Financial Reporting by Investment Funds - Second Edition

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