financial statements should presentinformation as at or for the most recent interim period(for the current financial year to the date the financialstatements are prepared) and comparative data for thecorresponding period in the immediately precedingfinancial period. The comparative statement of netassets is, however, compiled as of the last year-end dateand the statement of investment portfolio does not haveto be prepared on a comparative basis.Other interim financial reporting matters of noteinclude the following:•y The notes to interim financial statements shoulddisclose that:—— interim financial statements should be read inconjunction with the investment fund’s mostrecent annual financial statements;—— significant accounting policies used forpreparing the interim financial statements areconsistent with those used in preparing theannual financial statements; and—— (where applicable) certain significant accountingpolicies vary from those used in preparing theannual financial statements.•ySection 2.4 of NI 81-106 requires interim financialstatements to be filed within 60 days of the interimdate.37

Financial Reporting by Investment Funds•y•yInterim financial statements that have not beenaudited by an independent public accountantshould be clearly marked “unaudited”; investmentfunds that are reporting issuers and have chosen notto have their interim financial statements reviewedby their auditor have to disclose this fact in theirinterim financial statements (Section 2.12(2) of NI81-106).Interim annual reports for reporting issuer investmentfunds should also include an interim managementreport of fund performance prepared inaccordance with Form 81-106F1.CONCLUSIONThis chapter presents the Study Group’s views on thenature and content of information to be included ininvestment fund financial statement disclosures andits views on business combinations, consolidation,performance fees, income taxes, investor equity, earningsper share and interim financial statements. TheStudy Group also considers other types of disclosureby reviewing various sections of the CICA Handbook-Accounting and providing an interpretative commentaryon related party transactions.In addition, the Study Group expresses its views on fundmergers. It considers, and provides guidance on, the needfor disclosures, the basis for identifying an acquirer andthe method of accounting for, and reporting on, fundmergers in the financial statements. Disclosures relatedto an investment fund’s investments are addressed inChapter 4, “Accounting for Investments.”38

Chapter 4ACCOUNTING FOR INVESTMENTSINTRODUCTIONIn this chapter, the Study Group looks at accountingfor investments in accordance with Canadian generallyaccepted accounting principles (GAAP) and identifiesthe principles, without getting into detailed descriptionsof various models of valuation. Appendix C discussesthe application of these principles to accounting forspecific types of securities and transactions.It is important to note that the investment practices ofcertain types of investment funds, such as mutual funds,where securities are issued pursuant to a simplifiedprospectus are closely regulated, whereas the investmentpractices of other funds are not. The issues discussed inthis chapter and Appendix C are relevant to all types ofinvestment funds.It is also noteworthy that, in many situations, investmentsvalued in accordance with GAAP may carry adifferent value than the one used for carrying out transactionsin a fund’s securities. The terms and conditionsunder which an open-ended investment fund issuesand redeems units or shares are found in its governingdocuments, usually a simplified prospectus and annualinformation form in accordance with NI 81-101, MutualFund Prospectus Disclosure.Those terms and conditions are based on the commercialbargain between the fund and its investors as well as therequirements of the regulatory authorities. Currently,capital transactions in open-ended investment funds areexecuted based on a “pricing” net asset value, which isderived primarily from the last traded prices for a fund’sinvestment portfolio. This results in differences in thevalue of an investment portfolio for capital transactionpurposes and for financial reporting purposes.CANADIAN GENERALLY ACCEPTEDACCOUNTING PRINCIPLES (GAAP)The CICA Handbook-Accounting includes an AccountingGuideline and a number of Sections that are relevantto accounting for investments for investment funds:•y Accounting Guideline 18, Investment Companies(AcG-18).•y Section 3855, Financial Instruments – Recognitionand Measurement.•y Section 3861, Financial Instruments – Disclosureand Presentation. For financial periods commencingon or after October 1, 2007, Section 3861 hasbeen superseded by the following Sections:—— Section 3862, Financial Instruments –Disclosures; and—— Section 3863, Financial Instruments –Presentation.Section 3865, Hedges, does not apply to investmentfunds that measure all investments at fair value.ACCOUNTING GUIDELINE 18,INVESTMENT COMPANIES (AcG-18) 19AcG-18 addresses the special circumstances encounteredwhen investment companies account for their investments.It deals with the determination of whether anenterprise is an investment company (that is, an investmentfund) and the measurement of its investments.AcG-18, paragraph 8, defines an investment fund aseither:•y an investment fund as defined by the Canadiansecurities regulatory authorities in NationalInstrument 81-106, Investment Fund ContinuousDisclosure; or19 AcG-18 uses the term “investment companies” whereas this ResearchReport uses the term “investment funds” in a similar context.39

Financial Reporting by Investment Funds•ya separate legal entity whose primary business activityfor the period is investing.and 6 of AcG-18 classify an investment fund’s financialinstruments as “held for trading” under Section 3855.AcG-18, paragraph 9, sets out the criteria for determiningthat an enterprise’s primary business is investing.AcG-18, paragraph 5, states that an investment companyshould measure all of its investments at fair value andpresent them on this basis in its financial statements.This includes investments that meet the definitionof a subsidiary or joint venture, or investments overwhich the investment company exercises significantinfluence without control or joint control. (Even if itis the primary beneficiary, an investment company asdefined in AcG-18 is not required to follow AccountingGuideline 15, Consolidation of Variable Interest Entitiesand, therefore, does not have to consolidate exceptunder specific circumstances. See Chapter 3.) Changesin the fair value of investments should be included in netincome for the period in which the changes occurred.SECTION 3855, FINANCIALINSTRUMENTS – CLASSIFICATIONOF INVESTMENTSThe recognition, regular-way purchase or sale and fairvalue measurement considerations of Section 3855apply to investments accounted for in accordancewith AcG-18. Due to Section 3855 scope restrictions,however, the rest of Section 3855 material does notapply to an investment fund’s investments. (Althoughthis other material might apply to other financialinstruments within an investment fund’s net assets, thiswould be rare.)Accounting for investments in accordance with AcG-18results in several differences from the results achievedby an enterprise that follows only the requirements inSection 3855. AcG-18 does not permit investment fundsto classify investments as available for sale or held tomaturity. Effectively, the requirements of paragraphs 5The portions of Section 3855 that do apply to aninvestment fund (recognition, regular-way purchase orsale and fair value measurement considerations) are asignificant focus of this chapter.Transition to IFRS — Classification ofInvestments (IAS 39)Classification of financial instrumentsUnder IFRS, IAS 39, Financial Instruments: Recognitionand Measurement, contains the following fourcategories of financial instruments:20•y fair value through profit or loss;•y held to maturity;•y loans and receivables; and•y available for sale.Canadian investment funds have historically appliedAcG-18 which requires that investment funds meetingthe definition of an investment company measure theirinvestments at fair value with changes in fair valuethrough profit or loss in the period in which they arise.IFRS does not contain guidance similar to AcG-18.It follows that investment funds will need to determinethe appropriate classifications for each type of financialinstrument they hold. In order to determine theappropriate classification for financial instruments, theinvestment fund will need to consider the intention ofthe holding and the definitions of the various categoriesin IAS 39. It is expected that the investments of openendedinvestment funds with short-term investmentstrategies will default to the “held for trading” categoryand therefore be carried at fair value through profitor loss. Irrespective of the classification of financialinstruments, documentation should be maintained to20 Including held for trading instruments and instruments designated asat fair value through profit or loss.40

Accounting for Investmentsevidence the consideration of the relevant factors indetermining the appropriate classification.Despite the intention of the investment fund with respectto a financial instrument, alternative classificationsmay exist including the fair value through profit orloss option. Exhibit 4.1 summarizes the default andoptional classifications under IAS 39 for various typesof instruments.Exhibit 4.1Type of InstrumentFinancial assets and liabilities that are:• acquired for short-term resale;• part of a portfolio of identified financial instruments managed togetherfor which there is evidence of short-term profit-taking; or• are designated at inception as held for tradingOther than those financial assets and liabilities set out above:Loans and ReceivablesDebt Instruments (other than loans and receivables that are held tomaturity)Debt Instruments (other than loans and receivables that are not held tomaturity)Equity Instruments (Note 1)Financial LiabilitiesDerivatives (Note 2)Note 1 - Equity instruments, including those not quoted in an active market,are accounted for as available for sale and carried at fair value unless the fairvalue of the instrument is not reliably measureable.Note 2 - Unless linked to and required to be settled by equity instrumentsfor which fair value is not reliably determinable.Cost orAmortized CostDefaultclassificationDefaultclassificationDefaultclassificationAvailable forSaleOptionaldesignationOptionaldesignationDefaultclassificationDefaultclassificationAt Fair ValueHeld forTradingDefaultclassificationOptionaldesignationOptionaldesignationOptionaldesignationOptionaldesignationOptionaldesignationDefaultclassification41

Financial Reporting by Investment FundsIAS 39, Financial Instruments: Recognition andMeasurementParagraph 9 provides definitions of four categories offinancial instruments, reproduced below.1.Fair value through profit or lossA financial asset or financial liability at fairvalue through profit or loss is a financial asset orfinancial liability that meets either of the followingconditions.(a) It is classified as held for trading. A financialasset or financial liability is classified as held fortrading if:(i) it is acquired or incurred principally for thepurpose of selling or repurchasing it in thenear term;(ii) on initial recognition it is part of a portfolioof identified financial instruments that aremanaged together and for which there isevidence of a recent actual pattern of shorttermprofit-taking; or(iii) it is a derivative (except for a derivative thatis a financial guarantee contract or a designatedand effective hedging instrument).(b) Upon initial recognition it is designated by theentity as at fair value through profit or loss.An entity may use this designation only whenpermitted by paragraph 11A, or when doing soresults in more relevant information, becauseeither(i) it eliminates or significantly reduces ameasurement or recognition inconsistency(sometimes referred to as ‘an accountingmismatch’) that would otherwise arisefrom measuring assets or liabilities orrecognising the gains and losses on themon different bases; or(ii) a group of financial assets, financialliabilities or both is managed and its performanceis evaluated on a fair value basis,2.in accordance with a documented riskmanagement or investment strategy, andinformation about the group is providedinternally on that basis to the entity’skey management personnel (as defined inIAS 24 Related Party Disclosures (as revisedin 2003)), for example the entity’s board ofdirectors and chief executive officer.In IFRS 7, paragraphs 9-11 and B4 require theentity to provide disclosures about financial assetsand financial liabilities it has designated as at fairvalue through profit or loss, including how it hassatisfied these conditions. For instruments qualifyingin accordance with (ii) above, that disclosureincludes a narrative description of how designationas at fair value through profit or loss is consistentwith the entity’s documented risk management orinvestment strategy.Investments in equity instruments that do not havea quoted market price in an active market, andwhose fair value cannot be reliably measured (seeparagraph 46(c) and Appendix A paragraphs AG80and AG81), shall not be designated as at fair valuethrough profit or loss.It should be noted that paragraphs 48, 48A, 49 andAppendix A paragraphs AG69-AG82, which set outrequirements for determining a reliable measure ofthe fair value of a financial asset or financial liability,apply equally to all items that are measured atfair value, whether by designation or otherwise, orwhose fair value is disclosed.Held to maturityHeld-to-maturity investments are non-derivativefinancial assets with fixed or determinable paymentsand fixed maturity that an entity has the positiveintention and ability to hold to maturity (see42

Accounting for Investments3.Appendix A paragraphs AG16-AG25) other thanthose that:(a) the entity upon initial recognition designates asat fair value through profit or loss;(b) the entity designates as available for sale; and(c) meet the definition of loans and receivables.An entity shall not classify any financial assets asheld to maturity if the entity has, during the currentfinancial year or during the two preceding financialyears, sold or reclassified more than an insignificantamount of held-to-maturity investments beforematurity (more than insignificant in relation tothe total amount of held-to-maturity investments)other than sales or reclassifications that:(i) are so close to maturity or the financial asset’scall date (for example, less than three monthsbefore maturity) that changes in the marketrate of interest would not have a significanteffect on the financial asset’s fair value;(ii) occur after the entity has collected substantiallyall of the financial asset’s original principalthrough scheduled payments or prepayments;or(iii) are attributable to an isolated event that isbeyond the entity’s control, is non-recurringand could not have been reasonably anticipatedby the entity.Loans and receivablesLoans and receivables are non-derivative financialassets with fixed or determinable payments that arenot quoted in an active market, other than:(a) those that the entity intends to sell immediatelyor in the near term, which shall be classified asheld for trading, and those that the entity uponinitial recognition designates as at fair valuethrough profit or loss;(b) those that the entity upon initial recognitiondesignates as available for sale; or4.(c) those for which the holder may not recoversubstantially all of its initial investment, otherthan because of credit deterioration, whichshall be classified as available for sale.An interest acquired in a pool of assets that arenot loans or receivables (for example, an interest ina mutual fund or a similar fund) is not a loan orreceivable.Available for saleAvailable-for-sale financial assets are those nonderivativefinancial assets that are designated asavailable for sale or are not classified as (a) loans andreceivables, (b) held-to-maturity investments or (c)financial assets at fair value through profit or loss.Study Group ViewsThe default categorization under IAS 39 will not be atfair value through profit or loss (“FVTPL”) in everyinstance. If securities have been acquired principally forthe purpose of short-term trading, which may or maynot be the case depending on the investment strategy ofthe fund, the securities will meet the definition of heldfor trading and therefore be required to be carried at fairvalue through profit or loss.The Study Group recommends that, at inception,investment funds designate financial instruments thatare not required to be classified as “held for trading” as“fair value through profit or loss”.Where an investment fund chooses to carry its investmentsor other instruments at FVTPL, documentationwill need to be completed both for positions held ontransition to IFRS and subsequently on a basis contemporaneouswith the purchase of additional investments.Blanket policies may be completed for similarinvestments.43

Financial Reporting by Investment FundsInvestment funds that choose not to elect FVTPLtreatment for their financial instruments will need toconsider alternative classifications. The primary types ofinstruments held by an investment fund include:•y equity instruments;•y debt instruments; and•y derivative instruments.Derivative instruments will require treatment at fairvalue through profit or loss (i.e. as they are consideredheld for trading). In rare circumstances, a derivativemay be linked to and settled by an equity instrumentwhose fair value is not reliably measurable, in whichcase measurement at cost is appropriate.IFRS 7, Financial Instruments: Disclosures requiresseparate disclosure of each category of financial instrument(e.g. fair value through profit or loss, designated asfair value through profit or loss, etc.).Equity instruments and debt instruments, other thandebt instruments that are held to maturity, that arenot held for trading will default to available for saleand require treatment at fair value with changes in fairvalue accounted for in other comprehensive income.It is presumed that investment funds will typically beunable to classify investments as held to maturity, giventhe redeemable nature of their units or shares (i.e. aninvestment fund that would be required to dispose ofinvestments in order to satisfy redemptions is unlikelyto be able to meet the requirement to have the positiveintention to hold the security until maturity).Certain investments of an investment fund may includeassets other than equity instruments, contractual rightsto cash, or obligations to exchange financial instrumentsunder conditions that are potentially favorable tothe entity. Such assets do not meet the definition of afinancial instrument and therefore, are not be withinthe scope of IAS 39.For example, Exhibit 4.2 shows that such investmentsmay include real estate or commodity investments heldby a fund. These investments may be required to becarried at values other than fair value, such as cost oramortized cost, in accordance with the relevant guidance(e.g. IAS 40, Investment Property). Depending onthe circumstances associated with the investment, thecriteria in IFRS 5, Non-current Assets Held for Saleand Discontinued Operations, may be met to record theinvestment as held for sale.Exhibit 4.2Type of investmentReal EstateAgriculture (biological assets)Property, plant and equipmentMeasurement model[options available]Cost[Fair value option available]Fair value[If fair value cannot be reliably determined,measure at cost]Cost[Fair value under an optional “revaluationmodel”]Securitization Not applicable IAS 39IFRS standard/referenceIAS 40, Investment PropertyIAS 41, AgricultureIAS 16, Property, Plant and EquipmentCommodities and commodity contracts Various IAS 39 [if meets the definition of a financialasset or liability]IAS 2, Inventories [if considered inventory]IFRS 6, Exploration for and Evaluation ofMineral ResourcesLeases Not applicable IAS 17, Leases44

Accounting for InvestmentsSECTION 3855, FINANCIALINSTRUMENTS - RECOGNITIONSections 3855.39 and 3855.40 state that:An entity should recognize a financial asset or financialliability on its balance sheet when, and only when,the entity becomes a party to the contractual provisionsof the financial instrument (see paragraph 3855.40with respect to “regular-way” purchases of financialassets, and paragraphs 3855.A35-.A36 for examplesof applying this principle). [OCT. 2006]A regular-way purchase or sale of a financial assetshould be recognized and derecognized, as applicable,using trade-date accounting or settlement-dateaccounting as described in paragraphs 3855.42-.43.The method used should be applied consistently for allpurchases and sales of financial assets that belong to thesame category of financial assets defined in paragraph3855.19(f)-(i). [OCT. 2006]While Section 3855 permits recognition of investmenttransactions on either the trade date or settlement date, itis the Study Group’s view that investment funds shouldfollow trade-date accounting. Practical limitations inthe daily receipt and transmission of trade instructionsmay result in short delays in obtaining trade-date information.At financial period ends, funds should ensuretrading activity is captured in the appropriate periods.The disclosure of significant accounting policies shouldinclude whether the fund follows trade-date or settlement-dateaccounting (paragraph 3861.48(b) — carriedforward to paragraph 3862.B5(c)).The realized gain/loss on the disposition of investmentsshould be determined using average cost of the securities.Paragraph 3855.56 prohibits the average cost ofsecurities from including commissions or other purchasetransaction costs. Similarly, proceeds on dispositionshould be gross proceeds, before commissions or othertransaction costs.Transaction costs should be recognized immediately innet income. Transactions costs are presented as a separateline item on the statement of operations, either withother expenses, or with realized and unrealized gains/losses from investments. This treatment under Section3855 results in differences between accounting recordsand tax reporting which, in the Study Group’s view, isnot beneficial.The following explains current Canadian practices forinterest, dividends and corporate actions:•y InterestGenerally, interest income is accrued on all debtsecurities, such as corporate, municipal or treasurybonds. It is accrued daily or when a fund is valuedfor reporting purposes.•ySome types of securities may be purchased at adiscount or premium. Because an investment fundcarries its investments at fair value, and reports bothrealized and unrealized gains and losses, accretionof discounts and amortization of premiums doesnot affect its net asset value or results of operations.Funds may either recognize the discount orpremium at the disposition date of all or part ofthe security (the fair value method) or amortize theamount.The Study Group recommends following the fairvalue method. If discounts or premiums are amortized,the fund should use the effective interest ratemethod, and the amortization policy should bedisclosed in the significant accounting policies noteto the financial statements.DividendsDividend income is recorded on the ex-dividenddate. Distributions that represent returns of capitalare credited to the cost of the investment ratherthan to investment income.45

Financial Reporting by Investment Funds•yStock splits and stock dividends in shares ownedare not deemed income to the investment fund. Aswell, securities received as a result of other corporateactions, such as a spin-off, reorganization orconsolidation, would not be considered income tothe investment fund. Dividends offering the choiceto receive cash or stock are, however, usually recognizedas investment income. The income is deemedto be the amount payable in cash, because cash isusually the best evidence of the fair value of theshares. Cash dividends declared on stocks for whichthe securities portfolio reflects a short position as ofthe record date should be recognized as an expenseon the ex-dividend date.Corporate ActionsCertain Canadian and foreign corporate actions havedifferent recognition requirements for tax and GAAPpurposes. Usually, this creates timing differencesbetween when the income is recognized for tax orfinancial reporting (certain transactions can createpermanent differences), but not a difference in thevaluation of the fund (no impact on net assets).Often, investment funds will maintain detailedsecurity-level records on a tax basis to facilitatean accurate tax distribution or dividend calculation.In such circumstances, management shouldconsider whether the accounting treatment createsa significant departure from GAAP that wouldrequire adjustment for financial reporting purposes.Exhibit 4.3 provides examples of corporate actionsthat create timing or permanent differences inincome recognition.46

Accounting for InvestmentsExhibit 4.3Examples of Corporate Actions That Create Timing or Permanent Differences in Income RecognitionDeemed Dividends (Canadian Securities Only)Redemption of shares (generally preferred shares but can be common) for proceeds in excess of paid up capital:• For accounting purposes, the transaction is recorded as proceeds of disposition.• For tax purposes, proceeds in excess of PUC are treated as a dividend. There will also be a capital gain or loss realized for thedifference between the proceeds of disposition less the deemed dividend and the ACB of the shares plus costs of dispositions.Foreign Spin Off Transactions (Capital/Income) Section 86.1Foreign de-merger transaction where a foreign company issues shares of a subsidiary company to its shareholders:• For accounting purposes, the transaction is treated as a cost allocation.• For tax, the transaction can be treated as either income (the default) or cost allocations for qualified transactions where the fund filesan election.Other Foreign Corporate Actions• In some cases, the foreign spin off transaction has resulted in the receipt of shares with no cost assigned and no disposition of theoriginal shares. Accounting would allocate the cost of the shares held to the shares received (B plan shares).• Disposition of shares held as a result of a foreign merger may result in a rollover for tax purposes if the only consideration for theshares is shares of the acquiring corporation. Accounting would treat the transaction as a disposition.Stock Dividends Paid by Canadian CorporationsA dividend paid by a Canadian corporation in the form of its shares:• For accounting purposes, mutual funds treat the transaction as receipt of shares having no cost.• For tax purposes, a portion or all of a stock dividend could be dividend income (if there was an increase in PUC) and the sharesassigned a tax cost equal to the dividend income recognized.Section 85 Transactions• When a fund has transferred securities to a Canadian corporation in exchange for consideration that includes shares of thecorporation, the fund may be able to elect an amount to be used as proceeds of disposition for tax purposes and defer all or a portionof the unrealized gain.• For accounting purposes, the transaction would be a disposition for proceeds equal to the market value of the consideration received.Section 85.1 Transactions• Where shares are disposed of to a corporation and the consideration received is only shares of the corporation acquiring the shares,the transaction for tax purposes can be treated as a disposition of the security for proceeds equal to the security’s cost.• For accounting purposes, the transaction is a disposition for proceeds equal to the fair value of the shares received.Section 86(1) TransactionsWhere shares are disposed of to a corporation in the course of a reorganization of capital:• For tax purposes, there is an allocation of the original cost to the consideration based on the market value and type of considerationreceived. Specifically, the ACB of the new shares is equal to the ACB of the old shares less the fair market value of the propertyreceived. In addition, if there is other consideration received, the Fund is deemed to have disposed of the old shares for proceedsequal to the ACB of the new shares plus the value of any other property.• For accounting purposes, the transaction would be a disposition.47

Financial Reporting by Investment FundsTransition to IFRS — Revenue Recognition (IAS18 and IAS 39)Revenue is defined as income arising in the course ofthe ordinary activities of an entity. IAS 18, Revenue,applies to revenue arising from:•y the sale of goods;•y the rendering of services; and•y the use by others of entity assets yielding interest,royalties and dividends.There are three potential issues with respect to revenuerecognition for investment funds.1. Dividends from pre-acquisition surplusIAS 18 originally required that dividends on equitysecurities declared from pre-acquisition profits bededucted from the cost of the securities, rather thanbe recorded as dividend income (IAS 18 paragraph32). This would have added significant complexity toaccounting for investment funds, with little addedvalue in terms of information to the investor giventhat investment funds record their investments at fairvalue and there is no net asset value impact. As well,sales were not treated consistently with purchases,as there was no corresponding requirement to adjustthe sale for the dividend.2.The requirement to deduct dividends from preacquisitionsurplus from cost was removed in the2008 IFRS amendments. Therefore, this issue hasbeen resolved.Effective interest rate methodIAS 18 requires that interest income be recognizedusing the effective interest method as set out in IAS39. IAS 39 specifies that the effective interest methodapplies to financial instruments that fall into theloans and receivables, held-to-maturity or availablefor sale categories. The effective interest rate methodis not applicable to the fair value through profit andloss category of financial instruments. Therefore,3.the effective interest rate method is not applicableto investment funds that record their financialinstruments at fair value through profit and loss.These funds are not required to amortize premiumor discount on fixed income instruments.However, investment funds that choose to amortizethe premium and discount on fixed income instrumentsshould use the effective interest rate method.In addition, funds that record their financial instrumentsas available for sale should use the effectiveinterest rate method.Uncollectible amountsIAS 18, paragraph 18, requires that uncollectibleamounts be recognized as an expense, rather than asan adjustment to the revenue originally recognized.Recording these items as an expense will impactmanagement expense ratio (MER) calculations.Authoritative Guidance•y IASBIAS 18, RevenueIAS 39, Financial Instruments: Recognition andMeasurementIFRS 7, Financial Instruments: Disclosures•y Canadian GAAPSection 3855, Financial Instruments – Recognitionand Measurement•y United States GAAPAICPA Audit and Accounting Guide: InvestmentCompaniesCurrent Practice•y CanadaThe preceding discussion explains current Canadianpractices for interest and dividends.•y InternationalThe European Fund and Asset ManagementAssociation (EFAMA) June 2007 discussion paper48

Accounting for Investments•yon IFRS convergence indicates that some memberstates use a form of effective yield accounting forbonds, although it is a less complex method than isenvisaged in IAS 39. If there are changes in estimatedcash flows, these would give rise to a change in theEIR rather than the change in amortized cost.The EFAMA paper also notes that some memberstates, such as UK and Ireland, historically haverecognized bond income on an accrual of couponbasis unless the bond was issued at a significantdiscount or premium, in which case an effectiveyield based method will have been used. If thereare changes in estimated cash flows, these wouldagain give rise to a change in the EIR rather than achange in amortized cost. As mentioned above, theUK and Ireland have, as part of UK GAAP convergencewith IFRS, begun to transition towards anIAS 39 EIR methodology.United StatesThe AICPA Guide provides guidance with respectto interest:2.53 Interest. Interest income on debt securities,such as corporate bonds, municipal bonds, ortreasury bonds, is accrued daily. Premiumsand discounts should be amortized using theinterest method.FAS 91, Accounting for Nonrefundable Fees andCosts Associated with Originating or AcquiringLoans and Initial Direct Costs of Leases (paragraph18), indicates that “The objective of the interestmethod is to arrive at periodic interest income(including recognition of fees and costs) at a constanteffective yield on the net investment (that is,the principal amount of the investment adjusted byunamortized fees or costs and purchase premiumor discount).”In addition, the AICPA Guide provides guidanceregarding defaulted debt securities:2.57 In accordance with the guidance providedby FASB Statement No. 5, accrued interestshould be written off when it becomes probablethat the interest will not be collected and theamount of uncollectible interest can be reasonablyestimated.2.58 The portion of interest receivable ondefaulted debt securities written off that wasrecognized as interest income should be treatedas a reduction of interest income. Write-offsof purchased interest should be reported asincreases to the cost basis of the security, whichwill result in an unrealized loss.Discussion and AnalysisAs previously noted, revenue is defined as income arisingin the course of the ordinary activities of an entity. IAS18 applies to revenue arising from the:•y sale of goods;•y rendering of services; and•y use by others of entity assets yielding interest, royaltiesand dividends.IAS 18 does not deal with revenue from:•y Dividends arising from investments which areaccounted for under the equity method (these arecovered under IAS 28, Investments in Associates)•y Changes in the fair value of financial assets andfinancial liabilities of their disposal (IAS 39)IAS 18 states that revenue shall be measured at thefair value of consideration received or receivable (IAS18.9). It also deals with dividends, interest, uncollectibleamounts and disclosure.1.DividendsIAS 18, paragraph 30(c), states that “dividends49

Financial Reporting by Investment Fundsshall be recognized when the shareholder’s rightto receive payment is established.” Paragraph32 originally stated “When dividends on equitysecurities are declared from pre-acquisition profits,those dividends are deducted from the cost of thesecurities.” However, it was amended in 2008 andnow reads as follows:“When unpaid interest has accrued before theacquisition of an interest-bearing investment, thesubsequent receipt of interest is allocated betweenpre-acquisition and post-acquisition periods; onlythe post-acquisition portion is recognised as revenue.(The amendment is to be applied prospectively forannual periods beginning on or after 1 January2009. Earlier application is permitted.)”Therefore, this issue is resolved.relevant period. The effective interest rate is therate that exactly discounts the estimated futurecash payments or receipts through the expectedlife of the financial instrument… .The effective interest method applies to loans andreceivables, held-to-maturity and available-for-saleinvestments (IAS 39, paragraphs 46(a), 46(b)and 55(b)). IFRS 7, paragraph 20(b) requires thedisclosure of total interest income (calculated usingthe effective interest method) for financial assetsthat are not at fair value through profit and loss.The effective interest rate method is not applicableto the fair value through profit and loss categoryof financial instruments. Therefore, the effectiveinterest rate method is not applicable to investmentfunds that record their financial instruments at fairvalue through profit and loss.2.InterestIAS 18.30 requires interest to be recognized usingthe effective interest method as set out in IAS 39,paragraph 9, and AG5-AG8. The complexity andcost of applying this methodology to the debtinstruments of investment funds has little addedvalue. A fund carries its investments at fair valueand the use of the effective interest rate method torecognize income has no effect on the net asset valueof the fund. It affects only the allocation betweeninvestment gains and interest income. Therefore, theissue is whether investment funds have to apply theeffective interest method to record interest income.IAS 39, paragraph 9, provides the following definitionof effective interest method:The effective interest method is a method of calculatingthe amortized cost of a financial assetor a financial liability (or a group of financialassets or financial liabilities) and of allocatingthe interest income or interest expense over the3.Although not required, if these funds choose toamortize the premium and discount on fixedincome instruments, they should use the effectiveinterest rate method. Investment funds must disclosethe accounting policy used. In addition, fundsthat record their financial instruments as availablefor sale should use the effective interest method.Uncollectible AmountsIAS 18.18 states that:Revenue is recognised only when it is probablethat the economic benefits associatedwith the transaction will flow to the entity. …However, when an uncertainty arises about thecollectibility of an amount already includedin revenue, the uncollectible amount or theamount in respect of which recovery has ceasedto be probable is recognised as an expense,rather than as an adjustment of the amount ofrevenue originally recognized.50

Accounting for Investments4.This is different from the current practice in Canadaand the US where the uncollectible amount isrecorded as an adjustment to income. The IFRSaccounting treatment for uncollectible amountscould affect the MER of investment funds subjectto NI 81-106. Industry associations should bringthis to the attention of the regulator to determineif this is an intended consequence of the adoptionof IAS 18.DisclosureIAS 18, paragraph 35, states that:An entity shall disclose:(a) the accounting policies adopted for the recognitionof revenue, including the methodsadopted to determine the stage of completionof transactions involving the rendering ofservices;(b) the amount of each significant category ofrevenue recognised during the period, includingrevenue arising from:(i) the sale of goods;(ii) the rendering of services;(iii) interest;(iv) royalties;(v) dividends; and(c) the amount of revenue arising from exchangesof goods or services included in each significantcategory of revenue.IFRS 7 disclosure requirements include the following:Statement of Comprehensive Income - Items ofincome, expense, gains or lossesParagraph 20 reads, in part:An entity shall disclose the following items ofincome, expense, gains or losses either in thestatement of comprehensive income or in thenotes:(a) net gains and net losses on:…(b) total interest income and total interest expense(calculated using the effective interest method)for financial assets or financial liabilities thatare not at fair value through profit or loss;(c) fee income and expense…(d) interest income on impaired financial assetsaccrued in accordance with paragraph AG93of IAS 39; and(e) the amount of any impairment loss for eachclass of financial asset.The Basis for Conclusions notes the followingconcerning paragraph 20(a):BC34 Some entities include interest and dividendincome in gains and losses on financial assets andfinancial liabilities held for trading and others donot. To assist users in comparing income arisingfrom financial instruments across differententities, the Board decided that an entity shoulddisclose how the income statement amounts aredetermined. For example, an entity should disclosewhether net gains and losses on financial assets orfinancial liabilities held for trading include interestand dividend income (see Appendix B, paragraphB5(e)).Appendix B - Other disclosure – accounting policies(paragraph 21)B5, paragraph 21, requires disclosure of themeasurement basis (or bases) used in preparing thefinancial statements and other accounting policiesused that are relevant to an understanding of thefinancial statements. For financial instruments,such disclosure may include:(e) how net gains or net losses on each categoryof financial instrument are determined (seeparagraph 20(a)), for example, whether thenet gains or net losses on items at fair valuethrough profit or loss include interest or dividendincome.51

Financial Reporting by Investment FundsStudy Group Views•y InterestA fund that carries its holdings at fair value throughprofit or loss may either recognize the discount orpremium at the disposition date of all or part ofthe security (the fair value method) or amortize theamount. The Study Group recommends followingthe fair value method. If discounts or premiums areamortized, the fund should use the effective interestrate method and the amortization policy should bedisclosed in the significant accounting policies noteto the financial statements. Funds that record theirfinancial instruments as available for sale shoulduse the effective interest method and disclose thetotal interest income, as well as the significantaccounting policies adopted.•yUncollectible amountsThe Study Group recommends that industryassociations bring the point on uncollectibleamounts to the attention of the regulator todetermine if this is an intended consequence of theadoption of IAS 18.Future IFRS DevelopmentsIn December 2008, the IASB published a discussionpaper, Preliminary Views on Revenue Recognitionin Contracts with Customers. The comment deadlinewas June 19, 2009.SECTION 3855, FINANCIALINSTRUMENTS - MEASUREMENTAs Exhibit 4.4 illustrates, an investment companyshould measure all of its investments at fair value andpresent them on this basis in its financial statements(AcG-18, paragraph 5). Fair value is the amount of theconsideration that would be agreed upon in an arm’slength transaction between knowledgeable, willingparties who are under no compulsion to act (AcG-18,paragraph 7). Published price quotations in an activemarket provide the best evidence of fair value (paragraph3855.73).For financial statement reporting purposes, the appropriatequoted market price for an asset held or a liabilityto be issued is usually the current bid price and, foran asset to be acquired or a liability held, the askingprice. When an entity has assets and liabilities withoffsetting market risks, it may use mid-market prices asa basis for establishing fair values for the offsetting riskpositions and apply the bid or asking price to the netopen position, as appropriate (paragraph 3855.A45). Forpurposes other than financial statement reporting, thelong-standing Canadian industry valuation practice ofusing last trade prices is still in use (see Chapter 6).It is notable that paragraph 3855.A44 states: “Theobjective of determining fair value for an instrumentthat is traded in an active market is to arrive at the priceat which a transaction would occur at the balance sheetdate in that instrument (i.e., without repackaging theinstrument) in the most advantageous active marketfor that instrument to which the entity has immediateaccess.” This is subtly different from the commonpricing practice, which is to use the primary market forthe security.When current bid and asking prices are unavailable, theprice of the most recent transaction provides evidenceof the current fair value so long as there has not beena significant change in economic circumstances sincethe time of the transaction (paragraph 3855.A45). Paragraph3855.66 reads, in part:After initial recognition, an entity should measurefinancial assets, including derivatives that are assets,at their fair values, without any deduction for transactioncosts it may incur on sale or other disposal... .52

Accounting for InvestmentsExhibit 4.4Fair Valuation Decision Tree under Section 3855ALL INVESTMENTSActive MarketNo Active MarketSTARTENDBid / askavailable?NoRecent trade?NoNot based onobservablemarket pricesand ratesYesYesSignificantchangein economiccircumstancesince trade?YesUseValuationTechniqueExamples:Halted orsuspendedtradingPrivateplacementsBankruptcySignificantchangein economiccircumstance?YesNoNoUse bid / askUse actualtrade priceDiscloseExamples:Bid / AskOptions /WarrantsPricingmodelsRestrictedStockENDENDEND53

Financial Reporting by Investment FundsWhen the market for a financial instrument is not active,an entity establishes fair value by using a valuationtechnique. Valuation techniques include using recentarm’s length market transactions between knowledgeable,willing parties, if available; reference to the currentfair value of another instrument that is substantially thesame; discounted cash flow analysis; and option pricingmodels. When there is a reliable valuation techniquecommonly used by market participants to price suchan instrument, the entity could use that technique(paragraph 3855.A47).————————much as 15 hours before the time the investmentfund begins to calculate its net asset value);trading is halted;events occur that unexpectedly close entiremarkets (for example, natural disasters, powerblackouts, public disturbances, or similar majorevents);markets are closed due to scheduled holidays;andthe security is illiquid and trades infrequently(Section 9.4(2)).Part 9 of the Companion Policy to NI 81-106 providesthe following guidance on determining whether amarket is active when determining pricing NAV. 21 Thissame guidance could be considered in determining fairvalue in accordance with GAAP.•y A market is generally considered active when quotedprices are readily and regularly available from anexchange, dealer, broker, industry group, pricingservice or regulatory agency, and those prices reflectactual and regularly occurring market transactionson an arm’s length basis (Section 9.4(1)).•yA market is not considered to be active, and pricesderived from it may be unreliable for valuation purposes,if, at the time the investment fund begins tocalculate its net asset value, any of the following circumstancesare present:—— markets on which portfolio securities areprincipally traded closed several hours earlier(for example, some foreign markets may close as21 Section 14.2 of NI 81-106 requires an investment fund to calculate itsnet asset value based on the fair value of the investment fund’s assetsand liabilities. For the purposes of calculating pricing NAV, investmentfunds are required to comply with the definition of “fair value” setout in subsection 14.2(1.2) of NI 81-106; however, the CompanionPolicy states that the investment funds may also look to the Handbookfor guidance on the measurement of fair value. While the regulatorshave not endorsed any particular fair value technique, they state thatan investment fund’s valuation policy should be approved by themanager’s board of directors.In the Study Group’s view, estimated fair values derivedfrom valuation techniques will often be the same forfinancial reporting purposes and for pricing of theinvestment fund for issue and redemption of securities.For example, under NI 81-106, the fair valuationof stale security prices from foreign markets involvingmarket data and attribution models is a valuation techniquethat is acceptable for both financial reporting andpricing. Further, this valuation of foreign security pricesis normally construed to be based on observable marketprices and rates, as defined in Section 3855.The fair value for units or shares of an underlying fundin a fund-of-funds structure will usually be the pricingNAV of that underlying fund. Most Canadian fundshave only one offering price per security — the valuethat represents consideration for that unit/share whetherone is buying or redeeming the security.Transition to IFRS — Fair Value Measurementand Disclosure (IAS 39)With regard to fair value measurement and disclosure,there have been significant changes in Canadian GAAPresulting from convergence with IFRS. In addition, theglobal economic crisis has had an impact on IFRS andCanadian GAAP, as well as US GAAP, and this willlikely result in some changes that will be implementedin Canada before 2011 and other possible changes now54

Accounting for Investmentsin process that are not likely to be implemented before2011.Furthermore, there have been practical difficulties forDecember 31, 2008 year ends in determining fair valuesin accordance with Section 3855 and AcG-18, anddisclosures required under Section 3862. There mayalso be practical difficulties for December 31, 2009 and2010 year ends (for example, amendments to Section3862 to harmonize with amendments to IFRS 7).The Study Group believes that there is a need for discussionregarding any changes that become effectivebefore 2011 as a result of IFRS 7 amendments in 2009.It is difficult, however, to provide guidance regardingwhat might happen in 2011 on the transition to IFRS.Therefore, guidance is limited to providing:•y a list of relevant standards, guidance and proposals(see Exhibit 4.5);•y•ya chronology of what has happened in Canada, theUS and at the IASB starting with Canadian convergencewith IAS 39, noting new or amended standardscoming into effect in 2008 and 2009 at theIASB and in Canada, and finishing with currentproposals outstanding and the work plans of IASBand AcSB (see Exhibit 4.6);a list of fair value measurement and disclosurematters for consideration (see Exhibit 4.7)There is continuing interest in fair value measurementand disclosure issues, such as bid/close and transactioncosts, being addressed around the world. The StudyGroup believes this situation requires monitoring andanalysis. It is anticipated that an analysis of mattersfor consideration will be undertaken by the CICAInvestment Funds standing Committee when the IASBexposure draft on how to measure fair value is releasedand the AcSB issues a CICA Handbook release to harmonizeSection 3862 with recent amendments to IFRS7 (expected in mid-2009).55

Financial Reporting by Investment FundsExhibit 4.5Authoritative GuidanceIASB• IAS 39, Financial Instruments: Recognition and Measurement• IAS 39, Amendment – reclassification from “fair value through profit or loss” to “other comprehensive income”, October 13, 2008• IFRS 7, Financial Instruments: Disclosures• IFRS 7, Financial Instruments: Disclosures – amendments to enhance disclosures about fair value measurement, March 5, 2009(effective January 1, 2009)• IASB, Discussion Paper: Fair Value Measurements – Part 1: Invitation to Comment and relevant IFRS guidance, November 2006(comments were due by April 2, 2007)• IASB, ED re “how to” measure fair value expected Q2 2009• IASB, Derecognition – ED issued in March 2009 (comments due by July 31, 2009)Canadian GAAP• Section 3855, Financial Instruments – recognition and measurement• Section 3861, Financial Instruments – disclosure and presentation (superseded by Sections 3862 and 3863 effective for yearscommencing October 1, 2007)• Section 3862, Financial Instruments – disclosures• Section 3863, Financial Instruments – presentation• EIC 173, Credit Risk and the Fair Value of Financial Assets and Financial Liabilities (January 20, 2009)• AcG-18, Investment Companies (January 2004)• AcSB: Amendments to Sections 3855, 3861 and 3862 to permit reclassification of financial assets in limited circumstances, October 24,2008 (effective for reclassifications made on or after July1, 2008, but only for periods for which annual or interim financial statementshave not been issued previously)• AcSB Staff: Four Commentaries on the measurement, presentation and disclosure of investments in non-bank-sponsored ABCP(2008), and on implementing the restructuring plan (2009)• AcSB ED: Improving Disclosures about Financial Instruments, November 2008 (comments were due January 12, 2009) [objective is toharmonize with amendments to IFRS 7; likely to be incorporated into Canadian GAAP prior to 2011]• AcSB: amendments to Section 3862 to harmonize this Section with recent amendments to IFRS 7 (Handbook release expected Q22009)United States GAAP• FAS 157, Fair Value Measurements (effective November 15, 2007)• FAS 157, Amendment – reclassification• AICPA AcSEC, Draft Issues Paper: FASB Statement No. 157 – Valuation Considerations for Interests in Alternative Investments, January2009• ICI Paper: FAS 157, Hierarchy Level Matrix and Financial Statements Disclosures (2008)56

Accounting for InvestmentsExhibit 4.6Chronology of Events2005April Section 3855 issued April 2005, effective for years commencing October 20062006--November2007October2008JanuaryOctober2009MarchQ2Q220102011January--FAS 157 – finalized in 2006, effective for years ending December 31, 2008IASB Discussion Paper on Fair Value Measurements (comments due April 2007)Sections 3862 and 3863 issued, effective for years commencing October 1, 2007 (superseding Section 3861 which firstbecame effective in 1996)FAS 157 effective in the US for years commencing January 1, 2008IASB reclassification of financial assets (amendments to IAS 39 and IFRS 7) and AcSB reclassification of financial assets(amendments to Sections 3855 and 3862)Changes to IFRS 7 issued March 5, 2009, effective for years commencing January 1, 2009IASB exposure draft expected re fair value measurement (“how to”)Handbook release to harmonize Section 3862 with recent amendments to IFRS 7 (effective date yet to decided)IASB fair value measurement standards planned to become effectiveHarmonized AcSB standards to be effective for years ending December 31, 2011AcG-18 to be withdrawn; Section 3855 to be applicable to investment fundsExhibit 4.7Fair Value Measurement and Disclosure - Matters for Consideration(based on the November 2006 IASB Discussion Paper on Fair Value Measurement)• FAS 157 and fair value measurement guidance in current IFRS;• Differences between the definitions of fair value in FAS 157 and in IFRS — bid/close(FAS 157 continues to support use of closing market prices for actively traded assets and liabilities and is generally more flexible thancurrent Canadian GAAP or IFRS);• Transaction price and fair value at initial recognition — transaction costs(FAS 157 allows transaction costs to continue to be capitalized under the AICPA Guide);• Principal (or most advantageous) market — inter-listed securities(FAS 157 requires active prices on the principal market for the security to be used whereas Canadian GAAP and IFRS require the mostadvantageous market);• Valuation of liabilities — this is not an issue for most funds but some analysis will be required for hedge funds, closed end funds andstructured products;• Disclosures — use of level 1, 2 and 3 (IFRS 7 has now been amended to require similar levels of disclosures to FAS 157); issues inclassifying between levels for fund of funds, derivatives, bonds, fair valuation dates, etc.; practical difficulties around transfers betweencategories; and• Large positions of a single financial instrument (blocks)(FAS 157 is harmonized with Canadian GAAP and IFRS on precluding use of block discounts and requiring use of liquidity discounts).57

Financial Reporting by Investment FundsSECTION 3861, FINANCIALINSTRUMENTS – DISCLOSUREAND PRESENTATIONSection 3861, which is effective for fiscal years commencingon or after October 1, 2006, applies to investmentfunds. Many of the disclosure requirements ofSection 3861 are, however, met through the detailedstatement of investment portfolio required under NI81-106. Funds that do not provide a detailed statementof investment portfolio may have to make additionaldisclosures.Terms, Conditions and Risk-RelatedInformation about Investments HeldThe current detailed information on each securityprovided in the statement of investments will suffice formost of the required disclosures of paragraphs 3861.43,3861.49 and 3861.58. (The equivalent paragraphs inSection 3862 are 3862.34, 3862.36, 3862.41, B22and IG34-36.) Funds that invest directly or indirectlyin other funds should consider augmenting the listof investments in underlying funds with additionalinformation on the indirect exposure to risks. One suchoption is a summary of the asset composition basedon the effective exposure to the security holdings ofthe underlying funds; Section 2.5.1 of the CompanionPolicy to NI 81-106 includes guidance on such additionaldisclosures for funds that invest substantially allof their assets in one other fund, directly or indirectly.Risk Management Policies and HedgingParagraphs 3861.41-.42 (also see paragraph 3862.33)require an entity to describe its financial risk managementobjectives and policies, including its policy forhedging. Only funds with significant, active risk mitigationactivities would need disclosure (e.g., foreign currencyhedging). Risks assumed by a fund as a result of atypical investment strategy do not require disclosure.Fair Value DisclosuresAccording to paragraph 3861.72 (also see paragraph3862.27), a fund should disclose the following:•y Methods and significant assumptions applied indetermining fair values.•y Whether fair values are determined directly, in fullor in part, by reference to published price quotationsin an active market, or are estimated using avaluation technique.•y Whether the fund holds financial instruments measuredat fair values that are determined, in full or inpart, using a valuation technique based on assumptionsthat are not supported by observable marketprices or rates. If changing any such assumption toa reasonably possible alternative would result in asignificantly different fair value, the fund shouldstate this fact and disclose the effect on the fair valueof those reasonably possible alternative assumptions.(This disclosure is expected only for venturecapital-type funds, or other funds with significantestimation in the valuation process.)•y Total impact on net income during the period whencertain investments were valued using a valuationtechnique based on assumptions that are not supportedby observable market prices or rates. (Notethat the emphasis is on income statement impact, sothe disclosed impact must include those securitiesvalued in such a manner throughout the period.)See Exhibit 4.4 for a decision tree assessing which securitiesrequire additional disclosure.In addition, if the investments held at the balance sheetdate do not represent the value of those investmentsthroughout the period (for example, a new fund or asurviving fund after a merger), consider additionaldisclosures about average values. That will enhance theusefulness of the financial statements.58

Accounting for InvestmentsSECTION 3862, FINANCIALINSTRUMENTS – DISCLOSURESFor interim and annual periods beginning on or afterOctober 1, 2007, Section 3862 introduces additionaldisclosure requirements. For investment funds, theprincipal changes involve disclosures about risks arisingfrom financial instruments, including summary quantitativeexposure to risks. Disclosures also include sensitivityanalysis to market risks (i.e., interest, currency andother risks) and the impact on net income of reasonablechanges in the relevant risk variable. For purposes ofdisclosure under Section 3862, an investment fund’sinvestment portfolio is deemed to be held for trading.Disclosure about risk management policies and measurementare greater under Section 3862 than Section 3861.However, fair value disclosures are replaced substantiallyunchanged from Section 3861 to Section 3862.Open-ended investment funds are usually exposed toa significant amount of liquidity risk arising from theirredeemable-on-demand features. While investor capitalis normally considered equity and not a financial liability,in the Study Group’s view, the disclosure requirementsfor liquidity risk arising from financial liabilities (paragraph3862.39) are pertinent for these funds.Exhibit 4.8 provides a summary of some of the majorincremental disclosures for investment funds. Additionaldisclosure may be necessary to meet the objectivesof financial instrument risk disclosure identified inparagraphs 3862.31 and 3862.34. Further, funds thathave significant financial instruments other than theirinvestment portfolio may have additional disclosureobligations.SECTION 3863, FINANCIALINSTRUMENTS – PRESENTATIONSection 3863 is effective for interim and annual periodsbeginning on or after October 1, 2007. Section 3863carried forward the presentation requirements forinvestment funds previously in Section 3861. Mostsignificantly, Section 3863 indicates that units or sharesissued by an investment fund would generally be treatedas equity in the financial statements of the issuer (paragraph3863.15).59

Financial Reporting by Investment FundsExhibit 4.8Risk Disclosures under Section 3862Disclosures:Risk:CreditLiquidityInterestRateMarketCurrencyOtherPrice• Exposure to risk and how it arises (.33(a))• Objectives, policies and processes for managing the riskand methods used to measure the risk (.33(b))√ √ √ √ √√ √ √ √ √• Any significant changes from the prior period to theabove (.33(c)) √ √ √ √ √• Summary quantitative data about exposure to risk atthe balance sheet date (.34(a))• By class of instrument,Maximum amount of credit risk (.36(a))Collateral held as security (.36(b))Information about the credit quality (.36(c))Carrying amount of past due or impaired assets (.36(d))• Maturity analysis for financial liabilities that shows theremaining contractual maturities (.39(a))• Description of how it manages the liquidity risk inherentin (a) (.39(b))• Sensitivity analysis for each applicable type of marketrisk and impact on net income due to reasonablechanges in the relevant risk variable (.40(a))• Methods and assumptions used in sensitivity analysis(.40(b))√ √ √ √ √√√√√√√√ √ √√ √ √• Changes in methods and assumptions from the priorperiod (.40(c)) √ √ √CICA Handbook-Accounting (paragraph 3862.05A) setsout the following definitions of “risk”:•y credit risk: The risk that one party to a financialinstrument will cause a financial loss for the otherparty by failing to discharge an obligation.•y liquidity risk: The risk that an entity will encounterdifficulty in meeting obligations associated withfinancial liabilities.•y market risk: The risk that the fair value or futurecash flows of a financial instrument will fluctuatebecause of changes in market prices. Market riskcomprises three types of risk: currency risk, interestrate risk and other price risk.•y interest rate risk: The risk that the fair value or futurecash flows of a financial instrument will fluctuatebecause of changes in market interest rates.•y•ycurrency risk: The risk that the fair value or futurecash flows of a financial instrument will fluctuatebecause of changes in foreign exchange rates.other price risk: The risk that the fair value or futurecash flows of a financial instrument will fluctuatebecause of changes in market prices (other thanthose arising from interest rate risk or currency risk),whether those changes are caused by factors specificto the individual financial instrument or its issuer,or factors affecting all similar financial instrumentstraded in the market.An illustration of risk disclosures is provided in theexample of interim financial statements in Appendix B,Exhibit B3.60

Accounting for InvestmentsCONCLUSIONAlthough investment transactions can be recordedeither on trade or settlement date, the Study Groupviews the trade date as preferable. Investment fundscarry their investments at fair value, and any changesin fair value are recognized in income. Fair value for asecurity traded in an active market is usually the mostrecent bid quotation.When the market for an investment is not active,an entity estimates fair value using a valuationtechnique. Estimated fair values not based on observablemarket prices or rates trigger additional disclosurerequirements.Realized gains and/or losses on disposition of investmentsare determined using the average cost of investments,but transaction costs are charged immediatelyto income and not added to the cost of purchases ordeducted from the proceeds on disposition.61

Chapter 5MANAGEMENT REPORT ANDAUDITOR’S REPORTINTRODUCTIONIn this chapter, the Study Group addresses the contentof the management report, which acknowledges management’sresponsibility for the financial information inthe annual report. The Study Group also deals with theaudit of financial statements, the form of the auditor’sstandard report (prepared in accordance with Canadiangenerally accepted auditing standards) on investmentfund financial statements, and what that report mightlook like when conforming with International Standardson Auditing.MANAGEMENT REPORTThe CICA Handbook-Accounting AcG-7, The ManagementReport, describes the minimum content of amanagement report that acknowledges management’sresponsibility for financial information. The Guidelinenotes that, when an entity widely distributes its annualfinancial statements, it needs to present a managementreport along with them. Currently, however, Canada’ssecurities administrators do not call for a managementreport for regulatory or other filing purposes.The purpose of a management report is to make externalusers aware of who is responsible for the representationsmade in financial statements and other financialinformation and to clarify the limits of their accuracy.A management report accompanies, but is not partof, the financial statements. Because the managementreport is not part of the financial statements, the StudyGroup does not consider the lack of such a report tobe a departure from GAAP. Nevertheless, it would bebest practice when issuing an annual report to include amanagement report.A management report states management’s responsibilityfor the financial statements and other financial information,as well as for the financial reporting process thatproduces the statements and other information. It alsodescribes the roles of the manager, trustees or board ofdirectors and, when one exists, the audit committee.For varied reasons, including concerns about possiblelegal ramifications, many investment funds do not issuea management report.ContentWhen a management report is presented, it shouldacknowledge management’s responsibility for the followingmatters:1. Financial statements — the preparation and presentationof the financial statements, includingresponsibility for significant accounting judgmentsand estimates, such as:•y choosing accounting principles and valuationmethods appropriate to an investment fund’scircumstances; and•y making decisions on the measurement of transactionswhere judgment is required in determiningthe amount to be reported.2. Specialists’ reports — in certain circumstances, anannual report containing financial statementsand other financial information includes a signedreport by someone who has significant specializedexpertise in a particular field. When such a report isincluded, management still retains ultimate responsibilityfor all financial information in the annualreport, including the amounts determined by63

Financial Reporting by Investment Fundsspecialists, because it is management that providesthe specialists with the information necessary forcompleting their reports. To clarify the respectiveresponsibilities of management and specialists, themanagement report should describe the role andresponsibilities of any specialists whose reports areincluded in the annual report.3. Other financial information — the preparationand presentation of other financial information(for example, the management report of fundperformance) and its consistency with the financialstatements. Inconsistencies between the financialstatements and other published financial informationundermine the credibility of the financialinformation presented in the annual report.4.Internal control over the financial reporting process— the development of internal controls over thefinancial reporting process designed to providereasonable assurance that relevant and reliablefinancial information is produced.A management report should include a statement ofthe role of the manager, trustees, board of directorsor general partner in the financial reporting process,including an acknowledgment of:•y the responsibility for reviewing and approving thefinancial statements;•y the responsibility for overseeing management’s performanceof its financial reporting responsibilities;and•y the responsibilities, if any, delegated to the auditcommittee.The manager, trustees, board of directors and/or generalpartner are responsible for overseeing management inthe performance of its financial reporting responsibilitiesand also are responsible for approving the financialinformation included in the annual report. When theoversight of the financial reporting process has beenassigned to an audit committee, the role of this committee,as well as its responsibilities and specific activities,should be described in the management report.It is not appropriate to disclose in a management reportinformation that belongs in the financial statementsor elsewhere in the annual report. Further, a managementreport should not be used to emphasize or repeatmatters described appropriately in the financial statementsor in management’s discussion and analysis. (Themanagement report of fund performance is discussed inChapter 6.)PresentationWhen a management report is included in an annualreport, it should be presented separately from, butadjacent to, the financial statements. The managementreport should be signed by one or more senior officers ofthe investment fund, or its manager (usually the chiefexecutive officer or other senior officer responsible forthe overall management of the fund), and the chieffinancial officer or other senior officer having overallresponsibility for the financial reporting process. Themanagement report should be dated to indicate thepoint to which events have been taken into account.The date would normally be the same as the date of theauditor’s report to ensure consistent consideration ofsubsequent events.Exhibit 5.1 provides an example of a management reportfor a mutual fund trust. This report should be tailoredto the legal and governance structure of the investmentfund.64

Management Report and Auditor’s ReportExhibit 5.1XYZ Investment FundManagement’s Responsibility for Financial ReportingThe accompanying financial statements have been prepared by Manager of the Fund. The Manager is responsiblefor the information and representations contained in these financial statements and the Management Report ofFund Performance.The Manager is responsible for maintaining appropriate processes to ensure that relevant and reliable financialinformation is produced. The financial statements have been prepared in accordance with Canadian generallyaccepted accounting principles and include certain amounts that are based on estimates and judgments. Thesignificant accounting policies which the Manager believes are appropriate for the Fund are described in Note1 to the financial statements. Financial information used in the Management Report of Fund Performance isconsistent with that in the financial statements.The Board of Directors of the Manager is responsible for reviewing and approving the financial statements andoverseeing the Manager’s performance of its financial reporting responsibilities. The Board is assisted in dischargingthis responsibility by an Audit Committee, which reviews the financial statements and recommends them forapproval by the Board. The Audit Committee also meets regularly with the Manager, the internal auditor andexternal auditor to discuss internal controls over the financial reporting process, auditing matters and financialreporting issues.Chief Executive Officer 22 _________________________Chief Financial Officer 23 _________________________Date __________________AUDITOR’S REPORTIn considering the auditor’s report on an investmentfund’s financial statements, the Study Group reviewedCanadian generally accepted auditing standards andspecifically considered the recommendations in thefollowing Sections of the CICA Handbook-Assurance:Section 5090, Audit of Financial Statements — anIntroduction; Section 5400, The Auditor’s StandardReport; Section 5405, Date of the Auditor’s Report;Section 5510, Reservations in the Auditor’s Report; andSection 5701, Other Reporting Matters. In the StudyGroup’s view, the recommendations contained in all ofthese sections are relevant to the auditor of an investmentfund.Audit of Financial StatementsThe Study Group reviewed the regulatory requirementsset out in NI 81-106 Investment Fund ContinuousDisclosure, which deals with comparative financialstatements and the auditor’s report. NI 81-106 requiresthat every investment fund to which it applies mustfile annually, on or before the 90 th day after its mostrecently completed financial year, comparative financialstatements prepared in accordance with Canadian generallyaccepted accounting principles. NI 81-106 alsorequires that the financial statements be accompaniedby an auditor’s report and be approved by the board ofdirectors, general partner, manager or trustees of theinvestment fund, as applicable.22 Or persons acting in this role.23 Or persons acting in this role.65

Financial Reporting by Investment FundsThe auditor’s report must be prepared in accordancewith Canadian generally accepted auditing standards,must not contain a reservation, must identify all financialperiods for which the auditor has issued an auditor’sreport, and must identify the auditing standards usedto conduct the audit and the accounting principlesused to prepare the financial statements. For reportingissuer investment funds, the auditor’s report must coverthe most recently completed financial year and, whereapplicable, the immediately preceding financial year.The Auditor’s Standard ReportCICA Handbook-Assurance Section 5400, The Auditor’sStandard Report, deals with the standard report of anauditor who has been engaged to express an opinionon general purpose financial statements. In the StudyGroup’s view, the auditor’s standard report for an investmentfund should cover all financial statements requiredfor fair presentation of net assets, results of operations,cash flows (if applicable) and changes in net assets inaccordance with Canadian GAAP. Unaudited information,which could be construed to be part of the auditedfinancial statements, should be clearly differentiated.It is desirable to have some uniformity in the auditor’sstandard report because it helps readers to identifyany unusual circumstances. Accordingly, the auditor’sstandard report should make specific reference to theinvestment fund’s financial statements, which normallycomprise a statement of net assets, a statement of portfolioinvestments, a statement of operations, a statementof changes in net assets and, if applicable, a statement ofcash flows. The notes to the financial statements are anintegral part of the financial statements and need not bespecifically referred to in the auditor’s standard report.The auditor’s standard report on an investment fund’sgeneral purpose financial statements should disclose theaddressee, the name of the auditor (or firm), the date ofthe report and the place of issue. The auditor’s reportshould take the form suggested in Exhibit 5.2 and, wherethere has been a change in auditor, refer to the formerauditor’s report on the prior, comparative period.For corporate class funds, the auditor’s report on eachclass should contain a fourth paragraph indicating thatthe auditor has also expressed an opinion on the financialstatements of the corporation, if applicable. In addition,the auditor’s report on the corporation’s financialstatements should contain a fourth paragraph statingthat the auditor has also expressed an opinion on thefinancial statements of each of the classes, if applicable.66

Management Report and Auditor’s ReportExhibit 5.2Auditors’ ReportTo the Unitholders of ABC Investment Fund 24We have audited the accompanying statement of portfolio investments of ABC Investment Fund as at December31, 20x2, the statement of net assets as at December 31, 20x2 and 20x1, and the statements of operations andchanges in net assets for the years then ended. 25 These financial statements are the responsibility of the Fund’smanagement. Our responsibility is to express an opinion on these financial statements based on our audits.We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standardsrequire that we plan and perform an audit to obtain reasonable assurance whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by the Fund’s management, as well as evaluating the overall financial statementpresentation.In our opinion, these financial statements present fairly, in all material respects, the financial position of the Fundas at December 31, 20x2 and 20x1 and the results of its operations and the changes in its net assets for the yearsthen ended in accordance with Canadian generally accepted accounting principles.City _______________________Date _______________________(signed) _____________________CHARTERED ACCOUNTANTSLicensed Public Accountants 26INTERNATIONAL FINANCIALREPORTING STANDARDS (IFRS)AND INTERNATIONAL STANDARDSON AUDITING (ISA)When reporting in accordance with International Standardson Auditing, the auditor’s report should take theform in Exhibit 5.3 which is effective for reports datedon or after December 31, 2006. (This exhibit assumesthat the financial statements reported on are preparedin accordance with International Financial ReportingStandards.)CONCLUSIONThis chapter addresses the content of a managementreport, which acknowledges management’s responsibilityfor the financial information in the annual report. Italso discusses the audit of financial statements, the formof the auditor’s standard report (prepared in accordancewith Canadian generally accepted auditing standards)on investment fund financial statements and the auditor’sreport prepared in accordance with InternationalStandards on Auditing.24 This example report is for an investment fund that is a reporting issuer.25 If presented, the statement of cash flows would also be referred to in thescope and opinion paragraphs.26 The words “Licensed Public Accountants” are required only inOntario.67

Financial Reporting by Investment FundsExhibit 5.3Independent Auditor’s ReportTo the Shareholders of DEF FundWe have audited the accompanying financial statements of DEF Fund (“the Company”), which comprise thebalance sheet and schedule of investments as at December 31, 20x2, and the income statement, statement ofchanges in net assets attributable to holders of redeemable shares and statement of cash flows for the year thenended, and a summary of significant accounting policies and other explanatory notes.Management’s Responsibility for the Financial StatementsManagement is responsible for the preparation and fair presentation of these financial statements in accordancewith International Financial Reporting Standards. This responsibility includes: designing, implementing andmaintaining internal control relevant to the preparation and fair presentation of financial statements that arefree from material misstatement, whether due to fraud or error; selecting and applying appropriate accountingpolicies; and making accounting estimates that are reasonable in the circumstances.Auditor’s ResponsibilityOur responsibility is to express an opinion on these financial statements based on our audit. We conductedour audit in accordance with International Standards on Auditing. Those standards require that we complywith ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financialstatements are free from material misstatement.An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in thefinancial statements. The procedures selected depend on our judgment, including the assessment of the risks ofmaterial misstatement of the financial statements, whether due to fraud or error. In making those risk assessments,we consider internal control relevant to the entity’s preparation and fair presentation of the financialstatements in order to design audit procedures that are appropriate in the circumstances, but not for the purposeof expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluatingthe appropriateness of accounting policies used and the reasonableness of accounting estimates made by management,as well as evaluating the overall presentation of the financial statements.We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for ouropinion.OpinionIn our opinion, the financial statements present fairly, in all material respects, the financial position of theCompany as at December 31, 20x2, and its financial performance and its cash flows for the year then ended inaccordance with International Financial Reporting Standards.City ____________________Date 27 ___________________(signed) _____________________CHARTERED ACCOUNTANTS27 Under International Standards on Auditing, the auditor’s report is dated the date the financial statements are approved.68

Chapter 6MANAGEMENT REPORT OFFUND PERFORMANCEINTRODUCTIONThis chapter deals with National Instrument 81-106,Investment Fund Continuous Disclosure (NI 81-106)and, in particular, the management report of fundperformance (MRFP) described in Form 81-106F1,Contents of Annual and Interim Management Report ofFund Performance. 28 It also presents the Study Group’sviews in areas that securities regulators may address inthe future.NATIONAL INSTRUMENT 81-106Background to the AmendmentsNI 81-106, which includes specific financial reportingrequirements, applies to investment funds that arereporting issuers or mutual funds in the jurisdiction.On June 20, 2008, the Canadian Securities Administrators(CSA) issued amended NI 81-106, Form 81-106F1and Companion Policy 81-106CP, which came intoforce on September 8, 2008. In preparing this Report,the Study Group used this amended material (also seeChapter 1).NI 81-106, which initially came into force on June1, 2005, required investment funds to calculate netasset value in accordance with Canadian generallyaccepted accounting principles (GAAP). Maintainingthis requirement after the introduction of CICAHandbook-Accounting Section 3855, Financial Instruments– Recognition and Measurement, would have28 Additional guidance to assist in complying with NI 81-106 and Form81-106F is provided in the following two OSC Staff Notices: 81-709,Report on Staff’s Continuous Disclosure Review of InvestmentFunds (published May 30, 2008); and 81-315, Frequently AskedQuestions on NI 81-106, Investment Fund Continuous Disclosure(published November 25, 2005).meant that investment funds would have had to changelong-standing industry valuation practices.The CSA granted an exemption until September 30,2007 permitting investment funds to calculate netasset value for purposes other than financial statementswithout giving effect to Section 3855. In September2007, the CSA extended the exemption until the earlierof (i) September 30, 2008 or (ii) the date on whichchanges to NI 81-106 come into effect. As previouslynoted, amended NI 81-106 came into force on September8, 2008.NI 81-106 now permits investment funds to have twodifferent net asset values: one for financial statements, tobe prepared in accordance with Canadian GAAP (andreferred to as “net assets”); and another for all other purposes,including unit pricing (referred to as “net assetvalue” or NAV). NI 81-106 requires an explanation ofthe differences between net assets per security and NAVper security in the notes to the financial statements (alsosee Chapter 2).The requirements previously in NI 81-106 to calculatenet asset value in accordance with Canadian GAAP hasbeen replaced with a requirement to fair value assetsand liabilities. For this purpose, fair value of assets andliabilities will mean the market value based on reportedprices and quotations in an active market or, if themarket value is not available or the manager believesthat it is unreliable, a value that is fair and reasonable inall the relevant circumstances (also see Chapter 4). 2929 Valuation techniques or other valuation methods are used to determinefair value when there is no active market.69

Financial Reporting by Investment FundsForm 81-106F1Part A – Instructions and InterpretationThe MRFP should focus on material information.Would a reasonable investor’s decision to buy, sell or holdsecurities of an investment fund likely be influenced orchanged if the information in question was omitted ormisstated? If so, the information is material. This conceptof materiality is consistent with the financial reportingnotion of materiality contained in the CICA Handbook-Accounting. In determining whether information is material,take into account both quantitative and qualitativefactors.Management’s discussion of fund performance is acritical part of the MRFP. It is an analysis and explanationdesigned to complement and supplement an investmentfund’s financial statements. The discussion is theequivalent of the corporate management discussion andanalysis (MD&A), with specific modifications for investmentfunds. It gives an investment fund’s manager theopportunity to discuss the investment fund’s position andfinancial results for the relevant period. The discussionpermits readers to look at the investment fund throughthe eyes of management by providing both a historicaland prospective analysis of the fund’s investment activitiesand operations. Coupled with the financial highlights,this information should enable readers to better assess theinvestment fund’s performance and future prospects.The management discussion should focus on materialinformation about the performance of the investmentfund, with particular emphasis on known materialtrends, commitments, events, risks or uncertainties thatthe manager reasonably expects to have a material effecton the investment fund’s future performance or investmentactivities.The description of the disclosure requirements is intentionallygeneral. Form 81-106F1 contains a minimumnumber of specific instructions to allow, as well as toencourage, investment funds to discuss their activities inthe most appropriate manner and to tailor their commentsto their individual circumstances.Part B – Content Requirements for Annual ManagementReport of Fund PerformanceThe contents should include:•y Investment objectives and strategies. [item 2.1]•y Risk – how changes to the fund over the yearaffected the overall level of risk of an investmentin the investment fund, and whether the changesaffect the suitability or investor risk tolerance asstated in the prospectus. [item 2.2]• y Results of Operations, including a discussion of:[item 2.3]—— any material changes in investments in specificportfolio assets and overall asset mix from theprevious period;—— how the composition and changes to thecomposition of the investment portfolio relate tothe investment fund’s fundamental investmentobjective and strategies or to changes in theeconomy, markets or unusual events;—— unusual trends in redemptions or sales and theeffect of these on the investment fund;—— significant components and changes to thecomponents of revenue and expenses;—— risks, events, trends and commitments that had amaterial effect on past performance; and—— unusual or infrequent events or transactions,economic changes and market conditions thataffected performance.•y Information about borrowings. [item 2.3(2)]•y Recent developments including: [item 2.4]—— known changes to the strategic position of theinvestment fund;—— known material trends, commitments, events oruncertainties that might reasonably be expectedto affect the investment fund;70

Management Report of Fund Performance•y—— changes to the manager or portfolio adviser,or change of control of the manager, of theinvestment fund;—— the effects of any actual or plannedreorganizations, mergers or similartransactions;—— the estimated effects of changes in accountingpolicies adopted subsequent to year end; and—— changes to the composition or members of theindependent review committee of the investmentfund.Related party transactions [item 2.5]Discuss any transactions involving parties relatedto the investment fund, including the manager andportfolio adviser (or their affiliates) and a brokeror dealer related to any of the investment fund, itsmanager or its portfolio adviser.Financial Highlights (item 3.1)Financial Highlights are to include two tables, describedbelow (Exhibit 6.1 and Exhibit 6.3):•y The Fund’s Net Assets per [Unit/Share]; and•y Ratios and Supplemental Data.Exhibit 6.1The Fund’s Net Assets per [Unit/Share] (1)[insert year] [insert year] [insert year] [insert year] [insert year]Net Assets, beginning of year $ $ $ $ $Increase (decrease) from operations:Total revenue $ $ $ $ $Total expenses $ $ $ $ $Realized gains (losses) for the period $ $ $ $ $Unrealized gains (losses) for the period $ $ $ $ $Total increase (decrease) fromoperations (2) $ $ $ $ $Distributions:From income (excluding dividends) $ $ $ $ $From dividends $ $ $ $ $From capital gains $ $ $ $ $Return of capital $ $ $ $ $Total Annual Distributions (3) $ $ $ $ $Net assets at [insert last day offinancial year] of year shown$ $ $ $ $(1)(2)(3)This information is derived from the Fund’s audited annual financial statements. The net assets per security presented in the financialstatements differs from the net asset value calculated for fund pricing purposes. [An explanation of these differences can be found inthe notes to the financial statements. This difference is due to [explain].]Net assets and distributions are based on the actual number of [units/shares] outstanding at the relevant time. The increase/decreasefrom operations is based on the weighted average number of [units/shares] outstanding over the financial period.Distributions were [paid in cash/reinvested in additional [units/shares] of the Fund, or both].The form includes detailed instructions for completing the above table.71

Financial Reporting by Investment FundsIn the initial year after the implementation of Section3855, there may be a difference between the net assetvalue at the end of the last financial year and the netassets at the beginning of the new financial year. Investmentfunds may add an explanation to the financialhighlights table of those differences relating to the firstyear. An explanation is preferable since Part A, Item 1(c)of the Form states that disclosure of financial highlightsand past performance is required in the specific formatof Items 3 and 4 of Part B of the Form.Section 3855 may also require an adjustment to the classificationof transaction costs in the table. Transactioncosts per unit could be captured in either expenses (ifso categorized on the statement of operations) or withinrealized and unrealized gains and losses. The table isnot intended to reconcile opening and closing NAV perunit/share and, therefore, will not add.In the US, investment fund financial statements contain“Financial Highlights” that are similar to the first tablerequired under NI 81-106. In the US, however, the tableis meant to reflect the change in value of one unit/shareof the fund over the period and, therefore, to reconcileopening and closing NAV per unit.changes in value by component. The sum of the dailyunitized amounts can differ considerably from the totalincrease/decrease in net assets from operations dividedby the weighted average units/shares outstanding. SeeExhibit 6.2 for Study Group examples of per unit/sharevalues.To provide information that is as meaningful as possible,the Study Group suggests the following considerationsin determining the per unit/share values forthe financial highlights, although it recognizes thatthese considerations go beyond the requirements of NI81-106:1. Consider dividing the entire financial reportingperiod into shorter periods of time, such as months.Divide the monthly results from operations (perseries as appropriate) by the weighted averageunits/shares outstanding for the month. This willminimize the differential caused by changes overthe period in the asset size of the fund or changesin the relative size of the series within the fund.The shorter the period over which results fromoperations are divided by average units/shares, theless the difference from the sum of daily unitizedvalues.Because investment funds are unitized and prepare aNAV per unit/share each valuation day, it is possibleto reconcile opening and closing NAV per unit over aperiod of time. Every valuation day, each investmentfund notionally allocates all income, expenses, realizedand unrealized gains and losses to each series and toeach unit/share within each series. These are the componentsof the net increase/decrease in net assets fromoperations. The impact from operations over a periodof time is represented by the sum of the daily unitized2.3.Consider further bifurcation during periods ofunusual activity, such as a merger or launch of anew series, to avoid anomalous results due to significantintra-period changes in assets and/or units/shares.Consider use of daily weighted average number ofunits/shares outstanding for each shorter calculationperiod (monthly). Simple averages of openingand closing values can skew results.72

Management Report of Fund PerformanceExhibit 6.2Study Group Examples of Per Unit/Share ValuesDay 1 Day 2 Day 3$ units per unit $ units per unit $ units per unitOpening assets 100,000 10,000 10.00 123,167 12,000 10.26 192,067 18,333 10.48Net issue/(redemption) ofunits/shares20,000 2,000 - 65,000 6,333 - 65,000 6,204 -Income 417 0.03 513 0.03 800 0.03Expenses (250) (0.02) (308) (0.02) (480) (0.02)Investment gains/(losses) 3,000 0.25 3,695 0.20 5,762 0.23Ending assets 123,167 12,000 10.26 192,067 18,333 10.48 263,149 24,537 10.72Day 4 Day 5 Day 6$ units per unit $ units per unit $ units per unitOpening assets 263,149 24,537 10.72 336,482 30,598 11.00 326,948 30,598 10.69Net issue/(redemption) ofunits/shares65,000 6,061 - - - - (10,000) (936) -Income 1,096 0.04 1,402 0.05 1,362 0.05Expenses (658) (0.02) (841) (0.03) (817) (0.03)Investment gains/(losses) 7,894 0.26 (10,094) (0.33) (9,808) (0.33)Ending assets 336,482 30,598 11.00 326,948 30,598 10.69 307,685 29,662 10.37Day 7 Day 8 Totals for period Usingave. units$ units per unit $ units per unit $ units per unitOpening assets 307,685 29,662 10.37 308,967 30,626 10.09 100,000 10,000 10.00 10.00Net issue/(redemption) ofunits/shares10,000 964 - (5,000) (496) 210,000 20,131Income 1,282 0.04 1,287 0.04 8,160 0.31 0.34Expenses (769) (0.03) (772) (0.03) (4,896) (0.18) (0.20)Investment gains/(losses) (9,231) (0.30) (9,269) (0.31) (18,051) (0.33) (0.75)Ending assets 308,967 30,626 10.09 295,213 30,131 9.80 295,213 30,131 9.80 9.39Average units calculationSimple (opening + closing)/2 20,065Weighted average (sum of each day/number of days) 24,054The “Ratios and Supplemental Data” in Exhibit 6.3discloses the total net asset value of each series. As theTerminology section in Part A, Item 1(f) of the Formexplains, net asset value (NAV) is determined in accordancewith Part 14 of NI 81-106 (commonly referredas the transactional or pricing NAV). The Terminologysection also states that, except for the use of net assetsin “The Fund’s Net Assets per [Unit/Share]” table, allother calculations in the MRFP must be made usingnet asset value. This means that the managementexpense ratio and trading expense ratio in the “Ratiosand Supplemental Data” table are calculated usingtransactional or pricing NAV.73

Financial Reporting by Investment FundsExhibit 6.3Ratios and Supplemental Data[insert year] [insert year] [insert year] [insert year] [insert year]Total net asset value (000’s) (1) $ $ $ $ $Number of [units/shares] outstanding (1)Management expense ratio (2) % % % % %Management expense ratio beforewaivers or absorptions% % % % %Trading expense ratio (3) % % % % %Portfolio turnover rate (4) % % % % %Net asset value per [unit/share] $ $ $ $ $Closing market price [if applicable] $ $ $ $ $(1)(2)(3)(4)This information is provided as at [insert date of end of financial year] of the year shown.Management expense ratio is based on total expenses (excluding commissions and other portfolio transaction costs) for the statedperiod and is expressed as an annualized percentage of daily average net asset value during the period.The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentageof daily average net asset value during the period.The Fund’s portfolio turnover rate indicates how actively the Fund’s portfolio adviser manages its portfolio investments. A portfolioturnover rate of 100% is equivalent to the Fund buying and selling all of the securities in its portfolio once in the course of the year.The higher a fund’s portfolio turnover rate in a year, the greater the trading costs payable by the fund in the year, and the greater thechance of an investor receiving taxable capital gains in the year. There is not necessarily a relationship between a high turnover rateand the performance of a fund.The difference between the net asset value in the “Ratiosand Supplemental Data” table and net assets in the preceding“The Fund’s Net Assets per [Unit/Share]” tableis explained in footnote (1) to “The Fund’s Net Assetsper [Unit/Share]” table, or a reference to the explanationis included.The form includes detailed instructions for completingthe above table.Scholarship plans [item 3.2]An investment fund that is a scholarship plan mustcomply with Item 3.1 of Form 81-106F1, except that it isto provide a table of “Financial & Operating Highlights(with comparative figures)” in place of “The Fund’sNet Assets per [Unit/Share]” table and the “Ratios andSupplemental Data” table.Management fees [item 3.3]Disclose the basis for calculating the management feespaid by the investment fund and a breakdown of theservices received in consideration of the management fees,as a percentage of management fees.The Study Group notes that the disclosure of managementfees under 3.3 varies across the industry. Somefund groups have opted to disclose only trailer fee ratesfor the fund and/or series. Issues to be considered whendetermining what to disclose include:•y categories of services provided to the fund and toeach series in exchange for management fees apartfrom services provided for different fees;•y availability of cost information associated withthose services;•y how to allocate profit to various services provided;•y impact of deferrals for commission component ofcosts (i.e., use cash basis or commission expense forthe period); and74

Management Report of Fund Performance•yhow to track and allocate initial commissionexpense when assets are transferred from fund tofund without new commissions being paid.Past Performance (item 4)Past performance requirements are detailed in the Form.[item 4.1]Year-by-Year Returns should include: [item 4.2]•y A bar chart, under the heading “Past Performance”and under the sub-heading “Year-by-Year Returns,”that shows, in chronological order with the mostrecent year on the right of the bar chart, the annualtotal return of the investment fund for the lesserof:—— each of the 10 most recently completed financialyears; and—— each of the completed financial years in whichthe investment fund has been in existence andin which the investment fund was a reportingissuer.•y•yAn introduction to the bar chart that:—— indicates that the bar chart shows theinvestment fund’s annual performance for eachof the years shown, and illustrates how theinvestment fund’s performance has changedfrom year to year; and—— indicates that the bar chart shows, in percentageterms, how much an investment made on thefirst day of each financial year would havegrown or decreased by the last day of eachfinancial year.If the investment fund holds short portfolio positions,show separately the annual total return forboth the long and short portfolio positions in additionto the overall total return.Annual Compound Returns – requirements are detailedin Form 81-106F1. [item 4.3]Include in the table, for the same periods showing theannual compound returns of the investment fund, thehistorical annual compound total returns or changes ofone or more appropriate broad-based securities marketindices (4.3(2)(a)). Include a brief description of thebroad-based securities market index (or indices) as wellas a discussion of the relative performance of the investmentfund compared to that index (4.3(3)).In addition, the investment fund can also elect (4.3(2)(b)) to include other financial indices or one or morenarrowly-based securities indices (or a blend of indices)that reflect the market sectors in which the investmentfund invests, and may also compare its performanceto these indices; however, neither a blended index or anarrowly-based index is a substitute for the broad-basedindex.Where the fund has experienced significant changesover the performance reporting period (that is, up to 10years), consider adding a footnote to the performancedata highlighting the nature and impact of the changes.For example, changes in investment objective, changesin fee structure, or changes in sub-adviser might warrantdisclosure.Other Material Information [item 6]Provide any other material information concerning theinvestment fund not otherwise required to be disclosedunder this Part, including information to be disclosedpursuant to an order or exemption received by theinvestment fund.Part C - Interim MRFPsRequirements are detailed in the Form.75

Financial Reporting by Investment FundsCompanion Policy 81-106CPCalculation of Management Expense Ratio (MER) [Part10]The investment fund is to use its “total expenses” beforeincome taxes for the relevant period as the basis for thecalculation of MER. Total expenses, before incometaxes, include interest charges and taxes, including salestaxes, GST and capital taxes payable by the investmentfund.Canadian GAAP currently permits an investment fund todeduct withholding taxes from the income to which theyapply. Accordingly, withholding taxes are not recorded as“total expenses” on the investment fund’s income statementand need not be included in its MER calculation.The Companion Policy states that, while brokeragecommissions and other portfolio transaction costs areinvestment fund expenses for accounting purposes, theyare not included in the MER. These costs are reflectedin the trading expense ratio (subsection 10.1(4)).CONCLUSIONThis chapter summarizes the current requirements ofNI 81-106 (which came into force on September 8,2008) for financial reporting. The Study Group hasalso included certain considerations and suggestionsto assist investment funds in completing their financialreporting.76

Chapter 7SPECIAL TYPES OFINVESTMENT FUNDSINTRODUCTIONIn Chapter 1, the Study Group identified the varioustypes of investment funds that would be covered inthis Research Report. Institutions and high net worthinvestors invest in pooled funds, while life insurancecompanies manage segregated funds. Closed-end fundsare generally listed on a recognized stock exchange.Open-end mutual funds are highly regulated and governedby prospectus. The subsequent chapters describedwhat the Study Group considers appropriate financialreporting for these investment funds.The Study Group believes that most of its conclusions,as set out in this Research Report, also apply to specialtypes of investment funds. This chapter looks at thesignificant accounting and financial reporting issues ofthe more common of these, including:•y commodity pools;•y labour-sponsored investment funds;•y mortgage funds;•y scholarship plans;•y fund of funds – referenced portfolio;•y hedge funds;•y split corporations;•y flow-through limited partnerships;•y exchange traded funds (ETFs); and•y segregated funds.This chapter does not address other classes of investmentvehicles having no specific accounting issues (forexample, pooled funds). Note also that certain specialpurpose investment vehicles may be created for narrowlydefined and unique purposes — for example, venturecapital funds (rather than labour-sponsored investmentfund corporations) and real estate investment trusts(rather than open-ended real estate funds). Such specialpurpose investment vehicles are beyond the scope ofthis Research Report.COMMODITY POOLSA commodity pool is a corporation or limited partnershipformed to invest in commodity futures contracts, commodityoptions and related products. They strive to earnhigh rates of return through capital gains. As a result,returns can be extremely volatile and performance canvary widely from year to year. Because they are highlyspeculative, dealers and their individual salespeople arerequired to register under both the Ontario SecuritiesAct and the Commodity Futures Act. The legislation andpolicies relating to mutual funds apply to commoditypool funds.The valuation of derivative financial instruments, thedisclosure of off-balance-sheet risk (including marketrisk and credit risk) and the disclosure of related partytransactions are key issues for commodity pool funds.Accordingly, the Study Group recommends that thebasis of valuation should be disclosed in the significantaccounting policies note to the financial statements, alongwith the policy for the recognition of gains and losses onfutures contracts. The guidance in this Research Reportwill be helpful for making these disclosures, especiallythe discussion of CICA Handbook – Accounting Sections3861, 3862 and 3863 in Chapter 4 and the subsectionon “Futures and Forwards” in Appendix C. As well,Chapter 3 provides guidance on the disclosure of relatedparty transactions.77

Financial Reporting by Investment FundsIn addition, a commodity pool’s MRFP should disclosethe information required by National Instrument81-106.Commodity Pools are governed by:• y National Instrument 41-101, General ProspectusRequirements;• y National Instrument 81-102, Mutual Funds; and• y National Instrument 81-104, Commodity Pools.LABOUR-SPONSOREDINVESTMENT FUNDS 30Labour-sponsored investment funds (also known aslabour-sponsored venture capital corporations) are poolsof capital collected from large numbers of investors. Bylaw, these funds can be sponsored only by organizedlabour organizations, for example, unions or workers’cooperatives.Labour-sponsored funds offer federal and provincial taxbreaks to encourage investment in small and mediumsizedCanadian companies. Depending on the fund andthe Canadian jurisdiction in which it is offered, investorsmay be eligible for federal and provincial tax credits, upto a certain prescribed annual limit (although Ontariois scaling back and eventually will eliminate its credit).They may also be eligible for inclusion in registeredretirement savings plans (RRSPs), which reduces thecost of investing even further. If an investor redeemsunits within a specified period of time, however, thefederal and provincial tax credits must be repaid.Labour-sponsored funds have several features that aresimilar to other investment funds:•y They may be organized as unit trusts or corporations.30 Further reference should be made to the Ontario Securities Act Regulations,Part XIV, “Labour Sponsored Investment Fund Corporations,”and the Ontario Securities Act Regulations, Form 45, “InformationRequired to be Included in Prospectus of a Labour Sponsored InvestmentFund Corporation.”•y•y•yThere is a regular valuation of portfolio investments,usually weekly.Units or shares may be issued on demand.Units or shares in the fund qualify for tax deferralplans such as RRSPs and RRIFs.Nonetheless, the following differences can make laboursponsoredfunds high-risk investments:•y Portfolio securities are speculative, since investmentsare usually in relatively new companies thatare not listed on any securities exchanges, thathave no secondary market for their shares and thatmay not be subject to the same financial reportingrequirements as listed securities.•y The valuation of portfolios is based on appraisals ofsecurities, rather than published prices.•y Units or shares are priced weekly or monthly, ratherthan daily, making them less liquid.•y Redemptions may be restricted to a specified percentageof the fund’s assets in any one year and,consequently, investors may not be able to redeemunits if a large number decide to do so at the sametime.•y Generally, portfolios are less diversified.•y The fund may borrow for purposes other thanmaking redemptions.The valuation of portfolio investments, the disclosureof related risks (including market risk and credit risk),the accounting for incentive fees and the disclosureof related party transactions are key issues for laboursponsoredfunds.The Study Group recommends that the basis usedto value portfolio investments and record incentivefees should be disclosed in the significant accountingpolicies note to the financial statements, along with thepolicy for recognition of gains and losses. Again, theguidance in Chapter 4 on investment valuation applies.As well, Chapter 3 provides guidance on the disclosure78

Special Types of Investment Fundsof related party transactions and the recognition ofincentive fees.Prior to the introduction of CICA Handbook-AccountingSection 1100, Generally Accepted Accounting Principles,a significant accounting issue for labour-sponsoredfunds was the treatment of deferred selling commissions.Some funds deferred and amortized sellingcommissions paid. When Canadian GAAP indicatedthis was no longer appropriate, funds were required towrite off the unamortized balance of deferred sellingcommissions. NI 81-106 gave some exemptive relief byallowing trading or pricing net asset value to continueto be calculated under the deferral method, resulting ina difference between net asset value under GAAP andthat used for pricing purposes. The reconciliation of netasset values must be disclosed.Liquidity considerations and the use of estimationtechniques for determining the fair value of portfolioinvestments can have a significant impact on investordecision making.The Study Group believes that a labour-sponsored fund’sfinancial statements should include a statement of cashflows prepared in accordance with the standards setout in Section 1540, Cash Flow Statements, in circumstanceswhere there is leverage or a lack of liquidity.It should also be noted that, under Part 8 of NI 81-106,labour-sponsored funds have an exemption from disclosingindividual fair values for venture investments intheir statement of investment portfolio. To obtain thisexemption, the labour-sponsored fund must providecertain aggregate disclosures for its venture investmentsbased on industry and stage of development groupings.In addition, Part 8 of NI 81-106 (as augmented byPart 5 of the Companion Policy to NI 81-106) statesthe requirements the independent valuator of laboursponsoredfunds has to meet.In addition, the Study Group recommends that a laboursponsoredfund’s MRFP should disclose informationon any significant risks and uncertainties that will helpin the understanding of the fund’s performance. TheMRFP should identify the investment strategy usedand discuss key risk exposures, with an emphasis on therisks associated with the holding of illiquid securities.Chapter 6 provides further guidance.MORTGAGE FUNDS 31Mortgage investment funds are generally classified asincome funds. As the name implies, mortgage fundsinvest in mortgages and their portfolios usually consistof first mortgages on Canadian residential property,although some funds also invest in commercialmortgages. Cash flow for mortgage funds stems fromthe repayment of mortgage principal and from interestpayments. Like bonds, mortgage values rise wheninterest rates fall. Conversely, mortgage values fall andmortgage fund returns are reduced in times of risinginterest rates.Appendix C provides guidance on accounting for mortgage-backedsecurities. It does not, however, addressdirect investments in mortgages. In this regard, when afund has investments in mortgages that amount to 10%or more of its portfolio, reference should be made to theregulations set out in National Policy No. 29, MutualFunds Investing in Mortgages.The valuation of mortgage instruments and the relateddisclosures are key issues for mortgage investment funds.Here, the Study Group concurs with the requirementsin National Policy No. 29. The policy states that, fordetermining the net asset value of a portfolio’s mortgages,the value of mortgages shall be calculated on aconsistent basis to produce a principal amount that willproduce a yield:31 Certain disclosures are required under National Policy No. 29, MutualFunds Investing in Mortgages.79

Financial Reporting by Investment Funds•y•yequal to the yield prevailing for the sale of comparablemortgages by major lending institutions, ifascertainable on the date of valuation; orequal to, or not less than, one quarter of one percent below the interest rate at which major lendinginstitutions are making commitments at the dateof valuation.Investment funds dealing in mortgages should providethe following disclosures in their statement of portfolioinvestments:•y the origin of the mortgages acquired by the fundduring the financial year; and•y the distribution of mortgages among mortgagesinsured under the National Housing Act (Canada),insured and uninsured mortgages.The note on significant accounting policies shoulddescribe:•y the method the fund used for determining the priceof any mortgages sold during the financial year;and•y the methods used to value all portfolio holdings(including mortgages in arrears) in determining thefund’s net asset value.Furthermore, the note on related party transactionsshould include a statement of the risks and rewards themanagement company, or an affiliate or associate of themanagement company, faced in managing the fundand in the sale or purchase of mortgages to or from thefund.SCHOLARSHIP PLANSA scholarship plan is a trust formed for the purpose ofaccumulating deposits by subscribers, investing thosedeposits to earn income and, ultimately, refunding thedeposits to subscribers and paying out earned incometo beneficiaries once they have qualified for the receiptof such payments. A subscriber, typically a parent orgrandparent, enters into an agreement with the distributorof the scholarship plan (the plan) that defines, amongother things, who the beneficiary (child) is, how manyunits of the plan will be subscribed for, the frequencyand amount of deposits the subscriber is to make, thetype of plan purchased and an expected maturity date.The expected maturity of the plan is the year the beneficiaryis anticipated to become eligible to enroll in aqualifying post-secondary educational program.There are various types of scholarship plans, includinggroup savings plans, multiple-student and individualplans, each of which has somewhat different characteristics,primarily in the beneficiary’s entitlements to theincome earned in the plan. Generally, subscribers willhave their agreement registered as a registered educationsavings plan for income tax purposes as well as to takeadvantage of the various federal and provincial incentivesaimed at encouraging saving for post-secondaryeducation.Scholarship plans pool the deposits made by subscribersand then invest these deposits in much the same wayas many fixed-income mutual funds do. NI 81-106 setsout the continuous disclosure obligations applicable toscholarship plans and National Policy No. 15, ConditionsPrecedent to Acceptance of Scholarship or EducationalPlan Prospectuses (NP 15) outlines the requirements foraccepting prospectuses for scholarship plans. NP 15further sets out investment restrictions, which generallylimit scholarship plans to investing in high-grade fixedincomesecurities.NI 81-106 requires scholarship plans to present financialstatements prepared in accordance with CanadianGAAP. NI 81-106 also specifies certain disclosures thatmust be made in the financial statements and managementreports on fund performance that are unique tothe scholarship plan industry. These disclosures dealwith a plan’s maturity profile of outstanding units and80

Special Types of Investment Fundswith scholarship payments made to beneficiaries (alsosee Chapter 6).The majority of scholarship plans do not operate on acommon net asset value per unit basis. Rather, a subscribergenerally has a principal balance and, dependingon the type of plan, the beneficiary will receive scholarshippayments when eligible that are based largely onincome and available funds within the plan. In a groupplan, the scholarship payments are generally fixedamounts per unit, as established annually by the boardof directors of the scholarship plan’s fiduciary agency,which is typically a not-for-profit foundation. In anindividual plan, the scholarship payment is tied directlyto the income earned by the plan’s deposits made onbehalf of the specific beneficiary. Most commonly,the plan reports the subscribers’ deposits, representingtheir principal, as deposit liabilities. The undistributedincome, as well as most government grants received,represents the plan’s residual equity attributable to thebeneficiaries of the plan.FUND OF FUNDS – REFERENCEDPORTFOLIOTypically, this type of fund enters into a forward purchaseand sale agreement or purchases a portfolio ofsecurities which are then sold under a forward agreementwith a major institutional bank (the counterparty). Theforward agreement will ultimately provide the fund withexposure to the reference portfolio held by a trust issuedunder a non-offering prospectus to the counterparty.The trust will have been created for the sole purpose ofholding the reference portfolio. The details of the referenceportfolio are outlined in the forward agreementwith the counterparty and may vary throughout the lifeof the fund:•y on mutual agreement of the fund and the counterparty;or•yon the occurrence of certain events as specified inthe forward agreement, i.e., mergers of issuers ordelisting from an exchange.The intent of the structure is to make an election underthe tax act to have the reference portfolio treated ascapital property. Such an election would result in gainsand losses realized by the fund being treated as capitalgains and losses for tax purposes. The forward agreementwould not result in any income, gain or loss as aresult of entering into the agreement, and any partialsettlements of the forward agreement would result incapital gains and losses. A fund might require partialsettlements to fund distributions, retractions and to payfor its expenses and liabilities. A key reporting considerationfor this type of fund would be the risk disclosuresrequired by Section 3862 (for example, a “look through”to a reference portfolio).HEDGE FUNDSA hedge fund is typically a private investment fundformed as a mutual fund trust, unit trust or partnershipoffered to high-net-worth and institutional investors.Hedge funds often have few investment restrictions andcan employ leverage and invest in derivatives. Hedgefunds are characterized by a fee structure involving anasset-based management fee and a performance-basedincentive fee. A hedge fund is often structured withmultiple classes or series in order to provide differingfees, liquidity terms or other features to investors. Hedgefunds are also structured as managed accounts, masterfeederfunds and fund of funds. Although the majorityof hedge funds are private, some retail funds are offeredin the form of structured notes, closed end funds orcommodity pools. Units or shares in a hedge fund aretypically priced monthly or weekly, are often subjectto a lock-up period and/or early redemption penalty.Redemptions may also be restricted at the discretion ofthe manager.81

Financial Reporting by Investment FundsHedge funds are typically offered in the exempt market.The typical exemptions include the minimum investmentexemption, accredited investor exemption andoffering memorandum exemption. Although exemptfunds are not reporting issuers, managers of hedge fundsare typically subject to regulatory requirements. NI81-106 requires that financial statements be prepared inaccordance with Canadian GAAP and outlines specificdisclosure requirements. Private funds can, however,apply for an exemption from filing financial statements,subject to certain conditions.Hedge fund accounting issues include valuation of illiquidsecurities and derivatives (Chapter 4), calculationof incentive-based fees (Chapter 3), and market, credit,liquidity and other risk disclosures (Chapter 4).SPLIT CORPORATIONSSplit corporations are another form of investment pool(structured product) offering two share classes, one witha fixed coupon rate and another entitled to the residueand, therefore, most of the risks and rewards. The shareswith a fixed coupon rate are often referred to as preferredshares and, for accounting purposes, are treated as afinancial liability in accordance with Sections 3862 and3863. The coupon itself is treated as an interest expense.The treatment of preferred shares as a financial liabilityalso brings additional considerations such as valuation,risk disclosures and presentation.The other class of shares, like common shares, is treatedas part of shareholders’ equity. Generally, these productshave been offered as closed-end funds listed on a stockexchange, albeit they could be offered by an offeringmemorandum to accredited investors. Such productsaddress the needs of both risk averse and risk-seekinginvestors. The risk-seeking investors enjoy/suffer thebenefits/losses of leverage gained through offering afixed rate of return to the preference shareholders. Splitcorporations would comply with all the requirements ofNI 81-106 for preparation of financial statements andwould also include a statement of cash flows.FLOW-THROUGH LIMITEDPARTNERSHIPSFlow-through limited partnerships are closed-endmutual funds that invest in flow-through securities ofresource issuers. Flow-through securities are structuredto allow tax deductions for exploration costs, whichwould otherwise have to be used by the investee (andwhich likely couldn’t be used for years), to be passedon to the limited partners. Limited partners can alsoreceive tax credits for investments in qualifying issuers(usually junior mining/energy companies). To use thedeductions, limited partners must hold their investmentin the fund for 18 to 24 months. Flow-through limitedpartnerships are typically wound up after the requiredhold periods and the assets are transferred into a mutualfund (usually one that is resource focused).Most flow-through limited partnerships employ leveragewhich, in turn, requires a cash flow statement underSection 1540, Cash Flow Statements. In addition, sinceflow-through limited partnerships are closed-end funds,they are required to follow Section 3240, Share Capital,and separate net asset value into share capital andretained earnings (see Chapter 3). Other accountingand disclosure matters relevant to many flow-throughlimited partnerships include the recognition of incentivefees and the valuation of non-actively traded securities(see Chapter 4).EXCHANGE TRADED FUNDS (ETFs)ETFs are one of the fastest-growing investment vehiclesin the financial markets today. They have experiencedsignificant growth in recent years as investor demandfor trading flexibility, transparency and cost efficiencyhas increased. Most ETFs combine the characteristics ofan open-end mutual fund and a stock. Similar to indexmutual funds, ETFs represent a fractional ownership in82

Special Types of Investment Fundsan underlying portfolio of securities that track a specificmarket index. Unlike mutual funds, however, investorsdo not subscribe for or redeem securities from a fund.Instead, individuals buy and sell shares of ETFs likestocks on a stock exchange and, like stocks, ETFs canbe bought and sold, long or short.Unlike closed-end funds, ETFs have the capability tocontinuously offer securities through a unique creationand redemption process, which means that the numberof outstanding securities may be increased or decreasedon a daily basis, as necessary, to reflect demand. Thus,open-end ETFs do not need to trade at large premiumsand discounts to their NAV. Closed-end funds, on theother hand, offer a fixed supply of securities; as demandchanges, they frequently trade at appreciable discountsfrom, and sometimes premiums to, their NAV.In mutual funds, securityholder redemptions may resultin capital gains distributions to all securityholders, evenwhen the fund may have lost value. ETF shares, on theother hand, are bought and sold on an exchange andnot from a fund company. The trading of ETF sharestypically generates no capital gains for other securityholders.Management expense ratios for ETFs tend tobe significantly lower than those of traditional mutualfunds. There are no special accounting implicationswith respect to ETFs.SEGREGATED FUNDSUnder the Insurance Companies Act (ICA), a life insurermay offer individual and group variable insurance contracts.These contracts vary in amount depending onthe market value of a fund consisting of a specified poolof assets. The life company must “(a) maintain separateaccounts; and (b) establish and maintain one or morefunds consisting of assets that are segregated from theother assets of the life company…” (ICA 451(a) and(b)). Because of this separation, the funds are known as“segregated funds” and the variable insurance contractsare frequently, although incorrectly, also referred to assegregated funds. While the value of such a contractreflects the value of one or more segregated funds, theconsumer does not own units of the funds. This is afundamental difference between segregated funds andmutual funds.CLHIA Guideline G2, Individual Variable InsuranceContracts Relating to Segregated Funds (approved by theCanadian Council of Insurance Regulators (CCIR)and the Canadian Life and Health Insurance AssociationInc. (CLHIA)), documents accounting and auditrequirements for individual segregated funds. 32Financial StatementsCLHIA Guideline G2 states: “The financial statementsof a segregated fund shall be prepared in accordance withgenerally accepted accounting principles, the primarysource of which is the Handbook of the Canadian Instituteof Chartered Accountants.” [CLHIA Guideline G2s.12.1 (1)].The specific requirements of Guideline G2 apply only toindividual variable insurance contracts. Group variableinsurance contracts are not required to follow GuidelineG2. Group contracts are, however, treated as securitiesfor purposes of securities legislation and are subjectto the accounting requirements for investment fundsestablished by the CICA Handbook-Accounting.Under Guideline G2, financial statements for segregatedfunds must be prepared using bid prices, althoughclosing prices may be used for non-financial statementpurposes “provided that the notes to the funds financialstatements include a reconciliation of the unit value in32 CLHIA Guideline G2 is a regulation under the Insurance Act (Ontario)and an industry guideline in the other Canadian provinces.83

Financial Reporting by Investment Fundsthe financial statements with any unit value used forany other purpose.” [CLHIA Circular No. 6034] 33Part XII of Guideline G2 specifies requirements for thestatement of operations, statement of changes in netassets, statement of net assets, statement of investmentportfolio and the notes to the audited financial statements.Some specific points:•y On each statement, items that are individually nonmaterialcan be grouped together as “other.”•y The Statement of Changes in Net Assets is at thefund level (rather than at the class or series leveldisclosure required for mutual funds).•y On the Statement of Net Assets, investments arerecorded at market value, with a notation of theircost.•y For fund-of-fund structures, the Guideline requiresa segregated fund that invests in a secondary fundto disclose the top 25 holdings of the secondaryfund in the Statement of Investment Portfolio or, ifthere is more than one secondary fund, the top fiveholdings of each underlying fund.Financial HighlightsAn insurer that offers individual variable insurance contractsmust file an information folder with the applicableinsurance regulators. The information folder includesperformance data and is accompanied by financial highlights.CLHIA Guideline G2 establishes the standardsfor reporting financial highlights and performance datafor individual segregated funds. Financial highlights arepresented in a table format (see Exhibit 7.1), as specifiedby the instructions for Form 1, Item 21.Calculation of Management Expense Ratio(MER) for Segregated FundsCLHIA Guideline G2 Part VIII provides guidance onthe calculation of the MER for segregated funds. MERmust be calculated for each fee option, both with andwithout waived and absorbed costs. The MER is calculatedbased on the aggregate of all fees, charges andother expenses, including interest charges and GST, butexcluding commissions and brokerage fees.In a fund-of-fund structure, the management fees orsales charges of both the principal and secondary fundmust be disclosed in the information folder. These feesor charges must be included in the MER of the principalfund.Calculation of the Portfolio Turnover RateCLHIA Guideline G2 Form 1, Item 21 (8.1) providesspecific guidance on how to calculate the portfolioturnover rate for a segregated fund.“Calculate the segregated fund’s portfolio turnoverrate by dividing the lesser of amounts of thepurchases and sales of portfolio securities for thefinancial year by the average of the value of theportfolio securities owned by the segregated fundin the financial year. Calculate the monthly averageby totaling the values of portfolio securities as at thebeginning and end of the first month of the financialyear and as at the end of each of the succeeding 11months and dividing the sum by 13. Exclude fromboth numerator and denominator amounts relatingto all securities having a remaining term to maturityon the date of acquisition by the segregated fund ofone year or less.” [CLHIA Guideline G2 Form 1,Item 21 (8.1)]33 Since CICA Handbook – Accounting, Section 3855, has general application,segregated funds offered through group arrangements will berequired to use bid prices for financial statements, but may continue touse closing prices for all other purposes. [CLHIA Circular No. 6034]84

Special Types of Investment FundsExhibit 7.1Financial Highlights – Segregated FundsThe following tables show selected key financial information about the Fund and are intended to help you understandthe Fund’s financial performance for the past [insert number] years. This information is derived from theFund’s audited annual financial statements. Please see page [insert page number] for information about how youcan obtain either the Fund’s semi-annual unaudited or annual audited financial statements.(a)Where the segregated fund does not provide for distributions (as opposed to allocations for tax purposes),provide the information in the following table:The Fund’s Net Asset Value per UnitNet asset value at (insert last day of financialyear) of year shown(insert year) (insert year) (insert year) (insert year) (insert year)$ $ $ $ $(b)orWhere the segregated fund does provide for distributions of income and net capital gains, provide the followingtable:The Fund’s Distributions and Net Asset Value per Unit(insert year) (insert year) (insert year) (insert year) (insert year)Distributions: $ $ $ $ $From net income $ $ $ $ $From realized gain $ $ $ $ $Return of capital $ $ $ $ $Total Annual Distributions 1 $ $ $ $ $Net Asset Value at (insert last day of financial$ $ $ $ $year) of year shown1 Distributions were [paid in cash/reinvested in additional [units] of the Fund].and(c)the following table must be provided for all segregated funds:Ratios and Supplemental Data(insert year) (insert year) (insert year) (insert year) (insert year)Net assets (000’s) $ $ $ $ $Number of units outstandingManagement expense ratio % % % % %Portfolio turnover rate % % % % %85

Financial Reporting by Investment FundsPerformance DataCLHIA Guideline G2 section 7.12 states: “The standardperformance data of a segregated fund shall be calculatedand disclosed in accordance with the CLHIA ReferenceDocument, Calculation and Disclosure of PerformanceData.”This reference document provides instructions for thepresentation of performance data in the informationfolder. Performance data includes the following:•y a bar chart showing year-by-year returns;•y a line graph showing growth of a hypothetical$10,000 investment (except for money marketfunds);•y annual compound returns (except for moneymarket funds).CONCLUSIONThe Study Group maintains that most of the conclusionsset out in this Research Report also apply to specialtypes of investment funds, including those addressed inthis chapter.Because liquidity considerations and the use of estimationtechniques for determining fair value can have asignificant impact on investor decision making, thesespecial types of investment funds may need to provide astatement of cash flows, as well as enhanced disclosuresin both the notes to the financial statements and management’sdiscussion and analysis.As stated in Chapter 3, the Study Group maintainsthat the management of an investment fund and itsauditor should recognize the need to prepare financialstatements that highlight information significant toinvestors and other interested parties and, if applicable,fulfill the requirements of the reporting forms, rulesand regulations of the regulatory authorities.Decisions on how and what to disclose in specificsituations require the exercise of sound judgment,consideration of the minimum standards establishedby the profession and recognition of specific provisionsin governing statutes. Effective reporting should alsorecognize new problems as they arise and any changesin the requirements of financial statement users.86

Chapter 8TRANSITION TO INTERNATIONALFINANCIAL REPORTING STANDARDSINTRODUCTIONBuilding on the “Transition to IFRS” guidance providedin Chapter 2, Chapter 3 and Chapter 4 (as well asAppendix D, Appendix E and Appendix F), this chapterconsiders the general implications of moving fromCanadian GAAP to International Financial ReportingStandards (IFRS), which take effect for financial periodscommencing on or after January 1, 2011.The objective is to:•y List the financial reporting issues that may arise inthe migration of the CICA Handbook-Accountingto International Financial Reporting Standards(IFRS);•y Identify IFRS financial reporting issues that mayarise from existing and proposed regulatory andindustry-related requirements in Canada and internationally;•y Consider whether, and if so what, additionalimplementation guidance on IFRS issues, proposedregulatory and industry-related requirements mighthelp meet the special needs of users of investmentfunds.The implementation guidance is based on the StudyGroup’s review of IFRS applicable to investment fundsin Canada, illustrative financial statements in countrieswhere IFRS are being applied, and material publishedby various organizations including the CanadianInstitute of Chartered Accountants (CICA), theCanadian Securities Administrators (CSA) and majorpublic accounting firms. The implementation guidanceis preliminary and will be revised and updated duringthe IFRS transition period and perhaps, beyond. 34In January 2006, Canada’s Accounting StandardsBoard (AcSB) adopted a strategic plan calling for theadoption of IFRS by publicly accountable enterprises(PAEs) in Canada, after a specified transition period.Early in 2008, it announced that Canadian PAEs wouldhave to make the transition to IFRS on January 1, 2011. 35At that time, IFRS will become Canadian accountingstandards. 36 As Exhibit 8.1 shows, the real deadline isDecember 2009 when PAEs must be ready to create aJanuary 1, 2010 opening balance sheet. Furthermore,the CSA expect that in the 2008 annual Management’sDiscussion and Analysis (MD&A), PAEs will tell investorsabout the key elements and timing of their IFRSchangeover plans. 3734 The AcSB has issued two omnibus exposure drafts (ED) — AdoptingIFRS in Canada (April 2008) and Adopting IFRS in Canada, II(March 2009). It expects to issue a third omnibus ED in mid-2009and to incorporate IFRS into the CICA Handbook - Accounting in thesecond half of the year.35 In May 2009, Canada’s Accounting Standard Board (AcSB) publisheda bulletin called Changeover to IFRSs: January 1, 2011. The bulletinoutlines the factors supporting the 2011 changeover date for the adoptionof IFRS by publicly-accountable enterprises.36 For information and resources on Canada’s transition to IFRS, includingthe comparison of IFRS to Canadian GAAP, visit the CICA IFRSTransition Website and also refer to the online news at Migrating toIFRS.37 The AcSB second omnibus ED states that banks, credit unions, insurancecompanies, securities brokers/dealers, mutual funds and investmentbanks typically meet the established criteria for PAEs.87

Financial Reporting by Investment FundsExhibit 8.1IFRS Conversion Timeline 381 2 345Fiscal2008Fiscal2009Fiscal2010Fiscal2011Convergence to IFRS standardsTraining and knowledge of IFRSPreparation of convergence planIFRSopeningbalance sheetQ1 Q2 Q3 Q4 Q1 Q2 Q3 Q42009 and 2010 statements filed under Canadian GaaPIFRSconversion dateIFRSconvergenceplan disclosureIFRSdetailedplan disclosureStatements restated underIFRS but to be filed in 2011IFRS statements are publishedwith comparatives for 2010Project Structure and Governance (budget implications, resourcing, etc.)assess System Change Impact and Implementation1Disclose IFRS implementationplan3Opening IFRS balance sheetand transition adjustments5First full year of IFRS2Disclose IFRS quantitativeimpact analysis4First external quarterly IFRSfinancial statementsincluding comparativesCanadian accounting standards will continue tochange as certain IFRS are incorporated into CanadianGAAP. This may reduce some of the differencesfrom IFRS before Canada’s 2011 changeover date. 39 Inaddition, new and amended standards from the InternationalAccounting Standards Board (IASB) willaffect Canadian PAEs, both on transition in 2011 andafterwards. 40 It is important, therefore, to pay attentionto the activities and work plan of the IASB which is themajor source of standards and interpretations that canaffect IFRS conversion efforts. 4138 Exhibit 1 reproduces Figure 1 on page 6 of the 2008 CICA publicationIFRS Conversions: What CFOs Need to Know and Do prepared byR. Greiss, CA, and S. Sharp, CA.39 For example, the AcSB plans to revise three standards before 2011 —business combinations and non-controlling minority interests, jointventures and earnings per share. AcSB staff has also prepared a papercalled Which IFRSs Are Expected to Apply for Canadian Changeoverin 2011? The paper analyzes the IFRS changes still expected andtheir likely effect.40 To facilitate an understanding of the process for developing InternationalFinancial Reporting Standards, the IASB has issued a quickreference guide IASB and the IASC Foundation: Who we are andwhat we do.41 The IASB Work Plan is available on the IASB website. Publishedstandards are available online and in the IFRS Bound Volume 2009.Regarding the transition to IFRS, the Study Groupidentified 15 matters for consideration:1. First time adoption and transition (IFRS 1);2. Publicly accountable enterprises;3. Balance sheet presentation and schedule ofinvestments (including comparatives) (IAS 1);4. Cash flow statements (IAS 7);5. Segment reporting (IFRS 8);6. Presentation and functional currency (IAS 21);7. Related party disclosures (IAS 24);8. Business combinations and mergers (disclosuredifferences) (IFRS 3);9. Consolidation by investment funds under IFRS(IAS 27);10. Income taxes (IAS 12);11. Classification of investor equity (IAS 1 and IAS32);12. Earnings per share (IAS 33);13. Classification of investments (IAS 39);14. Revenue recognition (IAS 18 and IAS 39);15. Fair value measurement and disclosure (IAS39).88

Transition to International Financial Reporting StandardsThis chapter examines the first two matters for consideration— First time adoption and transition (IFRS 1);and Publicly accountable enterprises (PAEs).Implementation guidance is provided on all the othermatters in the “Transition to IFRS” sections of Chapters2, 3 and 4, supplemented by Appendix D, Appendix Eand Appendix F.FIRST TIME ADOPTION ANDTRANSITION (IFRS 1)IFRS 1, First-time Adoption of International FinancialReporting Standards, is the standard used by all investmentfunds adopting IFRS. It sets out the requirementsfor specific transition disclosures and reconciliations,and certain mandatory and alternative choices concerningthe adoption of IFRS accounting policies. It does notprovide any exemptions from disclosure requirements inother standards. The disclosures are intended to providea bridge between previous Canadian GAAP financialstatements and the IFRS statements. It can only be usedonce — upon initial adoption of IFRS in the first set ofIFRS financial statements when an unreserved statementof compliance with IFRS is made for the first time.The analysis of matters to consider in the first-timeadoption of IFRS is set out as follows:•y Overview;•y Authoritative guidance;•y Current practices;•y Study Group views; and•y Future IFRS developments.OverviewOn transition, IFRS 1 requires that accounting policiesbe adopted retrospectively, as if the entity had alwaysused IFRS. The standards that are effective for financialperiods ending December 31, 2011, for calendar yearend companies, will be the ones used on transition.IFRS 1 sets out certain exemptions and exceptions foradoption of IFRS as at the transition date. The transitiondate is the opening date of the first comparativeperiod of financial statements. For calendar year endcompanies, the transition date is January 1, 2010, andthe changeover date is December 31, 2011. For investmentfunds, the first set of IFRS financial statements forcalendar year ends will be the semi-annual statements asat June 30, 2011.For investment funds:•y What are the likely optional choices to be made?•y What are the challenges of using IFRS 1?Investment funds should refer to National Instrument81-106 Investment Fund Continuous Disclosure for specificregulatory requirements. The rule will be updatedfor IFRS terminology in advance of the conversion in2011.Investment funds should also refer to CSA Staff Notice52-320 Disclosure of Expected Changes in AccountingPolicies Relating to Changeover to International FinancialReporting Standards. It includes disclosure requirementsabout the fund’s changeover plan (in advance of thechangeover to IFRS), the IFRS 1 elective choices andother accounting policy choices.In the annual and interim filings three, two and oneyear(s) before changeover, as appropriate, an investmentfund should disclose relevant information about itschangeover to IFRS, including:•y the key elements and timing of its changeoverplan;•y impact on business arrangements;•y impact, if any, on net asset value per unit;•y accounting policy and implementation decisionsthe fund will have to make;•y major differences the fund has identified betweenits current accounting policies and those it expectsto apply under IFRS; and89

Financial Reporting by Investment Funds•yprogress made on the fund’s changeover plan.In the year before changeover, disclosure should includethe quantitative impact of the changeover to IFRS.Consistent with instructions for the MRFP, disclosureshould be clear and concise, focusing on specific materialinformation, risks and uncertainties to enable readers tobetter assess the impact on the investment fund.Authoritative Guidance•y IASBIFRS 1, First-time Adoption of InternationalFinancial Reporting StandardsIASB Exposure Draft: Additional Exemptions forFirst-time Adopters – Proposed Amendments toIFRS 1, September 25, 2008 (comments were dueby January 23, 2009)•y Canadian GAAPAcSB ED, Adopting IFRS in Canada, April 2008AcSB ED, Adopting IFRS in Canada, II, March2009 (comments due by May 15, 2009)•y United States GAAP – not applicable.Current Practices•y InternationalCertain Australian funds moved to bid/ask valuationon the conversion to IFRS and changed on thetransition date. An example of note disclosure fromthe financial statements of an Australian fund whenit adopted IFRS for the first time for the year endedJune 30, 2006 is set out in Exhibit 8.2.•y Canadian GAAP – not applicable•y United States GAAP – not applicableExhibit 8.2“Application of AASB 1 First Time Adoption ofAustralian Equivalents to International FinancialReporting StandardsThis is the first annual financial report of the Fundprepared in accordance with AIFRS. AASB 1First-time Adoption of Australian Equivalents toInternational Financial Reporting Standards hasbeen applied in preparing this financial report.The financial statements of the Fund until 30 June2005 had been prepared in accordance with previousAustralian Generally Accepted Accounting Principles(AGAAP). AGAAP differs in several respectsfrom AIFRS. When preparing the 30 June 2006financial statements, management has amendedcertain accounting and valuation methods appliedin the AGAAP financial statements to comply withAIFRS. The comparative figures in respect of theyear ended 30 June 2005 were restated to reflectthese adjustments.The Fund has elected not to adopt the exemption inAASB 1 First-time Adoption of Australian Equivalentsto International Financial Reporting Standards(“AASB 1”) to not restate comparatives for the effectsof AASB 132 Financial Instruments: Disclosure andpresentation (“AASB 132”) and AASB 139 FinancialInstruments: Recognition and measurement (“AASB139”).Reconciliations and descriptions of the effect of thetransition from previous AGAAP to AIFRS on netassets attributable to unitholders and profit are givenin note 2(q).”90

Transition to International Financial Reporting StandardsStudy Group ViewsThe requirements for the transition disclosures and reconciliationsare consistent for all enterprises. There arefive reconciliations to be provided (the dates are relevantfor a financial year ending December 31, 2011):1. Reconciliation of equity reported under previousCanadian GAAP to equity under IFRS for the dateof transition (that is, January 1, 2010).2. Reconciliation of equity reported under previousCanadian GAAP to equity under IFRS for theend of latest period presented under recent annualfinancial statements under previous GAAP (that is,December 31, 2010).3. Reconciliation of total comprehensive income underIFRS to previous Canadian GAAP for latest periodin most recent annual financial statements (that is,calendar year 2010).4. Reconciliation of equity under previous CanadianGAAP to IFRS at the end of the comparative interimperiod (that is, March 31, 2010).5. Reconciliation of total comprehensive incomeunder IFRS to previous Canadian GAAP for thatcomparative interim period (that is, first quarter2010).Transition disclosure requirements include impairmentlosses recognized or reversed in opening IFRS financialstatements, and disclosure of material adjustments inthe above reconciliations.There are 14 elective exemptions, with three new onesexpected to be adopted in 2010. These should be consideredby each investment fund. Essentially, the IASBconsiders that retrospective treatment for these standardsmay be impracticable (as defined in IAS 8) and that prospectivetreatment and adjustments to opening retainedearnings may be preferred. In addition, there are fivemandatory exceptions to retrospective application. Ifapplicable, they must be used by investment funds.The exemptions and exceptions, along with the StudyGroup views are set out as follows:•y Elective exemptions (Exhibit 8.3)•y Elective exemptions expected to be adopted in 2010(Exhibit 8.4)•y Mandatory exceptions (Exhibit 8.5)91

Financial Reporting by Investment FundsExhibit 8.3Elective exemptions1.Business combinations. This may apply to fund mergersthat have occurred either before transition date or betweentransition date and changeover date.Study Group ViewsThe Study Group recommends that if these have occurred, theelection should be made so that treatment is not retrospective for allprevious acquisitions.2.Fair value or revaluation as deemed cost. Normally,investment funds do not have property, plant andequipment.Related issues are Consolidations and Classification of InvestorEquity. Note that new IFRS Business Combination standards takeeffect January 1, 2011 but can be early adopted at transition date.The fair value requirements of the new standards are already used byinvestment funds, such as bid/ask instead of closing price on activemarket securities, and expensing transaction costs.Not expected to apply for most investment funds.3. Employee benefits.Not expected to apply for most investment funds.4.Cumulative translation differences. These should be relativelyrare for investment funds except for a consolidated entitythat is a self sustaining foreign operation.The Study Group recommends that if these have occurred, theelection should be made so that treatment is not retrospective.5. Compound financial instruments.Not expected to apply for most investment funds.6.7.Assets and liabilities of subsidiaries, associates and jointventures.Designation of previously recognized financial instruments.On transition date, an investment fund could designate thefinancial instrument on a prospective basis.Not expected to be applicable for most investment funds. IAS 28,Investments in Associates, has specifically scoped out investmentfunds. However, it may be applicable for subsidiaries with noncoterminousyear ends with their parent.The Study Group recommends that if these exist that the election bemade so treatment is not retrospective.8. Share-based payment transactions.Not expected to apply for most investment funds.9. Insurance contracts.Not expected to apply for most investment funds.10.Changes in existing decommissioning, restoration andsimilar liabilities included in the cost of property, plant andequipment.Not expected to apply for most investment funds.11. Leases.Not expected to apply for most investment funds.12.Fair value measurement of financial assets or financialliabilities.The Study Group recommends that the election be made sotreatment is not retrospective in determining fair value.13. Service concession arrangements.Not expected to apply for most investment funds.14. Borrowing costs.Not expected to apply for most investment funds.Exhibit 8.4Elective exemptions expected to be adopted in 2010Study Group views1. Oil and gas – full cost.Not applicable for investment funds.2. Rate regulated industries.Not applicable for investment funds.3. Leases.Not expected to apply for investment funds.92

Transition to International Financial Reporting StandardsExhibit 8.5Mandatory exceptions1.Derecognition of financial assets and financial liabilities(examples are securitization vehicles which may go back onbalance sheet).Study Group viewsNot expected to apply for most investment funds.2. Hedge accounting.Not expected to apply for most investment funds.3.4.Estimates. Notes that estimates cannot be changed and thathindsight cannot be used, but that errors can be corrected.Assets classified as held for sale and discontinuedoperations.Similar for all entities.Not expected to apply for most investment funds.5. Non-controlling interests.Should be very limited application where there are consolidated fundof funds.Future IFRS DevelopmentsRevisions to IFRS 1 have been proposed (see the IASBand AcSB exposure drafts referred to above). Investmentfunds should monitor the IASB and AcSB websitesfor final approval of these revisions and for any futurerevisions to IFRS 1 that will be applicable to the 2011transition.PUBLICLY ACCOUNTABLE ENTERPRISESThe adoption of IFRS in Canada is based on the requirementsfor reporting issuers and certain registrants foraccounting standards in financial statements filed withsecurities regulators, and is also impacted by the Canadianaccounting standard-setter’s plan to move to IFRSfor publicly-accountable enterprises (PAEs). Investmentfunds should consider with their auditors whether theyare required to move to IFRS. Additionally, if theyare not required to change, they should consider whataccounting standards their peer group will be using, andwhether they should be choosing to change to IFRS.IFRS issued by the IASB, as stated in IAS 1, is considered“suitable for profit-oriented entities.”The analysis of matters to consider is set out as follows:•y Overview;•y Authoritative guidance;•y Current practices; and•y Study Group views.OverviewAccounting Standards Board (AcSB)In January 2006, the AcSB adopted a Strategic Plancalling for the adoption of IFRS by publicly accountableenterprises in Canada, after a specified transitionperiod. In early 2008, it confirmed January 1, 2011 asthe changeover date (that is, the date IFRS will replacecurrent Canadian GAAP for this category of reportingentity).In April 2008, the AcSB issued an omnibus exposuredraft that included proposals that all Canadian reportingentities, with specified exceptions, be required toapply IFRS effective for years commencing January 1,2011 and a proposed definition of “publicly accountableenterprises.”The AcSB issued a second omnibus exposure draft inMarch 2009 (for comment by May 15, 2009) whichincludes an amended definition of “publicly accountableenterprises.” This definition clarifies the meaning of keyterms such as “public market” and “fiduciary capacity”and is now stated in the positive, rather than the negative,as follows:“A publicly accountable enterprise is an entity, otherthan a not-for-profit organization, or a governmentor other entity in the public sector that:93

Financial Reporting by Investment Funds(i) has issued, or is in the process of issuing, debtor equity instruments that are, or will be,outstanding and traded in a public market(a domestic or foreign stock exchange or anover-the-counter market, including local andregional markets); or(ii) holds assets in a fiduciary capacity for abroad group of outsiders as one of its primarybusinesses.Banks, credit unions, insurance companies, securitiesbrokers/dealers, mutual funds and investmentbanks typically meet the second of these criteria.Other entities may also hold assets in a fiduciarycapacity for a broad group of outsiders because theyhold and manage financial resources entrusted tothem by clients, customers or members not involvedin the management of the entity. However, if anentity does so for reasons incidental to one of itsprimary businesses (as, for example, may be thecase for some travel or real estate agents, or cooperativeenterprises requiring a nominal membershipdeposit), it is not considered to be publicly accountable.”Canadian securities regulatorsCanadian securities regulators explained what “publiclyaccountable enterprises” means for registrants in CSAStaff Notice 33-313, International Financial ReportingStandards and Registrants, September 12, 2008. TheNotice focuses on those registrants that are regulateddirectly by the Canadian securities regulatory authorities– those that are not members of a self-regulatoryorganization (“non-SRO registrants”) and states thatthe regulators are considering whether non-SRO registrantswho are not PAEs will be required to file financialstatements with securities regulators using IFRS.The Notice states that it is staff’s position that anynon-SRO registrant that holds or has access to any clientassets will be required to deliver financial statementsprepared in accordance with IFRS to the Canadiansecurities regulatory authorities for financial years commencingon or after January 1, 2011.In addition, the Notice states that staff are also consideringwhether non-SRO registrants that do not hold orhave access to any client assets should be required to useIFRS and, if so, the appropriate implementation datefor that changeover.Authoritative Guidance•y IASBIAS 1, Presentation of Financial Statements•y Canadian GAAPAcSB Exposure Draft: Adopting IFRS in Canada,April 2008AcSB Exposure Draft: Adopting IFRS in Canada,II, March 2009(comments due May 15, 2009)AcG-18, Investment Companies•y United States GAAPIn November 2008, the Securities and ExchangeCommission (SEC) published its “Roadmapfor the Potential Use of Financial StatementsPrepared in Accordance with InternationalFinancial Reporting Standards by U.S. Issuers.”The SEC is proposing a move to IFRS for USissuers. The proposal does not include issuers thatare investment companies under the InvestmentCompany Act of 1940. It also does not includeregistered broker-dealers.Current Practices•y InternationalAustralia has adopted IFRS and extended the scopeto cover all entities, including all not-for-profit,all government entities and all investment funds.In Hong Kong and Ireland, IFRS are apparentlyapplied broadly or completely to investment funds.94

Transition to International Financial Reporting Standards•y•yIn the UK, exchange traded funds and closed endfunds are required to use IFRS: the LSE as of 2005and AIM as of 2007 42 .Canadian GAAPWith the change to IFRS, investment funds willno longer be governed by AcG 18 under CanadianGAAP. This will create significant changes forinvestment funds.United States GAAPIn the US, investment company practices aregoverned by the AICPA Audit and AccountingGuide, Investment Companies, which is based onUS GAAP.Other pertinent reference sources include:• y ICAEW• y AICPAy Investment and Financial Services Associatio• y Investment Management Association (UK)• nStudy Group ViewsThere are many different types of investment fundsin Canada, differentiated by provincial legislation, bysecurities regulation and by the requirements of SROssuch as stock exchanges, the Mutual Funds DealersAssociation (MFDA) and the Investment IndustryRegulatory Organization of Canada (IIROC). As well,there are many unregulated types of funds.Investment funds should be considering whether theyare PAEs and if they are not PAEs, whether they willchoose to move to IFRS. Fund categories to be consideredinclude:•y segregated funds;•y private institutional pooled funds;•y investment funds not identified by NI 81-102,Mutual Funds;•y•y•y•yprivate limited partnerships;hedge funds;private equity; andventure capital.Investment funds that are required to submit financialstatements under NI 81-106, Investment Funds ContinuousDisclosure are PAEs. This includes:•y listed funds;•y exchange traded funds (ETFs) (for example,iShares);•y over the counter funds (OTCs);•y closed end funds;•y most investment funds identified by NI 81-102,Mutual Funds; and•y labour sponsored funds.CONCLUSIONAs previously noted, the Study Group’s review of IFRSapplicable to investment funds in Canada is based onillustrative financial statements in countries where IFRSare being applied, and material published by variousorganizations including the Canadian Institute ofChartered Accountants (CICA), the Canadian SecuritiesAdministrators (CSA) and major public accountingfirms. The implementation guidance is preliminary andwill be revised and updated during the IFRS transitionperiod and, perhaps, beyond.To monitor developments during the IFRS transitionperiod and to provide timely guidance on current andemerging IFRS issues affecting investment funds, theCICA has established an Investment Funds StandingCommittee. It is anticipated that the Committee willalso provide guidance on the evolution of risk managementand develop a vision for the future of financialreporting by investment funds in Canada.42 For statistics on the use of IFRS by non-exchange-traded mutual fundsat September 30, 2008, see Appendix C of the March 2009 responseby the Investment Funds Institute of Canada to IASB ED 10,Consolidated Financial Statements, December 2008.95

Appendix AOVERVIEW OF THEINVESTMENT FUNDS INDUSTRYThis appendix provides an overview of the investmentfunds industry in Canada. The overview covers the followingtopics:•y investment fund definition;•y legal structure;•y types of funds — by investment objective;•y typical organization of a fund;•y securities regulations; and•y taxation.INVESTMENT FUND DEFINITIONChapter 1 notes that, for purposes of this ResearchReport, an investment fund is defined as an entity thatoffers its shares or units for sale to various investors. Itis usually traded at the net asset value (NAV) per share/unit, which is based on the current market value of theassets and liabilities of the fund. A fund may not beavailable for daily trading because the calculation ofNAV may be performed less frequently than daily (forexample, weekly, monthly or quarterly).Operating on a pooled basis on behalf of individualinvestors, policyholders and institutions, an investmentfund provides a cost-effective means of obtaining professionalinvestment management services and diversifiedinvestments. The capital raised is invested in accordancewith the fund’s investment policies and objectives.Income is earned primarily through interest, dividendsand capital gains.LEGAL STRUCTUREThe legal structure of an investment fund is heavilyinfluenced by local tax regulations. Because fund structuresvary considerably, it is important that the businessobjective and tax consequences of the fund structure beclearly understood.An investment fund generally has one of three forms:•y a trust — established by a declaration of trust;•y a corporation — founded by articles of incorporation;or•y a partnership — formed by a partnership agreement.The declaration of trust, articles of incorporation orpartnership agreement contains the investment objectivesand other information dictating how the fund willcarry on business.In recent years, more complex structures have beendeveloped. For example, some funds are structured sothat several funds having a common investment objectivecan invest in a single central portfolio. This “master/feeder” structure allows each fund’s services and fees tobe tailored to a specific market segment and provideseconomies of scale through a centralized investmentportfolio. A similar effect may be obtained by having afund with multiple series of shares or units.TYPES OF FUNDS — BY INVESTMENTOBJECTIVEInvestment funds may be grouped according to theirinvestment objectives and the types of securities inwhich they invest, for example:•y income funds (such as money market funds, bondfunds and dividend funds);•y equity funds; and•y combined income and equity funds (such as balancedfunds and asset allocation funds).97

Financial Reporting by Investment FundsIncome FundsMoney market fundsMoney market funds invest primarily or exclusively inshort-term debt securities designed to maximize currentincome with liquidity and capital preservation, usuallymaintaining per share/unit net asset value at a constantamount, such as one, five or ten dollars. Returns comestrictly from regular income payments. Returns for investorsin money market funds fluctuate with general interestrate levels. In periods when short-term interest ratesare high, money market funds return high income.A money market fund’s portfolio may include federalor provincial government treasury bills, commercialpaper, bankers’ acceptances, certificates of deposit andother short-term securities that have a maximum termto maturity of 365 days and whose average term tomaturity is no more than 90 days. Investments in lowrisksecurities and fixed unit values make money marketfunds the lowest-risk funds.Bond fundsBond funds invest primarily in fixed income securities,with the investment objective of producing income.Bond values tend to rise when interest rates fall anddrop when interest rates rise. Accordingly, capital gainsand capital losses may be experienced.Bond funds invest in bonds issued by the Government ofCanada, provincial governments, institutions, corporationsand foreign governments. Some bond funds investexclusively in one type of bond — for instance, governmentbonds — while others may hold a combinationof bond types. In addition to the securities of a rangeof bond issuers, bond funds generally hold securities ofvarying maturities.Bond funds are considered low to moderate-risk investments.They tend to be more volatile than mortgagefunds because they hold securities with longer maturities— often 20 years or more. Some bond funds invest primarilyin foreign-currency bonds issued by governmentsand companies outside of Canada, or issued by Canadiangovernments and businesses in foreign currencyto attract international investors. Funds specializing inforeign-currency bonds tend to be more volatile thanthose that invest primarily in Canadian dollar bonds.Dividend fundsDividend funds invest primarily in high-yielding preferredshares of Canadian companies. They may alsoinvest in dividend-paying common shares. These investmentsenable dividend funds to generate tax-preferentialincome. Investors in these funds benefit from thedividend tax credit, which reduces the amount of taxpayable by investors who receive dividends distributedby Canadian corporations.Returns from dividend funds consist of a combinationof income and capital appreciation (or depreciation) ofshares. Therefore, returns depend on both the directionof interest rates — which have a major impact on pricesof preferred shares — and the general direction of stockmarkets. Dividend funds are generally more volatilethan bond funds. Preferred shares are riskier investmentsthan bonds because preferred shareholders are behindbondholders in their rights to claims on company assets.A dividend fund should be considered a moderate-riskinvestment.Equity FundsEquity funds comprise the largest group of investmentfunds. They invest primarily in common shares. Thereare many types of equity funds, ranging from those thatinvest in a wide variety of shares to those that invest inforeign securities. Some may specialize in more secure,blue-chip stocks, while others invest in smaller-growthcompanies. Canadian equity funds invest primarily inthe shares of Canadian companies. Consequently, theyare generally fully eligible for RRSP investments.98

Overview of the Investment Funds IndustryThis fund category has a wide range of investmentobjectives and investment focuses. So-called growthfunds may take a more aggressive stance by investing insmaller companies with good growth potential. Othersmay confine their investments to one sector of the stockmarket. For example, energy funds and resource fundsmay invest in oil and gas companies, forestry productscompanies and other businesses that make their moneyfrom the harvesting of natural resources.Returns from equity funds will vary according to anumber of factors. These include the industries inwhich the fund invests, aggressiveness of investing,the proportion of domestic and foreign equities heldand the skills of the fund managers in selecting stockmarket investments. Some funds strive to earn highreturns through capital gains, while more conservativefunds may derive their returns from a combination ofcapital gains and dividends. These funds usually investin blue-chip stocks.Generally, equity funds are higher-risk investments.Volatility is high because of the volatility of stock pricesin general. Growth funds and specialty equity funds arethe most volatile and are the highest-risk mutual fundsavailable to investors. The tradeoff is the potential of fargreater returns.Combined Income and Equity FundsBalanced fundsBalanced funds contain a variety of investments — primarilybonds and common shares. The objective is toearn income and realize capital gains. Bonds provideincome and offer a measure of stability, while commonshares provide growth and some dividend income. Themix of bonds and stocks in a balanced fund’s portfoliois adjusted by the fund manager to reflect changingconditions of financial markets.Most balanced funds are required to hold minimumpercentages of each type of investment, according toobjectives set out in the fund’s prospectus. For example,a fund may be required to hold no less than 30% of itsportfolio in either stocks or bonds at any given time.Returns from balanced funds are generally higher thanthose for bond funds and lower than those for equityfunds. Risk to the investor in balanced funds is consideredto be moderate.Asset allocation fundsAsset allocation funds are similar to balanced funds.Like balanced funds, managers of asset allocationfunds vary the asset mix of their portfolio in responseto changing market conditions. The risk to investors inasset allocation funds varies greatly, depending on thefund’s mandate and objectives. Most asset allocationfunds would be moderate to high risk.TYPICAL ORGANIZATION OF A FUNDA typical organization of an investment fund is depictedin Exhibit A1. Service organizations or agents mayinclude a fund manager, a portfolio manager, a distributor,a custodian, a transfer agent, a fund accountant andan investor servicing agent. The significant activities ofthe fund (including portfolio management, the sale ofshares/units, custodianship, administration and recordkeeping)may be performed in-house by the fund manager’sorganization, or contracted out, or a combinationof both. A servicing organization or agent may handleseveral of these functions, which are briefly describedbelow.Fund ManagerOther than the board of directors or trustees, a funddoes not usually employ any personnel. The fundmanager sponsors the fund, usually provides the initialseed capital, markets it to investors and is responsiblefor its day-to-day operations. As a result, the managermay be responsible for administering all necessaryservices, facilities and personnel in connection with the99

Financial Reporting by Investment Fundsfund’s activities. Some of these responsibilities may becontracted to third parties.The fund manager’s responsibilities and relationshipwith the fund is usually set out in a managementagreement. As compensation, the manager receivesa management fee, which is normally calculated as aspecific percentage of the fund’s average net assets heldduring the year. Management fee rates vary dependingon the type of fund. When third-party servicing agentscarry out responsibilities to which the management feerelates, the manager directly or indirectly shares this feewith those agents.Exhibit A1Typical Organization of an Investment FundThese services may be provided by the fund manager ora third-party adviser.DistributorA distributor is usually the principal underwriter whosells the fund’s shares/units by acting as an agent(intermediary between the fund and an independentdealer or the public) or as a principal, buying shares/units from the fund at net asset value and selling themthrough dealers or directly to the public at the purchaseprice plus a commission. Investors pay the commissions(often referred to as the “load”) directly, so the assets ofthe fund itself are not affected.Funds generally offer their investors three types of salescommission structures: no load, front-end load, andback-end or contingent deferred load.InvestorsGoverningBody•yNo load funds sell shares/units without addingfront-end or back-end sales charges. Investors generallydeal directly with the fund, rather thanthrough an investment dealer or broker. Such fundsare commonly marketed by financial institutionswith direct distribution channels.FundManagerService ProvidersInvestment Adviser, Distributor, Custodian, Transfer Agent,Fund Accountant, Investor Servicing Agent(Note: Some of these functions may be performed by theFund Manager or contracted out.)Investment AdviserIn addition to managing the investment portfolio, theinvestment adviser provides investment analysis andmakes decisions on the investment of the fund’s assets.•y•yFront-end load funds impose a charge on the purchaseof shares/units sold by brokers or membersof a sales force. The charge is deducted from theamount to be invested in the fund’s shares/units.The investor pays commissions at the date of purchase,usually based on a straight percentage of thepurchase cost.Back-end load funds and contingent deferred loadfunds impose a charge when the investor redeemsshares/units. The commission is based on a percentageof the redemption price or original cost.In most cases, the charge is calculated on a slidingscale basis, which declines over the duration ofownership, sometimes to zero. The fund manager100

Overview of the Investment Funds Industrywill usually pay a commission to an agent/broker atthe time of purchase and will be reimbursed whenthe commission is received from the investor onredemption of shares/units. These structures oftenhave an asset-based distribution fee charged eitherdirectly to the investor or to the fund.The fund manager may also pay service fees (calledtrailer commissions) to agents/brokers who have clientswith a high cumulative value of assets in the fund. Thefee is usually calculated as a percentage of eligible assetsheld in the fund during the period. In most cases, forthe agents/brokers to qualify for this commission, theclients have to keep a minimum balance continuously inthe fund. This requirement ensures that only dedicateddealer representatives are rewarded for their efforts.CustodianThe fund custodian usually performs several functions,such as maintaining physical custody of the fund’sinvestments, collecting income, paying expenses,settling investment transactions and receiving anddisbursing cash from or to the transfer agent for capitalstock transactions.Transfer AgentAn investment fund’s transfer agent maintains theshareholder/unitholder records and processes the subscriptionsand redemptions of the fund’s capital sharesor units. For closed-end funds, the transfer agent’sfunctions are the same as those for other public companies.For open-end funds, however, the transfer agentprocesses the capital share/unit transactions.Fund AccountantThe accounting systems of an investment fund maybe maintained by the various service agents — mostcommonly the custodian or the transfer agent — whocontrol a fund’s assets or its accounting records. Thefund accountant maintains the fund’s general ledgerand portfolio accounting records, including the recordssupporting the valuation of the investment portfolio.Investor Servicing AgentThe investor servicing agent provides the customerservice functions, such as answering queries and acceptingsubscriptions or redemptions. In some cases, thesefunctions are combined with the transfer agent’s responsibilities.There is a growing trend, however, for the fundmanager (in the case of directly-marketed funds) or thedistributor (in the case of funds sold through a salesforce) to handle the direct contact with the investor.SECURITIES REGULATIONSThe investment fund industry is highly regulated. Togain an understanding of a particular type of investmentfund, it is important to be aware of the regulationsthat govern a fund and of any special reports that mustbe filed with regulatory bodies.Although the specific regulations that a fund mustcomply with may vary from jurisdiction to jurisdiction,they generally cover the following areas:•y•y•yFinancial reporting and disclosure — to ensure thatinvestors receive adequate information to makeinformed investment decisions, the contents of thefinancial statements, prospectuses and other documentsare generally regulated.Investment restrictions — although a fund may setits own investment policies and objectives, somejurisdictions also regulate the composition of thefund’s portfolio.Investment valuation — a fund’s investment portfoliomay be regulated as to which valuation methodis to be followed.101

Financial Reporting by Investment Funds•y•y•y•yCustodianship — some regulators may recognizeonly certain institutions as acceptable custodians.Investor approval — certain changes to a fund’soperations, investment policies or accounting policiescannot be made without approval of the investors.Commingling of money — the regulations mayrestrict the manager and distributor from includingmonies from subscriptions or redemptions in theirown bank accounts.Advertising — to eliminate false or misleadingadvertising, regulators sometimes provide guidanceon advertising.TAXATIONAs previously noted, the legal structure of an investmentfund is heavily influenced by local tax regulations. Taxrules may also have a significant impact on the compositionof the investment portfolio (for example, thepercentage of the portfolio invested in foreign securities)and on the withholding taxes on foreign income. It isimportant to be aware of the tax legislation a fund issubject to and whether the fund has complied with thatlegislation throughout the year. Failure to comply withthe legislation could have a significant impact on thefund and/or the investor’s tax position.102

Appendix BEXAMPLES OF FINANCIAL STATEMENTPRESENTATION AND DISCLOSUREThis Appendix provides illustrative examples of investmentfund presentation and disclosure regarding mattersaddressed in the Research Report. The examples, preparedin accordance with current Canadian generallyaccepted accounting principles and regulatory requirements,cover the following:•y Business combinations / fund mergers (Section1581) (Exhibit B1);•y•yIncome taxes (Section 3465) – Illustrative disclosuresfor a multi-class mutual fund corporation(Exhibit B2);Interim financial statements for the six monthsended September 30, 2008 – Canadian BalancedFund (Exhibit B3).103

Financial Reporting by Investment FundsExhibit B1 – Fund MergersIllustrative Example of Disclosure in Notes to Financial Statements of the Continuing FundsMERGER OF MUTUAL FUNDSThe purchase method of accounting was been adopted for the merger of the mutual funds. Under this method, an acquiring Fund mustbe identified. This identification was based on a comparison of the continuing Funds and the terminated Funds using criteria such asinvestment advisers, principal investment objectives and policies, portfolio composition, asset size, expense structures and expenseratios, overall management and corporate governance arrangements.Effective as of the close of business on December 31, 20x2, the continuing Funds, as set out below, acquired all of the assets and assumedall of the liabilities of the corresponding terminated Funds in exchange for units in the continuing Funds. The value of the units of eachcontinuing Fund issued in connection with these mergers was equal to the net assets transferred from the respective terminated Funds.Terminated FundCanadian Diversified FundAmerican Large Cap Value FundAmerican Advantage Value FundAmerican Opportunity FundGlobal Short-Term FundEmerging Markets Debt FundNAFTA FundContinuing FundBalanced FundAdvantage Value FundAdvantage Value FundBond FundBond FundAdvantage Value FundAdvantage Value FundAs a result of the Funds’ mergers, each of these seven Funds was deemed to have a taxation year end as at December 31, 20x2. Inaccordance with the Income Tax Act (Tax Reorganization Rules), all unrealized losses and certain (elected) unrealized gains of thoseseven Funds’ investment portfolios were deemed to be realized at December 31, 20x2.In accordance with the Tax Reorganization Rules, each terminating Fund effectively transferred its assets to the applicable continuingFunds without creating a tax liability for either of the Funds. The majority of investments of the terminating Funds were deemed tohave been disposed of at their fair market value to the continuing Funds as at December 31, 20x2, and the remaining investments weretransferred at cost. The following table summarizes the net assets acquired and the number of units issued in exchange for the net assetsof the terminated Funds acquired at December 31, 20x2.Fund Net Assets Acquired Number of Units IssuedBalanced Fund $3,209,680 262,873Advantage Value Fund 11,742,092 778,514Bond Fund 5,273,396 515,483The financial statements of the continuing Funds do not include the operating results of the terminated Funds prior to the merger date.104

Examples of Financial Statement Presentation and DisclosureAdvantage Value FundStatements of Changes in Net Assetsfor the periods ended December 31 (in $ thousands except when stated)Series A 20x2 20x1Net assets, beginning of period 20,513 10,614Increase (decrease) in net assets resulting from:Initial adoption of Section 3855 (Note 2) (76) -Operations 10,818 2,218DistributionsIncome (572) (92)Capital gains - -Total distributions (572) (92)Unit transactionsProceeds from sale of units 9,452 9,589Proceeds from units issued on merger 10,956 -Reinvested from distributions 572 92Payment on redemption of units (3,965) (1,908)Total unit transactions 17,015 7,773Increase (decrease) in net assets 27,185 9,899Net assets, end of period 47,698 20,513Series BNet assets, beginning of period 1,922 1,402Increase (decrease) in net assets resulting from:Initial adoption of Section 3855 (Note 2) (7) -Operations 876 222DistributionsIncome (39) (10)Capital gains - -Total distributions (39) (10)Unit transactionsProceeds from sale of units 759 719Proceeds from units issued on merger 786 -Reinvested from distributions 39 10Payment on redemption of units (1,013) (421)Total unit transactions 571 308Increase (decrease) in net assets 1,401 520Net assets, end of period 3,323 1,922105

Financial Reporting by Investment FundsAdvantage Value FundStatements of Changes in Net Assetsfor the periods ended December 31 (in $ thousands except when stated)TotalNet assets, beginning of period 22,435 12,016Increase (decrease) in net assets resulting from:Initial adoption of Section 3855 (Note 2) (83) -Operations 11,694 2,440DistributionsIncome (611) (102)Capital gains - -Total distributions (611) (102)Unit transactionsProceeds from sale of units 10,211 10,308Proceeds from units issued on merger 11,742 -Reinvested from distributions 611 102Payment on redemption of units (4,978) (2,329)Total unit transactions 17,586 8,081Increase (decrease) in net assets 28,586 10,419Net assets, end of period 51,021 22,435Increase (decrease) in units (in thousands):Series AUnits outstanding, beginning of period 2,325 1,383Add (deduct):Units sold 1,031 1,157Issued on merger 727 -Reinvested from distributions 48 12Units redeemed (346) (227)Units outstanding, end of period 3,785 2,325Series BUnits outstanding, beginning of period 219 183Add (deduct):Units sold 79 87Issued on merger 52 -Reinvested from distributions 3 1Units redeemed (87) (52)Units outstanding, end of period 266 219106

Examples of Financial Statement Presentation and DisclosureExhibit B2Income TaxesIllustrative Disclosures for a Multi-class Mutual Fund Corporation 43(This exhibit assumes that the Corporation constitutes a single legal entity for tax purposes and qualifies as amutual fund corporation under the Income Tax Act (Canada).)The general income tax rules associated with a public corporation also apply to a mutual fund corporation exceptthat income taxes payable on capital gains are refundable on a formula basis when issued shares of the Corporationare redeemed or capital gain dividends are paid. As a mutual fund corporation, the Corporation computes its netincome (loss) and net capital gains (losses) for income tax purposes as a single entity. Therefore, as stated in thesimplified prospectus, net losses of one Corporate Class Fund may be used to offset net gains of another CorporateClass Fund to reduce the total net income or net gain of the Corporation as a whole. The taxation year end for theCorporation is December 31.The Corporation is subject to a refundable tax of 1/3 of dividends received from certain taxable Canadian corporations.This tax is refundable at the rate of $1 for every $3 of ordinary dividends paid. If there is net income fromother sources (such as interest and foreign income), it is taxed at the full general corporate rate before the generalrate reductions. If the Corporation experiences an overall loss, this loss can be carried forward and used to reduceincome in future years.The Corporation follows the asset and liability method of accounting for income taxes whereby future income taxassets and liabilities reflect the expected future tax consequences of temporary differences between the carryingamounts of assets and liabilities and their tax bases. Future income tax assets and liabilities are measured based onthe enacted or substantively enacted taxes rates expected to be in effect when the underlying items of income orexpense are expected to be realized.While the Corporation is taxed as a single legal entity, the individual Corporate Class Funds recognize, foraccounting purposes, the impact of current and future taxes based on the net income (loss) and increase (decrease)in net assets from realized and unrealized gains (losses), respectively, of each Fund. The Funds offset the future taxliability for refundable taxes payable with the refund expected on payment of capital gains dividends. As a result,the future tax liability for refundable taxes payable is eliminated. The Funds with negative taxable income do notrecognize a tax asset for unused tax losses as these losses can be used to offset income in other Funds or reduce therefundable taxes otherwise payable by the Corporation.The following table identifies the future tax liability for refundable taxes payable and the future refunds that havebeen offset in the Statements of Net Assets of the Funds. The table also identifies the gross amounts of currenttax provisions and utilization of tax losses and/or refundable tax asset (or valuation allowance in case of negativeincome) that have been offset in the Statements of Operations for Corporate Class Funds.($000) Future refundable tax asset and liabilityProvision for current tax and utilization oftax losses or refundable tax assetEquity Class - 358Bond Class 412 31Global Class 675 716Short-term Income Class 499 4243 These disclosures should be modified for a stand-alone mutual fund corporation.107

Financial Reporting by Investment FundsExhibit B3 – Financial StatementsCanadian Balanced Fund Interim FINANCIAL STATEMENTS Financial Statements for the six months ended September 30, 2008STATEMENTS OF NET ASSETSat September 30, 2008 (unaudited) with comparative figures at March 31, 2008(in $ thousands except per unit amounts)Sept. 30, 2008 March 31, 2008Assets:InvestmentsCash and cash equivalentsAccrued interest and dividends receivableTaxes recoverable (payable)Accounts receivable for securities soldDue from brokersDue from managerDue from other fundsNet receivable for variation on futures contractsUnrealized gains on forward contracts and other derivativesOther assetsTotal assetsLiabilities:Bank overdraftDue to brokersAccounts payable for securities redeemedAccrued expensesDue to other fundsLiability for options writtenUnrealized losses on forward contracts and other derivativesOther liabilitiesTotal liabilitiesNet assets1,463,202 1,445,348104,441 173,4505,780 7,01714 30203 660- 19,945- 4- -- -- -- 9110,438 201,1151,573,640 1,646,463- -5,822 19,87687 453 363- -4,060 2,481- -5 -9,977 22,7651,563,663 1,623,698STATEMENTS OF OPERATIONSfor the six-month periods ended September 30 (unaudited) (in $ thousands except per unit amounts)Income:DividendsTrust incomeInterest and other incomeIncome (loss) from derivativesSecurities lendingForeign withholding taxesExpenses:Management feesManagement fee rebatesAdministrative servicesTrustee feesAudit feesCustody feesRegistration fees and expensesUnitholder reportingOtherNet income (loss)Realized gain (loss)Unrealized gain (loss)Commissions and other portfolio transaction costsNet realized and unrealized gain (loss)from investments and foreign exchangeNet increase (decrease) in net assetsfrom operations2008 200712,731 7,2772,455 5,62811,222 12,306- -25 34(376) (70)26,057 25,17516,947 16,071(1,370) (672)2,343 2,242393 374- 12- 8- 13- 1228 1118,321 18,1817,736 6,994(28,441) 45,065(56,073) 29,934(2,847) (1,296)(87,361) 73,703(79,625) 80,697Net assets per series, end of periodSeries ASeries BSeries CSeries S529,854 517,62849,002 50,459940,630 1,019,04344,177 36,568Net increase (decrease) in net assetsfrom operations per seriesSeries ASeries BSeries CSeries S(26,429) 22,204(2,562) 2,200(48,784) 54,938(1,850) 1,355Net assets per unit, end of periodSeries ASeries BSeries CSeries S13.24 14.8013.19 14.7513.11 14.6713.40 14.95Net increase (decrease) in net assetsfrom operations per unitSeries ASeries BSeries CSeries S(0.74) 0.76(0.74) 0.75(0.72) 0.76(0.72) 0.80NOTE: If the interim financial statements have not been reviewed by an auditor, Section2.12(2) of NI 81-106 requires that the statements be accompanied by a notice to this effect.See accompanying notes to financial statements.White_Label_FS_4.indd 18/5/08 5:07:57 PM108

Examples of Financial Statement Presentation and DisclosureExhibit B3 – Financial Statements (continued)Canadian Balanced Fund Interim FINANCIAL STATEMENTS Financial Statements for the six months ended September 30, 2008STATEMENTS OF CHANGES IN NET ASSETSfor the six-month periods ended September 30 (unaudited) (in $ thousands except when stated)2008 20072008 2007Series ANet assets, beginning of periodIncrease (decrease) in net assets resulting from:Initial adoption of Section 3855 (Note 2)OperationsDistributions:IncomeCapital gainsTotal distributionsUnit transactions:Proceeds from sale of unitsReinvested from distributionsPayment on redemption of unitsTotal unit transactionsIncrease (decrease) in net assetsNet assets, end of period517,628 387,382- (218)(26,429) 22,204(3,934) (2,456)(25,822) (21,799)(29,756) (24,255)65,569 75,36229,539 24,172(26,697) (24,794)68,411 74,74012,226 72,471529,854 459,853Series SNet assets, beginning of periodIncrease (decrease) in net assets resulting from:Initial adoption of Section 3855 (Note 2)OperationsDistributions:IncomeCapital gainsTotal distributionsUnit transactions:Proceeds from sale of unitsReinvested from distributionsPayment on redemption of unitsTotal unit transactionsIncrease (decrease) in net assetsNet assets, end of period36,568 21,811- (12)(1,850) 1,355(315) (154)(2,054) (1,306)(2,369) (1,460)10,261 6,6122,369 1,460(802) (1,141)11,828 6,9317,609 6,81444,177 28,625Series BNet assets, beginning of periodIncrease (decrease) in net assets resulting from:Initial adoption of Section 3855 (Note 2)OperationsDistributions:IncomeCapital gainsTotal distributionsUnit transactions:Proceeds from sale of unitsReinvested from distributionsPayment on redemption of unitsTotal unit transactionsIncrease (decrease) in net assetsNet assets, end of periodSeries CNet assets, beginning of periodIncrease (decrease) in net assets resulting from:Initial adoption of Section 3855 (Note 2)OperationsDistributions:IncomeCapital gainsManagement fee rebatesService fee rebatesTotal distributionsUnit transactions:Proceeds from sale of unitsReinvested from distributionsPayment on redemption of unitsTotal unit transactionsIncrease (decrease) in net assetsNet assets, end of period50,459 38,290- (22)(2,562) 2,200(371) (253)(2,448) (2,200)(2,819) (2,453)12,081 13,2102,757 2,452(10,914) (7,899)3,924 7,763(1,457) 7,48849,002 45,7781,019,043 994,899- (560)(48,784) 54,938(7,351) (5,790)(48,719) (52,203)(1,370) (672)(2,090) (2,116)(59,530) (60,781)29,777 39,54358,332 53,707(58,208) (67,291)29,901 25,959(78,413) 19,556940,630 1,014,455TotalNet assets, beginning of periodIncrease (decrease) in net assets resulting from:Initial adoption of Section 3855 (Note 2)OperationsDistributions:IncomeCapital gainsManagement fee rebatesService fee rebatesTotal distributionsUnit transactions:Proceeds from sale of unitsReinvested from distributionsPayment on redemption of unitsTotal unit transactionsIncrease (decrease) in net assetsNet assets, end of periodIncrease (decrease) in units (in thousands):Series AUnits outstanding, beginning of periodAdd (deduct):Units soldReinvested from distributionsUnits redeemedUnits outstanding, end of periodSeries BUnits outstanding, beginning of periodAdd (deduct):Units soldReinvested from distributionsUnits redeemedUnits outstanding, end of periodSeries CUnits outstanding, beginning of periodAdd (deduct):Units soldReinvested from distributionsUnits redeemedUnits outstanding, end of periodSeries SUnits outstanding, beginning of periodAdd (deduct):Units soldReinvested from distributionsUnits redeemedUnits outstanding, end of period1,623,698 1,442,382- (812)(79,625) 80,697(11,971) (8,653)(79,043) (77,508)(1,370) (672)(2,090) (2,116)(94,474) (88,949)117,688 134,72792,997 81,791(96,621) (101,125)114,064 115,393(60,035) 106,3291,563,663 1,548,71134,983 26,6254,788 5,1942,216 1,713(1,974) (1,713)40,013 31,8193,421 2,636879 910207 174(792) (545)3,715 3,17569,503 68,8802,148 2,7874,413 3,786(4,317) (4,681)71,747 70,7722,448 1,491734 451175 103(60) (79)3,297 1,966See accompanying notes to financial statements.NOTE: Section 3.6(1)2 of NI 81-106 requires that information regarding the “Increase(Decrease) in Units” be disclosed in the notes to the financial statements; however, many fundsWhite_Label_FS_4.indd 2present this information in the statement of changes in net assets.8/5/08 5:07:58 PM109

Financial Reporting by Investment FundsExhibit B3 – Financial Statements (continued)Canadian Balanced Fund Interim FINANCIAL STATEMENTS Financial Statements for the six months ended September 30, 2008STATEMENT OF INVESTMENTSat September 30, 2008 (unaudited)Percent ofNo. of Units, Average Fair Total NetShares, or Cost Value AssetsPar Value ($ 000) ($ 000) (%)CANADIAN BONDSFederal GovernmentGovernment of Canada4.25% 09-01-08 22,900,000 23,070 23,0644.00% 09-01-10 15,000,000 15,262 15,4683.75% 06-01-12 360,000 364 3725.75% 06-01-29 39,000,000 46,356 49,063Canada Housing Trust4.05% 03-15-11 18,500,000 18,170 18,9094.60% 09-15-11 28,060,000 28,543 29,2014.00% 06-15-12 31,500,000 31,249 32,182MILIT-AIR Inc. 5.75% 06-30-19 5,794,398 5,878 6,416168,892 174,675 11.2Provincial GovernmentsAlberta Capital Finance Authority4.65% 06-15-17 5,000,000 5,074 5,220Borealis Infrastructure Trust6.35% 12-01-20 6,648,990 6,980 7,617Durham District School Board6.75% 11-19-19 2,682,000 2,986 3,226New Brunswick (F-M) Project Co. Inc.0% 11-30-27 4,102,786 3,280 4,888Province of Ontario0% 06-02-13 10,000,000 7,289 8,2920% 06-02-14 15,000,000 10,359 11,9080% 03-08-15 10,000,000 6,622 7,6614.30% 03-08-17 20,000,000 19,000 20,4185.85% 03-08-33 6,600,000 7,214 7,773Province of Quebec4.50% 12-01-16 12,900,000 13,016 13,2536.00% 10-01-29 10,500,000 11,896 12,238Scotia Schools Trust 7.31% 09-17-20 Callable 3,109,246 3,089 3,808York Region District School Board5.30% 06-03-25 2,017,493 1,957 2,12798,762 108,429 7.0Municipal GovernmentsCity of Winnipeg 5.35% 02-02-09 5,000,000 4,995 5,102 0.3Corporate - Non ConvertibleBank of Montreal4.69% 01-31-11 5,000,000 4,999 5,0466.17% 03-28-23(F/R @ 03-28-18) Callable 18 4,000,000 3,999 4,013The Bank of Nova Scotia4.56% 10-30-13 4,000,000 3,999 3,9954.99% 03-27-18(F/R @ 03-27-13) Callable 13 10,000,000 9,998 9,997Canadian Natural Resources Ltd.5.50% 12-17-10 5,000,000 4,997 5,142Manitoba Telecom Services Inc.5.90% 06-02-08 3,000,000 2,899 3,0145.85% 02-23-09 4,500,000 4,421 4,570Royal Bank of Canada5.13% 09-27-10 10,000,000 10,027 10,2425.20% 08-15-12 8,000,000 8,013 8,2114.84% 03-11-18(F/R @ 03-11-13) Callable 7,000,000 7,000 6,951The Toronto-Dominion Bank5.76% 12-18-2106(F/R @ 12-18-17) Callable 17 5,000,000 5,000 4,8825.14% 11-19-12 5,000,000 5,010 5,1244.85% 02-13-13 6,000,000 6,000 6,0694.78% 12-14-2105(F/R @ 12-14-16) Callable 16 7,000,000 7,000 6,48483,362 83,740 5.3Percent ofNo. of Units, Average Fair Total NetShares, or Cost Value AssetsPar Value ($ 000) ($ 000) (%)Asset BackedMaster Credit Card Trust 4.44% 11-21-11 13,000,000 13,000 12,964 0.8TOTAL CANADIAN BONDS 369,011 384,910 24.6UNITED STATES BONDS1 Bank of America 5.15% 05-30-17 2,000,000 1,993 1,941 0.1TOTAL BONDS 371,004 386,851 24.7CANADIAN COMMON STOCKConsumer DiscretionaryShaw Communications Inc. Class B non-voting 1,555,000 34,292 29,0162 The Thomson Corp. 300,000 11,201 10,34445,493 39,360 2.5Consumer StaplesMetro Inc. Class A Sub. voting 324,100 8,926 7,872 0.5EnergyCanadian Natural Resources Ltd. 426,550 20,055 29,9742 EnCana Corp. 927,212 46,972 72,406Husky Energy Inc. 1,127,100 38,058 45,2983 Laricina Energy Ltd. 406,250 8,282 13,203Savanna Energy Services Corp. 1,055,400 21,008 20,285Trinidad Drilling Ltd. 1,231,000 12,495 15,892UTS Energy Corp. 5,500,000 24,527 28,490Uranium One Inc. 3,087,100 22,416 10,373193,813 235,921 15.1FinancialsAGF Management Ltd. Class B non-voting 666,259 16,757 14,465The Bank of Nova Scotia 1,313,300 60,497 60,924Power Financial Corp. 1,551,450 56,542 54,456Royal Bank of Canada 2,717,100 118,232 130,095252,028 259,940 16.6IndustrialsATS Automation Tooling Systems Inc. 1,281,520 10,078 7,7152 Canadian National Railway Co. 400,000 19,112 19,896Russel Metals Inc. 536,000 14,491 14,00043,681 41,611 2.7MaterialsFNX Mining Co. Inc. 300,900 8,257 8,669NOVA Chemicals Corp. 920,000 26,520 22,540Sherritt International Corp. 700,000 10,050 10,1502 Teck Cominco Ltd. Class B Sub. voting 1,211,200 44,605 50,9432 Thompson Creek Metals Co. Inc. 400,000 6,469 7,49295,901 99,794 6.4Telecommunication Services2 BCE Inc. 300,000 10,921 10,425Rogers Communications Inc. Class B non-voting 765,700 30,654 28,23141,575 38,656 2.5TOTAL CANADIAN COMMON STOCK 681,417 723,154 46.3UNITED STATES COMMON STOCKEnergyConocoPhillips 400,000 32,150 31,258Valero Energy Corp. 100,000 5,203 5,04237,353 36,300 2.3FinancialsBank of America Corp. 400,000 17,224 15,5632 Toll Brothers Inc. 800,000 16,818 19,28434,042 34,847 2.2IndustrialsThe Boeing Co. 405,000 37,471 30,892General Electric Co. 700,000 25,827 26,481Spirit Aerosystems Holdings Inc. 1,100,000 34,386 25,00297,684 82,375 5.31 Par Value expressed in Canadian dollars.2 See Schedule 2.3 This security is not actively traded.See accompanying notes to financial statements.White_Label_FS_4.indd 38/5/08 5:07:58 PM110

Examples of Financial Statement Presentation and DisclosureExhibit B3 – Financial Statements (continued)Canadian Balanced Fund Interim FINANCIAL STATEMENTS Financial Statements for the six months ended September 30, 2008STATEMENT OF INVESTMENTS (continued)at September 30, 2008 (unaudited)Percent ofNo. of Units, Average Fair Total NetShares, or Cost Value AssetsPar Value ($ 000) ($ 000) (%)UNITED STATES COMMON STOCK (continued)Information TechnologyApple Inc. 250,000 38,434 36,829Intel Corp. 1,000,000 23,265 21,743Microsoft Corp. 500,000 16,339 14,52178,038 73,093 4.7Materials2 Alcoa Inc. 1,090,600 38,453 40,317 2.6Telecommunication ServicesAT&T Inc. 200,000 6,787 7,856 0.5TOTAL UNITED STATES COMMON STOCK 292,357 274,788 17.6GLOBAL COMMON STOCKAustralia2 BHP Billiton Ltd. 100,000 6,650 6,746 0.4China2 Aluminum Corp. of China Ltd. ADR 200,000 7,859 8,301 0.5NetherlandsASML Holding NV 300,000 7,666 7,626 0.5TOTAL GLOBAL COMMON STOCK 22,175 22,673 1.4TOTAL COMMON STOCK 995,949 1,020,615 65.3Percent ofNo. of Units, Average Fair Total NetShares, or Cost Value AssetsPar Value ($ 000) ($ 000) (%)INVESTMENT TRUSTS AND OTHER FUNDSCI Financial Income Fund 388,100 8,678 8,375GMP Capital Trust 712,100 15,286 11,913Precision Drilling Trust 982,700 17,417 23,339TOTAL INVESTMENT TRUSTS AND OTHER FUNDS 41,381 43,627 2.8OPTIONS (see Schedule 1) 21,040 12,109 0.8TRANSACTION COSTS (see notes to financial statements) (1,468) - -TOTAL INVESTMENTS 1,427,906 1,463,202 93.6Net Assets:Total investments 1,463,202 93.6Cash and cash equivalents 104,441 6.7Liability for options written (see Schedule 2) (4,060) (0.3)Other net assets (liabilities) 80 -1,563,663 100.0Schedule 1 - Optionsat September 30, 2008 (unaudited)PremiumFairUnderlying No. of Option Expiration Bid Strike Paid ValueSecurity Shares Type Date Price Price ($ 000) ($ 000)Intel Corp. 500,000 Call 01-16-10 21.18 USD 20.00 USD 2,182 2,361Microsoft Corp. 500,000 Call 01-22-10 28.29 USD 25.00 USD 3,401 3,439Schering-Plough Corp. 2,000,000 Call 01-16-09 14.41 USD 20.00 USD 5,272 1,951Schering-Plough Corp. 1,500,000 Call 01-15-10 14.41 USD 20.00 USD 7,434 3,234Valero Energy Corp. 300,000 Call 01-16-09 49.11 USD 60.00 USD 2,751 1,12421,040 12,109Schedule 2 - Liability for Options Writtenat September 30, 2008 (unaudited)PremiumFairUnderlying No. of Option Expiration Bid Strike Received ValueSecurity Shares Type Date Price Price ($ 000) ($ 000)Alcoa Inc. 100,000 Call 04-19-08 36.01 USD 37.50 USD (196) (114)Alcoa Inc. 50,000 Call 04-19-08 36.01 USD 40.00 USD (68) (23)Aluminum Corp. of China Ltd. ADR 200,000 Put 04-19-08 40.43 USD 40.00 USD (410) (452)BCE Inc. 300,000 Put 05-16-08 34.75 CAD 34.00 CAD (444) (633)BCE Inc. 300,000 Call 05-17-08 34.75 CAD 36.00 CAD (819) (630)BHP Billiton Ltd. 150,000 Put 04-19-08 65.71 USD 65.00 USD (361) (362)Canadian National Railway Co. 100,000 Call 04-19-08 49.74 CAD 50.00 CAD (168) (135)EnCana Corp. 150,000 Call 04-19-08 78.09 CAD 78.00 CAD (307) (318)EnCana Corp. 100,000 Call 07-19-08 78.09 CAD 78.00 CAD (443) (490)Teck Cominco Ltd. Class B Sub. voting 100,000 Call 04-19-08 42.06 CAD 42.00 CAD (213) (179)Thompson Creek Metals Co. Inc. 100,000 Call 04-18-08 18.73 CAD 20.00 CAD (118) (65)Thompson Creek Metals Co. Inc. 100,000 Call 04-19-08 18.73 CAD 22.00 CAD (93) (35)The Thomson Corp. 100,000 Put 04-18-08 34.48 CAD 36.00 CAD (118) (255)Toll Brothers Inc. 100,000 Call 06-20-08 23.48 USD 25.00 USD (251) (231)Toll Brothers Inc. 100,000 Call 06-20-08 23.48 USD 27.50 USD (163) (138)(4,172) (4,060)Premiums received from writing options are recorded as a liability and adjusted daily to fair value.2 See Schedule 2.See accompanying notes to financial statements.White_Label_FS_4.indd 48/5/08 5:07:58 PM111

Financial Reporting by Investment FundsExhibit B3 – Financial Statements (continued)Canadian Balanced Fund Notes NOTES TO to THE FINANCIAL the Financial STATEMENTS Statements1. Organization of the Fund, fiscal periods and general information(a) Organization of the Fund and fiscal periodsThe Canadian Balanced Fund (the “Fund”) is organized as an open-ended mutual fund trust. The Fund is authorized to issue an unlimited number of units of multiple series. The financial statementsof the Fund are presented as at and for the six-month periods ended September 30, 2008 and 2007, except for the comparative information presented in the Statement of Net Assets which is as atMarch 31, 2008.(b) General InformationThe Fund is managed by Investment Management, Ltd. (the “Manager”). The Trustee of the Fund is Trust Co. Ltd. The Fund is distributed by Fund Distribution Inc. These companies are, indirectly,wholly owned subsidiaries of Financial Company Inc.(c) Series Information(i) Series A units have a redemption fee if you redeem within seven years of the date of purchase.(ii) Series B units generally have no redemption fee (referred to as no load), unless you redeem within the initial 90 days after your purchase.(iii) Series C is comprised of units purchased under both the redemption fee and no load options.(iv) Series S units are only available for purchase by other investment funds, or other accredited institutional investors. Series S units have no sales charges or redemption fees.(v) Distributions for each series may vary, partly due to the differences in expenses between the series.(vi) Other than as noted above, all series generally share in the operations of the Fund, including net income, realized gain (loss), and unrealized gain (loss), on a pro rata basis except for items thatcan be specifically attributed to one or more series (see note 3).2. Summary of significant accounting policiesThese financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”). GAAP requires Management to make estimates and assumptions thataffect the amounts reported in the financial statements. Actual results may differ from such estimates. The notes to these interim financial statements are presented in a condensed or summarized formatand, therefore, should be read in conjunction with the Fund’s March 31, 2008 annual financial statements. These financial statements follow the same accounting policies and methods of their applicationas those used in preparing the annual financial statements (if applicable).(a) Valuation of investmentsInvestments are deemed to be held for trading in accordance with CICA Section 3855, Financial Instruments – Recognition and Measurement (“Section 3855”) and therefore are recorded at fair value.Investment purchase and sale transactions are recorded as of the trade date and realized and unrealized gains and losses on investments are determined using average cost. Brokers’ commissionsand other transaction charges are immediately charged to net income in the period incurred.(i) Equity securities, bonds and other mutual fundsFor equity securities, fair value is generally the closing bid price for a security on the recognized exchange on which it is principally traded. Bonds and other debt securities are recorded at fairvalue, usually established using the closing bid price on the over-the-counter market. The fair value of unlisted securities is normally established using quotations determined by a major dealerin a particular security. Should the quoted value for a security, in the opinion of the Manager, be inaccurate, unreliable or not readily available, the fair value of the security is estimated based onvaluation techniques. Fair value is determined by the Manager on the basis of the most recently reported information for the security, similar securities and the markets in which the security isactive. Cost of securities is determined based on average cost.(ii) Forward currency contractsForward currency contracts are valued at the gain or loss that would arise as a result of closing the position at the reporting date.(iii) Options contractsPremiums received from writing options are included in the Statements of Net Assets as a liability and subsequently adjusted daily to fair value. If a written option expires unexercised, thepremium received is recognized as a realized gain. If a written call option is exercised, the difference between the proceeds of the sale plus the value of the premium, and the cost of the securityis recognized as a realized gain or loss. If a written put option is exercised, the cost of the security acquired is the exercise price of the option less the premium received.(b) Cash and cash equivalentsCash and cash equivalents are comprised of cash on deposit and short-term debt instruments with terms to maturity of less than one year at acquisition. Short-term debt instruments are notconsidered to be portfolio investments. Cash and cash equivalents are deemed to be held for trading and therefore carried at fair value.(c) CurrencyAll amounts are expressed in Canadian dollars. The par value of securities in the Statement of Investments is expressed in the currency of origin unless otherwise noted. For securities of Austria,Belgium, France, Finland, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain, par values are expressed in euro currency, unless otherwise noted. Foreign currencyamounts have been expressed in Canadian dollars on the following bases:(i) Fair value of investments and other assets and liabilities at the rate of exchange at the end of the period.(ii) Income, expenses, purchases and sales of investments at the rate of exchange on the dates of such transactions.(d) Income recognitionIncome from investments is recognized on an accrual basis. Dividend income is recognized at the time a security trades on an ex-dividend basis. Interest income is based on the number of days theinvestment is held during the period.(e) Securities lending and repurchase transactionsThe Fund is permitted to enter into securities lending, repurchase and reverse repurchase transactions as set out in its Simplified Prospectus. These transactions involve the temporary exchangeof securities for collateral with a commitment to deliver the same securities on a future date. Income is earned from these transactions in the form of fees paid by the counterparty and, in certaincircumstances, interest paid on cash or securities held as collateral. Income earned from these transactions is recognized on the accrual basis and included in the Statements of Operations. All thecounterparties have a sufficient, approved credit rating and the value of cash or securities held as collateral must be at least 102% of the fair value of the securities loaned, sold or purchased.(f) Per unit information(i) Net asset value (pricing NAV) per unit is computed by dividing the net asset value attributable to a series, determined for the purchase and redemption of units in accordance with the Fund’sprospectus and annual information form, by the total number of units of the series outstanding.(ii) Net assets per unit is computed by dividing the net assets attributable to a series, determined in accordance with GAAP, by the total number of units of the series outstanding.(iii) Net increase (decrease) in net assets from operations per unit in the Statements of Operations represents the net increase/(decrease) in net assets for the series from operations for the period,divided by the weighted average units outstanding for the series during the period.(g) Other assets and liabilitiesFor the purposes of categorization in accordance with Section 3862, accrued interest and dividends receivable for securities issued, amounts due from brokers, the Manager, and other Funds, andother net assets are designated as loans and receivables and recorded at cost or amortized cost. Similarly, amounts due to brokers and other funds, accounts payable for securities redeemed, accruedexpenses and other liabilities are designated as other financial liabilities and reported at cost or amortized cost. Cost or amortized cost approximates fair value for these assets and liabilities.White_Label_Notes_5.indd 19/17/08 4:20:04 PM112

Examples of Financial Statement Presentation and DisclosureExhibit B3 – Financial Statements (continued)Canadian Balanced Fund Notes NOTES TO to THE FINANCIAL the Financial STATEMENTS Statements2. Summary of significant accounting policies (continued)(h) Comparative figuresCertain prior period comparative amounts have been restated to conform to the current period’s presentation.(i) Changes in accounting policiesOn April 1, 2008, the Fund adopted CICA Section 3862, Financial Instruments – Disclosures (“Section 3862”) and CICA Section 3863, Financial Instruments – Presentation (“Section 3863”), replacingSection 3861. Section 3862 requires enhanced disclosure of the nature and extent of the risks arising from financial instruments and how the Fund manages those risks. Section 3863 carries forwardunchanged the presentation requirements of Section 3861 with respect to financial instruments.Effective April 1, 2007, Section 3855 required that the fair value of financial instruments which are actively traded be measured based on the bid price for the security. Until March 31, 2007, fair valuefor GAAP was based on the last traded price for the day, when available. For financial reporting purposes, on April 1, 2007, the Fund adopted the amended valuation policy for actively traded securitiesheld by the Fund on a prospective basis (that is, without retroactive restatement of prior periods). The impact of the initial adoption of the new valuation policy on April 1, 2007, has been disclosed inthe Statement of Changes in Net Assets.In addition, Section 3855 required that transaction costs, such as brokerage commissions, incurred in the purchase and sale of securities by the Fund be charged to net income in the period. UntilMarch 31, 2007, the Fund’s policy has been to add these expenses to the cost of the securities purchased or deduct from the proceeds of sale. Effective April 1, 2007, the Fund adopted the newaccounting policy retroactively, without restatement of prior periods. There is no impact on net assets, results of operations or earnings per unit, as a result of this change in accounting policy.(j) Future accounting changeThe Canadian Accounting Standards Board (AcSB) has confirmed its plan to adopt all International Financial Reporting Standards, as published by the International Accounting Standards Board, on or byJanuary 1, 2011. The Funds will adopt all of the International Financial Reporting Standards in accordance with the AcSB’s plan. The impact of the adoption of these standards is not known at this time.3. Management fees and other expenses(a) The Manager provides or arranges for the provision of investment and advisory services for a management fee, the rate for which was stipulated in the most recent annual financial statements.Currently, all series of the Fund pay the same management fee rate.The Manager may, at its discretion, pay certain expenses of the Fund so the Fund’s performance remains competitive; however, there is no assurance that this will occur in the future. Any expensesabsorbed by the Manager during the periods ended September 30, 2008 and 2007, have been identified in the Statements of Operations.(b) Each series of the Fund will incur an expense item that can be specifically attributed to that series. Common expenses of the Fund are allocated across the series of the Fund based on net asset value.(c) The Trustee is responsible for overall direction and management of the affairs of the Fund. The Trustee is paid an annual fee of 0.05% of the average net assets of the Fund for its services.(d) GST paid by the Fund on its expenses is not recoverable.(e) Other expenses are comprised of bank charges and other miscellaneous expenses.4. Income taxesThe Fund qualifies as a mutual fund trust under the provisions of the Income Tax Act (Canada) and, accordingly, is subject to tax on its income including net realized capital gains, which is not paid orpayable to their unitholders. The taxation year-end for the Fund is December 15. The Fund is subject to withholding taxes on foreign income. In general, the Fund deducts withholding tax for tax purposesas a charge against income. It is the intention of the Fund to distribute sufficient net income and net realized capital gains, as required, so that the Fund will not pay income taxes other than refundabletax on capital gains, if applicable.As at the last taxation year-end, the following losses were available to offset future income for tax purposes. The net capital losses can be carried forward indefinitely to reduce future realized capitalgains. The non-capital losses may be utilized to reduce taxable income of future years and expire in December of the years indicated.Total net Total non- Expiration year for non-capital losses($ 000) capital loss capital loss 2027 2026 2015 2014 2010 2009 2008779 325 - - - - - 325 -5. Soft DollarsThe total commissions paid by the Fund to brokers in connection with portfolio transactions for the periods ended September 30, 2008 and 2007, together with other transaction charges, are disclosed in theStatement of Operations of the Fund. Brokerage business is allocated to brokers based on the best net result for the Fund. Subject to this criteria, preference may be given to brokerage firms which provide (orpay for) certain services (arrangements referred to as “soft dollars”), which may include investment research, analysis and reports, and data bases or software in support of these services. Third-party servicesthat were paid for by brokers where ascertainable, during the periods ended September 30, 2008 and 2007 were $302,000 and $193,000, respectively. The value of certain proprietary services provided bybrokers is not considered to be reasonably estimable.6. Financial Instruments(a) Risk managementThe Fund’s investment activities expose it to a variety of financial risks. The Statement of Investments presents the securities held by the Fund as at September 30, 2008, and groups the securities byasset type, geographic region and/or market segment. Significant risks that are relevant to the Fund are discussed below.The Manager seeks to minimize potential adverse effects of these risks on the Fund’s performance by employing professional, experienced portfolio advisors, by daily monitoring of the Fund’s positionsand market events, by diversifying the investment portfolio within the constraints of the investment objective, and periodically may use derivatives to hedge certain risk exposures. To assist inmanaging risks, the Manager also uses internal guidelines that identify the target exposures for each type of risk, maintains a governance structure that oversees the Fund’s investment activities andmonitors compliance with the Fund’s stated investment strategy, internal guidelines, and securities regulations.The investment portfolio is comprised of primarily large capitalization Canadian stocks and primarily investment credit quality corporate and government debt instruments. The Manager will maintaina mix of equities, debt, and cash that represents its view of the most optimal combination of these investments based on economic outlook, market conditions, and the relative value of theseinvestments. The Fund’s investments may also include debt securities rated “BBB” or less, or their equivalent, as well as small cap stocks. It is the Fund’s intention that its investment in foreignsecurities will not exceed 30% of its assets, but the Fund may invest up to 50% of its assets in foreign securities.(b) Liquidity riskThe Fund is exposed to daily cash redemptions of redeemable units. In accordance with securities regulations, the Fund must maintain at least 90% of its assets in liquid investments (i.e. investmentsthat are traded in an active market and can be readily disposed). In addition, the Fund retains sufficient cash and cash equivalent positions to maintain adequate liquidity. The Fund also has theability to borrow up to 5% of its net assets for the purposes of funding redemptions. The Statement of Investment identifies any securities that are not actively traded.White_Label_Notes_5.indd 29/17/08 4:20:04 PM113

Financial Reporting by Investment FundsExhibit B3 – Financial Statements (continued)Canadian Balanced Fund Notes NOTES TO to THE FINANCIAL the Financial STATEMENTS Statements6. Financial Instruments (continued)(c) Currency riskCurrency risk is the risk that financial instruments which are denominated or exchanged in a currency other than the Canadian dollar, which is the Fund’s reporting currency, will fluctuate due tochanges in exchange rates.The table below indicates the foreign currencies to which the Fund had significant exposure as at period end in Canadian dollar terms, including the underlying principal amount of forward currencycontracts, if any. The table also illustrates the potential impact to the Fund’s net assets, all other variables held constant, as a result of 5% changes in these currencies relative to the Canadian dollar.In practice, the actual trading results may differ from this sensitivity analysis and the difference could be material.Cash and Cash Other Impact onInvestments Equivalents Net Assets Total* Net AssetsCurrency ($ 000) ($ 000) ($ 000) ($ 000) ($ 000)United States Dollars 309,569 58,103 (3,335) 364,337 18,217Other currencies - 4 - 4 -Total 309,569 58,107 (3,335) 364,341 18,217As Percent of Net Assets (%) 23.3 1.2* includes both monetary and non-monetary financial instruments.(d) Interest rate riskInterest rate risk arises on interest-bearing financial instruments such as bonds. The Fund is exposed to the risk that the value of interest-bearing financial instruments will fluctuate due to changesin the prevailing levels of market interest rates. The table below summarizes the Fund’s exposure to interest rate risks by remaining term to maturity.($ 000) Less than 1 year 1 - 5 years 5 - 10 years > 10 years TotalBonds 35,750 148,929 89,636 112,536 386,851As at September 30, 2008, had prevailing interest rates raised or lowered by 1%, assuming a parallel shift in the yield curve, with all other variables held constant, net assets would have decreasedor increased, respectively, by approximately $24,758,000 (approximately 1.6% of total net assets). The Fund’s sensitivity to interest rate changes was estimated using the weighted average duration ofthe bond portfolio. In practice, the actual trading results may differ and the difference could be material.(e) Other price riskOther price risk is the risk that the value of financial instruments will fluctuate as a result of changes in market prices (other than those arising from interest rate or currency risk), whether causedby factors specific to an individual investment, its issuer, or all factors affecting all instruments traded in a market or market segment. All securities present a risk of loss of capital. The Managermoderates this risk through a careful selection of securities and other financial instruments within the parameters of the investment strategy. Except for options written and futures contracts, themaximum risk resulting from financial instruments is equivalent to their fair value. The maximum risk of loss on options written and futures contracts is equal to their notional values. However,options written are used within the overall investment management process to manage the risk from the underlying securities and do not typically increase the overall risk of loss to the Fund.For this Fund, the most significant exposure to other price risk arises from its investment in equity securities. As at September 30, 2008, had the prices on the respective stock exchanges for thesesecurities raised by 10%, with all other variables held constant, net assets would have increased by approximately $108,298,000 (approximately 6.9% of total net assets). Similarly, had the prices onthe respective stock exchanges for these securities lowered by 10%, with all other variables held constant, net assets would have decreased by approximately $110,706,000 (approximately 7.1% oftotal net assets). In practice, the actual trading results may differ and the difference could be material.(f) Credit riskCredit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Fund. The Fund’s greatest concentration ofcredit risk is in debt securities, such as bonds. The fair value of debt securities includes consideration of the credit worthiness of the debt issuer. The carrying amount of investments represents themaximum credit risk exposure as at September 30, 2008. The maximum exposure to any one debt issuer as of September 30, 2008, was 5.6% of the net assets of the Fund. The carrying amount ofother assets also represents the maximum credit risk exposure, as they will be settled in the short term.All transactions in listed securities are settled/paid for upon delivery using approved brokers. The risk of default is considered minimal, as delivery of securities sold is only made once the broker hasreceived payment. Payment is made on a purchase once the securities have been received by the broker.The Fund enters into securities lending transactions with counterparties whereby the Fund temporarily exchanges securities for collateral with a commitment by the counterparty to deliver the samesecurities on a future date. Credit risk associated with these transactions is considered minimal as all counterparties have a sufficient, approved credit rating and the value of cash or securities heldas collateral must be at least 102% of the fair value of the securities loaned.As of September 30, 2008, debt securities by credit rating are as follows:Percent of Percent of TotalTotal Bonds (%) Net Assets (%)AAA 49.9 12.3AA 35.5 8.8A 11.3 2.8BBB 3.3 0.8Total 100.0 24.7White_Label_Notes_5.indd 39/17/08 4:20:04 PM114

Examples of Financial Statement Presentation and DisclosureExhibit B3 – Financial Statements (continued)Canadian Balanced Fund Notes NOTES TO to THE FINANCIAL the Financial STATEMENTS Statements6. Financial Instruments (continued)(g) Fair value of securitiesThe fair value of individual securities may be estimated using valuation techniques based on assumptions that are not supported by observable market prices or rates. Assumptions used in thesetechniques may include the cost paid for the security, recent new reports about the issuer and general market indicators.September 30, 2008 March 31, 2008Estimated Fair Value Percent of Total Estimated Fair Value Percent of Total($ 000) Net Assets (%) ($ 000) Net Assets (%)Securities valued based on assumptions that are not supported byobservable market prices or rates 13,203 0.8 5,445 0.3Change in fair value recognized in net income for the period ended September 30, 2008 2,883Change in fair value recognized in net income for the period ended September 30, 2007 -7. Contingent LiabilityAgreements between the individual members of the Fund’s Independent Review Committee (“IRC”) and the Trustee, on behalf of the Fund, provides for the indemnification of each IRC member by theFund from and against liabilities and costs in respect of any action or suit against the member by reason of being or having been a member of the IRC, provided that the member acted honestly and ingood faith with a view to the best interest of the Fund, or, in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, that they had reasonable grounds forbelieving that his/her conduct was lawful. No claims with respect to such occurrences have been made and, as such, no amount has been recorded in these financial statements with respect to theseindemnifications.8. Securities LendingThe value of securities loaned and collateral received from securities lending at September 30, 2008, were as follows:Value of Value ofsecurities collateral($ 000) loaned receivedCanadian Balanced Fund 23,597 24,931Collateral received is comprised of debt obligations of the Government of Canada and other countries, Canadian provincial and municipal governments, and financial institutions.9. Net asset values (pricing NAV) per unitThe net assets per unit presented in the financial statements may differ from the net asset value calculated for Fund pricing purposes. This difference is due to the requirements of Section 3855 whichmay result in a different valuation of securities held by the Fund in accordance with GAAP than the market value used to determine net asset value of the Fund for the purchase and redemption of theFund’s units (“pricing NAV”). The pricing NAV per unit at September 30, 2008 and 2007 are as follows:($ per unit) 2008 2007Series A 13.26 14.81Series B 13.21 14.70Series C 13.13 14.68Series S 13.42 14.9610. Further information availableA copy of a Fund’s current simplified prospectus or prospectus, annual information form and Management Report of Fund Performance for the period ended September 30, 2008, will be provided, withoutcharge, by writing to 123 Main Street, Toronto, ON, X0X 0X0, or calling toll-free 1-800-123-4567.White_Label_Notes_5.indd 49/17/08 4:20:04 PM115

Appendix CACCOUNTING FOR SPECIFIC TYPESOF SECURITIES AND TRANSACTIONSThis Appendix provides a general description of varioustypes of securities and transactions, and includes pertinentnotes on accounting, disclosure and valuation considerations.It supplements the discussion in Chapter 4,Accounting for Investments.117

118Security ortransaction1.ADRs, GDRs,subscriptionreceipts,participatorynotes, etc.General descriptionA certificate, denominated in USdollars, issued by an Americanbank to provide evidence ofownership of original foreignshares. The certificate istransferable and can be traded.The original foreign stockcertificate is deposited withforeign branch or correspondentbank of the issuing Americanbank.These are commonly used inglobal equity offerings to US andnon-US investors. It facilitatescross-border trading andsettlement, minimizes transactioncosts and broadens a non-UScompany’s potential investorbase. A depository receipt isa negotiable certificate thatusually represents a company’spublicly-traded equity or debt.These are created when a brokerpurchase the company’s shareson the home stock market anddelivers them to the depository’slocal custodian banks, whichthen instructs the depositorybank to issue depository receipts.Depository receipts may tradefreely, just like any other security,either on an exchange or in theover-the-counter market.Accounting or disclosure considerationsThese are priced at bid prices from independent service provider forfinancial reporting purposes.Valuation Considerations forPricing PurposesTypically ADRs and GDRs arefully tradable on an exchangeand would be valued in thesame manner as equities (thelast traded price or official closeprice on the primary exchange onwhich it trades).Participatory notes are not listedand would be valued utilizing theprice of the underlying securitybased upon the terms of thenote (e.g., one note represents10 shares of the underlying). If aGDR or ADR is deemed illiquidthen it could be valued in thesame manner as participatorynotes.Subscription receipts are quitecommon for Canadian securitiesand are valued in the samemanner as Special Warrants underNI 81-102.Financial Reporting by Investment Funds

Security ortransactionGeneral descriptionAccounting or disclosure considerationsValuation Considerations forPricing Purposes1192.3.Futures andforwardsMoney marketinstrumentsAn agreement to buy or sell, at aspecified future date and price, aspecified quantity of commodity,currency or financial instrument.Futures contracts are tradedon various exchanges and are,thus, distinguished from forwardcontracts, which are enteredinto privately by the parties. Forfutures contracts, the date is aspecified delivery month, and thecontract generally is settled byexecuting an offsetting futurescontract before or during thedelivery month. The quantityand quality provisions of futurescontracts are standardized.This is not the case for forwardcontracts. Most forwards aresettled in cash. Forward contractsare entered into directly betweentwo counterparties for futuredelivery receipt at a specifiedprice. As a result, they do notsettle up on a daily basis viamargin settlement as do futurescontracts.Short-term investments suchas treasury bills and othergovernment obligations,commercial paper, bankers’acceptances, and certificates ofdeposit with a term to maturity of365 days or less.Future contracts are valued at bid prices for financial reportingpurposes. The accounting records for future contracts reflect themargin deposit and the daily mark to market for variation margin.Futures contracts are marked to market daily; that is, they are valuedat the close of business each day (valued at the settlement pricesestablished by the exchanges), and a gain or loss is recorded for thedifference between the value of the contracts that day and on theprevious day.Because market quotations are often not readily available for forwardcontracts, their fair values should be estimated using valuationtechniques. The terms for the securities covered by the contractshould be compared with the terms of similar securities, if prices forthose securities are readily available. A forward contract that offsetsthe economics of an existing contract may not qualify for nettingunless the requirements of Section 3863.26 are met.For futures, a corresponding entry for daily variation margin isrecorded in a receivable or payable account. Variation margin isnormally settled in cash with the broker each morning for the amountof the previous afternoon’s mark to market. When a contract isclosed, exchange fee and brokers’ commissions are calculated. Afinal variation margin payment, net of such fees, is recorded and acorresponding amount is recorded as a gain or loss.Exchanges limit intraday fluctuations in prices of futures contracts,referred to as daily limits. During a single trading day, trades may notbe executed at prices exceeding the daily limit. Once the price of afutures contract has increased or decreased by an amount equal tothe daily limit, positions cannot be taken or liquidated unless tradersare willing to trade at or within the limit. The bid price for a particularfutures contract may move by the amount of the daily limit for severalconsecutive days with little or no trading.The fair value of futures positions affected by a daily limit should beestimated by applying appropriate valuation techniques. NI 81-106requires disclosure of the terms of the futures contract, includingthe number of contracts, the underlying interest, the price at whichthe contract was entered into, the delivery month and year and thecurrent value (3.5(6)(b)).The bid quotations obtained from investment dealers are used forvaluing the instruments for financial reporting purposes. Industrypractice is to use amortized cost on the basis that it would not bematerially different than fair value. However, the accounting policynote should state that fair value or bid price has been used.Futures are valued using the lasttraded price on a recognizedexchange in a manner similar toequities.Forward currency contractsare valued utilizing the tradingquotation of spot plus or minuspoints depending on the lengthof the forward. Typically, a priceis interpolated from between twotrading points (i.e., if there are75 days left, the price is derivedfrom the 60 and 90 day forwardquotes).Forward contracts are valuedutilizing the terms of the specificcontract. They vary widely, sothere is no set way to value them.There are also typically no brokerquotes.Typically valued at amortizedcost, approximating marketvalue. This assumption needs tobe tested regularly to ensure itcontinues to be valid. Testingincludes obtaining broker bidsand independent valuations.Accounting for Specific Types of Securities and Transactions

120Security ortransaction4.Mortgagebackedsecurities(MBS)General descriptionAn asset-backed securityissued on a pool of underlyingmortgages. A pass-throughsecurity created by poolingmortgages and selling interests orparticipations in the MBS. Usually,the mortgage originator willcontinue to service the underlyingmortgage. Principal and interestpayments received frommortgagors will then be passedon to the MBS holders.In Canada, most MBS are issuedunder the National Housing ActMortgage-Backed Securities(NHA MBS) program, which wasconceived in January 1987. Underthe program, each mortgagein the pool is insured by CMHCand is therefore unconditionallyguaranteed by the Governmentof Canada. The NHA MBSadministrator publishes a monthlyreport on mortgage interest andprincipal pay down.Accounting or disclosure considerationsIn valuing MBSs, investment funds should distinguish betweenseasoned and unseasoned securities. Mortgages are nothomogeneous and, as a result, different pools have differentprepayment experience. MBSs are considered seasoned once theyhave been outstanding four to five years.Generally, MBS price quotes can be readily obtained from dealers orpricing services. If independent price quotations are not available,the characteristics of the MBS should be factored into the valuationtechnique.MBS instruments may be purchased at a premium or discount. Generalindustry practice is to recognize the premium or discount at thedisposition date of all or part of the security rather than amortizingthe amount. The Study Group concurs with this practice.Valuation Considerations forPricing PurposesBonds are valued at either bidor mid price. MBS securities canbe quoted on a factored or nonfactoredbasis depending onwhether or not there is a decisionto adjust the face value of thebond for the principal factorpaydown.Financial Reporting by Investment FundsMBS are of two basic types:A closed MBS is an instrument inwhich the underlying mortgagesdo not have prepaymentprovisions and cash flows arepredictable from month to month.An open MBS is an instrument inwhich the underlying mortgageshave prepayment privileges (withor without a charge) and cashflows are more unpredictablebecause of principal repayments.5.Purchasewarrants,specialwarrantsCertificates issued by acorporation that give theholder the right to purchasethe underlying assets at a setprice for a set period of time.The certificates are often issuedin conjunction with a new issueof bonds, preferred shares orcommon shares..Traded warrants are priced at bid from an independent serviceprovider for financial reporting purposes. Non-actively tradedwarrants use valuation techniques based upon observable marketrates and/or may include models. Disclosure may include exerciseprice and date of expiry of the warrants.Purchase warrants should bevalued based on a valuationmodel (for example, BlackScholes Option Pricing Model orBinomial Model).

Security ortransactionGeneral descriptionAccounting or disclosure considerationsValuation Considerations forPricing Purposes1216.Put and calloptions (writtenand purchased)A contract that gives the ownerthe opportunity to buy (in thecase of a call option) or sell (inthe case of a put option) theunderlying security from or to,respectively, the writer of theoption at a fixed price (called theexercise price) on or before theoption’s expiry date. In return forthis right, the purchaser pays anonrefundable fee (the premium)to the writer of the option. Theamount of the premium is basedon factors such as the durationof the option, the differencebetween the exercise price andthe current market price of theunderlying security, the volatilityin the price, current interest ratesand other characteristics of theunderlying security.Option trading consists of bothlisted and over-the-countermarkets in options. The exerciseprice and number of units/sharesof equity options are generallyadjusted on the ex-date for rightsand stock dividends or splits inthe underlying shares.Purchased options:The premium paid by an investment fund for the purchase of a callor put option should be included in the statement of net assets as aninvestment and subsequently marked to market to reflect the currentmarket value of the option. When an option that an investmentfund has purchased expires on the stipulated expiration date, theinvestment fund will realize a loss in the amount of the cost of theoption.When an investment fund enters into a closing transaction, it willrealize a gain or loss, depending on whether the proceeds from theclosing transaction are greater than or less than the cost of the option.When an investment fund exercises a put option, it will realize a gainor loss from the sale of the underlying security and the proceeds fromsuch sale should be decreased by the premium originally paid. Whenthe investment fund exercises a call option, the cost of the securitywhich it purchases upon exercise should be increased by the premiumoriginally paid.Written options:Premiums from writing options should be included in the statement ofnet assets as a liability and subsequently marked to market to reflectthe current market value of the option, with the offsetting entryrecorded as unrealized gain or loss.Premiums received from writing options that expire unexercisedare treated on expiration date as realized gains. An option writer’sobligation may also be discharged before the exercise of the optionby closing out its position. The difference between the premiumreceived and the amount paid on executing a closing transactionis treated as a realized gain or, if the cost of the closing transactionexceeds the premium received, as a realized loss.When an option holder exercises the right to call or put the security,the writer’s obligation is also discharged. In the case of a call option,the writer delivers the underlying security and receives the exerciseprice. For a covered position, the difference between the proceedsof the sale plus the amount of the premium and the cost of thesecurity should be accounted for as a realized gain or loss. For anuncovered position, a realized loss from the simultaneous purchase,at market, and sale, at the option strike price, of the security shouldbe reduced by the premium. For a put option, the cost recorded bythe investment fund for the security delivered as part of the optioncontract should be the exercise price of the option plus commissionsless the premium received.Disclosure:NI 81-106 requires disclosure of the terms of the options including thequantity of the underlying interest, the number of options, the strikeprice, the expiration month and year, the cost and the current value(3.5(6)(a)).Options which are listed arevalued using the last tradedprice on the recognized primaryexchange. If the options aretraded OTC, value can be basedon the price of a listed option ifthey have the exact same terms.If the OTC option does not havea listed counterpart, it shouldbe valued based on a valuationmodel (for example, the Black-Scholes method).Accounting for Specific Types of Securities and Transactions

122Security ortransaction7.8.Real returnbonds (RRB)Repurchaseagreements(and reverserepurchaseagreements)General descriptionGovernment (federal/provincial)bonds that pay a rate of returnthat is adjusted for inflation.Unlike regular (nominal)bonds, this feature assuresthat your purchasing power ismaintained regardless of futurerate of inflation. RRBs payinterest semi-annually basedon inflation-adjusted principaland at maturity they repay theprincipal in inflation-adjusteddollars. RRBs have many of thereturn characteristics of longtermbonds with interest ratesensitivity of short-term bonds.A repurchase agreement (repo)is, in its simplest form, the saleof a security at a specified pricewith an agreement to purchasethe same or substantially thesame security from the samecounterparty at a fixed ordeterminable price at a futuredate. A repurchase agreementallows the investment company totransfer possession of a securityto a buyer, usually a broker, forcash. The investment companyagrees to repay cash plus interestin exchange for the return of thesame securities. Because a repobetween the two specific partiesinvolved is not transferable, arepo has no ready market.Accounting or disclosure considerationsRRBs are valued at bid prices for financial reporting from independentservice providers.A repurchase agreement allows the investment fund to transferpossession of (sell) a security to a buyer, usually a broker, for cash.The investment fund does not record a sale of the security, and itagrees to later repay cash plus interest in exchange for the return(repurchase) of the same securities. The transaction is thus similarin effect to a borrowing by the investment fund, collateralized bythe security. The contract may be a daily contract that is continuallyrenewed. The proceeds of the transaction should be recorded as ifthey were of a borrowing, and the security should continue to berecorded as if it were in the portfolio, though subject to lien, andshould be valued in a manner suited to it.A reverse repo is similar to a loan by the investment fund to the seller,with the securities serving as collateral. The investment fund does notrecord the purchase of the securities received but does record thereverse repo as if it were a loan.Income or expenses associated with these transactions need to bedisclosed under the statement of investment operations.Valuation Considerations forPricing PurposesBonds are valued at either bid ormid price. Real Return Bonds canbe quoted either on an adjustedor non-adjusted basis whichreflects the intrinsic value of theCPA adjustment.Repurchase agreements –continue to value security inthe same manner as prior toagreement.Reverse repurchase agreements –value as a short-term investment,(i.e. at cost plus accrued interest).Financial Reporting by Investment FundsA reverse repurchase agreement(reverse repo or resale) is, in itssimplest form, the purchase of asecurity at a specified price withan agreement to sell the same orsubstantially the same security tothe same counterparty at a fixedor determinable price at a futuredate.9.Restrictedsecurities forregulationor otherpurposesA portfolio security that maybe sold privately. It is probablyexempted from registration butsome aspect of its nature isrestricted in some manner.Disclose why the security is restricted and disclose to allow readerto understand impact. There may be a discount or premiumconsideration.Consider whether a liquiditydiscount (“haircut”) isappropriate.

Security ortransactionGeneral descriptionAccounting or disclosure considerationsValuation Considerations forPricing Purposes10.SecuritieslendingThe practice of lending portfoliosecurities, usually to a brokerto cover a short sale. The loanis usually collateralized bycash or government securities.Investment funds used thisstrategy to enhance the returns.Disclosure includes market value of securities loaned and collateralheld. Income from this lending activity should be reported in thestatement of operations when earned.Continue to value security inthe same manner as prior toagreement.11.Short securitiespositionsA short sale is a sale of securitiesnot owned at the time of sale butwhere the buyer anticipates theprice to fall so that the securitiescan be purchased at a profit.A fund selling short borrowsequivalent securities to deliver tothe buyer and eventually buys thesecurities to return to the lender.Short securities positions should be valued at the current ask price,except where a fund has offsetting assets and liabilities with offsettingmarket risks (in which case mid-market is appropriate).Amounts deposited with brokers for short sales of securities shouldbe separately disclosed.Proceeds from securities sold short should be reported as liabilitiesin the statement of net assets and marked to market. The differencebetween the net proceeds of the short sales and the valuationsshould be reported as unrealized appreciation or depreciation of theinvestments in the statement of operations. Gains and losses shouldbe classified as realized when a short position is closed out.Value in the same manner asequities, with the qualificationthat if not priced at last trade,use ask or mid of bid/ask ratherthan bid.12312. Stapled units A unique form of security thatcombines the attributes ofcommon shares, preferred sharesand debt in a single security.These are “stapled” together as asingle unit that trades in the stockmarket.13.Structurednotes orindexedsecuritiesStructured notes are hybridinvestments that havecomponents of straight debtinstruments and derivativescombined into one structure.Rather than paying a straightfixed or floating coupon, theseinstruments’ interest paymentsare tied to a myriad of possibleindices, rates or other underlyingassets. The derivative componentcan affect the redemption valueand stated maturity of the note.Structured notes vary by theirunderlying assets – they maybe linked to a group of mutualfunds, hedge funds, equity indexor group of indices, or basket ofselected stocks – and usually payinterest based on an increase (ordecrease) in the underlying asset.An example would be a PrincipalProtected Note (PPN).These are priced at bid prices from independent service provider forfinancial reporting purposes.These are valued at bid prices by the investment dealers. Minimumdisclosure includes principal value, credit rating of the issuer, maturitydate, underlying assets used and interest or rate of return information.These securities typically trade inthe market (see description) sothey would be valued at the lasttraded price (or official close) onthe recognized primary exchange.Multiple broker quotes and/orvaluation model based on thefeatures of the note.Accounting for Specific Types of Securities and Transactions

124Security ortransactionGeneral description14. SwapsA series of forward contractswhich obligate two parties toswap or exchange a series of cashflows on specified payment dates.The cash flows are either fixed orcalculated by specified referencerates or prices. Interim paymentsare netted, with the differencebeing paid by one party to theother.A swap is a particular type ofOTC forward contract. The mostcommon type is one that is basedon interest rates. In a basic plainvanilla interest rate swap, twoparties agree to swap cash flowsbased on two different rates(one fixed, the other floating) ona certain principal amount, andon a certain date. Other typesof swaps include cross-currencyinterest rate swaps, equity swaps,index swaps, total return swapsand commodity swaps.Accounting or disclosure considerationsSwaps are not traded on exchanges; therefore, market quotations arenot available for swaps. Fair values should be used.Disclosures may include swap arrangement details such as underlyingasset, maturity date, counterparty and their rating, notional amount,market value and payable or receivable amounts.Valuation Considerations forPricing PurposesSwaps should be valued usinga model that incorporates theterms of the swap agreementand relevant market data tocalculate the net present value ofthe expected future cask flows.Typically, broker quotes are notavailable.Financial Reporting by Investment Funds

Security ortransactionGeneral descriptionAccounting or disclosure considerationsValuation Considerations forPricing Purposes12515.16.When-issuedsecuritiesZero couponbondA short form for “when, as andif issued.” The term indicatesa conditional transaction in asecurity authorized for issuancebut not yet actually issued. Allsuch transactions are settled ifand when the actual securityis issued and the exchangedetermines that the transactionsare to be settled.Some securities are traded on awhen-issued basis. A securitiesunderwriter solicits expressionsof interest in a proposed issueand sends a when-issued priceconfirmation against whichsecurities are delivered later whenthe terms of the issue are known.The securities usually begintrading on a when-issued basis onthe issuance of the confirmationas if they had been issued a fewdays before the closing date.In Canada, when-issued securitiesmay include treasury bills,provincial bonds, corporatebonds and government ofCanada bonds. Securities, suchas government of Canada bonds,can be bought and sold inadvance of the issue date, andtrading may begin at the time ofthe announcement.A discount bond that pays asingle lump sum payment atmaturity; no periodic couponpayments; predominantly OTCinstruments traded by dealers. Itis generally issued at a discountfrom its face value. The holderderives the return from thegradual appreciation in the valueof security, which redeems at facevalue at a specified maturity.Securities offerings are rarely aborted after when-issued tradingbegins. A when-issued security and the obligation to pay for thesecurity should be recorded when the commitment becomes fixed,which is the date on which the priced transaction confirmation isissued.When-issued securities for which the fund has not taken deliveryare required to be identified in a registered investment company’sfinancial statements. Securities may also be bought on a delayeddelivery contract under which the underwriter agrees to deliversecurities to buyers at later specified dates.These instruments are traded OTC and their bid prices for financialreporting are available from dealers. The Study Group recommendsthe “notional interest income method” (required under Canadianincome tax regulations). Under this method, the zero coupon bond is“marked to market” and an accrual is made for the interest income.The income stream is conceptually in two components, an accretionof the discount using a constant yield to maturity, and fluctuations invalue due to changing interest rates or credit worthiness of the issuer.The interest accrual is based on the yield to maturity in effect at thetime of purchase. The offset is to the cost of the zero coupon bond.Typically when-issued securitiesare tradable in the applicablemarket for the underlyingsecurity (listed on an exchangefor a when-issued equity andOTC for a when-issued bond).In that instance, the normalpricing convention for the type ofsecurity would apply. If the whenissuedsecurity is not readilytradable then the security wouldbe valued at cost (as a proxyfor fair value) until such time asit becomes tradable (or otherevidence of fair value becomesavailable).Bonds are valued at either bid ormid price.Accounting for Specific Types of Securities and Transactions

Appendix DSELECTED CANADIAN ACCOUNTINGSTANDARDS AND COMPARABLE IFRSAPPLICABLE TO INVESTMENT FUNDSWhen preparing this Research Report, the Study Groupundertook a comprehensive analysis of the accountingstandards, guidelines and EIC abstracts containedin the CICA Handbook – Accounting to identify thoseapplicable to investment funds. The results of thatanalysis are presented in this Appendix, together withselected excerpts from the July 31, 2008 comparisonof Canadian accounting standards and InternationalFinancial Reporting Standards (IFRS). That comparisonis set out in the summary document Comparisonof Canadian GAAP and IFRSs prepared by staff ofthe Canadian Accounting Standards Board (AcSB). It isavailable on the CICA Canadian Standards in TransitionWebsite, along with a more detailed Comparisonof IFRSs and Canadian GAAP and numerous otheruseful IFRS transition resources.To make it easier to access the Study Group’s discussionof issues, this Appendix contains hyperlinks from theindividual Canadian accounting standards, guidelinesand EIC abstracts to pertinent sections of this ResearchReport. The related matters for consideration during thetransition to IFRS are also hyperlinked to pertinent sectionsof this Research Report. In addition, hyperlinksare provided to the IASB website for individual IFRSand IAS Summaries of accounting standards and,where applicable, to the current status of projects on theIASB Work Plan as at April 30, 2009.127

128Canadian AccountingStandards(CICA Handbook)1 Section 1000, FinancialStatement Concepts2 Section 1100, GenerallyAccepted AccountingPrinciples3 Section 1300, DifferentialReporting4 Section 1400, GeneralStandards of FinancialStatement PresentationTransitionto IFRSIssue 3Comparison of Canadian GAAP and IFRS at July 31, 2008Section 1000 and the IASB Framework are converged, except that: (i) the IASB Framework does notexplicitly address not-for-profit organizations; and (ii) the IASB Framework describes concepts of financialand physical capital maintenance without prescribing that a particular concept should apply, whereas Section1000 specifies that financial statements are prepared with capital maintenance measured in financial terms.(Current Status of Conceptual Framework Project)Section 1100 and the corresponding requirements of IAS 8 are converged.There is no corresponding IFRS. All entities adopting IFRSs apply the standards in full.Section 1400 and the corresponding requirements of IAS 1 are converged, except that IAS 1: (i) permitsdeparture from standards if it would be so misleading as to conflict with the objective of financial statementsset out in the IASB’s Framework and if the relevant regulatory framework for the enterprise permitsor requires such a departure; (ii) does not require a statement of retained earnings, but does require astatement of changes in equity; (iii) does not permit comparative information to be omitted in the rarecircumstances when it is not meaningful; and (iv) requires a balance sheet for the earliest comparative periodwhen there is retrospective application of an accounting policy that restates or reclassifies items.(Current Status of Financial Statement Presentation Project)Financial Reporting by Investment Funds5 Section 1505, Disclosure ofAccounting PoliciesSection 1505 and the corresponding requirements of IAS 1 are converged, except that IAS 1 requiresdisclosure of judgments made in the process of applying accounting policies. Some Canadian standards onindividual financial statement items require disclosure of assumptions.6 Section 1506, AccountingChangesSection 1506 and the corresponding requirements of IAS 8 are converged, except that IAS 8 allows an entityto be exempt from the requirement to restate prior periods for the correction of an error on grounds ofimpracticality.7 Section 1508, MeasurementUncertaintySection 1508 and the corresponding requirements of IAS 1 and IAS 37 are converged, except that IFRSs:(i) contain additional disclosure requirements; and (ii) do not allow an exemption from these disclosures,including the recognized amount, based on seriously prejudicial circumstances.8 Section 1510, Current Assetsand Current LiabilitiesIssue 3Section 1510 is less comprehensive than IAS 1 as IAS 1: (i) requires presentation in order of liquiditywhen such presentation provides information that is reliable and more relevant; and (ii) requires currentclassification of breached long-term liabilities unless refinancing is complete by the balance sheet date.(Current Status of Financial Statement Presentation Project)9 Section 1520, IncomeStatementSection 1520 and the corresponding requirements of IAS 1 are converged, except that Section 1520 providesmore specific guidance on the items to be disclosed in the income statement.(Current Status of Financial Statement Presentation Project)10 Section 1530, ComprehensiveIncomeSection 1530 and the corresponding requirements of IAS 1 are converged, except that IAS 1 prohibits thepresentation of comprehensive income in the statement of changes in equity.(Current Status of Financial Statement Presentation Project)11 Section 1540, Cash FlowStatementsIssue 4Section 1540 and IAS 7 are converged, except that IAS 7 does not prohibit the disclosure of cash flow pershare amounts. (Current Status of Financial Statement Presentation Project)

Canadian AccountingStandards(CICA Handbook)Transitionto IFRSComparison of Canadian GAAP and IFRS at July 31, 200812912 Section 1581, BusinessCombinationsIssue 813 Section 1590, Subsidiaries Issue 9,Appendix E14 Section 1600, ConsolidatedFinancial Statements15 Section 1651, Foreign CurrencyTranslation16 Section 1701, SegmentDisclosures17 Section 1751, Interim FinancialStatements18 Section 1800, UnincorporatedBusinessesIssue 9,Appendix EIssue 6Issue 5Section 1581 differs from IFRS 3 as IFRS 3: (i) accounts for business combinations using the acquisitionmethod, which may result in transactions being recognized as a business combination under IFRS 3 thatwould not be recognized under Section 1581; (ii) requires the acquisition date to be the date on which theacquirer obtains control over the acquired entity or business; (iii) requires that shares issued as considerationbe measured based on their fair value at the acquisition date; (iv) does not require outputs to be part ofan integrated set of activities or assets to qualify as a business; (v) requires that contingent considerationbe recognized when it can be reliably measured; (vi) requires acquisition-related costs, such as finders’fees and legal fees, be expensed; (vii) requires that any gain on a bargain purchase or negative goodwill berecognized immediately in net income; and (viii) requires the acquirer to recognize the acquiree’s identifiableassets acquired, liabilities assumed and contingent liabilities, at their fair values at the acquisition date (ratherthan the acquirer’s share only) Any non-controlling interest in the acquiree is measured at the non-controllinginterest’s portion of the net fair values of those items or of the fair value of the business.Section 1590 and IAS 27 are converged, except that IAS 27 assesses control at a point in time, whereasSection 1590 assesses control based on an entity’s continuing ability to make strategic policy decisions. (Seealso AcG-15 and AcG-18.) (Current Status of Consolidation Project)Section 1600 and IFRS 3 and IAS 27 are converged, except that IFRSs: (i) requires shares owned priorto a change in control on a step acquisition to be valued at their fair value on the date of acquisition andrecognizes any gain or loss on those shares in income; (ii) requires the net income and each componentof other comprehensive income to be attributed to the owners of the parent and to the non-controllinginterests, even if this results in the non-controlling interest having a deficit balance; and (iii) requires noncontrollinginterests to be stated at their proportion of the net fair value of the acquired net assets, or thefair value of the business, rather than at the subsidiary’s carrying amount. (See also Section 1581 and AcG-18.)(Current Status of Consolidation Project)Section 1651 and EIC-130 and IAS 21 are converged, except that IAS 21 requires that non-monetary itemsmeasured at fair value be translated at the date when the fair value was determined rather than the balancesheet date. For accounting in highly inflationary environments, IAS 29 is more comprehensive than Section1651, including providing requirements for restating financial statements to an inflation-adjusted basis beforetranslation.Section 1701 and IFRS 8 are converged, except that: (i) IFRS 8 only applies to listed entities and those in theprocess of filing; (ii) IFRS 8 requires the disclosure of segment liabilities; and (iii) IFRSs do not recognizeextraordinary items.Section 1751 and IAS 34 are converged, except that: (i) IAS 34 contemplates providing a condensed set offinancial statements; (ii) IAS 34 does not require the presentation of a cash flow statement for the currentinterim period, only for the cumulative period; (iii) IAS 34 precludes the deferral, in interim periods, ofmanufacturing cost variances that are expected to be absorbed by year end; and (iv) IAS 34 treats the initialrecognition of a previously unrecognized income tax asset as an adjustment to the estimated average annualeffective income tax rate used in determining interim period tax expense, rather than as a separate item ofthe income tax expense.There is no corresponding IFRS.19 Section 3000, Cash Section 3000 and the corresponding requirements of IAS 1 are converged.20 Section 3020, Accounts andNotes ReceivableSection 3020 and the corresponding requirements of IAS 1 are converged.21 Section 3025, Impaired Loans Section 3025 and related requirements in IAS 39 are converged, except that IAS 39 is more stringentregarding general loan loss allowances.22 Section 3040, PrepaidExpensesSection 3040 and the corresponding requirements of IAS 1 are converged.Selected Canadian Accounting Standards and Comparable IFRS Applicable to Investment Funds

130Canadian AccountingStandards(CICA Handbook)23 Section 3064, Goodwill andIntangible AssetsTransitionto IFRSComparison of Canadian GAAP and IFRS at July 31, 2008Section 3064 is converged with IAS 38 for the initial recognition and measurement of intangible assets. Also,IAS 38 permits revaluation at fair value for intangible assets that have an active market. Section 3064 andIAS 38 requirements on accounting for goodwill are converged. Section 3064 uses a different model fromIAS 36 and IAS 38 for testing impairment. IAS 36: (i) includes identifiable indefinite life intangible assets inthe cash-generating unit to which it relates; (ii) might require goodwill impairment assessments to be madebelow the level of the reporting unit, at the cash generating unit; and (iii) determines an impairment loss asthe excess of the carrying amount above the recoverable amount of the cash generating unit to which thegoodwill is allocated to, rather than the difference between carrying amount and fair value of the reportingunit’s goodwill.24 Section 3065, Leases Section 3065 and IAS 17 are converged, except that: (i) IAS 17 uses the term “finance lease” in the samemanner as Section 3065 uses “capital lease”; (ii) IAS 17 does not subdivide finance leases into sales-typeleases and direct financing leases; and (iii) disclosure requirements differ.(Current Status of Leases Project)25 Section 3210, Long-Term Debt Section 3210 and the corresponding requirements of IAS 1 are converged.26 Section 3240, Share Capital Issue 11,Appendix F27 Section 3251, Equity Issue 11,Appendix F28 Section 3280, ContractualObligationsSection 3240 and the corresponding requirements of IAS 1 are converged.Section 3251 and the corresponding requirements of IAS 1 are converged.(Current Status of Financial Statement Presentation Project)Section 3280 and the corresponding requirements of IAS 1 and IAS 16 are converged.29 Section 3290, Contingencies Section 3290 and IAS 37 are converged, except that when a contingency under IAS 37 meets recognitioncriteria it is treated as a provision, or if it is a debit balance it is recognized as an asset when realization ofincome is virtually certain. (See also AcG-14.)(Current Status of Liabilities Project)30 Section 3400, Revenue Issue 14 Recognition criteria in Section 3400 and EIC 141 and IAS 11, IAS 18, SIC-31 and IFRIC-12 are converged,except that: (i) IAS 11 does not allow the completed contract method; (ii) IAS 11 provides more guidance onwork in process; (iii) IAS 18 includes measurement standards requiring fair value for consideration receivedor receivable; (iv) SIC-31 deals with barter transactions involving advertising services specifically; (v)IFRIC-12 provides guidance on recognition and measurement of the obligations and related rights in serviceconcession arrangements; (vi) IFRSs do not provide specific guidance regarding goods with right of return,like EIC 141; and (vii) both sets of standards have application guidance in various other related standards.(See also AcG-4.)(Current Status of Revenue Recognition Project)31 Section 3465, Income Taxes Issue 10 Section 3465 and IAS 12 are converged on the principle for the recognition and measurement of taxes,but have different exceptions to the principle. Section 3465 differs from IAS 12 as IAS 12: (i) continues toallocate to equity any current-year deferred taxes on items that are related to an item charged to equity in aprior year (“backward tracing”); (ii) prohibits recognition of a deferred tax liability if it arises from the initialrecognition of specified assets or liabilities in a transaction that is not a business combination and does notaffect accounting or taxable income at the time; (iii) requires recognition of a deferred tax liability or assetfor temporary differences that arise on translation of non-monetary assets that are remeasured from thelocal currency to the functional currency using historical rates and result from changes in exchange ratesand indexing for tax purposes; (iv) requires recognition of an income tax asset or liability when there is atemporary difference on intercompany transfers of assets; (v) addresses the consequences of a change in taxstatus of the entity. SIC-25 requires that the effects of such a change be allocated based on its origin; and(vi) requires an estimate of the tax deduction authorities will permit on share-based payment transactions infuture years, if the amount is not known at the end of the period.(Current Status of Income Taxes Project)Financial Reporting by Investment Funds

Canadian AccountingStandards(CICA Handbook)Transitionto IFRSComparison of Canadian GAAP and IFRS at July 31, 200832 Section 3480, ExtraordinaryItemsSection 3480 differs from IAS 1 as IAS 1 does not allow separate presentation of extraordinary items.13133 Section 3500, Earnings perShare34 Section 3610, CapitalTransactions35 Section 3820, SubsequentEvents36 Section 3840, Related PartyTransactions37 Section 3841, EconomicDependence38 Section 3855, FinancialInstruments — Recognitionand MeasurementIssue 12Issue 7Issue 13Issue 14Issue 15Section 3500 and IAS 33 are converged, except that IAS 33: (i) does not require presentation of earningsper share for income and loss before discontinued operations and extraordinary items and (ii) does not allowrebuttal of the presumption of share settlement treatment on contracts that may be settled in shares or cash,based on past experience of contract settlements.(Current Status of Earnings per Share Project)There is no corresponding IFRS.Section 3820 and IAS 10 are converged, except that IAS 10: (i) requires reporting of subsequent events to thedate of authorization for issue of financial statements; and (ii) requires disclosure of the date of authorizationfor issue and who gave that authorization.Section 3840 differs from IAS 24 as IAS 24 does not contain requirements for measuring related partytransactions or guidance on the resulting treatment of any gains and losses. Also, IAS 24 does not excludefrom its scope management compensation arrangements, expense allowances and similar paymentsto individuals in the normal course of operations. Section 3840 and IAS 24 disclosure requirements areconverged. (Current Status of Related Party Disclosures Project)There is no corresponding IFRS.Section 3855 and IAS 39 are converged, except that IAS 39: (i) restricts the circumstances in which theoption to measure a financial instrument at fair value through profit or loss is available; (ii) requires quotedloans to be measured at fair value through profit or loss, whereas Section 3855 classifies these as loans andreceivables and accounts for them at amortized cost (other than debt securities, which may be classifiedas held for trading, held to maturity or available for sale); (iii) requires all available-for-sale financial assetsto be measured at fair value unless fair value is not reliably determinable, whereas Section 3855 requiresnon-quoted equity instruments classified as available for sale to be measured at cost; (iv) requires foreignexchange gains and losses on available-for-sale financial assets to be recognized immediately in net income;(v) does not allow a choice of accounting policy for transaction costs; (vi) does not address financialinstruments exchanged or issued in related party transactions; (vii) requires reversal of impairment losses insome circumstances; and (viii) has no scope exceptions for non-publicly accountable enterprises and not-forprofitorganizations.(Current Status of Financial Instruments Project and Derecognition Project)Selected Canadian Accounting Standards and Comparable IFRS Applicable to Investment Funds

132Canadian AccountingStandards(CICA Handbook)39 Section 3861, FinancialInstruments — Disclosure andPresentation(Note: Section 3861 issuperseded by Sections 3862and 3863 effective for yearscommencing October 1, 2007.)Transitionto IFRSIssue 15Comparison of Canadian GAAP and IFRS at July 31, 2008The presentation requirements of Section 3861 and IAS 32 are converged, except that IAS 32: (i) doesnot apply to insurance contracts (however, IFRS 4 requires disclosures similar to those specified in IAS32; (ii) addresses the presentation of derivatives on an entity’s own equity; (iii) does not allow for initialmeasurement of a compound financial instrument using the relative fair value method; and (iv) has noscope exceptions for non-publicly accountable enterprises and not-for-profit organizations. The disclosurerequirements of IFRS 7 are generally more comprehensive than Section 3861 as IFRS 7: (i) requires only thatentities disclose information that enables users of their financial statements to evaluate the significanceof financial instruments, rather than specific contractual terms and conditions of financial instruments; (ii)requires disclosures about financial instruments classified into (as well as out of) a fair value classification;(iii) requires more specific disclosures about collateral; (iv) requires disclosure of the existence of multipleembedded derivatives whose values are interdependent, when these are contained in an instrument havingboth a liability and an equity component; (v) does not encourage (or require) disclosures about averageaggregate carrying amounts during the year, average aggregate principal during the year, or aggregate fairvalue during the year; (vi) requires disclosure of the disposition of any inception profit that might result fromthe use of a valuation technique used to measure a financial instrument that has no active market price; (vii)requires extensive disclosures about exposures to liquidity, currency and other price risks; and (viii) requiresan analysis of the sensitivity of net income to possible changes in market risk factors.(Current Status of Financial Instruments with Characteristics of Equity Project)Financial Reporting by Investment Funds40 Section 3862, FinancialInstruments - DisclosureIssue 13Issue 14Issue 15The disclosure requirements of Section 3862 and IFRS 7 are converged, except that IFRS 7: (i) does notapply to insurance contracts, however IFRS 4 requires the disclosure as specified in IFRS 7; (ii) does apply topartially derecognized assets; (iii) requires disclosure of any remedy or renegotiation on the terms of a loanin default obtained prior to the financial statements being “authorized for issue” versus “completed”; and (iv)requires less specific disclosures about hedging transactions.41 Section 3863, FinancialInstruments - PresentationIssue 11Appendix FIssue 15The presentation requirements of Section 3863 and IAS 32 are converged, except that IAS 32: (i) does notapply to insurance contracts; (ii) addresses the presentation of derivatives on an entity’s own equity; and(iii) does not allow for initial measurement of a compound financial instrument using the relative fair valuemethod.(Current Status of Financial Instruments with Characteristics of Equity Project)42 Section 3865, Hedges Section 3865 and IAS 39 are converged, except that IAS 39 permits fair value hedge accounting for aportfolio hedge of interest rate risk.43 Accounting Guideline AcG-4,Fees and Costs Associated withLending Activities44 Accounting Guideline AcG-7,The Management Report45 Accounting Guideline AcG-14,Disclosure of Guarantees46 Accounting Guideline AcG-15,Variable Interest EntitiesIssue 14 AcG-4 is more comprehensive than IAS 18.(Current Status of Revenue Recognition Project)Issue 9Appendix EThere is no corresponding IFRS.AcG-14 differs from IAS 37 as: (i) IAS 37 addresses recognition and measurement requirements for nonfinancialguarantees, as well as disclosure; and (ii) IAS 37 addresses subsequent measurement moreextensively than Section 3290.(Current Status of Liabilities Project)AcG-15 differs from SIC-12 as SIC-12: (i) does not deal with variable interest entities (VIEs) in the samemanner, and relies on the general principles of consolidation; and (ii) is less detailed. However, both rely onsimilar underlying principles.(Current Status of Consolidation Project)

Canadian AccountingStandards(CICA Handbook)Transitionto IFRSComparison of Canadian GAAP and IFRS at July 31, 200813347 Accounting Guideline AcG-18,Investment Companies48 EIC-18, Accounting for Goodsand Services Tax49 EIC-47, Interest Discount orPremium in the Cash FlowStatement50 EIC-79, Gain Recognition inArm’s Length and RelatedParty Transactions Whenthe Consideration ReceivedIncludes a Claim on the AssetsSold51 EIC-83, Identification ofRelated Party Transactionsin the Normal Course ofOperations52 EIC-87, Balance SheetClassification of Share CapitalIssued by a Split ShareCorporation53 EIC-94, Accounting forCorporate Transaction Costs54 EIC-104, Impact of RefundableTaxes on Future Income TaxCalculations55 EIC-107, Application of CICA3465 to Mutual Fund Trusts,Real Estate Investment Trusts,Royalty Trusts and IncomeTrusts56 EIC-121, Accounting for WashSales57 EIC-130, Translation Methodwhen the Reporting CurrencyDiffers from the MeasurementCurrency or there is a Changein the Reporting Currency58 EIC-149 Accounting forRetractable or MandatorilyRedeemable SharesIssue 2Issue 8Issue 9Appendix EIssue 13Issue 15Issue 7Issue 7Issue 10Issue 6Issue 11Appendix FAcG-18 differs from IFRSs as IFRSs do not contain any special treatments for accounting for investments byinvestment companies and for investment companies by its parent or equity method investor. The fair valuetreatment under AcG-18 differs from the consolidation method required by IAS 27 for subsidiaries and theequity method required by IAS 28 for associates subject to significant influence.(Current Status of Consolidation Project)Selected Canadian Accounting Standards and Comparable IFRS Applicable to Investment Funds

134Canadian AccountingStandards(CICA Handbook)59 EIC-173, Credit Risk and theFair Value of Financial Assetsand Financial Liabilities60 AcSB ED,Adopting IFRS in Canada(April 2008)AcSB ED,Adopting IFRS in Canada, II(March 2009)61 There is no correspondingCanadian Standard.62 There is no correspondingCanadian Standard.Transitionto IFRSIssue 15Issue 1Issue 2Comparison of Canadian GAAP and IFRS at July 31, 2008IFRS 1, First-time Adoption of International Financial Reporting StandardsIAS 37, Provisions, Contingent Liabilities and Contingent AssetsIAS 41, AgricultureFinancial Reporting by Investment Funds

Financial Reporting by Investment FundsThe accounting requirements for consolidation underIFRS are currently under development by the InternationalAccounting Standards Board (IASB) and areexpected to be revised prior to the date of adoption ofIFRS in Canada.AUTHORITATIVE GUIDANCEInternational•y IAS 27, Consolidated and Separate Financial Statements•y IAS 28, Investments in Associates•y IAS 31, Interests in Joint Ventures•y SIC 12, Consolidation - Special Purpose Entities•y IFRS 1, First-time Adoption of InternationalFinancial Reporting Standards•y IFRS 5, Non-current Assets Held for Sale andDiscontinued Operations•y ED 10, Consolidated Financial Statements,December 2008 (comments due March 20, 2009)Canadian GAAP•y AcG-15, Consolidation of Variable Interest Entities•y AcG-18, Investment Companies•y National Instrument 81-102, Mutual Funds (“NI81-102”)United States GAAP•y AICPA Audit and Accounting Guide– InvestmentCompanies (“AICPA Guide”)•y FASB FIN 46R, Consolidation of Variable InterestEntitiesCURRENT PRACTICESInternationalWith the exception of Ireland and Australia, themajority of investment funds internationally do notprepare financial statements in accordance with IFRSas they are typically not required to do so by their localsecurities regulators. For those investment funds domiciledinternationally that do prepare financial statementsin accordance with IFRS, there is wide variation inpractice regarding consolidation of investments withinan investment fund. In most open-ended retail funds,it is widely believed by IFRS preparers that open-endedinvestment funds will not consolidate their underlyinginvestment funds unless the fund maintains votingcontrol over its underlying investments (i.e. greater than50% of the votes attributable to the entity, unless othermitigating factors exist that demonstrate why controldoes not exist).Under IFRS, venture capital organizations, mutualfunds, unit trusts and other similar type entities areexempt from having to apply proportionate consolidationor equity accounting for their underlying investments44 . However, such entities are not exempt frompreparing consolidated accounts when the investmentfund controls an underlying investment.There is wide belief amongst preparers of financial statementsfor investment funds under IFRS that fair valueis the most appropriate measurement for the investmentsof an investment fund, in lieu of equity accounting, proportionateconsolidation or full consolidation. EFAMA,in a 2007 discussion paper indicated that “All investmentsare at fair value (marked to market), so consolidationmay result in a decrease in the net asset value of thefund, as the accounting for the assets and liabilities ofthe company would generally not equal the value of itslisted shares. Therefore consolidated financial statementswould not result in either a fuller or more accurate presentationof the underlying economic situation. In fact,44 IAS 28.1 and IAS 31.1. Further, IAS 28.BC5 acknowledges that the“use of the equity or proportionate consolidation methods for investmentsheld by venture capital organisations, mutual funds, unit trustsand similar entities often produces information that is not relevantto their management and investors and that fair value measurementproduces more relevant information”. In addition, BC6 acknowledgesthat “there may be frequent changes in the level of ownership in theseinvestments and that financial statements are less useful if there arefrequent changes in the method of accounting for an investment.”136

Consolidation by Investment Funds Under IFRS (IAS 27)one may argue that they distort the financial positionof the fund and that this is contrary to the objective ofconsolidated financial statements, to present a true andfair view of the structure’s economic reality.” 45Canadian GAAPAs outlined in Chapter 3 of this Research Report, generally,investment funds cannot apply consolidation, proportionateconsolidation or equity accounting principlesto their investments because of the exemptions containedin AcG-15, Variable Interest Entities (paragraph 4(e))and AcG-18, Investment Companies (paragraph 5). Fairvalue accounting is therefore generally applied for aninvestment fund’s investments instead of consolidation,even if the investment fund holds more than 50% of theequity or units of the underlying investment. It shouldbe noted that paragraph 5 of AcG-18 does provide fortwo situations where something other than fair valueaccounting is appropriate.United States GAAPSimilar to Canadian GAAP in that investment fundsgenerally cannot apply consolidation, proportionateconsolidation or equity accounting principles to theirinvestments because of the requirements under theAICPA guide to record investments at fair value.In a 2007 letter to the United States Securities andExchange Commission (“SEC”) regarding a ConceptRelease to allow U.S. issuers to prepare financial statementsin accordance with IFRS, ICI indicated thatthe requirements under IFRS for investment funds,including consolidation, are “contrary to sound andlong-standing practices for meaningful investment fundreporting” 46 and have advocated that the IASB develop45 The European Funds and Asset Management Association (EFAMA)issued a discussion paper in June 2007, International FinancialReporting Standards: application to investment funds.46 The ICI letter dated November 13, 2007 to the Nancy M. Morris,Secretary of the SEC is available on the SEC website: http://www.sec.gov/comments/s7-20-07/s72007-60.pdfindustry specific accounting guidance for investmentfunds prior to the SEC requiring financial statementsprepared under IFRS.DISCUSSION AND ANALYSIS(including illustrative examples) 47The definition of control and the criteria for evaluatingwhether control exists under IFRS do not providea meaningful framework for investment funds as suchguidance is more oriented towards general corporateenterprises. There are numerous differences betweengeneral corporate entities and investment funds, asoutlined below, which could render these criteria eithernot applicable or non determinant:•y Unlike corporations, investment funds do nottypically have their own employees and/or “mindand management” and therefore do not possess thesame faculties that a corporate entity would have inbeing able to determine or influence the operatingand financing activities of the fund’s underlyinginvestments.•y•yUnder securities regulation in Canada, most openendedinvestment retail funds, will not be permittedto have control over their underlying investments[NI 81-102, Part 2.2] and therefore typicallywill “pass-through” such voting control either tothe underlying unit holders of the fund or the fundmanager.For non-exchange traded funds, the number ofunits of a fund in issuance or circulation will varyon a daily basis based on subscriptions and redemptions– which is different to the minority interestconcept of a corporate entity where the shareholdercan only liquidate its investment by selling its sharesto another entity. The minority interest attributable47 This discussion and analysis is based on current IFRS as of March2009. The requirements are being revised by the IASB and could resultin different consolidation requirements and criteria for evaluatingconsolidation.137

Financial Reporting by Investment Funds•y•yto a corporate entity’s investment in another corporateentity will therefore continue to exist regardlessof the number of individual shareholders. However,in contrast, the minority interest attributable tothe proportion of outstanding units not owned byinvestment fund could fluctuate on a daily basis.A primary objective of a retail investment fund isto passively invest in entities and/or other investmentfunds so as to generate investment returnsfor the investment fund unit holders and generatefee income for the fund manager. Therefore, theinvestment fund, under normal circumstances,would not seek to direct the financing and/or operatingactivities of the underlying investment. Thisdiffers from a traditional corporate entity whichtypically would take and/or have the ability to playa much more active role in the operations and/orinvestment decisions of any underlying investment.Investments in subsidiaries acquired by investmententities for this purpose are like an inventory offinancial instruments held for trading by a financialinstitution, or investment property held by anentity for some combination of income and capitalappreciation, or both.Users of an investment fund’s financial statementsneed to understand the cash flows and changes inthe fair value of its investments, including subsidiariesacquired for investment purposes, in order tounderstand the performance and financial conditionof the fund.In light of these differences, the following discussionand analysis attempts to provide a framework on howinvestment funds could apply the IFRS definitionof control and criteria for evaluating whether or notcontrol exists in relation to an investment funds (reportingentity) ownership in an underlying investment. Theconsolidation assessment should be made based on theindividual facts and circumstances of the particularreporting entity in relation to each of the investmentfund’s underlying investments independently. Giventhat the current IFRS literature does not provide explicitinterpretive guidance relating to investment funds, it isnecessary to apply professional judgment when performingany consolidation analysis under IFRS.As outlined above, control is presumed to exist underIFRS when the investment fund owns, directly orindirectly through other consolidated investments, anddirects more than half of the voting power of an entityunless, in exceptional circumstances, it can be clearlydemonstrated that such ownership does not constitutecontrol.Application of control to Canadian retailmutual funds governed by NI 81-102Open-ended mutual funds that report reporting underNI 81-102, in accordance with Part 2.2 of that rule,are not generally permitted to hold more than 10% ofthe votes attached to any underlying investment. In theevent the mutual fund were to hold ownership intereststhat entitled the fund to more than 10% of the votes, theinvestment fund would be obligated to pass-through allvoting rights or any voting rights in excess of the 10%threshold to the unitholders of the top fund. Therefore,given that the open-ended mutual fund would nottypically hold more than 10% of the voting power, itwould be prevented from exercising control over themanagement of the investment and therefore would notconsolidate its underlying investments. This essentiallynegates the consolidation risk for most retail mutualfunds in Canada.In the event an open-ended mutual fund that reportsunder NI 81-102 held more than 50% of the votingrights and did not pass through such voting privileges, itwould likely need to consolidate the underlying investment,unless it could demonstrate that it does not directthe operating and financing policies of the underlyinginvestment. In this situation, absent regulatory approval,138

Consolidation by Investment Funds Under IFRS (IAS 27)the fund would be in violation of NI 81-102, Part 2.2 asit would have control over the underlying investment.Example 1[This example includes simplifying assumptions toillustrate possible interpretations of the IFRS guidance.Additional and/or alternative factors could lead to alternativeoutcomes under IFRS].BackgroundFund 1 owns 4 underlying funds; A (15% of Fund1’s net assets are invested in this fund), B (25%), C(15%) & D (45%). All funds, top fund and underlyingfunds are open-ended mutual funds offeredunder NI 81-102. Fund 1’s simplified prospectusstates that the asset allocation to underlying fundsis typically passive (i.e. standard weightings as aboveare maintained day-to-day, subject to a +/- range fornormal market fluctuations), but that the manager,in order to meet the investment objectives of the topfund, may change weightings or underlying fundssubject to prior notice to unitholders. Further, Fund1 will not vote at a meeting of any of the underlyingfunds, but it will, if it deems appropriate, flow thosevoting rights through to the unitholders of the topfund and the manager will vote in proportion to thetop fund unitholders’ elections. During the year,Fund 1’s ownership percentage of Fund A fluctuatesdue to (1) changes in cash flow at Fund 1 and (2)changes in cash flow at Fund A. Part way throughthe year, the level exceeds 50% and remains above50% at year end.Should Fund 1 consolidate Fund A for the period oftime ownership interest exceeded 50%?ResponseNo. Fund 1 does not have control over Fund A’sfinancial and operating policies. Because both Fund1 and Fund A are open-ended, the number of unitsin issue at anytime, and thus Fund 1’s proportionateownership (i.e. financial policy), is not within Fund1’s control. Further, Fund 1 is merely a conduit for thevoting interests of its (diverse) beneficial owners, ormight not even flow through those voting rights (i.e.abstain from voting those units). Fund 1 itself can notexert voting control.Application of control to investmentfunds not governed by NI 81-102(e.g. labour sponsored, venture capital, segregated fundsetc)Given that there are no regulatory restrictions preventingnon-regulated investment funds from controllingtheir underlying investments, a detailed evaluation ofthe facts and circumstances is required under IFRS todetermine if a fund controls its underlying investment.Application of professional judgment is required in thesesituations to evaluate whether the consolidation criteriaunder IFRS have been met.Factors that may indicate a fund has control over itsunderlying investments include:•y Ability to determine the financial and operatingpolicies of the underlying investment, either throughvotes and/or direct management of the underlyingactivities of the investment.•y Special purpose entity that is created for the solebenefit of the investment fund.•y The independent ability to remove the fund managerof an underlying investment in another investmentfund without approval and/or input from otherinvestors.•y The investment fund is exposed to the majority ofthe underlying risks and rewards of ownership in itsunderlying investment and has the ability to director influence the level of these benefits.Exhibit E1 sets out factors that could provide evidenceof voting control in the context of an investment fund.139

Financial Reporting by Investment FundsExhibit E1Voting Control ConsiderationsDoes ownership in the investment /investment fund confer voting privileges tothe investment fund?NoYesDoes the investment fund maintain themajority(i.e., more than 50%) 1 of the votes? 2NoYesNoAre such voting privileges substantive? 3YesHas the investment fund delegated and/ortransferred all or a portion of its majorityvoting privileges to another party (i.e., fundmanager)? 4NoYesConsider whether the investment fund obtainsbenefits from its ownership (Exhibit E3).Consider whether other indicators ofcontrol exist (Exhibit E2).(1)(2)(3)(4)Presumption of control with a majority of voting rights is valid only when matters are decided by majority vote. When mattersare decided by supermajority, or require unanimity, a simple majority of voting right does not necessarily convey control. It isnecessary, in each situation, to determine the actual level of votes required to decide business issues, in order to determine whenlevel of votes conveys control. This paper uses “majority” throughout for simplicity of presentation.Potential voting rights that are not currently exercisable or convertible (i.e. as they are not exercisable until a future date and/orupon occurrence of an event) should not be included in the analysis until such time as they become exercisable or convertible.Management’s intention and/or financial ability is not relevant in determining the exerciseability and/or convertibility of the accessto potential voting rights.Votes may be considered substantive if they provide ability to vote on key decisions that may evidence power to influenceoperating and financial policy such as appointment of board of directors, appointment and replacement of fund manager etc.If majority voting privileges are conferred to the investment fund but all or a portion were subsequently transferred or delegatedto others could provide evidence of defacto control, whereby the und could still be considered to have control.140

Consolidation by Investment Funds Under IFRS (IAS 27)In the absence of substantive voting privileges and/or non-determinant indication of voting control, it isnecessary to evaluate other factors or benefits that mayevidence control. Exhibit E2 lists the factors that mayprovide evidence of an investment funds control over itsunderlying investments.Exhibit E2Considerations Regarding Control Over UnderlyingInvestments1.2.3.4.The reporting entity (investment fund) is a party toany agreements, statutes or other arrangements whichconvey the power to govern financial and operatingpolicies of its investment. (Note. It is envisaged thatmost open-ended investment funds, as a matter ofnormal course, would not typically execute additionalagreements and/or side arrangements associated withthe underlying investments that the fund holds.)There any other rights or privileges conferred to theinvestment fund relating to its underlying investmentwhich may evidence control.The activities of the underlying investment/investmentfund are being conducted on behalf of the reportingentity.The reporting entity (investment fund) has the ability toremove, without cause, the board of directors or fundmanager of an underlying investment in another entity orinvestment fund respectively.The power to govern the operating and financial policiesof an investment are not sufficient themselves to evidencecontrol under IFRS. The investment fund mustalso obtain benefits from its ownership in the underlyinginvestment/investment fund. Exhibit E3 lists the factorsfrom which benefits can be derived.Exhibit E3Considerations Regarding Benefits of Ownership1.2.3.4.The reporting entity (investment fund) is a party toany agreements, statutes or other arrangements whichconvey the power to govern financial and operatingpolicies of its investment. (Note. It is envisaged thatmost open-ended investment funds, as a matter ofnormal course, would not typically execute additionalagreements and/or side arrangements associated withthe underlying investments that the fund holds.)There any other rights or privileges conferred to theinvestment fund relating to its underlying investmentwhich may evidence control.The activities of the underlying investment/investmentfund are being conducted on behalf of the reportingentity.The reporting entity (investment fund) has the ability toremove, without cause, the board of directors or fundmanager of an underlying investment in another entity orinvestment fund respectively.141

Financial Reporting by Investment FundsIf the investment fund has the ability to govern thefinancial and operating policies of its underlying investmentand has access to benefits from that investment,then the reporting entity should consolidate its underlyinginvestment.Examples 2 and 3 below illustrate the interpretation/application of several of the criteria listed in Exhibit E1,Exhibit E2 and Exhibit E3 above.Example 2 — Open ended investment funds (notreporting under NI 81-102)[This example includes simplifying assumptions toillustrate possible interpretations of the IFRS guidance.The existence of additional and/or or alternative factorscould lead to alternative outcomes under IFRS].BackgroundFund X (who does not report under NI 81-102) holds51% of the outstanding units of Fund Y (an openendedmutual fund reporting under NI 81-102). Oneunit in mutual fund Y entitles the holder to one voteon any change to investment strategies of the fundand on the replacement of the fund manager (withoutcause) and is therefore considered to be a substantivevoting right (see Exhibit E1 above).Is Fund X required to consolidate its investment inFund Y?ResponseYes. Each unit held by Fund X entitles it to vote onall significant matters relating to Fund Y’s operationsincluding changes to investment fund strategy outlinedin the prospectus and the replacement of thefund manager without cause and therefore are consideredto be substantive. Given that Fund X holdsgreater than 50% of the votes, it can determine theoperating decisions of the investment fund. Fund Xhas access to benefits (i.e. investment returns) fromFund Y through its ownership interest and thereforeshould consolidate its investment.Example 3 — Other fund types – direct holdings inan underlying equity investment[This example includes simplifying assumptions toillustrate possible interpretations of the IFRS guidance.The existence of additional and/or or alternative factorscould lead to alternative outcomes under IFRS].BackgroundVenture Capital Fund X (who does not report underNI 81-102) holds 30% of the outstanding shares of aPrivate (i.e. non-publicly traded) Entity Y. Each shareentitles the shareholder to one vote to determine themajor operating decisions of Private Entity Y, includingthe nomination and replacement of the board ofdirectors. The remaining shares are widely disbursedwith no individual entity/fund owning more than 10%of the outstanding shares. In addition to receiving thereturns associated with its underlying investment inPrivate Entity Y, Venture Capital Fund X is able togain exposure to research and development activitiesperformed by Private Entity Y, the outcome/findingsof which may also benefit other investment holdingsmaintained by Venture Capital Fund X.Is Venture Capital Fund X required to consolidate itsinvestment in Private Company Y?ResponseIt would appear that the consolidation principles havebeen met. Each share held by Venture Capital FundX entitles it to vote on all significant matters relatingto Private Entity Y’s operations including nominationand replacement of the board of directors – andtherefore are considered to be substantive. Despite thefact that Venture Capital Fund X does not maintaingreater than 50% of the outstanding votes, the Fundmaintains the most significant number of the votes142

Consolidation by Investment Funds Under IFRS (IAS 27)as the remaining ownership of Private Company Yis widely disbursed. In addition to the investmentreturns associated with its common equity holdings,Venture Capital Fund X gains access to the R&Defforts of Private Company Y which can benefit otherportfolio holdings of the fund. Therefore, VentureCapital Fund X has access to additional benefits fromits investment in Private Company Y beyond investmentreturns.Therefore, given the significance of its voting influence(compared to the widely disbursed voting interestsheld by other parties) and related benefits derived fromownership of the investment, Venture Capital FundX is likely viewed to control its investment in PrivateCompany Y and therefore would likely be required toconsolidate this investment under IFRS. Applicationof professional judgment is required in these situationsto evaluate the significance of the “benefits” receivedand the ability of the Fund to govern the financing andoperating policies of the underlying investment.OTHER FACTORS FOR CONSIDERATIONRole of the fund managerin the assessment of consolidation of theunderlying investments of an investment fundMore often than not, it is the fund manager who actson behalf of the investment fund in determining theunderlying investment decisions on behalf of the fund,including the creation and establishment of the investmentfund’s overall investment objectives and philosophy.The same fund manager may also play a similarrole for other investment funds within the same “fundfamily”. For the purpose of evaluating whether or notan investment fund (reporting entity) should consolidatean underlying investment, it is important to lookto the individual facts and circumstances surroundingthe reporting entity’s exposure, including the rights andbenefits that confer to the reporting entity and/or fundmanager in its role as the mind and management of thereporting entity investment fund.There may be other rights and benefits of ownership inan underlying investment that may accrue directly tothe fund manager in its broader capacity as manager ofa group of funds. Careful consideration should be madeto distinguish between such benefits as these are morerelevant to the evaluation of whether or not the fundmanger is acting in an agency capacity/relationship onbehalf of investors in the mutual fund or whether ornot the investment manager controls the underlyinginvestments directly as opposed to the reporting entityinvestment fund itself.Other related party considerationsThe definition of a related party was provided inchapter 3. From the perspective of the investment fund(reporting entity) that is evaluating its underlying investmentsfor consolidation, the investment fund wouldonly look to its ownership interests and benefits derivedfrom its underlying investments and/or subsidiaries forthe purposes of evaluating whether or not control exists.This evaluation would not consider other related parties,such as the fund manager or other funds within thesame “fund family” (unless the reporting entity held anownership interest in the other funds within the samefund family).Temporary controlThe concept of temporary control under IFRS, wherebyan entity may only control an underlying investment fora short period of time (either due to vacillating ownershipinterests and/or the intention of selling the investmentwithin a short period of time) cannot be used asan exemption from preparing consolidated financialstatements under IFRS. This concept was reconfirmedin recent IASB deliberations as follows: “The fact thatcontrol of an entity might be temporary does not of itselfchange the assets controlled by an entity. During the143

Financial Reporting by Investment Fundstime that control is held and until such time as controlceases, the controlled assets are part of the economicentity and should be recognised as such.”Non-current assets held for saleIf, in the event, it was determined that an investmentfund maintained control over an underlying investment,it should consider whether or not the investmentcan be considered a “disposal group” or “non-currentasset” held for sale under IFRS 5 which would providean exemption from full line-by-line consolidation.Under IFRS 5, a non-current asset is considered adisposal group held for sale if it meets certain criteriaincluding the fact that: (a) the asset must be available forimmediate sale in its present condition; (b) the sale mustbe highly probable (i.e. an appropriate level of managementmust be committed to a plan to sell the asset, anactive program to locate a buyer and complete the planmust have been initiated, and the asset must be activelymarketed for sale at a price that is reasonable in relationto its current fair value); and (c) must generally becompleted within one year of initial classification (IFRS5.7 and 8). If these criteria are met, the investment fundwould present the assets and liabilities from this investmentseparately from other assets and liabilities in thebalance sheet (refer to the Implementation Guidance ofIFRS 5 for further details). The criteria under IFRS 5for evaluating whether or not a non-current asset is considereda disposal group are more relevant for generaloperating companies, not investment funds. Therefore,professional judgment is required when evaluating thesecriteria and must incorporate the individual facts andcircumstances of the particular transaction.Changes in controlUnder IFRS, a parent loses control when it loses thepower to govern the financial and operating policies ofan investee so as to obtain benefit from its activities.The loss of control can occur with or without a changein absolute or relative ownership levels. It could occur,for example, when a subsidiary becomes subject to thecontrol of a government, court, administrator or regulator.It could also occur as a result of a contractual agreement(IAS 27.32). An investment fund must thereforecontinue to consolidate the underlying investments thatit controls until such time as it loses its control.FIRST TIME ADOPTIONIf an investment fund is required to consolidate anunderlying investment under IFRS, where it previouslydid not consolidate under existing Canadian GAAP,the investment fund must consolidate each underlyinginvestment on a line-by-line basis at the date of transitionto IFRS. Further, to the extent that the underlyinginvestment does not prepare its financial statements inaccordance with IFRS, the carrying amounts of theunderlying assets and liabilities of the subsidiary wouldrequire adjustment to conform to the requirements ofIFRS prior to being consolidated by the reporting entityinvestment fund. Any difference between the adjustedcarrying value of assets and liabilities of the subsidiaryunder IFRS and the parent’s interest and cost is considered“goodwill” in accordance with IFRS 1.B2(j).These consolidation adjustments would be recorded atthe date of transition of IFRS and the reporting entityinvestment fund would continue to apply consolidationprocedures at each reporting period until it no longercontrolled its underlying investment.These consolidation requirements could lead to insurmountableimplementation difficulties for many laboursponsored or venture capital funds who quite frequentlyinvest in non-publicly accountable enterprises that willnot likely prepare financial information in accordancewith IFRS. The complexities are further compoundedwhen a subsidiary investment has a non-coterminousreporting period compared to the reporting entity investmentfund. Adjustments, to the extent material, wouldalso be required to align the reporting period of the144

Consolidation by Investment Funds Under IFRS (IAS 27)underlying subsidiary to the parent company’s reportingperiod to facilitate the consolidation adjustments.STUDY GROUP VIEWSThe Study Group’s view is that fair value is the mostappropriate and most relevant basis of accounting forunderlying investments of an investment fund, regardlessof the ownership level and/or control that an investmentfund may have over its underlying investments. In mostcases, consolidation of underlying investments will notlead to useful financial reporting for funds because theunderlying investment is already accounted for at fairvalue. Additionally, consolidation will normally requirea minority interest to be included in the consolidatedfinancial statements and this may well confuse thereader rather than provide additional information orgreater transparency.Under the IFRS Framework, the objective of financialstatements is: “… to provide information about thefinancial position, performance and changes in financialposition of an entity that is useful to a wide rangeof users in making economic decisions” (paragraph 12).Further, the Framework indicates that “To be useful,information must be relevant to the decision-makingneeds of users. Information has the quality of relevancewhen it influences the economic decisions of users byhelping them evaluate past, present or future eventsor confirming, or correcting, their past evaluations”(paragraph 26).The Study Group’s view is that providing consolidatedfinancial information for an open-ended retail mutualfund will not help an investor evaluate past, presentor future events. Rather, providing additional assets,liabilities and minority interest will make such evaluationmore complex as it will distract from the changes inthe fair value of the underlying investments held by themutual fund that determine the past, present and futurereturns to the investor.Further, to the extent an investment fund were toconsolidate its underlying investments, it would likelydecrease the net asset value of the fund (as the net assetsand liabilities of a underlying entity will generally belower than the publicly quoted price of the shares/unitsof the investment) and therefore would therefore causefurther deviations from the pricing NAV – furtherobscuring the actual fair value return and benefitsreceived by a unit holder from its investment in theinvestment fund.It is the Study Group’s view that preparing consolidatedfinancial statements for any form of investment funddoes not provide decision-useful financial informationfor users of fund financial statements for the purposes ofmaking economic decisions and is in direct conflict withthe overarching principles and guidelines of IFRS.Alternative courses of actionIn light of the shortcomings of preparing consolidatedfinancial statements for investment funds, the StudyGroup has identified the following three courses ofaction that could help resolve the practical impossibilitiesof applying the consolidation principles under IFRSfor investment funds in Canada:1. change the definition of “publicly accountableenterprises” to specifically exclude investment fundssuch that these entities would not be required toadopt IFRS in 2011;2. encourage the Canadian Securities Administrators(CSA) to provide an exemption from preparingconsolidated financial statements for the purposes ofsatisfying any regulatory reporting requirements; or3. encourage the IASB to provide a scope exemptionfor investment funds (and similar-type entities)from applying the consolidation principles underIFRS. The scope exemption contemplated in thisregard is similar to exemptions previously providedby the CICA and FASB in their existing accountingframeworks for consolidation. Refer also to a letter145

Financial Reporting by Investment Fundsfrom the Investment Funds Institute of Canada(IFIC) dated March 20, 2009 to the IASB inresponse to ED 10 seeking a scope exemption forinvestment entities from applying consolidationprinciples under IFRS.FUTURE IFRS DEVELOPMENTSThe accounting requirements for consolidation underIFRS are currently under development by the InternationalAccounting Standards Board (IASB) and areexpected to be revised prior to the date of adoption ofIFRS in Canada. The objective of the IASB’s project onconsolidation is to:•y publish a single IFRS on consolidation to replacethe existing IAS 27 and SIC 12, thereby includingelements of IAS 27 and SIC 12 in a single standard;•y clarify and enhance previous guidance on consolidation,provide additional implementationguidance for areas practitioners previously foundchallenging, and address areas where there weredivergent interpretations in practice; and•y avoid significant changes in basic principles.The project addresses the following aspects:•y A revision of the control definition in order toremove apparent doubt amongst users that oneset of control criteria should be applied to all entitiesunder IFRS. The work on the revised controldefinition will focus on, but is not limited to, theconsolidation of structured entities.•y A requirement for enhanced disclosures aboutconsolidated and unconsolidated entities.The tentative conclusions reached by the IASB in theED that are most relevant for investment funds includethe following:•y Continuance of not providing any scope exemptionfor investment companies (particularly relevant toprivate equity entities and venture capital organizations)from having to apply consolidation principlesto their underlying investment portfolios. The IASBconcluded that the information needs of users arebest served by financial statements that consolidateinvestments under the control of the reportingentity whenever such control exists.•y•y•yA revised definition of control as follows: “A reportingentity controls another entity when the reportingentity has the power to direct the activities ofthat other entity to generate returns for the reportingentity”.The revised definition requires an investment fundto consider both power and returns together. Theparty that has the most to gain or lose from an entity’sactivities is the party most likely to have thepower to direct that entity’s activities.” The term“returns” replaces the original IAS 27 concept of“benefits” to make it more explicit that a reportingentity may obtain positive or negative returns. Theterm “benefits” implied only positive returns.Elaboration of the concept that investment fundsmust consider all relevant facts and circumstanceswhen evaluating control (including quantitativeand qualitative considerations).In April 2008, in response to the global financial crisisand the recommendation of the Financial StabilityForum, the Board decided to accelerate the consolidationproject and to proceed directly to the publicationof an Exposure Draft (“ED”), which was published inDecember 2008.•yElaboration of the concept that an investmentfund need not have the intent to exercise its powerto direct the activities of an entity to control thatentity. It can have power through unexercised votingrights or options to acquire voting rights even if notactively directing the activities of another entity.146

Consolidation by Investment Funds Under IFRS (IAS 27)•y•y•y•y•yElaboration of the concept that if substantive votingrights exist, an investment fund that holds less thanhalf of the voting rights in another entity can stillcontrol that entity (for example, if the investmentfund is the “dominant” shareholder and the balanceof holdings is dispersed and the other shareholdershave not organized their interests in such a way thatthey exercise more votes than the minority holder).For non NI 81-102 funds, this could require a consolidationanalysis of a much broader population ofinvestments which may not have been consideredunder previous IFRS guidance.Clarification that only one party can control anentity and there could be circumstances in whichan entity is not controlled (and therefore not consolidated)by any party.No guidance is provided for evaluating whetherrelated party considerations should be includedin the assessment of control. The current draftof the ED does not provide any criteria to determinewhich party within a related group (i.e. fundfamily) should consolidate where the returns and/orpower to determine activities are not clear (i.e. no“tie-breaker” test).There is no concept of “temporary control”. Duringthe time that control is held and until such time ascontrol ceases, the controlled assets are part of thegroup and should be consolidated.Enhanced guidance is provided for assessingwhether an “agency” relationship exists. Specifically,to the extent that a reporting entity has the abilityto direct the activities of another entity, but wheresuch ability is governed by an agreement, law orfiduciary responsibility that requires the entity (i.e.agent) to act in the best interests of third party•yinvestors in the other entity (i.e. the principle),the reporting entity would not be viewed to havecontrol over the investment. Further, the extentto which the reporting entity receives fees that arecommensurate with the services provided providesfurther evidence that an agency relationship andnot a controlling relationship exists. (These criteriawill be most relevant for fund manager consolidationconsiderations.)Investment funds would be required to discloseadditional information that enables users of financialstatement to evaluate items including, butnot limited to (a) the basis for which the reportingentity maintains control, (b) information aboutthe non-controlling interests in the group’s activities,(c) financial information on any restrictionson assets and liabilities of subsidiaries, and (d) thenature of risks with the reporting entity’s involvementwith entities in which it does not control andlengthy disclosures of risks and other features ofnon-consolidated entities.Comments on the Exposure Draft were due March 20,2009. The next stage in the project is to publish a finalstandard, expected in the second half of 2009 with aneffective date for 2011.The FASB is also currently revising the consolidationrequirements for variable interest entities in accordancewith US GAAP. Both boards agreed to cooperate onan informal basis and decided to monitor each other’sprogress in their respective consolidation projects.Depending on how those projects develop, the Boardsmight decide to conduct the projects jointly at a laterstage.Additional information on the IASB’s consolidationproject is available on the IASB website.147

Appendix FCLASSIFICATION OF INVESTOR EQUITYUNDER IFRS (IAS 1 and IAS 32)This appendix provides a comprehensive analysis of thematters to be considered regarding the classificationof investor equity by investment funds under IFRS. Itsupplements the discussion of investor equity matterspresented in Chapter 3 of this Research Report, includingthe Study Group’s views with regard to Transitionto IFRS — Classification of Investor Equity.The analysis is set out in the following sections:•y Overview;•y Authoritative guidance;•y Current practices;•y Discussion and analysis;•y First time adoption;•y Study Group views; and•y Future IFRS developments.OVERVIEWRegarding the classification of investor equity underIFRS, the issue is twofold.1. There is potential for inconsistency in presentation ofsecurity holder interests either as financial liabilitiesor as equity, depending to a large degree on the formof legal structure. In the Study Group’s view, it ispreferential for comparability purposes to have allinvestment funds follow equity treatment for thepresentation of owners’ capital. However, a literalinterpretation of current IFRS standards couldresult in inconsistent treatment between very similarentities.There two aspects of this issue:•y the requirement that the instrument be in thelowest class of issued capital; and2.•ythe requirement that all classes which are mostsubordinate have identical features.Application of these requirements from a purelylegal perspective (or based on a literal application ofIFRS) may differ from a broader accounting assessmentbased on a consideration of substance overform. Guidance would be beneficial in obtainingconsistency and comparability from one entity toanother.Where securities issued are considered equity, IFRSwould appear to require that the components ofequity (substantively share capital and undistributedretained earnings) be bifurcated and changesduring the period reconciled. The Study Groupbelieves that bifurcation is unnecessary, and potentiallymisleading. However, a literal interpretationof current IFRS standards could require bifurcation.Two aspects of implementing the bifurcationare in focus here – initial adoption at fair value asopposed to historical cost, and use of a weightedaverage methodology.AUTHORITATIVE GUIDANCEInternational•y IAS 1, Presentation of Financial Statements•y IAS 32, Financial Instruments: Presentation(including the February 2008 amendments)•y IFRIC 2, Members’ Shares in Co-operative Entitiesand Similar Instruments•y Framework for the Preparation and Presentation ofFinancial Statements149

Financial Reporting by Investment Funds•yIASB Discussion Paper: Financial Instrumentswith Characteristics of Equity, February 2008(comments due by September 5, 2008)Canadian GAAP•y Section 3240, Share Capital•y Section 3251, Equity•y Section 3863, Financial Instruments – presentation•y EIC-149, Accounting for Retractable or MandatorilyRedeemable Shares(open-ended investment funds are exempt fromrequirements of equity bifurcation and the rollforward of components of equity)United States GAAP•y AICPA Audit and Accounting Guide: InvestmentCompaniesCURRENT PRACTICESInternationalPrior to the IAS 39 amendments in February 2008,typically the issued capital of investment funds waspresented as a liability of the fund. Investment fundsoften did not have “equity” per se. Financial statementslooked similar to the Canadian presentation. There isan apparent discrepancy in typical presentation underIFRS, as distributions and dividends to security holdershave regularly been shown outside the statement ofoperations. Liability treatment would entail presentingthese payments as expenses. Further, as a financial liabilityat fair value, under IAS 39 it would seem appropriateto have the change in the value of net assets charged toincome, to arrive at a nil balance from operations (i.e.net income attributable to equity would be zero).Canadian GAAPIn accordance with Section 3863 (paragraph 3863.15),securities issued by investment funds are presented asequity of the entity. However, scope exemptions inSections 3240 and Section 3251 allow open-endedinvestment funds to present residual net assets attributableto security holders as one balance (refer to CICAHandbook-Accounting references in Exhibit F1). Bifurcationbetween share capital and retained earnings isnot required. Split-share corporations (see description inExample 3 below) typically present preferred shares asa liability and the issued common shares as equity. (Seealso Investor Equity in Chapter 3 for an explanation ofcurrent practice.)United States GAAPSecurities of investment companies are consideredequity. For pass-through entities and partnerships,all elements of equity are aggregated into one balancebecause the results of operations are deemed distributedto each partner (AICPA Audit and Accounting Guide:Investment Companies, paragraph 7.35). Other formsof investment companies should disaggregate componentsof equity including paid-in capital and cumulativedistributable earnings (AICPA Audit and AccountingGuide: Investment Companies, paragraph 7.34).DISCUSSION AND ANALYSIS (includingillustrative examples)Part I – Review of IAS AmendmentsIAS 32, paragraph 11 defines equity as follows:An equity instrument is any contract that evidencesa residual interest in the assets of an entity afterdeducting all of its liabilities.The February 2008 amendments to IAS 32 paragraph11 qualified the definition of financial liabilities asfollows:150

Classification of Investor Equity Under IFRS (IAS 1 and IAS 32)As an exception, an instrument that meets thedefinition of a financial liability is classified asan equity instrument if it has all the features andmeets the conditions in paragraphs 16A and 16B orparagraphs 16C and 16D.The “Basis for Conclusions” includes the followingbackground:•y BC51 The Board agreed with constituents thatmany puttable instruments, despite meetingthe definition of a financial liability, represent aresidual interest in the net assets of the entity. TheBoard also agreed with constituents that additionaldisclosures and adapting the format of the entity’sfinancial statements did not resolve the problem ofthe lack of relevance and understandability of thatcurrent accounting treatment. Therefore, the Boarddecided to amend IAS 32 to improve the financialreporting of these instruments.•y BC55 The Board decided to proceed with proposalsto amend IAS 32 to require puttable financialinstruments that represent a residual interest inthe net assets of the entity to be classified as equityprovided that specified conditions are met. The proposalsrepresented a limited scope exception to thedefinition of a financial liability and a short-term•ysolution, pending the outcome of the longer-termproject on liabilities and equity. In June 2006 theBoard published an exposure draft proposing thatfinancial instruments puttable at fair value thatmeet specific criteria should be classified as equity.BC70 In the interim, the Board concluded thatclassifying as equity the instruments that have allthe features and meet the conditions in paragraphs16A and 16B or paragraphs 16C and 16D wouldimprove the comparability of information providedto the users of financial statements. That is becausefinancial instruments that are largely equivalentto ordinary shares would be consistently classifiedacross different entity structures (e.g., some partnerships,limited life entities and co-operatives). Thespecified instruments differ from ordinary sharesin one respect; that difference is the obligation todeliver cash (or another financial asset). However,the Board concluded that the other characteristicsof the specified instruments are sufficiently similarto ordinary shares for the instruments to be classifiedas equity. Consequently, the Board concludedthat the amendments will result in financial reportingthat is more understandable and relevant to theusers of financial statements.151

Financial Reporting by Investment FundsIAS 32, paragraphs 16A and 16B and excerpts from EIC-149 are set out below, together with Study Groupcomments.IAS 32 Amendments16A A puttable financial instrumentincludes a contractual obligation forthe issuer to repurchase or redeem thatinstrument for cash or another financialasset on exercise of the put. As anexception to the definition of a financialliability, an instrument that includes suchan obligation is classified as an equityinstrument if it has all of the followingfeatures:(a) It entitles the holder to a pro ratashare of the entity’s net assets inthe event of the entity’s liquidation.The entity’s net assets are thoseassets that remain after deductingall other claims on its assets. A prorata share is determined by:(i) dividing the entity’s net assetson liquidation into units of equalamount; and(ii) multiplying that amount by thenumber of the units held by thefinancial instrument holder.Basis for Conclusionand ApplicationGuidanceBC57 The Boarddecided that theinstrument must entitlethe holder to a pro ratashare of the net assetson liquidation becausethe net assets onliquidation represent theultimate residual interestof the entity.CICA EIC 149The Committee reached a consensus on the first issue(Classification of retractable or mandatorily redeemable sharesas equity or liability instruments) that retractable or mandatorilyredeemable shares should be classified as a liability unless all of thefollowing criteria are met:(a) The redeemable shares are the most subordinated of all equitysecurities issued by the enterprise (i.e., along with the enterprise’scommon shares, they represent the “residual equity interest” in theenterprise), and the redeemable shares participate on a pro ratabasis in the residual equity of the enterprise.The Committee reached a consensus that for an instrument torepresent a residual interest, its participation in the investee’searnings should be substantially similar to the enterprise’s commonshares (i.e., the shares should be either common shares or insubstancecommon shares).In-substance common stock (share) is an instrument issued by anentity that has risk and reward characteristics that are substantiallysimilar to that entity’s common stock. An entity should consider thefollowing characteristics when determining whether an instrumentis substantially similar to the entity’s common stock. If the entitydetermines that any one of the following characteristics indicatesthat an instrument is not substantially similar to the entity’scommon stock, the instrument is not in-substance common stock.(a) ….(b) Risks and rewards of ownership. An entity should determinewhether the instrument has risks and rewards of ownershipthat are substantially similar to the entity’s common stock. If aninstrument is not expected to participate in the earnings (andlosses) and capital appreciation (and depreciation) in a mannerthat is substantially similar to common stock, the instrument is notsubstantially similar to common stock. If the entity pays dividendson its common stock and the instrument participates currently inthose dividends in a manner that is substantially similar to commonstock, that is an indicator that the instrument is substantiallysimilar to common stock. Likewise, if the holder has the ability toconvert the instrument into that entity’s common stock withoutany significant restrictions or contingencies that prohibit theholder from participating in the capital appreciation of the entityin a manner that is substantially similar to that entity’s commonstock, the conversion feature is an indicator that the instrumentis substantially similar to the common stock. The right to convertcertain instruments to common stock (such as the exercise ofdeep-in-the-money warrants) enables the holder to participate inthe entity’s earnings (and losses) and capital appreciation (anddepreciation) on a substantially similar basis to common stock.(c) ….]Comments: Securities should entitle holders to pro rata share of net asset on liquidation, i.e. a residual equity interest, and bear the risksand rewards of ownership. Consideration should be given to the calculation as described in paragraph 16A(a) for determininga pro rata share (also see redemption value below). Note that “dividing the entity’s net assets on liquidation into units of equalamount” does not specifically allow for the variation in issue price/NAVPU per series. However, series with varying issue pricesor NAVPU should not automatically fail paragraph (a). The test should consider the implications of varying issue prices in thedetermination of “units of equal amount”. That is, in order to achieve a pro rata liquidation of net assets, both the number ofunits and the proportion of net assets that those units represent needs to be taken into consideration.152

Classification of Investor Equity Under IFRS (IAS 1 and IAS 32)IAS 32 Amendments(b) The instrument is in the class ofinstruments that is subordinate toall other classes of instruments. Tobe in such a class the instrument:(i) has no priority over other claimsto the assets of the entity onliquidation, and(ii) does not need to be convertedinto another instrument before it isin the class of instruments that issubordinate to all other classes ofinstruments.Basis for Conclusionand ApplicationGuidanceBC58 The Boarddecided that theinstrument must be inthe class of instrumentsthat is subordinateto all other classesof instruments onliquidation in order torepresent the residualinterest in the entity.AG14B Whendetermining whetheran instrument is in thesubordinate class, anentity evaluates theinstrument’s claim onliquidation as if it wereto liquidate on the datewhen it classifies theinstrument. An entityshall reassess theclassification if thereis a change in relevantcircumstances. Forexample, if the entityissues or redeemsanother financialinstrument, this mayaffect whether theinstrument in questionis in the class ofinstruments that issubordinate to all otherclasses.CICA EIC 149(a)…For the participation of these shares to be considered substantiallysimilar to the common shares, along with the enterprise’s commonshares, they must be the most subordinated of all equity securitiesissued by the enterprise. Further, the holders should participatein the investee’s residual net assets, or undistributed earnings(after any preferred shares are redeemed), on a pro rata basis.Undistributed earnings should be allocated to the shares based ontheir contractual participation rights. Participation will include theright to participate in all dividends declared, including dividendsthat must be declared upon the occurrence of a specified event,the occurrence of which is subject to management discretion oris not objectively determinable (for example, liquidation of theenterprise or declaration of an “extraordinary” dividend).In-substance common stock (share)(a) Subordination. An entity should determine whether theinstrument has subordination characteristics that are substantiallysimilar to the entity’s common stock. If an instrument has asubstantive liquidation preference over common stock, it is notsubstantially similar to the common stock. However, certainliquidation preferences are not substantive. Accordingly, an entityshould determine whether a liquidation preference is substantive.For example, if the instrument has a stated liquidation preferencethat is not significant in relation to the purchase price of theinstrument, the liquidation preference is not substantive. Further,a stated liquidation preference is not substantive if the entity haslittle or no subordinated equity (for example, common stock) froma fair value perspective. A liquidation preference in an entity thathas little or no subordinated equity from a fair value perspective isnon-substantive because, in the event of liquidation, the instrumentwill participate in substantially all of the entity’s losses.(b) …(c) …]Comments: Securities should be in the class of instruments that is most subordinate. “When determining whether an instrument is inthe subordinate class, an entity evaluates the instrument’s claim on liquidation as if it were to liquidate on the date whenit classifies the instrument.” Several classes and/or series could be equally and most subordinate. There can not be priorityupon liquidation. Under EIC 149, liquidation preferences which are not substantive would not preclude an instrument frombeing most subordinate (e.g. Founder’s shares). Consistent with the EIC reference to “substantive” liquidation preferences,the Basis for Conclusions (BC70) indicates that if the instruments are “largely equivalent to ordinary shares”, they shouldreceive treatment consistent with common shares. Liquidation preferences that are not substantive to the instrument’s claimto a pro rata share of residual equity should not preclude equity treatment.153

Financial Reporting by Investment FundsIAS 32 Amendments(c) All financial instruments in the classof instruments that is subordinateto all other classes of instrumentshave identical features. Forexample, they must all be puttable,and the formula or other methodused to calculate the repurchase orredemption price is the same for allinstruments in that class.Basis for Conclusionand ApplicationGuidanceBC59 The Boarddecided that allinstruments in the classthat is subordinateto all other classes ofinstruments must haveidentical contractualterms and conditions. Inorder to ensure that theclass of instruments asa whole is the residualclass, the Board decidedthat no instrumentholder in that class canhave preferential termsor conditions in itsposition as an owner ofthe entity.CICA EIC 149(b) The redemption feature is extended to 100 percent of thecommon shares (and/or in-substance common shares), and thebasis for determination of the redemption price is the same for allshares.The Committee reached a consensus that the redemption featuremust be extended to 100 percent of the shares, be they commonshares and/or in-substance common shares. There cannot be aclass of common shares with the same degree of subordinationthat is not entitled to the same redemption feature.The Committee also reached a consensus that the basis fordetermination of the redemption price is the same for all shares.However, the redemption price may be determined based on thefair value of the redeemable shares at the redemption date, or itmay be based on a formula (which might be book value) that allthe shareholders agree on as being equitable, provided the samebasis or formula is applied to all of the redeemable shares.AG14C An instrumentthat has a preferentialright on liquidationof the entity is not aninstrument with anentitlement to a prorata share of the netassets of the entity. Forexample, an instrumenthas a preferentialright on liquidation ifit entitles the holderto a fixed dividend onliquidation, in additionto a share of the entity’snet assets, when otherinstruments in thesubordinate class witha right to a pro ratashare of the net assetsof the entity do nothave the same right onliquidation.(c) The shares have no preferential rights relative to otherclasses of shares of the enterprise that have the same degree ofsubordination.The Committee reached a consensus that all of the redeemableshares should include substantially similar characteristics to theenterprise’s common shares; for example, they should not includeany substantive liquidation preferences or dividend distributionpreferences.(d) The redemption event should be the same for all the sharessubject to the redemption feature.The Committee reached a consensus that the redemption eventshould be the same for all the shares subject to the redemptionfeature. However, this criterion does not require all of the sharesto be redeemed at the same time. Rather, it requires that thesame event or events trigger redemption rights for all shares, forexample, redemption on the resignation, termination, retirement ordeath of the shareholder.The Committee noted that, in accordance with paragraph 3861.16,when an event occurs that triggers the redemption right, the sharesshould be reclassified as liabilities.Comments: Securities in the most subordinate class(es) of instruments should have identical contractual terms and conditions. “Forexample, they must all be puttable, and the formula or other method used to calculate the repurchase or redemption priceis the same for all instruments in that class.” Under EIC 149, there is a similar requirement that the “determination of theredemption price is the same for all shares”. Absent unusual provisions, most investment funds have similar methods tocalculate NAVPU and the formula or methodology is consistent between series and/or classes of a fund (i.e. the formula isthe same, the ending NAVPU are different). The existence of fee differences between series does not impact the “methodused to calculate the repurchase or redemption price” and therefore should not preclude equity treatment.Consideration should be given to differences in distributions/dividends between series and whether the differences give riseto preferential rights to one or more series.154

Classification of Investor Equity Under IFRS (IAS 1 and IAS 32)IAS 32 Amendments(d) Apart from the contractualobligation for the issuer torepurchase or redeem theinstrument for cash or anotherfinancial asset, the instrumentdoes not include any contractualobligation to deliver cash oranother financial asset to anotherentity, or to exchange financialassets or financial liabilities withanother entity under conditionsthat are potentially unfavourable tothe entity, and it is not a contractthat will or may be settled in theentity’s own equity instruments asset out in subparagraph (b) of thedefinition of a financial liabilityBasis for Conclusionand ApplicationGuidanceComments: Should not be a determining factor for most investment funds.(e) The total expected cash flowsattributable to the instrumentover the life of the instrument arebased substantially on the profit orloss, the change in the recognisednet assets or the change in thefair value of the recognisedand unrecognised net assets ofthe entity over the life of theinstrument (excluding any effectsof the instrument).Comments: Should not be a determining factor for most investment funds.16B For an instrument to be classified asan equity instrument, in addition to theinstrument having all the above features,the issuer must have no other financialinstrument or contract that has:(a) total cash flows based substantiallyon the profit or loss, the changein the recognised net assets orthe change in the fair value of therecognised and unrecognised netassets of the entity (excludingany effects of such instrument orcontract) and(b) the effect of substantiallyrestricting or fixing the residualreturn to the puttable instrumentholders.For the purposes of applying thiscondition, the entity shall not considernon-financial contracts with a holder ofan instrument described in paragraph16A that have contractual terms andconditions that are similar to thecontractual terms and conditions of anequivalent contract that might occurbetween a non-instrument holder andthe issuing entity. If the entity cannotdetermine that this condition is met, itshall not classify the puttable instrumentas an equity instrument.Comments: Should not be a determining factor for most investment funds.CICA EIC 149In-substance common stock (share)(a) …(b) …(c) Obligation to transfer value. An instrument is not substantiallysimilar to common stock if the entity is expected to transfersubstantive value to the holder and the common shareholders donot participate in a similar manner. For example, if the instrumenthas a substantive redemption provision (for example, a mandatoryredemption provision or a non-fair value put option) that isnot available to common shareholders, the instrument is notsubstantially similar to common stock.155

Financial Reporting by Investment FundsPart II – Principles-Based Analysis1. Simply stated, an investment fund is a pooling ofassets which is professionally managed for the benefitof the providers of capital. Issued units of capitalare usually redeemable upon demand (“puttable”)by the owners at the current fair value. Increases ordecreases in the value of the assets are attributable tothe capital providers. The manager acts in a fiduciarycapacity on behalf of the capital providers for a fee.The capital providers are owners of the entity as theybear the risks and rewards of the investment activity.Certain legal or other operational requirementsmay require varying features on multiple classes ofequity (e.g. “founder’s shares” or varying fee levels).However, fundamentally, the capital providersretain the risks and rewards associated with theownership of the net assets of the fund and usuallyrank pari passu in the ultimate distribution ofresidual net assets. “Founder’s shares” are usuallythe result of business law requirements only and donot participate in the increase or decrease in value ofthe fund’s assets (i.e. no risks or rewards normallyassociated with ownership).ties that have puttable shares have contractualarrangements that dictate the redemption value ofthose shares. Fair value is not left up to market participantsto determine in place of a stock exchangeprice based on publicly-available information.The information requirements for holders ofpublicly-traded companies are different than thosefor holders of puttable instruments. In the absenceof an established trading value, holders of publiclytradedshares need information in order to estimatethe fair value at which to trade shares. Since thebalance sheets of most of these companies havenot historically been at fair value, the sought afterinformation includes, but is not limited to, earningshistory, cash flows, dividend pay-out history andretained earnings. This information is necessaryfor market participants to evaluate and estimatethe current fair value of shares (e.g. price/earningsratios). However, for an investment fund, the fairvalue of the residual net assets, and therefore theputtable value at which to purchase or redeemshares, is readily available.2.Therefore, in the Study Group’s view, the providersof capital for an investment fund that collectivelyshare in the gains and losses associated with itsinvestment activity bear the risks and rewards ofownership and therefore should be considered thefund’s owners and the units of capital should betreated as equity. Minor differences in capital structure(e.g., founder’s shares or fee differences) whichdo not significantly alter the liquidation preferencesof the owners who collectively share in the gains orlosses of the fund should not impact the determinationof equity treatment. It is more important tohave comparable and consistent treatment as equityacross all types of investment funds.Open-ended investment funds are fundamentallydifferent from publicly-traded companies. Enti-3.Therefore, the Study Group believes that thecomponents of net assets/equity, such as retainedearnings, are not relevant or useful to investmentfunds. Bifurcation of net assets/equity into itscomponent parts does not provide the financialstatement users with relevant information. Further,because of the differences in capital structure, taxlaw and operations, the component parts of equityare not comparable between traditional publiclytradedentities and investment funds. It is moreappropriate to compare the financial statementsof an investment fund with other similar vehicles,such as pension plans or funds.IAS 1 presents the premise that “The application ofIFRS…is presumed to result in financial statementsthat achieve a fair presentation (paragraph 15).156

Classification of Investor Equity Under IFRS (IAS 1 and IAS 32)Further, “In the extremely rare circumstances inwhich management concludes that compliance witha requirement in an IFRS would be so misleadingthat it would conflict with the objective of financialstatements set out in the Framework, the entity shalldepart from that requirement in the manner set outin paragraph 20... .(paragraph 19) Therefore, wheresecurities of an investment fund have been classifiedas equity under amended IAS 32, net assets shouldbe bifurcated and its components reconciled, unlessit is determined that the result would be so misleadingas to conflict with the Framework.Qualitative characteristics of financialstatements (Framework, paragraphs 24 - 46)Equity versus Liability treatment for Capital•y UnderstandabilityCapital providers of an investment fund are morelikely to understand financial statements wheretheir shares are presented as equity, than a set withliability treatment and potentially no equity (e.g.liability treatment results in a “nil” gain/loss fromoperations).•y•yRelevance, specifically MaterialityEquity treatment provides the most relevantpresentation for the results of operations for capitalproviders. Liability treatment results in a confusingpresentation for results of operations. (Distributionsand change in fair value of liability are deductedfrom operations to present a nil return for theperiod.)ComparabilityIt is not beneficial to have inconsistent presentation(i.e. equity vs. liability) between investment fundstructures, and potentially from one period toanother, as a result of minimal capital differences.This is a situation where legal form is given priorityover the substance of the ownership structure indetermining appropriate presentation. Inconsistenttreatment between investment funds would severelylimit comparability between similar entities (e.g.one series unit trust versus the same fund in acorporate structure).Bifurcation of Equity•y UnderstandabilityBifurcation of net assets will not be readilyunderstandable because it obfuscates the net valueattributable to security holders (i.e. the puttable valueof the shares) by presenting additional, confusingand potentially misleading information aboutthe fair value of residual ownership in the entity.The split between share capital and undistributedretained earnings has no predictive value in assessingthe economic position of the investment fund(a fundamental difference from publicly-tradedentities). Further, any split presented could confuseusers as it would not correlate to the capital andaccumulated retained earnings experience for anyspecific security holder. Users might misinterpretshare capital as the puttable value of those sharesupon redemption.•y•yRelevance, specifically MaterialityOmission of the component parts of net assetswould not influence the economic decisions ofusers of the financial statements, as evidenced bythe lack of such disclosure in financial statementsof investment funds prepared in accordance withCanadian GAAP.ReliabilityIt is likely that the historical information necessaryto accurately split net assets between the componentparts is unavailable, or not reliably estimated.157

Financial Reporting by Investment Funds•y•y•yComparabilityThe CICA believed it was appropriate to presentthe security holders’ residual interest in the netassets of an open-ended investment fund withoutbifurcation between share capital and retainedearnings. Financial statement presentation forinvestment funds should be consistent with similarvehicles such as pension plans.Constraints on relevant and reliable information,specifically the cost/benefit balanceIt is expected that the cost to bifurcate the componentparts of net assets will be excessive and historicalinformation may be impossible to recreate. Sincethe bifurcation of equity is not relevant to the usersof open-ended investment fund financial statements(as opposed to publicly-traded entities), the cost toprovide this information would exceed its perceivedbenefit.True and fair view/fair presentationOmission of the bifurcation of equity for openendedinvestment funds does not impair thefair presentation of their financial statements (asevidenced by the Canadian history as well as thepresentation which results from following liabilityaccounting for capital).Based on the above, in the Study Group’s view, literalapplication of IAS 1 and IAS 32 could result in potentiallymisleading presentation. Therefore, a principlesbasedapproach should be followed.Part III – Potential Application of Current IFRS– Classification of issued securitiesHistorically, investment funds under IFRS have classifiedtheir units/shares as liabilities under IAS 32 basedon a definition of financial liability. The February 2008amendments to IAS 32 added an exception for puttableinstruments that meet the requirements of paragraphs16A and 16B or 16C and 16D.The key is that the following five characteristics listed inparagraph 16A must all be present:(a) The instrument entitles the holder to a pro ratashare of the entity’s net assets in the event of theentity’s liquidation. [Pro rata share is defined.](b) The instrument is in the class of instruments that issubordinate to all other classes of instruments.(c) All financial instruments in the class of instrumentsthat is subordinate to all other classes of instrumentshave identical features.(d) The instrument does not include any contractualobligation to deliver cash or another financial assetto another entity, or to exchange financial assetsor financial liabilities with another entity underconditions that are potentially unfavourable to theentity.(e) Total expected cash flows attributable to the instrumentover the life of the instrument are basedsubstantially on the profit or loss, the change inrecognized net assets or the change in the fair valueof the recognized and unrecognized net assets ofthe entity over the life of the instrument.If all of the characteristics are present, the instrument isaccounted for as equity. If the entity has an “unconditionalright to refuse redemption”, then equity treatmentis appropriate (IFRIC 2, paragraph 7).Examples 1 to 6 set out below illustrate the potentialresults under a literal interpretation of the IFRSrequirements.158

Classification of Investor Equity Under IFRS (IAS 1 and IAS 32)Example 1A mutual fund unit trust issues one class of units. Allunits share equally in net assets of the fund.Conclusion: The units are equity.Example 2The same fund is converted to a corporation and trustunits are converted to mutual fund shares and 100common shares are issued for $100 for business lawpurposes. Mutual fund shares have rights to the netassets; common shares do not. The manager holds thecommon shares.Conclusion: Mutual fund shares might be consideredfinancial liabilities and the common shares equity. Asubordinated class of issued capital may preclude equitytreatment.Example 3A corporation issues multiple-classes of shares (redeemableupon demand at NAV) with each class having a distinctpool of assets attributable to that class. In addition,for corporate law purposes, the corporation also issuesa nominal value of common shares to the manager (e.g.$100). There are multiple series of shares within eachclass, each having varying fees and purchase options.Within each series and class, shares rank equally.Conclusion. For financial statements of the corporation asa whole, mutual fund shares might be considered liabilitiesand common shares considered equity because commonshares are the most subordinate shares issued by the corporation.However, potentially, separate financial statementsprepared for the individual classes of shares of the corporationmight be able to present mutual fund shares as equity,because at the class level, the mutual fund shares are themost subordinate.Assumption. Varying purchase options and expenselevels between the series of classes do not constitutebreach of the requirement that the securities have“identical features”. Other than expenses, all seriesrank pari passu (i.e. same or similar redeemableupon-demandfeatures, voting rights, share ofresidual assets in the event of liquidation, etc.) andfollow the same formula to determine redemptionrights.Example 4A corporation issues preferred shares with periodicredemption privileges linked to the value of the fundassets, and nominal common shares (“split-sharecorporation”).Conclusion. Treatment under IFRS is expected to be verysimilar to current Canadian practice: preferred shareswould be presented as liabilities and common shares wouldbe equity.Example 5Closed-end funds where issued shares/units are mostsubordinated class.Conclusion. Treatment under IFRS is expected to be verysimilar to current Canadian practice: shares/units wouldbe equity.Example 6Limited partnerships issue partnership units which aretied to the residual net assets and the general partnerholds a separate, subordinated class of units.Conclusion: Treatment under IFRS is expected to result inlimited partnership units being financial liabilities, andthe general partner’s units being classified as equity.Part IV – Potential application of current IFRS– presentation of residual interest in investmentfundIf the instrument is accounted for as equity, IAS 1appears to require a statement of changes in equity,which includes separate presentation of retained earningsand share capital (IAS 1, paragraphs 106 and 108).Tracking of share capital separately from retained earningswould require the ability to appropriately release159

Financial Reporting by Investment Fundspaid-in share capital and retained earnings upon theredemption of shares/units.This may be possible using certain simplifying assumptions/estimatessuch as the following:•y Upon conversion to IFRS, all existing issued capitalis assigned a cost equal to current fair value. Thus, inthe opening balance sheet upon conversion, 100%of net assets would be allocated to share capital andzero to retained earnings. This would require anamendment to IFRS 1, but would avoid the practicalissues due to lack of historical information inorder to generate actual split of balances.•y•yRelease of paid in capital would be based onweighted average methodology starting from conversion.Issued capital would be added to sharecapital balance at issue price (NAVPU). Securitieswould be released upon redemption based on thecurrent weighted average cost. Premium or discount(excess or shortfall of NAVPU over weightedaverage cost of capital per security) would becharged to retained earnings.Simplified calculation could be used for releasefrom share capital for financial statement disclosurepurposes. It could be possible to implementsystem changes to incorporate daily calculationsof weighted average cost of capital and automaticpostings between capital and retained earnings forredeemed securities. However, since the calculationsare only required for financial statements disclosurepurposes, it might be acceptable to consider simplifyingassumptions for financial reporting purposes.In order to minimize the system changes requiredto release share capital, monthly or weekly calculationscould be used to determine the weightedaverage cost of capital and amounts to be chargedto share capital and retained earnings.Obtaining the actual historical data required to accuratelybifurcate share capital (and thereby calculate theaverage cost per share per class) and retained earningswould be impracticable or impossible for most openendedinvestment funds.If securities are treated as liabilities, there is no requirementfor a statement of changes in equity. Distributionsand dividends paid to security holders should beexpensed (IFRIC 2, paragraph 11) and the change inthe fair value of the liability should be charged to operationsin accordance with IAS 39.FIRST TIME ADOPTIONObtaining the actual historical data required to accuratelybifurcate share capital and retained earnings wouldbe impracticable or impossible for most open-endedinvestment funds. This could be mitigated if, upon conversionto IFRS, all existing issued capital is assigneda cost equal to fair value. Thus, opening balance sheetposition upon conversions will be 100% of net assets toshare capital and zero to retained earnings. This wouldrequire an amendment to IFRS 1, but would avoid thepractical issues due to lack of historical information inorder to generate actual split of balances.STUDY GROUP VIEWSPuttable units or shares of an open-ended investmentfund should be equity. Investment funds should consistentlyfollow the equity treatment regardless of minorcapital structure differences (e.g. founder’s shares).The components of equity within the financial statementsof publicly traded companies assist market participantsin arriving at a fair value at which to exchangeshares in an open market. The components of equitydo not serve the same purpose for investment funds.Open-ended investment funds issue and redeem capitalat fair value based on the fund’s governing documents.Market participants more commonly use historical160

Classification of Investor Equity Under IFRS (IAS 1 and IAS 32)rates of return and other investment related metrics inassessing the appropriateness of investment in a fund.Therefore due to the facts and circumstances of investmentsfunds, the components of equity do not have thesame meaning or relevance.The priorities for the investment fund industry shouldbe:•y Consistency. The requirement to be the most subordinatedcapital issued will likely result in inconsistenttreatment based on different legal structures.Guidance should be provided that is focused onsubstance over form.•yBalance of cost/benefit. Efforts should be made toavoid bifurcation. Failing that, simplifying assumptionsshould be sought, including potential amendmentsto IFRS 1.Alternative courses of action1. Seek international industry perspective, includingaudit firms, on the application of “most subordinated”class of equity and “identical features”. The goal isconsistent, comparable practice (preferably equitytreatment) based on substance of ownership ratherthan form.2.Seek agreement that bifurcation of equity is notrequired for investment funds.FUTURE IFRS DEVELOPMENTS•y Monitor the financial statements issued by internationalfunds as amendments to IAS 32 are firstapplied in 2009.•y Monitor the IASB’s consideration of the responsesto the February 2008 Discussion Paper (for whichcomments were due September 5, 2008). The IASBWork Plan of April 2009 indicates that an exposuredraft is to be issued in the fourth quarter of 2009,with publication of a final document in 2011.Exhibit F1CICA Handbook-Accounting ReferencesSection 3863, Financial Instruments – presentation, paragraph 15Some financial instruments, such as mutual fund units,partnership interests and certain types of shares in co-operativeorganizations, provide for payments to the holder of a prorata share of the residual equity of the issuer. These financialinstruments may require redemption in specified circumstancesthat are certain to arise, such as the death of the holder, but donot impose an obligation on the issuer to deliver or exchangeany specific amount of financial assets in advance of redemption.On issuance, such financial instruments constitute an equityinstrument of the issuer. When the holder subsequently choosesto withdraw its equity and is entitled to do so, the issuer maybecome obliged to make a payment that is fixed or determinableas to amount and timing. This obligation satisfies the definitionof a financial liability and is presented as such.Section 3240, Share Capital, paragraph 1This Section establishes standards for disclosure of sharecapital and acquisition and redemption of shares. Foradditional standards, see FINANCIAL INSTRUMENTS —DISCLOSURE AND PRESENTATION, Disclosure, Section 3861,or FINANCIAL INSTRUMENTS — DISCLOSURES, Section 3862.The requirements of this Section dealing with acquisition andredemption of shares need not be applied by open-endedinvestment companies. (Open-ended investment companiesare described in ACCOUNTING GUIDELINE AcG-18, InvestmentCompanies.)3.Failing #2, seek an IFRS 1 exemption to permitthe use of fair value at conversion as the cost forshare capital. Opening retained earnings uponconversion would be zero. The exemption should bebased on a lack of historical information and theimpracticability of recreating such records becauseit was not required under previous GAAP (notindustry specific).Section 3251, Equity, paragraph 2This Section need not be applied by open-ended investmentcompanies. (Open-ended investment companies are described inACCOUNTING GUIDELINE AcG-18, Investment Companies.)161

GLOSSARYThe terms defined in this Glossary are used in theResearch Report or are commonly used in the investmentfunds industry and may be useful to the reader.Terms in bold within definitions are separately definedin the Glossary.AcronymsADR – American Depository ReceiptAIF – Annual Information FormAIMA – Alternative Investment ManagementAssociationAIMR-PPS – Association for Investment Managementand Research Performance Presentation StandardsCBOE – Chicago Board Options ExchangeCCIR – Canadian Council of Insurance RegulatorsCCO – Chief Compliance OfficerCDS – Canadian Depository for SecuritiesCEO – Chief Executive OfficerCFAI – Chartered Financial Analysts InstituteCFO – Chief Financial OfficerCFTC – Commodity Futures Trading CommissionCICA – The Canadian Institute of CharteredAccountantsCIFP – Canadian Institute of Financial PlanningCompCorp – Canadian Life and Health InsuranceCompensation CorporationCRA – Canada Revenue AgencyCSA – Canadian Securities AdministratorsDTC – Depository Trust CompanyGAAP – Generally Accepted Accounting PrinciplesGDR – Global Depository ReceiptGIPS – Global Investment Performance StandardsIFIC – The Investment Funds Institute of CanadaIIROC – Investment Industry Regulatory Organizationof Canada (The Investment Dealers Association ofCanada and Market Regulation Services Inc. combinedon June 8, 2008.)IOSCO – International Organization of SecuritiesCommissionsIRC – Independent Review CommitteeITA – Income Tax Act (Canada)MBS – Mortgage-Backed SecurityMFDA – Mutual Fund Dealers Association of CanadaMRFP – management report of fund performanceprepared in accordance with NI 81-106163

Financial Reporting by Investment FundsNAV – Net Asset ValueNYSE – New York Stock ExchangeNI 41-101 – National Instrument 41-101 – GeneralProspectus RequirementsNI 51-102 – National Instrument 51-102 – ContinuousDisclosure ObligationsNI 52-107 – National Instrument 52-107 – AcceptableAccounting Principles, Auditing Standards and ReportingCurrencyNI 52-201 – National Instrument 52-201 – DisclosureStandardsNI 81-101 – National Instrument 81-101 – MutualFund Prospectus DisclosureNI 81-105 – National Instrument 81-105 – MutualFund Sales PracticesNI 81-106 – National Instrument 81-106 – InvestmentFund Continuous DisclosureNI 81-107 – National Instrument 81-107 – IndependentReview Committee for Investment FundsOSA – Ontario Securities ActOSC – Ontario Securities CommissionOSFI – Office of the Superintendent of Financial Institutions(federal)PBCR – Provincial Business Corporation RegulatorsTSX – Toronto Stock ExchangeNI 81-102 – National Instrument 81-102 – MutualFunds164

Glossaryadviser. See investment adviser.advisory and service fee (contract). The fee charged toan investment fund by its investment adviser, generallyunder a contract approved by vote of a majority of thefund’s shareholders / unitholders. The fee is generallycalculated as a percentage of the average net assets, andmay also include an additional bonus or penalty basedon performance. (See incentive compensation.)alpha. A numerical value indicating a fund’s riskadjustedexcess return relative to a benchmark. It alsomeasures a fund manager’s “value added” in selectingindividual securities.amortization. In the context of a bond held as an asset,the systematic reduction of the difference between theprice of a bond purchased at a discount or premium andthe par value of the bond.amortized cost. The amount at which the financial assetor financial liability is measured at initial recognitionminus principal repayments, plus or minus the cumulativeamortization using the effective interest methodof any difference between that initial amount and thematurity amount, and minus any reduction (directly orthrough the use of an allowance account) for impairmentor uncollectability.annual information form (AIF). A disclosure documentintended to provide disclosure about different mattersthan those discussed in the prospectus or simplifiedprospectus. A mutual fund follows Form 81-102F2,whereas a non-mutual fund that meets the definition ofan investment fund looks to Part 9 of NI 81-106.annual report. A financial report sent yearly to a publiclyheld firm’s shareholders.arbitrage. The simultaneous purchase and sale ofthe same (or equivalent or related) securities to profitfrom short-term price differences prevailing in separatemarkets.ask price. The lowest declared price for a security that apotential seller is willing to receive at a point in time.as-of transaction. A purchase, redemption or exchangetransaction processed on a retroactive basis. The effectivedate of the trade will be prior to the processing date.The difference in the share price between the “as-of”trade and the processing date could result in a gain orloss to a series (or shareholder) which may increase ordilute the assets of the series or any dividends paid bythe series during the accumulation period.asset allocation. Apportioning of investment fundsamong categories of assets, such as cash equivalents,stocks, and fixed income instruments.averaging. (See dollar cost averaging.)back-end load. A charge imposed on a shareholder /unitholder on redemption of shares / units. The chargegenerally is calculated on a sliding scale basis whichdeclines over the duration of ownership. (See contingentdeferred sales charge.)balanced fund. An investment fund that invests invarying proportions of equity, fixed income and moneymarketsecurities for growth, income and temporarycash holding.bank rate. The rate at which the Bank of Canada makesshort-term loans to chartered banks and other financialinstitutions, and the benchmark for prime rates set byfinancial institutions.165

Financial Reporting by Investment Fundsbankers’ acceptance. Short-term bank paper with therepayment of principal and payment of interest guaranteedby the issuer’s bank.basis point. A measure of interest rates. One basis pointequals one hundredth of one percent (0.01%), or 10cents per $1,000 per annum.bear market. A prolonged period in which investmentvalues decline, usually accompanied by pessimisticmarket expectations.bear. A person who thinks that stock market prices willfall.bearer bond. A long-term debt instrument that is notregistered to a particular owner. The rights of ownershipare retained by the holder of the instrument.beta. A statistical term used to illustrate the relationshipof the price of an individual security or mutual fundunit to similar securities or financial market indexes. Afund with a beta greater than 1.0 is more volatile thanthe market, while a fund with a beta of less than 1.0 isless volatile than the market.bid price. The highest declared price for a security that apotential buyer is willing to pay at a point in time.bifurcation. The separation of underlying factors relatingto a transaction initially measured in one currencyand reported in a second currency. Any differencebetween originally recorded amounts and currentlyconsummated or measured amounts can be split intochanges in the foreign exchange rate and changes inforeign currency denominated fair value.block trading. The acquisition or disposition of largequantities (10,000 shares or more) or “blocks” of sharesby a broker-dealer to facilitate the execution of buy andsell orders of customers, usually institutions. Often, abroker-dealer absorbs a portion of the order for its ownaccount and risk.blue chip. Common shares of a nationally knowncompany that has a long record of profits, growth anddividend payments and a reputation for quality management,products and services.board lot. A standard number of shares for tradingtransactions (usually 100 shares), although the numberof shares varies with the price level of the security andthe exchange it trades on.bond discount. The difference between the face amountof a bond and the lower price paid by a buyer.bond fund. An investment fund that invests primarilyin fixed income securities, with the investment objectiveof producing income.bond premium. The difference between the face amountof a bond and the higher price paid by a buyer.bond. A debt instrument with the promise to pay aspecified amount of interest and to return the principalamount on a specified maturity date.book (entry) shares / units. Investment fund share/ unit ownership evidenced by records maintained bya transfer agent rather than by physical share / unitcertificates.book value. The value of net assets that belong to acompany’s shareholders, as stated on the balance sheet.breakpoint. A volume of securities purchases that triggersa lower sales charge to take effect. It may also referto the total amount of fund assets, which results in alower investment advisory fee being charged.166

Glossarybroker. An agent, often a member of a stock exchangefirm or an exchange member, who executes orders tobuy or sell securities or commodities and charges acommission.bull market. A period in which investment valuesincrease, usually accompanied by optimistic marketexpectations.bull. A person who thinks that stock market prices willrise.bunching. This occurs when an investment advisergroups transactions in the same security for severalclients to obtain lower commission charges and transactioncosts.buying on margin. Purchasing a security partly withborrowed money.call option. A contract that entitles the holder to buy(call), at his or her option, a specified number of units ofa particular security at a specified price (exercise price)either on (the European-style) or at any time until (theAmerican-style) the stated expiration date of the contract.The option, which is transferable, is bought in theexpectation of a price rise above the strike price. If theprice rises, the buyer exercises or sells the option. If theprice does not rise, the buyer lets the option expire andloses only the cost of the option. There is a listed andalso an over-the-counter market in options. During theexistence of an option, the exercise price and underlyingnumber of shares are adjusted on the exercise date forcash dividends, rights, and stock dividends or splits.(See put option.)callable. Redeemable by the issuer before the scheduledmaturity. The issuer usually must pay the holders apremium price if such a security is retired early. Suchsecurities are usually called when interest rates fall somuch that the issuer can save money by floating newbonds at lower rates.capital gain or loss. The profit or loss realized from thesale of capital assets, such as portfolio securities.capital gains distribution. Dividends paid to investmentfund shareholders / unitholders as a result of netcapital gains realized on the disposition of portfoliosecurities or in the case of fund-on-fund investments,received from capital gain distributions of underlyingfunds.capital stock. All ownership shares of a company, bothcommon and preferred.capital. Generally, the money or property used in a business.The term is also used to apply to cash in reserve,savings, or other property of value. capitalization. Thetotal amount of all securities, including long-term debt,common and preferred stock, issued by a company.cash equivalents. Short-term, highly liquid investmentsthat are readily convertible to known amounts of cashand which are subject to an insignificant risk of changesin value.cash sale. A sale with the same trade and settlementdates. The selling broker-dealer must be able to makedelivery of the security sold on the trade date. The customerwho is selling usually receives a discounted priceon the sale for this special service.cash. Refers to cash on hand and on deposit, in bothdomestic and foreign currency. It excludes cash subjectto restrictions that prevent its use for current purposesor cash appropriated for other than current purposes,unless such cash offsets a current liability.167

Financial Reporting by Investment Fundscertificate. A document providing evidence of ownershipof a security such as a stock or bond.certificates of deposit. Negotiable savings instrumentsissued by a bank or other deposit-taking institutionagainst funds deposited therewith. The instrumentscarry a specified rate of interest and maturity date.churning. The practice of executing unnecessarypurchases and sales of portfolio securities in a discretionaryclient account for the purpose of generatingcommissions.clearing agency. A central location at which securitytransactions of members are matched to determine theminimum quantities to be received or delivered.closed-end investment fund. An investment fundhaving a fixed number of nonredeemable shares / unitsoutstanding. The shares / units are traded similarly tothose of public corporations.collateralized mortgage obligation (CMO). A mortgage-backedbond that separates mortgage pools intodifferent classes called tranches. Each tranche is thensold separately. Repayment of each tranche is completedin the order specified in the prospectus.commercial paper. Short-term, unsecured, promissorynotes issued by banks and creditworthy corporations.Commercial paper is usually sold at a discount fromface value.Commodity Futures Trading Commission (CFTC).An agency established by the US Congress to regulateU.S. commodity futures markets and futures commissionmerchants. Among other things, this agencyestablishes rules governing the minimum financial,reporting and audit requirements of its members. Itsfunction is similar to that performed by the SEC inregulating broker-dealers in securities and various securitiesmarkets.common (collective) trust fund. An account maintainedby the trust department of a bank or trustcompany for the pooling of investment funds of its owntrust account customers.common stock. A security representing ownership of acorporation’s assets. Voting rights are normally accordedto holders of common stock.compounding. The process by which income is earnedon income that has previously been earned. The endvalue of the investment includes both the originalamount invested and the reinvested income.constating documents. Legal documents (such as acharter, declaration of trust, or articles of incorporation)that establish the powers of an entity.contingent deferred sales charge. A charge imposedagainst a shareholder / unitholder on redemption ofshares / units. The charge generally is calculated on asliding scale basis, which declines over the duration ofownership. (See back-end load.) contract difference.The difference between the contract and the marketvalues of commodities.contractual plan. An arrangement whereby an investorcontracts to purchase a given amount of a security bya certain date and agrees to make partial payments atspecified intervals.control. A concept that is much broader than thetraditional internal control over financial reporting,compliance and asset safeguarding. It encompasses all ofthe elements of an organization – its resources, systems,processes, culture, structure and tasks – that, taken168

Glossarytogether, support people in achieving the organization’sobjectives.convertible security. A security that is convertible intoanother security based on a conversion rate, for example,a convertible preferred share that is convertible intocommon shares on a two-for-one basis.corporate actions. An action by a company’s board ofdirectors, including dividend declarations, reorganizations,mergers, and acquisitions.corporate bonds. Debt instruments issued by corporationsas distinct from those issued by government agenciesor municipalities.corporation. A legal business entity created underfederal or provincial statutes. Because the corporationis a separate entity from its owners, shareholders haveno legal liability for its debts. coupon rate. The annualinterest rate of a bond.coupon stripping. The practice of separating a bondcertificate into its capital and its interest coupons, whichare then sold separately.current value. The market price or fair value of a securityat the reporting date.current yield. The annual rate of return that an investorpurchasing a security at its market price would realize.This is the annual income from a security divided bythe current price of the security. It is also known as thereturn on investment.custodian. A bank, trust company or, less frequently, amember of a national securities exchange, that is legallyresponsible for receiving delivery and for the safekeepingof an investment fund’s securities and other assets.daily limits. Limits established by exchanges to controlfluctuations in the prices of futures contracts or otherinstruments during a trading session (other than thecurrent month’s delivery contracts).dealer. A person or firm acting as a principal ratherthan as an agent in buying and selling securities. Mutualfund shares or units are generally sold through dealersexcept where the fund sponsor has its own captive salesforce (for example, a bank, trust company or life insurancecompany), or where the fund sponsor uses a directmarketing approach.debenture. A bond unsecured by any pledge of property.It is supported by the general credit of the issuingcorporation.declaration date. The day on which the board of directorsor the fund manager decides to make a dividend ordistribution payment on a specified date to shareholdersor unitholders of record on a specified record date. Theamount of the dividend or distribution is usually specifiedon a per share / unit basis.deemed dividend. A dividend not paid in cash or otherconsideration – an allocation of income that does notresult in an increase in units and corresponding declinein price, but will result in a change to the adjusted costbase.deferral. A form of tax sheltering that results from aninvestment that offers deductions during the investor’shigh-income years, and/or postpones capital gains orother income until after retirement or during anotherperiod when the income level is expected to change.denomination. The principal amount, or value atmaturity, or a debt obligation. Also known as the parvalue or face value.169

Financial Reporting by Investment Fundsderivative. A financial instrument or other contractwith all three of the following characteristics: (i) itsvalue changes in response to the change in a specifiedinterest rate, financial instrument price, commodityprice, foreign exchange rate, index of prices or rates, acredit rating or credit index, or other variable (sometimescalled the “underlying”), provided in the case ofa non-financial variable that the variable is not specificto a party to the contract; (ii) it requires no initial netinvestment or an initial net investment that is smallerthan would be required for other types of contracts thatwould be expected to have a similar response to changesin market factors; and (iii) it is settled at a future date.discount. The amount by which a bond sells on the secondarymarket at less than its par value or face value.distributions. Payments to unitholders from net investmentincome and realized capital gains. (See capitalgains distribution and dividend.)distributor. Usually the principal underwriter who sellsthe fund’s shares / units by acting as an agent (intermediarybetween the fund and an independent dealer or thepublic) or as a principal, buying shares / units from thefund at net asset value and selling them through dealersor directly to the public.diversification. Investment of a portfolio in securitiesthat have different kinds of investment risk, in orderto moderate the portfolio’s overall risk of loss. Mostcommonly refers to diversification by securities issuer,but can also be used in reference to industry exposure,creditworthiness or quality of security issuers takenas a whole, or, in international portfolios, exposure tonational (or regional) economies. Sometimes the termmay be used in reference to security kinds (for example,fixed-income versus equity securities).dividend fund. A mutual fund that invests in commonshares of senior Canadian corporations with a history ofregular dividend payments at above average rates, as wellas preferred shares.dividend tax credit. An income tax credit available toinvestors who earn dividend income through investmentsin the shares of Canadian corporations.dividend. A per-share payment designated by acompany’s board of directors to be distributed amongshareholders. For preferred shares, it is generally a fixedamount. For common shares, the dividend varies withthe fortunes of the company and the amount of cashon hand. It may be omitted if business is poor or thedirectors withhold earnings to invest in plant andequipment.dollar cost averaging. Investing a fixed amount ofdollars in a security at regular intervals over a period oftime, thereby averaging the cost paid per unit / share.dual purpose fund. A closed-end investment fund withtwo classes of shares / units – income shares / units forinvestors interested in income and capital shares / unitsfor those interested in capital growth.equalization. An accounting method used to preventa dilution of the continuing shareholders’ / unitholders’per share / unit equity in undistributed net investmentincome caused by the continuous sales and redemptionsof capital shares / units.equity fund. A mutual fund whose portfolio consistsprimarily of equity securities.equity securities. Common and preferred shares, anddebentures convertible into common shares.170

Glossaryequity. The net worth of a company. This represents theownership interest of the shareholders (common andpreferred) of a company. For this reason, shares are oftenknown as equities.eurodollar. US dollar deposits deposited in banksoutside the United States, including foreign branches ofAmerican banks.exchange. An organized forum, that can be a physicalor electronic location, for the trading of securities orcommodities by members for their own accounts orthe accounts of their customers. Examples of securitiesexchanges are the Toronto Stock Exchange (TSX), theToronto Venture Exchange (TSX-V) and the New YorkStock Exchange (NYSE).ex-dividend or ex-distribution. Shares that are tradedwithout dividend or without a distribution. The buyerof a share selling ex-dividend does not acquire a rightto receive a previously declared but unpaid dividend.Dividends are payable on a fixed date to shareholdersrecorded on the stock transfer books of the disbursingcompany as of a previous date of record. (See recorddate.) In the case of nontraded shares / units of mutualfunds, the ex-dividend date is usually the same as therecord date.ex-rights. Similar to ex-dividend. The buyer of a shareselling ex-rights is not entitled to a rights distribution.ex-warrants. Shares or bonds trading without attachedwarrants.face value. The principal amount, or value at maturity,of a debt obligation. Also known as the par value ordenomination.fail to deliver. Occurs when the selling broker or otherfinancial institution has not delivered the securitiesto the buyer at the settlement or clearance date of thetransaction.fail to receive. Occurs when the buying broker ora financial institution has not received the securitiesfrom the seller at the settlement or clearance date of thetransaction.fair value. The amount of the consideration that wouldbe agreed upon in an arm’s length transaction betweenknowledgeable, willing parties who are under no compulsionto act.fiduciary. An individual or institution that holds assetsin trust for another individual or institution. An executor,administrator or trustee. Hence, “fiduciary” duties.fiscal policy. The policy pursued by government tomanage the economy through its spending and taxationpowers.fixed-period withdrawal plan. A plan through whichthe mutual fund investor’s holdings are fully depletedthrough regular withdrawals over a set period of time.A specific amount of capital, together with accruedincome, is systematically exhausted.forward exchange contract. An agreement to exchangecurrencies of different countries at a specified future dateat a specified rate (the forward rate). Unlike a securitiesfutures contract, the terms of a forward contract are notstandardized.front-end load. A charge imposed on a unitholder /shareholder on the purchase of units / shares sold bybrokers or other members of a sales force. The charge isdeducted from the amount to be invested in the fund’sunits / shares.171

Financial Reporting by Investment Fundsfund of funds. An investment fund that invests insecurities of other investment funds.fund manager. A fund manager generally providesinvestment advice, research services and certain administrativeservices under a contract, commonly referredto as a management agreement, for a management feethat is based on a percentage of average net assets and,possibly, includes an incentive fee based on performanceresults.fundamental analysis. A method of evaluating thefuture prospects of a company by analyzing its financialstatements. It may also involve interviewing the managementof the company.futures contract. An agreement to buy or sell, at aspecified future date and price, a specified quantity ofcommodity, currency or financial instrument.growth fund. An investment fund investing primarilyin growth industry securities, emphasizing future capitalappreciation over current yield.growth stocks. Shares of companies whose earnings areexpected to increase at an above-average rate. Growthstocks are often typified by their low yields and relativelyhigh price/earnings ratios. Their prices reflect investors’belief in their future earnings in growth.guaranteed investment certificates. A deposit instrumentsold by Canadian banks and trust companiespaying a predetermined rate of interest for a specifiedterm.hedge accounting. A method for recognizing the gains,losses, revenues and expenses associated with the itemsin a hedging relationship such that those gains, losses,revenues and expenses are recognized in net incomein the same period when they would otherwise be recognizedin different periods.hedge fund. An investment fund seeking to minimizemarket risks by holding securities believed likely toincrease in value and, at the same time, being shortin securities believed likely to decrease in value. Thesefunds use investment strategies such as leverage andlong, short and derivative positions. The only objectiveis capital appreciation.hedging. The use of transactions to reduce existingmarket, interest rate or foreign currency risks. Hedgingtechniques include the use of futures, swaps and optionsto offset a present or anticipated position of risk.holder of record. The party listed as the registeredowner on the transfer records of a corporation.illiquid. Not readily convertible into cash, such as astock, bond, or commodity that is not actively traded,and would be difficult to sell in a current sale.incentive fee or incentive compensation. A fee paidto an investment adviser based upon the fund’s performancefor the period. The fee generally consists of abasic fee plus a bonus (or less a penalty) if the fund’sperformance exceeds (or fails to match) that of a specifiedbenchmark.income funds. Mutual funds that invest primarily infixed-income securities such as bonds, mortgages andpreferred shares. Their primary objective is to produceincome for investors, while preserving capital.independent review committee (IRC). A fully independentbody that must be established by a reportingissuer in accordance with NI 81-107 to oversee alldecisions involving an actual or perceived conflict of172

Glossaryinterest faced by the fund manager in the operation ofthe fund.index fund. A mutual fund that matches its portfolioto that of a specific financial market index, with theobjective of duplicating the general performance of themarket in which it invests.index option. Calls or puts on indexes of stock.index. A statistical composite that measures changesin the economy or in financial markets. In the case offinancial markets, an index is a portfolio of securitiesrepresenting a particular market or a portion of it. Eachindex has its own calculation methodology and is usuallyexpressed in terms of a change from a base value.indexed security. A security whose value is based on theabsolute or relative value, over a period of time or at apoint in time, of a financial indicator, such as a measureof interest rates, exchange rates, commodity prices, orstock prices.indexing. Weighting a portfolio to match a broad-basedindex so as to match its performance.individual variable insurance contract (IVIC). Anindividual contract of life insurance, including anannuity, or an undertaking to provide an annuity, asdefined by provincial and territorial insurance statutesand by the Civil Code of Quebec, under which theliabilities vary in amount depending upon the marketvalue of a specified group of assets in a segregated fund,and includes a provision in an individual contract of lifeinsurance under which policy dividends are deposited ina segregated fund.initial margin deposit. The amount of money or itsequivalent in securities, that is held as a good-faithdeposit when entering into a commodity transactionto make sure that the customer meets the variationmargin requirement. The amount is usually specifiedby the exchange on which the commodity is traded.Maintenance margin refers to additional deposits. (Seemargin.)international fund. A mutual fund that invests insecurities of a number of countries.intrinsic value. The amount by which the price of awarrant or call option exceeds the price at which thewarrant or option may be exercised.inverse floater. A floating rate note in which the ratepaid increases (decreases) at a multiple of declines (rises)in the specified floating market rate.investment adviser. A person or company providinginvestment advice, research and, often, administrativeand similar services for a contractually agreed-on fee,generally based on a percentage of net assets. (See fundmanager.)investment advisory agreement. An agreementbetween an investment fund and an investment manager,engaging the investment manager to provide investmentadvice to the investment fund for a fee.investment company. An investment company is either:(a) an investment fund as defined by the Canadiansecurities regulatory authorities in National Instrument81-106, Investment Fund Continuous Disclosure; 1 or(b) a separate legal entity whose primary business activityfor the period is investing. All of the following mustapply for an enterprise’s primary business activity to beinvesting: (a) The enterprise’s expressed business purposeis to be an investment company that holds investmentsfor current income, capital appreciation, or both. (b)The enterprise has no substantive activities other than itsinvestment activities and no significant assets or liabilities173

Financial Reporting by Investment Fundsother than those related to its investment activities,except for operating activities related to services providedto investment companies. (c) The enterprise doesnot obtain, or have the objective of obtaining, benefitsfrom its investments that are unavailable to unrelatednon-investor enterprises and that are not normalbenefits attributable to an ownership interest (such asdividends). Such benefits might include, for example,access to processes, intangible assets or technology of theinvestee; guarantees provided by an investee to benefitthe investor; or other transactions that are not at fairvalue. (d) The enterprise or its affiliates are not involvedin the day-to-day management of investees, affiliates ofinvestees, or other investment assets. That requirementmay be met, however, if management of the enterpriseor its affiliates is represented on the boards of directorsof investees or affiliates of investees, or provides limitedassistance to management of investees or affiliates ofinvestees for a short period. (e) For each investment, theenterprise has an exit strategy that involves the transferof the enterprise’s ownership interest to unrelated thirdparties. An exit strategy includes methods of exiting theinvestment and the time when this is expected to occur,which might, for example, be expressed as a time periodor when certain conditions or targets have been met.investment counsel. A firm or individual which furnishesinvestment advice for a fee.investment dealer. A securities firm.investment fund. An entity that offers its shares / unitsfor sale to a wide group of investors. The capital raised isinvested in accordance with the fund’s investment policiesand objectives. Income is earned through interest,dividends and capital gains. An investment fund makesinvestments on behalf of individuals and institutionswith similar financial goals on a “pooled” basis. Investmentfunds include: “open-end mutual” funds, whichare governed by prospectus; “pooled” funds, whichare generally prospectus-exempt and invested in byinstitutions and high-net-worth investors; “segregated”funds, which are managed by life insurance companies;“closed-end” funds, which are generally listed on a recognizedstock exchange; and “partnerships and limitedpartnerships,” which carry on the business of pooledinvesting on behalf of the partners.Investment Funds Institute of Canada (IFIC). Themutual fund industry trade association set up to serveits members, co-operate with regulatory bodies, andprotect the interests of the investing public that usemutual funds as a medium for their investments.investment grade bonds. Bonds rated by a ratingservice in one of its top four categories (for example,AAA to BBB/Baa).investment objective. The goal, such as long-termcapital growth, current income, growth and income,etc., that an investor or a fund pursues. Each fund’sobjective is stated in its prospectus or other offeringdocument.investment partnership. A partnership, usually alimited partnership, organized to invest and trade insecurities.issued shares. The number of securities of a companyoutstanding. This may be equal to or less than thenumber of shares a company is authorized to issue.junk bonds. Bonds with a rating of BB/Ba or lower,issued by a company without a long record of sales andearnings or with questionable credit strength. Commonkinds include step-interest, and payment-in-kind bonds.Also known as high-yield bonds.labour sponsored or venture capital fund. An investmentfund that is (a) a labour sponsored investment174

Glossaryfund corporation or a labour sponsored venture capitalcorporation under provincial legislation, (b) a registeredor prescribed labour sponsored venture capital corporationas defined in the Income Tax Act , or (c) in BritishColumbia, an employee venture capital corporation or aventure capital corporation.lapping. The timing differences between a trade dateand the settlement date, when a mutual fund client’smoney held for a trade that has not yet been settled isused to settle a trade for another mutual fund client whohas not provided adequate money to cover the settlementof that other trade on the settlement date.late trading. This is illegal and occurs when purchaseor redemption orders are received after the close of business,but are filled at that day’s price rather than thenext day’s price. Late trading is a violation of NationalInstrument 81-102.letter of intent. An agreement whereby an investoragrees to make a series of purchases of mutual fundunits.leverage. The use of various financial instruments orborrowed capital (for example, buying securities toincrease the potential return of an investmentLIBOR (London Interbank offered rate). The rate ofinterest that the most creditworthy international banksdealing in eurodollars charge each other for large loans.Various instruments’ rates are tied to LIBOR.liquidity. Measure of the ease with which a securitytrades in large blocks without a substantial drop inprice.listed security. A security listed and traded on a stockexchange.load. Commissions charged to holders of mutual fundunits. (See sales charge.)long position. Denotes ownership or right to possessionof securities, or holding a commodity or security inanticipation of a rise in price.management company. The entity within a mutualfund complex responsible for the investment of thefund’s portfolio and/or the administration of the fund.It is compensated on a percentage of the fund’s totalassets.management expense ratio. The ratio, expressed as anannualized percentage, of the expenses of an investmentfund to its average net asset value, calculated in accordancewith Part 15 of NI 81-106.management fee. The total fees paid or payable by aninvestment fund to its manager or one or more portfolioadvisers or sub-advisers, including incentive or performancefees, but excluding operating expenses of theinvestment fund.management report of fund performance (MRFP).An annual or interim management report of fund performanceprepared in accordance with NI 81-106.margin accounts. A means of leveraging offered bybrokers or dealers to permit their customers to buy securitiespartly with borrowed funds. The broker or dealerlends the customer the difference between the price of asecurity and the equity provided by the customer.margin. The amount of money or its equivalent insecurities that a customer must deposit with a broker ina securities transaction on margin. (See initial margindeposit.)175

Financial Reporting by Investment Fundsmark to market. A procedure used to adjust the carryingvalue of a security to current value at the reportingdate.market index. A vehicle used to denote trends in securitiesmarkets. A market index can be used as a proxy torepresent an entire market or a segment of a market.The most popular index in Canada is the Toronto StockExchange’s S&P/TSX Composite Index (TSE 300).market price. The last reported selling price for a security.If the security has not been traded or if the sellingprice has not been reported, market price is based onrecent bid and ask prices.market timing. This involves short-term trading ofmutual fund securities to take advantage of short-termdiscrepancies between the price of a mutual fund’ssecurities and the stale values of the securities within thefund’s portfolio. International funds are most vulnerableto this type of trading abuse, as traders can exploitdifferences between time zones. Where it happens,market timing may be in violation of mutual fund policies.Further, the heavy trading creates transaction costs,which reduces returns of other longer term investors. Assuch, market timing arrangements may be in violationof a fund manager’s fiduciary duty, for example, undersection 116 of the Ontario Securities Act.market value. Means (i) as to cash, the amount; and(ii) as to a security held by a fund, the current priceobtained from a generally recognized source, the mostrecent bid quotation from a generally recognized sourceor, if no generally recognized source exists, the pricefor the security as determined by data and assumptionsdocumented by the parties to a transaction, and accruedbut unpaid income on the security.material contract. For an investment fund, a documentthat the investment fund would be required to list inan annual information form under Item 16 of Form81-101F2 if the investment fund filed a simplified prospectusunder NI 81-101.materiality. Users are interested in information thatmay affect their decision making. Materiality is the termused to describe the significance of financial statementinformation to decision makers. An item of information,or an aggregate of items, is material if it is probable thatits omission or misstatement would influence or changea decision. Materiality is a matter of professional judgmentin the particular circumstances.matrix pricing. A statistical technique used to valuenormal institutional size trading units of debt securitieswithout relying exclusively on quoted prices. Factors suchas the issue’s coupon or stated interest rate, maturity,rating and quoted prices of similar issues are consideredin developing the issue’s current market yield. (See fairvalue.)maturity. The date at which a loan or bond or debenturecomes due and must be redeemed or paid off.money market fund. An investment fund whose investmentsare primarily or exclusively in short-term debtsecurities designed to maximize current income withliquidity and capital preservation, usually maintainingper share / unit net asset value at a constant amount,such as one, five or 10 dollars.money market instruments. Short-term investmentssuch as treasury bills and other government obligations,commercial paper, bankers acceptances and certificatesof deposit with a term to maturity of 365 days or less.money market. A sector of the capital market whereshort term obligations such as Treasury bills, commercialpaper and bankers’ acceptances are bought and sold.176

Glossarymortgage backed security (MBS). An asset backedsecurity issued on a pool of underlying mortgages.Created by pooling mortgages and selling interests orparticipation in the MBS. The mortgage originatorusually continues to service the underlying mortgageswhile passing principal and interest payments receivedfrom the mortgagors through to the MBS holders.mortgage fund. A mutual fund that invests in mortgages.Portfolios of mortgage funds usually consist of firstmortgages on Canadian residential property, althoughsome funds also invest in commercial mortgages.municipal notes and bonds. Securities that are issuedby cities and other local government authorities to fundpublic projects.mutual fund. An investment entity that pools shareholderor unitholder funds and invests in various securities.The units or shares are redeemable by the fund ondemand by the investor. The value of the underlyingassets of the fund influences the current price of units.NASDAQ. An electronic quotation system for securitiessponsored by the National Association of SecuritiesDealers (NASD) in the US which, for securities tradedon the NASD National Market System, reports pricesand shares or units of securities trades in addition toother market information.National Association of Securities Dealers, Inc.(NASD). An association of brokers or dealers in theUS, registered as such under section 15A of the SecuritiesExchange Act, that supervises and regulates tradingconducted by its members.net asset value (NAV). The value of the total assets ofthe investment fund less the value of the total liablilitiesof the investment fund, as at a specific date, determinedin accordance with Part 14 of NI 81-106. This is thevalue to be used for all purposes other than financialstatements (for example, purchases and redemptions ofthe investment fund’s securities).net asset value per security (NAV per security). Thevalue per unit / share of an investment fund, calculatedby dividing the net asset value by the total number ofshares / units outstanding.net assets. The amount determined under CanadianGAAP, which is the amount to be used for financialstatements and certain information derived from thefinancial statements (for example, certain disclosure inthe management reports of fund performance). It is thevalue at the beginning of the year based on the auditedannual financial statements plus (or minus) the increase(or decrease) from operations, less annual distributions.New York Stock Exchange (NYSE). A not-for-profitcorporation that is the largest securities exchange inthe United States. This self-regulatory organization alsofurnishes facilities for its members, allied members,member firms, and member corporations to aid them inconducting securities business.no-load fund. An investment fund that sells its shares/ units without adding front-end or back-end salescharges.non-redeemable investment fund. An issuer, (a) whoseprimary purpose is to invest money provided by its securityholders,(b) that does not invest, (i) for the purposeof exercising or seeking to exercise control of an issuer,other than an issuer that is a mutual fund or a nonredeemableinvestment fund, or (ii) for the purpose ofbeing actively involved in the management of any issuerin which it invests, other than an issuer that is a mutualfund or a non-redeemable investment fund, and (c) thatis not a mutual fund.177

Financial Reporting by Investment Fundsodd lot. Refers to a quantity of securities that is less thanan even 100 shares or less than the established tradingunit of that security in a particular securities market.offering price. The price at which mutual fund sharesor investment trust units can be bought, often equalingnet asset value per share plus a sales load.offset. A closing transaction involving the purchase orsale of an option having the same features as one alreadyheld. A hedge, such as a short sale of a share to protectcapital gain, or the purchase of a futures contract toprotect a commodity price, or a straddle representingthe purchase of offsetting put and call options on asecurity.offshore fund. An investment company organizedoutside the country of domicile, whose shares are offeredsolely to foreign investors.open contract. An unperformed or unsettled contract.May be used in referring to new issues traded when,as, and if issued or in referring to commodity futurestrading. The term is used to designate contracts boughtor sold, still outstanding, or delivered or offset.open-end investment fund. An investment fund whosecapitalization is generally not fixed or limited in anyway, that is ready to redeem its shares / units at any timeand that usually offers its shares / units for sale to thepublic continuously.option. The right or obligation to buy or sell a specificquantity of a security at a specific price within a stipulatedperiod of time.OTC (over-the-counter). A market for securities ofa company not listed on a stock exchange and tradedmainly by electronic communications or by phonebetween brokers and dealers who act on behalf ofcustomers.par value. The principal amount, or value at maturity, ofa debt obligation. It is also known as the denominationor face value. Preferred shares may also have par value,which indicates the value of assets each share would beentitled to if a company were liquidated.payable date. The date on which a dividend / distributionis payable to holders of record on some previousrecord date.point. A rise or decline of one dollar per share, used torefer to the purchase or sale of shares. If used for the purchaseor sale of bonds, the term means a rise or declineof $10 per $1,000 principal amount. A basis point is onehundredth of one percent of the principal amount.portfolio turnover rate. A measure of portfolio activity,generally calculated for an investment fund by dividingthe lesser of purchases or sales of securities, excludingsecurities having maturity dates at acquisition of oneyear or less, by the average value of the portfolio securitiesheld during the period. Refer to the full calculationin Instruction (i) in Part B, item 3.1 of Form 81-106F1.portfolio. Securities owned by an investment fund.preferred share. A share with rights that are preferentialto those of a common share. In determining whethershares are common shares or preferred shares, it is therights of the shares in relation to earnings rather thantheir legal designation that govern.premium. The amount by which a bond’s selling priceexceeds its face value. Also, the amounts paid to keep aninsurance policy in force.178

Glossarypresent value. The current worth of an amount to bereceived in the future. In the case of an annuity, presentvalue is the current worth of a series of equal paymentsto be made in the future.price-earnings ratio (P/E ratio). The market value of ashare of stock divided by its earnings per share.primary distribution. A new security issue, or one thatis made available to investors for the first time. This isalso called a primary offering or initial public offering(IPO).principal. The person for whom a broker executes anorder, or a dealer buying or selling for his or her ownaccount. Also, an individual’s capital or the face amountof a bond.private placement. The direct sale of a block of securitiesof a new or secondary issue to a single investor orgroup of investors.prospectus. A document that describes the securitiesbeing offered for sale by an investment fund. In Canada,a simplified prospectus is used by mutual funds. Thisprospectus containsinformation required by the securitiesregulators, such as the fund’s investment objectivesand policies, services, how shares / units are boughtand redeemed, fund fees, and risk. (See simplifiedprospectus.)proxy statement. A publication sent to securityholdersby a fund manager, a board of directors, or its adversaries,or others, usually containing financial reports (formerger and other financial proposals), stockholders’meeting notices and voting information on certainmatters to solicit proxies from the holders.proxy. A person authorized to vote the shares / unitsof an absent shareholder / unitholder at a meeting ofshareholders / unitholders. It also refers to the writtenauthorization given to that person.purchase warrants. See warrants.put option. A contract that gives the holder the optionto sell (put) the underlying security, at a specifiedprice (exercise price), either on (the European style) orat any time until (the American style) the contract’sstated expiration date. The put option is bought in theexpectation of decrease in the price of the underlyingsecurity below the exercise price. If the price declines,the buyer generally exercises or sells the option. If theprice does not decline, the buyer lets the option expireand loses only the premium paid for the option. Thereare both listed and over-the-counter markets in options.The exercise price and number of shares of an option areadjusted on the ex-date for cash dividends, rights andstock dividends or splits. (See call option.)quarterly portfolio disclosure. A summary of aninvestment fund’s investment portfolio prepared inaccordance with Part B, item 5 of Form 81-106F1for a period of three months at the end of the first orthird quarter. Must be posted on an investment fund’swebsite, if applicable (see Part 6 of NI 81-106).ratio withdrawal plan. A type of mutual fund withdrawalplan that provides investors with an incomebased on a percentage of the value of units held.real estate fund. A mutual fund that invests primarilyin residential and/or commercial real estate to produceincome and capital gains for its unitholders.real estate investment trust. A closed-end investmentcompany that specializes in real estate or mortgageinvestments.179

Financial Reporting by Investment Fundsreal return bond. A government bond that pays interestsemi-annually based on inflation-adjusted principal and,at maturity, repays the principal in inflation-adjusteddollars.realized gain or loss. See capital gain or loss.record date. The date on which an owner of a share mustbe registered on the books of a company as a shareholderto receive a declared dividend / distribution or, amongother things, to vote on company affairs.recordkeeping agent. Aservice bureau, bank, or otheragency engaged by an investment company to maintainrecords of purchases and sales of investments, sales andredemptions of fund shares, and shareholders’ accountstatements.redeemable. Preferred shares or bonds that give theissuing corporation an option to repurchase securitiesat a stated price. These are also known as callablesecurities.redemption fee. A percentage of net asset value thatmay be charged to the investor on redemptions.redemption in kind. Redemption of investment fundshares / units by payment in portfolio securities, notcash.redemption or repurchase price. The price, generallynet asset value less a redemption fee (if applicable), atwhich a share / unit of an investment fund is redeemedor repurchased.redemption. A shareholder’s / unitholder’s tender ofinvestment fund shares / units to the fund or agentdesignated by the fund, requiring liquidation of suchshares / units in exchange for proceeds, usually in cash,representing the net asset value of the shares / unitstendered (less any redemption fee).registered owner. The owner of a security whose nameis recorded on the face of the certificate and on the booksof the issuing fund or its agent.registrar. Generally, a banking institution that countersignsshare / unit certificates and is responsible forpreventing the issuance of more shares / units thanauthorized by the board of directors and the charter ofthe issuing fund. (See transfer agent.)registration of transfer. Usually refers to the act ofrecording a transfer of ownership of registered securitieson the transfer books of the issuing corporation, andissuing new certificates to the new registered owner. It isnot part of the transfer itself. (See transfer.)Regulation S-X. Accounting rules for form and contentof financial statements and schedules required underthe US Securities Act of 1933, the Securities ExchangeAct of 1934, the Public Utility Holding Company Actof 1940, and the Energy Policy and Conservation Actof 1975. Article 6 applies to financial statements, andspecified rules in article 12 apply to financial schedules,of investment companies.repurchase agreement (repo). An agreement underwhich an investment fund transfers (sells) securities forcash to another party (purchaser), usually a broker, andagrees to repurchase them within a specified time at aspecified price. (A repurchase agreement is known onthe side of a buying broker-dealer or other buyer as areverse repurchase agreement.)repurchase. Liquidation of investment fund shares /units through a distributor or a broker-dealer on behalfof shareholders / unitholders, sometimes for a purchaseor service charge or a brokerage commission.180

Glossaryrestricted security. A portfolio security that may besold privately, but that is required to be registered with aregulatory authority or to be exempted from such registrationbefore it may be sold in a public distribution.retractable. Bonds or preferred shares that allow theholder to require the issuer to redeem the security beforethe maturity date.return of capital. Distributions by investment companiesin excess of tax-basis earnings and profits.return. See yield.reverse repurchase agreement (reverse repo orresale). An agreement under which an investment fundpays for and receives (purchases) securities from a sellerwho agrees to repurchase them within a specified timeat a specified price. (A repurchase agreement is knownon the side of a selling broker-dealer or other seller as arepurchase agreement.)rights. Options granted to shareholders to purchaseadditional shares directly from the company concerned.Rights are issued to shareholders in proportion to thesecurities they may hold in a company.risk. The possibility that one or more individuals ororganizations will experience adverse consequencesfrom an event or circumstance.round lot. A unit of trading, or a multiple of it, generallyestablished by each particular exchange.sales charge. In the case of mutual funds, these arecommissions charged to holder of fund units, usuallybased on the purchase or redemption price. Sales chargesare also known as “loads.”Securities Act of 1933. The principal US federal lawregulating the public offering of corporate securities.Among other things, regulates contents of prospectusesand similar documents and is intended to ensure thatpotential investors receive adequate information to makereasonably informed investment decisions.securities legislation. Provincial legislation regulatingthe underwriting, distribution and sale of securities.Securities and Exchange Commission (SEC). Anagency established by the US Congress to administerUS federal securities laws.Securities Exchange Act of 1934. Regulates securitiesbrokers and dealers, stock exchanges, and the trading ofsecurities in the US securities markets.securities lending. The practice of lending portfoliosecurities, usually to a broker to cover a short sale. Theloan is usually collateralized by cash or governmentsecurities.seed money. An initial amount of capital contributed toa company at its inception.segregated fund. A pool of assets owned by a lifeinsurance company and held separate and apart fromother similar pools and its general assets. An individualvariable insurance contract (IVIC) gives a purchaser theright to choose among various segregated funds thatwill give the purchaser specified benefits based on thevalue of the chosen segregated funds. (See individualvariable insurance contract (IVIC).)seller’s option. A transaction that by agreement is tobe settled at a date later than the usual regular-waytransaction.181

Financial Reporting by Investment Fundssenior equity security. Any stock of a class having apriority over any other class as to distribution of assetsor payment of dividends.separate account. An account established and maintainedby an insurance company that holds particularassets allocated to that account, and is credited or chargedwith income, gains or losses from these assets separatelyfrom income, gains or losses of the insurance company’scorporate or other accounts. A separate account mayalso be called a “variable account” when the assets areheld on behalf of variable annuities or variable insurancepolicies.series. Different classes of shares set up by an investmentfund to differentiate expenses and distributions– targeted to different types of investors in the fund.Also referred to as classes.settlement date. The date that an asset is delivered toor by an entity. Settlement-date accounting refers to:(a) the recognition of an asset on the day it is receivedby the entity; and (b)the derecognition of an asset, andrecognition of any gain or loss on disposal, on the daythat it is delivered by the entity. When settlement-dateaccounting is applied, an entity accounts for any changein the fair value of the asset to be received during theperiod between the trade date and the settlement datein the same way as it accounts for the acquired asset. Inother words, the change in value is not recognized forassets carried at cost or amortized cost, it is recognizedin net income for assets classified as held for trading,and it is recognized in other comprehensive income forassets classified as available for sale.shareholder (unitholder) of record. A shareholder /unitholder whose name is registered on the share / unittransfer books of the issuing corporation.shareholders’ equity. The amount of a corporation’sassets belonging to its shareholders (both common andpreferred) after allowance for any prior claim.shares. A document signifying part ownership in acompany. The terms “share” and “stock” are often usedinterchangeably.short position. With respect to: (i) clearing corporationfinancial options, over-the-counter financial optionsand listed warrants, refers to a fund having a positionwhich, at the election of another, obliges the fund topurchase, sell, receive or deliver the underlying interest(or pay or receive cash in lieu thereof); (ii) futures andforward contracts, refers to a fund holding a positionwhich obliges the fund to deliver the underlying interest(or pay or receive cash in lieu thereof); (iii) call financialoptions on futures, refers to a fund holding a positionwhich, at the election of another, obliges the fund toassume a short position in futures; and (iv) put financialoptions on futures, refers to a fund holding a positionwhich, at the election of another, obliges the fund toassume a long position in futures.short sale. A sale of securities not owned at the time ofsale anticipating the price to fall and the securities to berepurchased at a profit. A person selling short borrowsequivalent securities to deliver to the buyer and eventuallybuys the securities to return to the lender.simplified prospectus. An abbreviated and simplifiedprospectus distributed by mutual funds to purchasersand potential purchasers of units or shares, whichfollows Form 81-101F1. (See prospectus.)special warrants. See warrants. specialty fund. Amutual fund that concentrates its investments on aspecific industrial or economic sector or a defined geographicalarea.182

Glossaryspread. A combination of a put and call option at differentprices, one below and the other above the currentmarket price. Also refers to the difference between thebid and asked prices of a security and to the dealer’scommission on a security offering .stapled unit. A unique form of security that combinesthe attributes of common shares, preferred shares anddebt in a single security. These are “stapled” together asa single unit that trades in the stock marketstep bond. A type of high-yield debt instrument withdeferred interest payments, or whose interest rate resetsat specific times during its term.stock dividend. A dividend payable in the stock of theissuing corporation.stock options. Rights to purchase a corporation’s stockat a specified price.stock split. An increase in the number of outstandingshares of a company’s stock to decrease the market priceand thus allow for greater distribution of the shares.For example, ownership of two shares for each sharepreviously held tends to reduce the price of each shareby approximately half, assuming no other concurrentchanges, such as in the rate of dividend.stockholder (unitholder) of record. A unitholder /stockholder whose name is registered on the unit / sharetransfer books of the issuing corporation.stop order. An order a customer places to protect apaper profit in a security or to keep down a possible lossin a security. The stop order becomes a market orderwhen the price of the security reaches or sells throughthe price specified by the customer. Also called a stoploss order.straddle. A combination of one put and one call option,identical to the security issue, number of shares, exerciseprice and expiration date.strip bonds. The capital portion of a bond from whichthe coupons have been stripped. The holder of the stripbond is entitled to its par value at maturity, but not theannual interest payments.structured note. A type of debt instrument with acustomized coupon that pays based on equal, proportionalor leveraged increases (or decreases) in interest orcurrency rates, commodity indexes or specific securities’fair values.swaps. A series of forward contracts which obligatetwo parties to swap or exchange a series of cash flowson specified payment dates. The cash flows are eitherfixed or calculated by specified reference rates or prices.Interim payments are netted, with the difference beingpaid by one party to the other.syndicate. A group of brokers or dealers who togetherunderwrite and distribute new issues of securities orlarge blocks of an outstanding issue.synthetic coupon security. A security created by thecombination of two or more other securities.synthetic floaters. A derivative instrument which usesinterest payments from long-term municipal bonds,which may be coupled with an interest rate swap andput features, to pay a floating short-term interest rate.systematic withdrawal plan. Plans offered by mutualfund companies that allow unitholders to receivepayment from their investment at regular intervals.technical analysis. A method of evaluating futuresecurity prices and market directions based on183

Financial Reporting by Investment Fundsstatistical analysis of variables such as trading volume,price changes, etc., to identify patterns.tender offer. A public offer to buy from stockholdersnot less than a specified number of shares of stock at afixed price, usually in an attempt to gain control of theissuing company.ticker. An instrument that displays the price and quantityof a security traded on an exchange within minutesafter the trade has been executed.TMX Group Inc. Operates Canadian exchangestrading equities and derivatives, including the TorontoStock Exchange (TSX), the TSX Venture exchange(TSX-V) and the Montreal Exchange.total return. A periodic measure of a fund’s overallchange in value, which assumes the reinvestment of netinvestment income distributions / dividends and capitalgain distributions.trade date. The date that an entity commits to purchaseor sell an asset. Trade-date accounting refers to: (a) therecognition of an asset to be received and the liabilityto pay for it on the trade date; and (b) derecognition ofan asset that is sold, recognition of any gain or loss ondisposal, and the recognition of a receivable from thebuyer for payment on the trade date. Generally, interestdoes not start to accrue on the asset and correspondingliability until the settlement date, when title passes.trade. An agreement of purchase and sale to be settledby payment and delivery on a settlement date.trading expense ratio. Represents total commissionsand other portfolio transaction costs of an investmentfund expressed as an annualized percentage of dailyaverage net asset value during the period (see Part B,section 3.1, item (1) of Form 81-106F1).trading unit. The unit by which the security is tradedon the exchange, usually 100 shares of stock or an evenmonetary value of bonds. Also called a round lot.transfer agent. An agent, acting on behalf of a company,who keeps records of the names of a company’s or investmentfund’s registered shareholders or unitholders, theiraddresses and the number of shares or units they own.(See registrar.)transfer. A change of ownership of a security by deliveryof certificates for the security in a sale (against paymentof the purchase price in a securities market sale), or bygift, pledge or other disposition. A subsequent registrationof the transfer in the securities transfer records ofthe issuer is not a part of the transfer itself.treasury bill (T-bill). Short-term government debt thatbears no interest but is sold at a discount. The differencebetween the discount price and par value is the return tobe received by the investor.trust. An instrument placing ownership of property inthe name of one individual or entity, called a trustee, tobe held by the trustee for the use and benefit of someother person.trustee. An individual or institution holding propertyin trust for the benefit of another.underwriter. An investment firm that purchases a securitydirectly from its issuer for resale to other investmentfirms or the public or sells for such issuer to the public.underwriting. The act of distributing a new issue ofsecurities or a large block of issued securities – that is, asecondary offering, commonly including an obligationto purchase the underwritten securities, regardless ofwhether they can be resold to others. unit investmenttrust. An investment company, organized under a trust184

Glossaryindenture, that issues only redeemable securities, eachof which represents an undivided interest in a unit ofspecified (usually unmanaged) securities.unit trust. An unincorporated fund whose organizationalstructure permits the conduit treatment of incomerealized by the fund.unlisted security. A security that is not listed on asecurities exchange. (See OTC (over-the-counter).)unrealized appreciation or depreciation. The excess(appreciation) or deficiency (depreciation) of the valueof securities over (under) their cost.variation margin. A term used in commodity operations.Refers to last-day point fluctuation — a differencebetween the settling price of the day before and the lastday’s settling price on net positions long and short.venture capital corporation (VCC). A corporationregistered under Part 1 of the Small Business VentureCapital Act (British Columbia), R.S.B.C. 1996 c. 429whose business objective is making multiple investments(see Part1.1 of NI 81-106).venture capital investment fund. A closed-end oropen-end investment fund whose primary investmentobjective is capital growth and whose capital is usuallyinvested wholly or largely in restricted securities innegotiated transactions to form or develop companieswith new ideas, products or processes.voluntary accumulation plan. A plan offered bymutual fund companies whereby an investor agrees toinvest a predetermined amount on a regular basis.conjunction with a new issue of bonds, preferred sharesor common shares.when-issued. A short form for “when, as, and if issued.”The term indicates a conditional transaction in a securityauthorized for issuance but not yet actually issued.All such transactions are settled if and when the actualsecurity is issued and the exchange determines that thetransactions are to be settled.wrap account. An account offered by investment dealerswhereby investors are charged an annual managementfee based on the value of invested assets.yield curve. A graphic representation of the relationshipamong yields of similar bonds of differing maturities.yield to maturity. The rate of return on a debt securityheld to maturity, giving effect to the stated interest rate,accrual of discount and amortization of premium.yield. The return on investment that an investor receivesfrom dividends or interest expressed as a percentage ofthe current market price of the security or, if the investoralready owns the security, of the price paid. The returnon shares is usually calculated by dividing the totaldividends paid in the past calendar year by the price ofthe shares. The return on bonds is calculated by dividingthe interest by the price of the bond.zero coupon bond. A type of high-yield debt instrumentthat makes no periodic interest payment, but is issuedat a discount from its face value. The holder derives areturn from the gradual appreciation in the value of thesecurity, which is redeemed at face value at a specifiedmaturity date.warrant. Certificates issued by a corporation that givethe holder the right to buy its shares at a stated price overa specified period. The certificates are often issued in185

SELECTED BIBLIOGRAPHYAccounting Standards Board of Canada (AcSB).——Adopting IFRSs in Canada (April 2008) .—— Adopting IFRSs in Canada, II (March2009).——Changeover to IFRSs: January 1, 2011.—— Which IFRSs Are Expected to Apply forCanadian Changeover in 2011?American Institute of Certified Public Accountants(AICPA).——Audit and Accounting Guide, Investment——Companies, New York, 2008.IFRS Resources Website.—— International Financial Reporting Standards(IFRS) – An AICPA Backgrounder.Canadian Institute of Chartered Accountants(CICA).——CICA Handbook-Accounting, Toronto.——CICA IFRS Transition Website.—— IFRS Conversions: What CFOs Need toKnow and Do, 2008.——Migrating to IFRS.Canadian Life and Health Insurance AssociationInc. (CLHIA). Guideline G2, Individual Variable InsuranceContracts Relating to Segregated Funds, Toronto.Canadian Securities Administrators (CSA).—— National Instrument 81-106 (NI 81-106),Investment Company Continuous Disclosure(official consolidated version available onthe BC Securities Commission website).——NI 81-106, Form 81-106F1, Contents of Annualand Interim Management Report of FundPerformance.——NI 81-106, Companion Policy.——National Policy No. 29, Mutual Funds Investingin Mortgages.European Fund and Asset Management Association(EFAMA), International Financial Reporting Standards:application to investment funds. DiscussionPaper, June 2007.International Accounting Standards Board (IASB).—— A Guide through International FinancialReporting Standards (IFRSs), July 2008.—— IASB and the IASC Foundation: Who we areand what we do.——IASB Work Plan.—— International Financial Reporting Standards(IFRSs), 2008.Investment Company Institute (ICI), letter to USSecurities and Exchange Commission (SEC) datedNovember 13, 2007 (available on the SEC website).Ontario Securities Commission (OSC).——OSC Staff Notice 81-709, Report on Staff’sContinuous Disclosure Review of InvestmentFunds (May 30, 2008).——OSC Staff Notice 81-315, Frequently AskedQuestions on NI 81-106, Investment FundContinuous Disclosure (November 25, 2005).——Staff Notices and Guidance (Investment FundRegulation).Securities Act (Ontario) and Regulations.—— Regulations, Part XIV, Labour SponsoredInvestment Fund Corporations.—— Regulations, Form 45, Information Required tobe Included in Prospectus of a Labour SponsoredInvestment Fund Corporation.187

The Canadian Institute of Chartered Accountants277 Wellington Street WestToronto, ON, Canada M5V 3H2Tel: 416-977-0748Toll-free: 1-800-268-3793Fax: 416-204-3416www.cica.ca www.knotia.ca