CONSOLIDATED FINANCIAL STATEMENTS OF ASSURED FUND AND ITS SUBSIDIARY 31 DECEMBER 2012

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1 CONSOLIDATED FINANCIAL STATEMENTS OF ASSURED FUND AND ITS SUBSIDIARY 31 DECEMBER 2012

2 TABLE OF CONTENTS Pages FUND INFORMATION 2 3 CHAIRMAN S STATEMENT 4 DIRECTORS REPORT 5-6 STATEMENT OF DIRECTORS RESPONSIBILITIES 7 INDEPENDENT AUDITORS REPORT TO THE DIRECTORS 8-9 CONSOLIDATED STATEMENT OF FINANCIAL POSITION 10 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 11 CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS ATTRIBUTABLE TO HOLDERS OF REDEEMABLE PARTICIPATING SHARES 12 CONSOLIDATED STATEMENT OF CASH FLOWS 13 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 14-46

3 FUND INFORMATION DIRECTORS REGISTERED OFFICE INVESTMENT MANAGER Michael Simmons Mark Hindle Alan Morgan-Moodie Richard Brindley (resigned 7 December 2012) SH Corporate Services Ltd. P.O. Box 61 4th Floor Harbour Centre George Town Grand Cayman, KY Cayman Islands. Policy Selection Limited P.O. Box 61 4th Floor Harbour Centre George Town Grand Cayman, KY Cayman Islands. ADMINISTRATOR AND REGISTRAR Blue Sea International (resigned 25 January 2013) North Quay Douglas Isle of Man, IM1 4LB British Isles. LEGAL ADVISORS Solomon Harris (as to Cayman Islands law) P.O. Box 1990 First Caribbean House George Town Grand Cayman, KY Cayman Islands. Maples Fund Services (Cayman) Limited (appointed 31 March 2013) P.O. Box 1093 Boundary Hall Cricket Square Grand Cayman, KY Cayman Islands. CUSTODIAN AND PRINCIPAL Kleinwort Benson Trustees (Isle of Man) Limited BANKERS P.O. Box 203 St George Court Upper Church Street Douglas Isle of Man, IM99 1RB British Isles. INDENTURE TRUSTEE AND BANKERS Wilmington Trust FSB Wilmington Family Office 520 Madison Avenue, 33rd Floor New York, NY USA. 2

4 FUND INFORMATION (continued) AUDITORS PricewaterhouseCoopers (resigned 19 April 2013) P.O. Box 258 Strathvale House George Town Grand Cayman, KY Cayman Islands. KPMG (appointed 27 June 2013) P.O. Box 493 Century Yard, Cricket Square Grand Cayman, KY Cayman Islands. ACTUARIAL REVIEWERS Deloitte & Touche GmbH General Guisan-Quai Zurich Switzerland 3

5 Chairman s Statement Dear Shareholders, Assured Fund has experienced several positive developments despite continued difficulties in the life settlement market. Following last year s re-evaluation of the policies the Fund is on a robust basis was an extraordinary year because of the policy revaluation and the difficulties that were encountered. This year has been more straightforward, even though we have changed auditors and administrators much to the Board's satisfaction. The life settlement market shows signs of growth, with a lot of interest in developing products around the asset class. The number of transactions in life insurance policies is increasing which is indicative of a strengthening market. But, given the nature of the asset, liquidity is still the consistent concern for investors with a short term investment perspective. However, long term prospects continue to be attractive. The accounts have been prepared using an IRR of 18% to reflect market value as is required by accounting standards. This does not reflect the book values which are a modelled return based on holding the policies to maturity and does not reflect variations in demand. Should policies be sold into the market there could be a reduction to book value. Assured Fund intends to implement in November 2013 the planned restructure that is designed to significantly improve liquidity prospects through offering Euronext bond listings. This will provide a potential route to assist redemptions. The Fund remains gated and Board continues to strive to improve liquidity within the Fund. The Board s aim is to always safeguard the interests of investors

6 DIRECTORS REPORT For the year ended The Directors present their report and the audited consolidated financial statements for the year ended 31 December Principal activities Assured Fund (the Fund ) was incorporated as an exempted limited liability company under the provisions of the Companies Law (as amended) of the Cayman Islands on 10 October 2003 and registered as an open ended fund under the Mutual Funds Law of Cayman Islands on 14 October The Fund commenced activities in February Although the Fund operates as an Overseas Scheme in accordance with the terms of the Isle of Man Financial Supervision Act 1988, the Fund is not subject to approval by the Isle of Man Financial Supervision Commission, neither has it the benefit of any compensation arrangement available. The registered office of the Fund is SH Corporate Services Ltd., 4th Floor Harbour Centre, George Town, Grand Cayman, KY1-1102, Cayman Islands. The Fund owns 100% of the Shares in Assured Holdings Ltd. ( Cayman SPV ), a Cayman Islands exempted limited liability company through which the Fund holds some of its portfolio of life settlement policies. These consolidated financial statements include the results and net assets of the Fund and its Cayman SPV (together the Group ). The Fund owned 99.99% of the share capital (10 shares in issue) and corresponding voting rights in Assured Fund S.A. ( Belgium SPV ) since the Belgium SPV s incorporation on 28 July The Belgium SPV is a limited liability company incorporated (société anonyme) under the laws of Belgium and registered at Place Flagey 18, 1050 Brussels, Belgium. On 11 April 2011, the Belgium SPV changed its name to Settlements S.A. On this same date, the Fund s holding in the Belgium SPV was diluted to % as a result of a private placement during which 260 additional shares were issued to qualified investors. On 9 June 2011 the Belgium SPV was listed on the NYSE Alternext in Brussels. The investment objective of the Fund and its subsidiaries, (the Group ), is to deliver consistent, long-term capital growth by investing in a portfolio of life settlement policies issued by life assurance companies scoring at least an A rating with Standard & Poor s or an equivalent rating at the time of purchase. The Fund will primarily purchase policies issued by US life assurance companies. Results for the year and state of affairs at The consolidated statement of financial position as at and the consolidated statement of comprehensive income for the period then ended are set out on pages 10 and 11, respectively. Review of important events since the year end Refer to note 16 to the consolidated financial statements for a review of important events subsequent to 31 December The Group evaluated subsequent events through 29 September 2013 being the date on which the consolidated financial statements became available for issue. Dividends No dividend was declared or paid during the year. Directors The Directors at the date of this report are listed on page 2. All directors served throughout the year, and to date, unless otherwise indicated. 5

7 DIRECTORS REPORT For the year ended (continued) Directors fees and interests Subject to the approval of the shareholders, directors fees have been charged at the rate per annum of US$16,255 in respect of Michael Simmons, US$24,382 in respect of Richard Brindley and Alan Morgan- Moodie with Mark Hindle receiving no fee. In addition the directors may recover their related expenses from the Group. Alan Morgan-Moodie owns shares in Class C GBP and shares in Class C US$ indirectly via a Self-Invested Personal Pension (SIPP). Mark Hindle is a director of both the Fund and the Investment Manager and owns shares in Class C GBP. On behalf of the Directors: Director: MARK HINDLE Director: ALAN MORGAN-MOODIE Date: 29 September 2013 Date: 29 September

8 STATEMENT OF DIRECTORS RESPONSIBILITIES The Directors are required to prepare consolidated financial statements for each financial year which present fairly the state of affairs of the Group and of the profit or loss of the Group for that period. In preparing those consolidated financial statements, the Directors are required to: select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; state whether applicable International Financial Reporting Standards have been followed, subject to any material departures disclosed and explained in the consolidated financial statements; and prepare the consolidated financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business. The Directors are responsible for keeping proper books of account which disclose with reasonable accuracy at any time the financial position of the Group and to enable them to ensure that the consolidated financial statements are prepared in accordance with International Financial Reporting Standards and comply with the Memorandum and Articles of Association and with the laws of the Cayman Islands. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors confirm that they have complied with the above requirements. On behalf of the Directors: Director: MARK HINDLE Director: ALAN MORGAN-MOODIE Date: 29 September 2013 Date: 29 September

9 ABCD KPMG PO Box 493 Telephone: Century Yard Fax: Grand Cayman KY Internet: CAYMAN ISLANDS Independent Auditors Report to the Directors We have audited the accompanying consolidated financial statements of Assured Fund (the Fund ) and its subsidiary, Assured Holdings Ltd. ( Cayman SPV ) together ( the Group ), which comprise the consolidated statement of financial position, as at, the consolidated statements of comprehensive income, changes in net assets attributable to holders of redeemable participating shares and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. The consolidated financial statements of the Group as at 31 December 2011, and for the year then ended, were audited by PricewaterhouseCoopers. Those auditors expressed a disclaimer of opinion on the 2011 consolidated financial statements in their report. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated 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 consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Basis for Qualified Opinion The Group invests in life settlement policies issued exclusively in the United States. Proceeds received by the Group on the maturity of these life settlement policies are subject to withholding tax at the source in the amount of 30% on the gain realised by the Group on the investment as a result of the Group s domicile. In certain cases, the Group has received death benefits from the underlying insurance carriers without the withholding taxes having been withheld at the source. As described in note 17, management consider the possible future payment to be a contingent liability based on a past event. In our opinion, the withholding tax amounts that have not yet been paid on the maturity of these life settlement policies and hence, meet the criteria of a provision as outlined by International Accounting Standards 37 Provisions, Contingent Liabilities and Contingent Assets. ( IAS 37 ). At 31 December 2012, the total potential liability on receipts of this nature which have not been provided for by the Group in accordance with IAS 37 and for which are subject to recourse either by underlying KPMG, a Cayman Islands partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity.

10 ABCD insurance carriers or the relevant taxing authority, amount to US$6,588,082. If the provision had been recorded, the net assets attributable to holders of redeemable Participating Shares would have been reduced by US$6,588,082. Subsequent to, insurance carriers requested repayment of withholding tax previously not withheld from the Group in the amount of US$1,453,513 (see note 17) for which payment proceeded in Qualified Opinion In our opinion, except for the matter referred to in the Basis for Qualified Opinion paragraph, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as at, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Emphasis of Matter Without qualifying our opinion, we draw attention to matters as set forth in note 12, which indicate the existence of a material uncertainty that may cast significant doubt about the Group s ability to continue as a going concern. We also draw your attention to note 4 and 8 of the consolidated financial statements. The Group invests in life settlement policies, which were valued at US$237,088,759 (2011: US$228,801,441) by the Group using a discounted cash flow model in the absence of readily ascertainable market values. However because of the inherent uncertainty of model valuation and uncertainties associated with the significant model inputs, the estimated values may differ significantly from the values that would have been used had readily available market values existed or if another valuation methodology had been adopted, and the difference could be material. We further draw your attention to note 7 and 9(c) of the consolidated financial statements. As at 31 December 2012, redemptions at net asset value have been suspended but redemptions are available to investors on a Net Realisable Value basis. These redemptions are funded by the proceeds obtained from the sale of policies. However, due to the illiquid nature of the life settlement policies portfolio, the option for management to dispose of life settlement policies to meet redemption requests may not be exercised. At, redemption requests on a Net Realisable Value basis pending approval by the Board of Directors across the various classes amount to US$75,217,501. We further draw your attention to note 14 of the consolidated financial statements. Investments in life settlement policies were incorrectly designated as financial assets through profit or loss at inception. These types of investments are specifically excluded from the scope of IAS 39, Financial instruments: Recognition and Measurement and should be reflected separately as other assets. The change in classification represents a prior period error in accordance with IAS 8, Accounting policies, changes in accounting estimates and prior period errors. The prior period error has no effect on the financial position of the Group as at and 2011, its financial performance or its cash flows for the years then ended. The premium liability balance in the prior year consolidated statement of financial position has been reclassified to conform to the current year presentation. There has been no effect on the net assets attributable to holders of redeemable Participating Shareholders as a result of these changes. Refer to note 14 of the consolidated financial statements. 29 September

11 Consolidated Statement of Financial Position Note Assets Loans and receivables Cash and cash equivalents 2(g), 3 5,670,979 6,254,083 Restricted cash 2(g), 3 28,981,008 8,788,584 Amounts receivable on maturity of life settlement policies 2(n) 14,500,000 0 Other receivables 100, ,000 Other assets Investment in life settlement policies 2(f),4,8 237,088, ,801,441 Prepayments 0 171,752 Total assets 286,340, ,115,860 Liabilities Financial liabilities measured at amortised cost Loan notes payable 2(l),5 43,665,959 33,936,354 Policy loans payable 2(m),6 4,295,000 4,295,000 Policy and loan note interest payable 5,6 17,786,678 9,500,296 Management fee payable 290, ,873 Accounts payable and other accruals 722, ,216 Total liabilities (excluding net assets attributable to holders of redeemable Participating Shares) 66,760,492 49,168,739 Net assets attributable to holders of redeemable Participating Shares 13 US$ 219,580, ,947,121 Represented by: Net assets attributable to holders of redeemable Participating Shares (valued at last redemption valuation) 279,200, ,028,546 Adjustment to account for difference between market price and last redemption valuation (59,620,379) (82,081,425) Net assets attributable to holders of redeemable Participating Shares US$ 219,580, ,947,121 Net Asset Value per redeemable Participating Share (valued at last redemption valuation and reflected in United States dollars): Class A US$ (Based on 722,667 (2011: 765,478) shares outstanding) Class B US$ (Based on 618,436 (2011: 624,696) shares outstanding) Class C US$ (Based on 42,918 (2011: 42,415) shares outstanding) Class D US$ (Based on 166,957 (2011: 168,578) shares outstanding) Class F US$ (Based on 3,004 (2011: 3,004) shares outstanding) Class B GBP (Based on 218,752 (2011: 220,227) shares outstanding) Class C GBP (Based on 244,208 (2011: 245,463) shares outstanding) Class B Euro (Based on 12,730 (2011: 12,730) shares outstanding) Class D Euro (Based on 137,153 (2011: 145,261) shares outstanding) Class E CHF (Based on 256,224 (2011: 256,804) shares outstanding) Approved on behalf of the Board of Directors on 29 September Director: MARK HINDLE Director: ALAN MORGAN-MOODIE Date: 29 September 2013 Date: 29 September 2013 See accompanying notes which form an integral part of the financial statements. 10

12 Consolidated Statement of Comprehensive Income For the year ended Note Investment income Interest income 2,413 5,405 Net realised gain on investment in life settlement policies 2(f),4 11,312,603 3,297,392 Net change in unrealised gain/(loss) on investment in life settlement policies 2(f),4 35,404,051 (86,034,640) Net foreign exchange losses (52,710) (168,477) Net investment income 46,666,357 (82,900,320) Expenses Loan and policy note interest 5,6 9,015,988 7,278,889 Investment advisory and management fees 10 3,466,045 5,268,549 Legal and professional fees 1,557,465 1,018,711 Other expenses 1,006, ,370 Administration expenses , ,290 Custodian and escrow fees , ,481 Audit fees 125, ,920 Directors fees and expenses 10 68,097 53,017 Bank charges 58,234 56,992 Commission 7,636 16,356 Total expenses 16,059,013 15,437,575 Net income/(loss) for the year before adjustment for difference between market value and last redemption value 30,607,344 (98,337,895) Net change in adjustment to account for difference between market price and last redemption valuation (22,461,046) (49,543,775) Net increase/(decrease) in net assets attributable to holders of redeemable Participating Shares US$ 8,146,298 (147,881,670) See accompanying notes which form an integral part of the financial statements. 11

13 Consolidated Statement of Changes in Net Assets Attributable to Holders of Redeemable Participating Shares For the year ended Note Net assets attributable to holders of redeemable Participating Shares at beginning of year 194,947, ,087,852 Net increase/(decrease) in net assets attributable to holders of redeemable Participating Shares 8,146,298 (147,881,670) Net change in adjustment to account for difference between market price and last redemption valuation 22,461,046 49,543,775 Capital transactions: Redemptions of redeemable Participating Shares 7 (5,974,212) 0 Gross transfers in between various share classes 7 16,945,078 32,045,261 Gross transfers out from various share classes 7 (16,945,078) (31,848,097) Net assets attributable to holders of redeemable Participating Shares at end of year US$ 219,580, ,947,121 Represented by: Net assets attributable to holders of redeemable Participating Shares (valued at last redemption valuation) 279,200, ,028,546 Adjustment to account for difference between market price and last redemption valuation (59,620,379) (82,081,425) See accompanying notes which form an integral part of the financial statements. 12

14 Consolidated Statement of Cash Flows For the year ended Cash flows provided by/(applied in): Operating activities: Net increase/(decrease) in net assets attributable to holders of redeemable Participating Shares resulting from operations 8,146,298 (147,881,670) Add/(deduct) items not involving cash: Net realised gain on investment in life settlements (11,312,603) (3,297,392) Net change in gain/(loss) on investment in life settlement policies (35,404,051) 13,472,146 Net change in adjustment to account for difference between market price and last redemption valuation 22,461,046 49,543,775 Net change in non-cash operating balances: Decrease/(increase) in other receivables and prepayments 171,752 (171,752) Increase in amounts receivable from maturity of life settlements (14,500,000) 0 Increase in policy and loan note interest payable 8,286,382 6,420,292 (Decrease)/increase in management fee payable (172,065) 210 Decrease in accounts payable and other accruals (252,169) (639,639) (Decrease)/increase in premium liability (13,185,778) 54,142,336 Proceeds from the sale and maturity of investments in life settlement policies 51,615,115 21,619,925 Net cash generated/(used by) operating activities 15,853,927 (6,791,769) Financing activities: Add/(deduct) items not involving cash: Capitalised interest paid on loan notes 729, ,557 Gross transfers in between various share classes 16,945,078 32,045,261 Gross transfers out from various share classes (16,945,078) (31,848,097) Redemptions of redeemable Participating Shares (5,974,212) 0 Increase in restricted cash (20,192,424) (7,733,751) Policy loans payable 0 0 Repayment of loan notes payable (6,000,000) 0 Proceeds from issuance of loan notes 15,000,000 5,000,000 Net cash provided by financing activities (16,437,031) (1,930,030) Net decrease in cash and cash equivalents (583,104) (8,721,799) Cash and cash equivalents at the beginning of the year 6,254,083 14,975,882 Cash and cash equivalents at the end of the year 5,670,979 6,254,083 Supplementary information on cash flows from operating activities Interest paid 0 0 Interest received 2,413 5,405 See accompanying notes which form an integral part of the financial statements. 13

15 Notes to the Consolidated Financial Statements 1. Incorporation and background information Assured Fund (the Fund ) was incorporated as an exempted limited liability company under the provisions of the Companies Law (as amended) of the Cayman Islands on 10 October 2003 and registered as an open ended fund under the Mutual Funds Law of Cayman Islands on 14 October The Fund commenced activities in February Although the Fund operates as an Overseas Scheme in accordance with the terms of the Isle of Man Financial Supervision Act 1988, the Fund is not subject to approval by the Isle of Man Financial Supervision Commission, neither has it the benefit of any compensation arrangement available. The registered office of the Fund is SH Corporate Services Ltd., 4th Floor Harbour Centre, George Town, Grand Cayman, KY1-1102, Cayman Islands. The Fund owns 100% of the Shares in Assured Holdings Ltd. ( Cayman SPV ), a Cayman Islands exempted limited liability company through which the Fund holds some of its portfolio of life settlement policies. These consolidated financial statements include the results and net assets of the Fund and its Cayman SPV (together the Group ). The Fund owned 99.99% of the share capital (10 shares in issue) and corresponding voting rights in Assured Fund S.A. ( Belgium SPV ) since the Belgium SPV s incorporation on 28 July The Belgium SPV is a limited liability company incorporated (société anonyme) under the laws of Belgium and registered at Place Flagey 18, 1050 Brussels, Belgium. On 11 April 2011, the Belgium SPV changed its name to Settlements S.A. On this same date, the Fund s holding in the Belgium SPV was diluted to % as a result of a private placement during which 260 additional shares were issued to qualified investors. On 9 June 2011 the Belgium SPV was listed on the NYSE Alternext in Brussels. The investment objective of the Fund and its Cayman SPV, (the Group ), is to deliver consistent, longterm capital growth by investing in a portfolio of life settlement policies issued by life assurance companies scoring at least an A rating with Standard & Poor s or an equivalent rating at the time of purchase. The Fund will primarily purchase policies issued by US life assurance companies. The investment activities of the Group are managed by Policy Selection Limited (the Investment Manager ). Blue Sea International (the Administrator ) was responsible for the administration of the Group including financial and accounting services until the date of their resignation after which Maples Fund Services (Cayman) Limited were appointed. The Fund currently issues shares in the following classes: Class A US$; Class B US$; Class C US$; Class D US$; Class F US$; Class B GBP; Class C GBP; Class B Euro; Class D Euro; and Class E CHF. The classes exist to cater for differing investor requirements, with different rates of commission being charged according to the class and utilisation of a shared investment pool known as the Operating Class. This optimises the spread for investors whilst reducing the costs of holding the assets (except for forward contracts which can be held in the non US$ classes). Expenses of specific classes are discharged in the relevant class whilst common expenses are borne through the Operating Class. The Operating Class invests exclusively in US$ denominated assets and accordingly the functional currency of the Fund is the US Dollar. PartnerRe Principal Finance, Inc. (the Noteholder ) has a charge over the assets of the Cayman SPV which was formed in order to hold all of the policies as security for the US$50 million credit facility. 14

16 2. Significant accounting policies The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been applied consistently, unless stated otherwise. (a) Basis of preparation The consolidated financial statements are prepared in accordance with International Financial Reporting Standards ( IFRS ) issued by the International Accounting Standards Board ( IASB ). The functional and presentation currency of the Group is United States dollars and not the local currency of the Cayman Islands reflecting the fact that the primary activity of the Group is to invest in United States dollar denominated life settlement policies. Redeemable Participating Shares of the Fund are issued and redeemed in United States dollars, Sterling, Euro and Swiss Franc s but the performance of the Group is measured and reported to these investors in United States dollars. The Board of Directors considers the United States dollar as the currency that most faithfully represents the economic effects of the underlying transactions, events and operations of the Group. The financial statements are prepared on a fair value basis for investments in life settlement policies. Other assets and liabilities are valued at amortised cost or historical cost. There are a number of other International Financial Reporting Standards and Interpretations which are in issue but have not been applied in these financial statements as they are not yet effective. See note 2(r) for details. (b) Basis of consolidation These consolidated financial statements include the results of the Cayman SPV, a 100% subsidiary of the Fund. The Fund owns 100% of the issued share capital of the Cayman SPV. All intercompany balances and transactions are eliminated upon consolidation. As at and 2011, the Fund only holds % of the shares issued by the Belgium SPV and hence the results of the Belgium SPV have not been consolidated. Subsidiaries are fully consolidated from the date on which control is transferred to the Group and are deconsolidated on the date that control ceases to exist. (c) Use of estimates The preparation of consolidated financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the amounts and disclosures in the consolidated financial statements and accompanying notes. Management believe that the estimates utilised in preparing its consolidated financial statements are reasonable and prudent. Actual results could differ from these estimates. Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year, as well as critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the consolidated financial statements are included in note 8. 15

17 2. Significant accounting policies (continued) (d) Financial assets and liabilities (i) Classification The Fund classifies financial assets and financial liabilities into the following categories: Financial assets classified as loans and receivables include cash and cash equivalents, restricted cash amounts receivable on maturity of life settlement policies and other receivables. Financial liabilities at amortised cost include loan notes payable, policy loans payable, interest payable, management fee payable, and accounts payable and accrued expenses. Other assets comprise prepayments and investment in life settlement policies. Investment in life settlement policies are classified separately as they are excluded from the scope of IAS 39. (ii) Recognition Financial assets classified as loans and receivables are recognised on the day that they are transferred to the Group. Financial liabilities are not recognised unless one of the parties has performed its obligations or the contract is a derivative contract not exempted from the scope of International Accounting Standard 39 ( IAS 39 ). (iii) Measurement Financial assets classified as loans and receivables are carried at amortised cost using the effective interest rate method, less impairment losses, if any. Financial liabilities are measured at amortised cost or redemption amounts (refer to note 7 for further details) for redeemable Participating Shares. (iv) Fair value measurement principles Fair value is the amount for which an asset could be exchanged or a liability settled, between knowledgeable, willing parties in an arm's length transaction on the measurement date. All changes in fair value, other than interest and dividend income and expense, are recognised in the consolidated statement of comprehensive income. (v) Amortised cost measurement principles The amortised cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment. 16

18 2. Significant accounting policies (continued) (d) Financial assets and liabilities (continued) (vi) Impairment A financial asset not classified at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence of impairment. A financial asset or group of financial assets is impaired if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset, and that loss event had an impact on the estimated future cash flows of that asset that can be estimated reliably. Objective evidence that the financial assets are impaired includes significant financial difficulty of the borrower or issuer, default or delinquency by a borrower, restructuring of amount due on the terms that the Group would not consider otherwise, indications that a borrower or issuer will enter bankruptcy, or adverse changes in the payment status of the borrowers. An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset s original effective interest rate. Losses are recognised in profit or loss and reflected in an allowance account against receivables. Interest on the impaired asset continues to be recognised. When an event occurring after the impairment was recognised causes the amount of the impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss. (vii) Derecognition The fund derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or it transfers the financial asset and the transfer qualifies for derecognition in accordance with IAS 39. On derecognition of a financial asset, the difference between the carrying amount of the asset, and the consideration received is recognised in the consolidated statement of comprehensive income. A financial liability is derecognised when the obligation specified in the contract is discharged, cancelled or expired. (e) Offsetting financial instruments Financial assets and liabilities are offset and the net amount presented in the consolidated statement of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted under IFRS, for example, for gains and losses arising from a group of similar transactions, such as realised and change in unrealised gains and losses from life settlement policies. (f) Other assets Other assets include prepayments and investments in life settlement policies which are classified separately as they are excluded from the scope of IAS 39 Financial Instruments: Recognition and Measurement. 17

19 2. Significant accounting policies (continued) (f) Other assets (continued) Life settlement policies (i) Recognition The purchase of a life settlement policy is recognised on the date the Fund is acknowledged as owner and beneficiary of the policy by the insurance carrier. The Fund does not hold the right to receive the future death benefit until the transfer of ownership and beneficiary rights have been acknowledged by the insurance carrier. At the purchase date of the life settlement policies, the Fund reserves the complete purchase price in escrow with a third party escrow agent. Once the transfer of ownership and the beneficiary rights are confirmed by the insurance carrier, the settlement amount and applicable fees are disbursed to the seller and relevant intermediaries in order to complete the purchase. From the date of the purchase, any gains and losses arising from changes in fair value are recorded in the consolidated statement of comprehensive income and any premium payments are for the account of the Fund. (ii) Measurement Investments in life settlement policies are initially recognised at fair value (transaction price) plus all acquisition costs that are directly attributable to the purchase of the specific policy net of future premium liabilities. Certain transaction costs associated with the purchase of the life settlement policies are expensed as incurred in the consolidated statement of comprehensive income. Net changes in fair value on investments in life settlement policies are recorded in the consolidated statement of comprehensive income through changes in unrealised gains and losses. Refer to note 8 for more details on the fair value estimation of life settlement policies. (g) Cash and cash equivalents and restricted cash Cash comprises cash on hand and demand deposits. Cash must be readily available for the payment of obligations, and free from any contractual restriction that limits its use (i.e. excludes restricted cash). Cash equivalents are short term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to insignificant changes in value. Restricted cash include cash balances which are held in accounts which have been designated to be used for a specific purpose and are therefore not available for immediate and general use by the Group. (h) Expenses Expenses are accounted for on an accrual basis and recorded in the consolidated statement of comprehensive income. This includes expenses incurred to acquire life settlement policies, including but not limited to commissions paid to agents, advisors and dealers. These costs are recognised as an expense when they are incurred. 18

20 2. Significant accounting policies (continued) (i) Interest income and expense Interest income and expenses are recorded in the consolidated statement of comprehensive income and accounted for on the effective yield basis. (j) Foreign currency translation Monetary assets and liabilities denominated in currencies other than United States dollars are translated into United States dollars at the closing rates of exchange at the period end. Transactions during the period, including purchases and sales of life settlement policies, income and expenses, are translated at the rate of exchange prevailing on the date of the transaction. Foreign currency translation gains and losses are included in realised and change in unrealised foreign exchange gains and losses in the consolidated statement of comprehensive income. Realised and change in unrealised foreign exchange gains and losses resulting from forward currency contracts are allocated to the specific class of shares to which the contracts relate. (k) Net Asset Value per share The NAV per share is calculated for each class of share in accordance with the Offering Memorandum, by dividing the net assets attributable to each class of share by the number of redeemable Participating Shares in issue at the period end. (l) Loan notes Loan notes are recognised initially at fair value, net of transaction costs incurred. Loan notes are subsequently carried at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the consolidated statement of comprehensive income over the period of the loan notes using the effective interest method. Fees paid on the establishment of loan notes are recognised as transaction costs on the loan notes to the extent that it is probable that some or all of the credit facility will be drawn down. (m) Policy loans Policy loans are recognised initially at fair value and subsequently carried at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the consolidated statement of comprehensive income over the period of the policy loans using the effective interest method. (n) Amounts receivable on maturity of life settlement policies Amounts receivable on maturity of life settlement policies represent the death benefit receivable from insurance carriers on life settlement policies which have matured prior to the end of the year for which the death benefits have not been received yet at year end. Amounts receivable on maturity of life settlement policies are carried at amortised cost using the effective interest rate method, less impairment losses, if any. 19

21 2. Significant accounting policies (continued) (o) Allocation of net profit and net loss Allocation of gains, losses, income and expenses (other than expenses attributable to a specific share class) among different classes and different series in each class of share is based on their monthly relative net assets value. (p) Taxation There is currently no taxation imposed on income and capital gains in the Cayman Islands and in accordance with the provisions of the Tax Concessions Law, the Fund has received an undertaking by the Governor in Cabinet of the Cayman Islands, exempting it from all local taxation on future profits, income or gains until 13 December In jurisdictions other than the Cayman Islands, foreign taxes will, in some cases, be withheld at source on proceeds from the maturity of life settlement policies received by the Fund. (q) Redeemable participating shares The redeemable Participating Shares issued by the Fund provide the holders of redeemable Participating Shares with the right to redeem their shares for cash equal to their proportionate share of the net assets of the Fund or on a net realisable value basis. Within the context of IAS 32 Financial instruments: Presentation ( IAS 32 ), the existence of the option for the holders of redeemable Participating Shares to redeem the shares in the Fund in exchange for cash requires the Fund to classify the redeemable Participating Shares as liabilities. Redemptions are subject to certain restrictions and limitations which are set out in note 7. IAS 32 provides for classification or reclassification of Redeemable Shares to equity rather than financial liabilities if it meets all of the following conditions: it entitles the holder to a pro rata share of the Fund s net assets in the event of the Fund s liquidation; it is in the class of instruments that is subordinate to all other classes of instruments; all financial instruments in the class of instruments that is subordinate to all other classes of instruments have identical features; apart from the contractual obligation for the Fund to redeem the instrument for cash or another financial asset, the instrument does not include any other features that would require classification as a liability; and the total expected cash flows attributable to the instrument over its life are based substantially on the profit or loss, the change in the recognised net assets or the change in the fair value of the recognised and unrecognised net assets of the Fund over the life of the instrument. The Fund has ten classes of redeemable Participating Shares in issue that incur different management fee percentages and as a result their redeemable features are not considered identical. The liability to holders of redeemable Participating Shares is presented on the statement of financial position as net assets attributable to holders of redeemable participating shares and is determined based on the residual assets of the Fund after deducting the Fund s other liabilities and management share capital. 20

22 2. Significant accounting policies (continued) (r) Changes in accounting standards Standards issued but not yet effective up to the date of issuance of the Group s consolidated financial statements are listed below. The Group intends to adopt applicable standards when they become effective. IFRS 9 Financial Instruments: Classification and Measurement IFRS 9 as issued reflects the first phase of the IASB s work on the replacement of IAS 39 and applies to classification and measurement of financial assets and financial liabilities as defined in IAS 39. The standard is effective for annual periods beginning on or after 1 January In subsequent phases, the IASB will address hedge accounting and impairment of financial assets. The adoption of the first phase of IFRS 9 will have an effect on the classification and measurement of the Group s financial assets but will potentially have no impact on classification and measurements of financial liabilities. The adoption is not expected to have an impact on the Group s consolidated financial position or performance. IFRS 13 Fair Value measurement IFRS 13, Fair value measurement, effective for annual periods beginning on or after 1 January The standard improves consistency and reduces complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs. The requirements do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRS. If an asset or a liability measured at fair value has a bid price and an ask price, the standard requires valuation to be based on a price within the bid ask spread that is most representative of fair value and allows the use of mid market pricing or other pricing conventions that are used by market participants as a practical expedient for fair value measurement within a bid ask spread. The Group is yet to assess IFRS 13 s full impact and intends to adopt IFRS 13 no later than the accounting period beginning on or after 1 January Investment Entities - Amendments to IFRS 10, IFRS 12 and IAS 27 On 31 October 2012, the IASB issued Investment Entities - Amendments to IFRS 10, IFRS 12 and IAS 27. The amendment to IFRS 10 defines an investment entity and provides an exception from consolidation for investment entities requiring them to measure subsidiaries at fair value through profit or loss in accordance with IFRS 9 (or IAS 39), rather than consolidate them. Investment entity refers to an entity whose business purpose is to invest funds solely for returns from capital appreciation, investment income or both. An investment entity must also evaluate the performance of its investments on a fair value basis. IFRS 12 has also been amended by introducing disclosures an investment entity applying the new consolidation exemption needs to make. A scope exemption for investment entities has been applied to IFRS 3 Business Combinations (i.e. business combination accounting is not required for the acquisition of subsidiaries by an investment entity). The Group is currently assessing the impact that this amendment will have on the Group s consolidated financial position and performance. The amendments are effective from 1 January 2014 with early adoption permitted, allowing investment entities to apply the Investment Entities amendments at the same time they first apply IFRS

23 2. Significant accounting policies (continued) (r) Changes in accounting standards (continued) IAS 32 Financial instruments: Presentation IAS 32, Financial instruments: Presentation amendments clarify some of the requirements for offsetting financial assets and financial liabilities in the consolidated statement of financial position. In connection therewith, IFRS 7, Financial instruments: Disclosures amendments were also issued. These new IFRS 7 disclosures are intended to facilitate comparison between IFRS and US GAAP preparers. The converged offsetting disclosures in IFRS 7 are to be retrospectively applied, with an effective date of annual periods beginning on or after 1 January The IAS 32 changes are retrospectively applied, with an effective date of annual periods beginning on or after 1 January Master netting agreements where the legal right of offset is only enforceable on the occurrence of some future event, such as default of the counterparty, continue not to meet the offsetting requirements. The disclosures focus on quantitative information about recognised financial instruments that are offset in the statement of financial position, as well as those recognised financial instruments that are subject to master netting or similar arrangements irrespective of whether they are offset. The new amendments are not expected to have any significant impact on the Group s financial position or performance. 3. Cash and cash equivalents Restricted cash 28,981,008 8,788,584 Cash and cash equivalents 5,670,979 6,254,083 34,651,987 15,042,667 Cash and cash equivalents include cash balances held in the Operating Account at the Principal Banker used to process daily operational expenses of the Group. Restricted cash includes cash balances which are held in accounts which have been designated to be used for a specific purpose and are therefore not available for immediate and general use by the Group. The restricted accounts relate to the credit facility received from the Noteholder. The balances are restricted in terms of the Indenture Agreement entered into between the Group and the Indenture Trustee as follows: Balances held in the Collection Account are held for the benefit of the Noteholder in order to repay the loan notes due on 28 June All proceeds from the maturity or sale of life settlement policies held by the Cayman SPV as security for the credit facility provided will be deposited to this account. The Indenture Trustee, shall have exclusive control and sole right of withdrawal with respect to the Collection Account. The amounts held herein will be transferred to the Payment Account in order to settle the Group s obligation when the loan notes are due for repayment. Balances held in the Payment Account are held for the benefit of the Noteholder. The only permitted withdrawal from or application of the funds held in this account shall be to pay the interest on and the principal of the loan notes in accordance with the terms of the Note Purchase Agreement and the Indenture. 22