Financial Reporting by Investment Funds - Second Edition

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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
Page 3 and 4: CICA Research ReportFINANCIAL REPOR
Page 6 and 7: Notice to ReaderThe Knowledge Devel
Page 8 and 9: Financial Reporting by Investment F
Page 10: PageChapter 3FINANCIAL STATEMENT DI
Page 13 and 14: EXECUTIVE OVERVIEWThe objective of
Page 15 and 16: Chapter 1INTRODUCTIONOUTLINE OF THE
Page 17 and 18: IntroductionThe Study Group’s man
Page 19 and 20: Introductionfor alternative present
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Management Report of Fund Performan
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Chapter 7SPECIAL TYPES OFINVESTMENT
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Special Types of Investment Fundsof
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Special Types of Investment Fundswi
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Special Types of Investment Fundsan
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Special Types of Investment FundsEx
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Chapter 8TRANSITION TO INTERNATIONA
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Transition to International Financi
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Financial Reporting by Investment F
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Appendix CACCOUNTING FOR SPECIFIC T
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Security ortransactionGeneral descr
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128Canadian AccountingStandards(CIC
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Consolidation by Investment Funds U
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GLOSSARYThe terms defined in this G
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Glossaryadviser. See investment adv
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Glossarybroker. An agent, often a m
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Glossarytogether, support people in
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Glossaryequity. The net worth of a
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Glossaryinterest faced by the fund
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Glossaryfund corporation or a labou
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Glossarymortgage backed security (M
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Glossarypresent value. The current
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Glossaryrestricted security. A port
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Glossaryspread. A combination of a
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Glossaryindenture, that issues only
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The Canadian Institute of Chartered
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Financial Reporting by Investment Funds - Second Edition

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