Investment funds. Illustrative IFRS financial statements 31 December PRECISE. PROVEN. PERFORMANCE.

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1 Investment funds Illustrative IFRS financial statements 31 December PRECISE. PROVEN. PERFORMANCE.

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3 Illustrative IFRS financial statements Investment funds Introduction Individuals preparing financial statements face many challenges: grappling with often complex accounting standards, writing clear notes, judging how much information is really material. Telling a clear and engaging story while also meeting regulatory expectations isn t easy. Therefore we are pleased to introduce, for the fourth year, a set of illustrative financial statements for investment funds in accordance with International Financial Reporting Standards (IFRS) as at 31 December For clarity, we have focused on the requirements for the financial statements themselves. Accordingly, we have not included any disclosure requirements arising from the Listing Rules, Disclosure and Transparency Rules and the Corporate Governance Code for listed investment trusts, for example. Also, to make the document as general as possible, we have not taken into account specific Statements of Recommended Practice (SORPs) that apply to investment trusts, venture capital trusts and authorized funds. We would be happy however to advise you on any of these aspects. The Alternative Investment Fund Managers Directive (AIFMD) has also introduced disclosure requirements for many funds. While these are not included in this document, Moore Stephens has produced materials advising on the impact of AIFMD which can be found at If you would like to discuss any aspects of our approach, please get in touch. We would be delighted to receive your feedback. Jonty Clarke Director jonty.clarke@moorestephens.com i

4 Illustrative IFRS financial statements Investment funds Financial statements for the year ended 31 December 2018 ii

5 Illustrative IFRS financial statements Investment funds Contents IFRS... 1 Statement of profit or loss and other comprehensive income...2 Statement of financial position...4 Statement of changes in equity...5 Statement of cash flows...6 Notes to the financial statements General information Summary of significant accounting policies Basis of preparation Foreign currency translation Revenue recognition Interest income and expense Dividend income and expense Fees and expenses Taxation Financial assets and financial liabilities at fair value through profit or loss Classification Recognition, derecognition and measurement Fair value Net gain or loss from financial assets and liabilities at fair value through profit or loss Financial assets at fair value through other comprehensive income Classification Recognition, derecognition and measurement Net gain or loss from financial assets and liabilities at fair value through other comprehensive income Due from and due to brokers Cash and cash equivalents Redeemable shares Change in accounting policies Classification and measurement of financial instruments Impairment of financial assets Adoption of new and revised International Financial Reporting Standards New and amended standards and interpretations effective for periods beginning on or after 1 January Standards, amendments and interpretations in issue but not yet effective Critical accounting estimates and judgments Financial risk management Market risk Price risk Currency risk Interest rate risk Credit risk Liquidity risk Fair value...22 iii

6 Illustrative IFRS financial statements Investment funds Financial statements for the year ended 31 December 2018 Contents (continued) Classification of fair value assets and liabilities Transfers between levels Valuation techniques Reconciliation of level 3 financial assets Capital risk management Interest income Financial assets and liabilities at fair value through profit or loss Financial assets at fair value through profit or loss Financial liabilities at fair value through profit or loss Assets pledged as collateral Cash and cash equivalents Redeemable shares Authorised, issued and fully paid up redeemable shares Related parties Investment manager Administrative agent Custodian Directors Events after the end of the reporting period Ultimate controlling party Capital commitments...28 IFRS for SMEs Statement of comprehensive income...30 Statement of financial position...31 Statement of changes in equity...32 Statement of cash flows...33 Notes to the financial statements...34 iv

7 Illustrative IFRS financial statements Investment funds Contents (continued) 1. General information Basis of preparation Summary of significant accounting policies Foreign currency translation Revenue recognition Interest income Dividend income and expense Financial assets and financial liabilities at fair value through profit or loss Classification Recognition, derecognition and measurement Fair value Net gain or loss from financial assets and liabilities at fair value through profit or loss Critical accounting estimates and judgments Taxation Investments Financial assets at fair value through profit or loss Financial liabilities at fair value through profit or loss Trade receivables Accruals and other payables Redeemable shares Authorised, issued and fully paid up redeemable shares Related parties Investment manager Administrative agent Custodian Directors Events after the end of the reporting period Ultimate controlling party Approval of financial statements...39 v

8 Illustrative IFRS financial statements Investment funds Financial statements for the year ended 31 December 2018 vi

9 Illustrative IFRS financial statements Investment funds IFRS Investment funds Illustrative IFRS financial statements 31 December 2018 Note A No new accounting policy has been applied retrospectively in these model financial statements and, accordingly, no presentation of the statement of financial position, or related notes, as at the beginning of the comparative period is made. Generally this would require a third column to be added to a current and prior period columnar presentation if the retrospective application has a material effect on the information in the statement of financial position at the beginning of the preceding period. See IAS 1.10(f) and IAS1.40A for details of requirements where retrospective applications of new accounting policies are made. In compiling these illustrative disclosures, we have made the following assumptions: The company has chosen 1 January 2018 as the date of initial application for the adoption of IFRS 9. There is no material impact from the application of IFRS 15. We believe this will generally be the case with investment entities, but there may be exceptions. Similarly we have assumed that there is no material impact from the future application of IFRS 16. The company has elected to apply the limited exemption in IFRS 9 paragraph relating to transition for classification and measurement and impairment, and accordingly has not restated comparative periods in the year of initial application. As a consequence: any adjustments to carrying amounts of financial assets or liabilities are recognised at the beginning of the current reporting period, with the difference recognised in opening retained earnings; financial assets are not reclassified in the balance sheet for the comparative period; provisions for impairment have not been restated in the comparative period; the transition is a change in accounting policy, and disclosures required by IAS 8 are illustrated; a third balance sheet as at 31 December 2016 is not presented as there is no impact of restatement on the balance sheet for the year ended 31 December 2016; disclosure requirements arising from the consequential amendments to IFRS 7 upon adoption of IFRS 9 have not been presented in relation to the comparative period; new accounting policies have been disclosed, and references to the old policies included, which are applied to the amounts presented in the comparative period; the company adopts the general expected credit loss model for debt investments carried at fair value through other comprehensive income; the company has adopted the simplified expected credit loss model for trade receivables, as permitted by IFRS 9, paragraph

10 Illustrative IFRS financial statements Investment funds Financial statements for the year ended 31 December 2018 Reference: IAS1.10(b), (10A) IAS1.51(a-e) IAS1.81A Statement of profit or loss and other comprehensive income 1 (Stated in US Dollars, unless otherwise indicated) IAS1.113 Note IAS1.82(a) Revenue IAS1.85 Interest income 6 24,116,758 16,282,936 IAS1.85 Dividend income 3,568,529 5,972,401 IAS1.85 IAS21.52(a) Net foreign currency gain/(loss) 2 97, ,171 IFRS7.20(a)(i) Net gain from financial assets and liabilities at fair value 7 36,042,674 11,369,001 through profit or loss 3 IFRS7.20(a)(viii) IAS1.82(cb) Profit reclassified from OCI on disposal 7 400,000 Total net income/(loss) 64,225,328 43,847,509 IAS1.99 Expenses Management fees (6,712,779) (3,432,865) Custodian fees (134,256) (68,657) Administration fees (895,037) (457,715) Directors fees (30,635) (25,058) Performance fees (8,325,686) (5,613,990) Legal and professional fees (256,662) (104,061) Other expenses (77,818) (77,648) Total operating expenses (16,432,873) (9,779,994) Profit before tax 47,792,455 34,067,515 IAS1.82(d) Withholding taxes 4 (5,099,792) (833,077) IAS1.81A(a) Profit or loss for the period 42,692,663 33,234,438 IAS1(82A)(b) Items that may be reclassified to profit or loss IFRS7.20(a)(viii) Net gain from financial assets at fair value through OCI 7 5,000,000 Profit reclassified from OCI on disposal 7 (400,000) IAS1.81A(c) Total comprehensive income for the period 47,292,663 33,234,438 2 Statement of profit or loss and other comprehensive income

11 Illustrative IFRS financial statements Investment funds 1 IAS1 (revised), Presentation of financial statements p.10a gives a choice of presenting all items of income and expense recognised in a period either (1) in a single statement of profit or loss and other comprehensive income, or (2) in two statements comprising (a) a separate statement of profit or loss, which displays components of profit or loss, and (b) a statement of comprehensive income, which begins with profit or loss and displays components of other comprehensive income. The Fund has elected to use the single statement approach. 2 The net foreign currency gains and losses presented do not include those arising on financial instruments measured at fair value through profit and loss in accordance with IFRS9. 3 It is assumed that the fund managers will be required to regularly value the Fund for the purposes of management information and the pricing of dealing units. As such, the liabilities of the Fund fall under IFRS (b) and may be irrevocably designated as fair value through profit and loss on inception; even if they do not meet the criteria for classification as held for trading. 4 The withholding tax charge relates to the tax deducted at source from the dividends receivable by the entity. IAS12 does not provide guidance on the treatment of withholding taxes in the recipient entity. However, for consistency with the treatment in the distributing entity it is considered to be appropriate to record the dividend income gross and record the withheld tax as an income tax charge. Statement of profit or loss and other comprehensive income 3

12 Illustrative IFRS financial statements Investment funds Financial statements for the year ended 31 December 2018 Reference: IAS1.10(a) IAS1.51(a-e) Statement of financial position (Stated in US Dollars, unless otherwise indicated) IAS1.113 Note IAS1.60, 66 IAS1.54(d) IFRS7.8(a) IFRS IFRS7.14(a) IFRS7.8(h) IFRS Assets Fixed assets Financial assets at fair value through profit or loss 5 602,333, ,928,835 Financial assets at fair value through profit or loss pledged as collateral Financial assets at fair value through other comprehensive income Financial assets at fair value through other comprehensive income pledged as collateral 5 282,229, ,765, ,281,553 5 IFRS7.8 IAS1.54(h) IFRS7.8 IAS1.54(h) Current assets Due from brokers 23,732,686 58,578,970 Other receivables and prepayments 48,727,943 27,002,274 IAS1.54(i) Cash and cash equivalents 8 23,585, ,642,010 Total assets 1,128,890, ,917,586 IAS1.60, 69 Liabilities and equity Current liabilities IAS1.54(m) Financial liabilities at fair value through profit or loss 5 528,463, ,587,845 IAS1.54(k) IFRS7.8 Due to brokers 8,660,169 5,256,368 IAS1.54(k) Accruals and other payables 4,642,271 1,160,367 IAS1.55 Total liabilities 541,765, ,004,580 IAS32.16 IAS1.54(r) Equity Share capital ,544, ,626,198 IAS1.54(r) OCI Reserve 4,800,000 IAS1.54(r) Retained earnings 127,779,471 88,286,808 Total equity 587,124, ,913,006 IAS1.54(r) Total liabilities and equity 1,128,890, ,917,586 5 In accordance with IAS32.16 redeemable shares, or units, where there is no subordinate class of shares will be classified as equity instruments as they represent the residual interest in the entity. Conversely, any subordinate redeemable shares, for instance management shares, would be classified as a financial liability. 4 Statement of financial position

13 Illustrative IFRS financial statements Investment funds Reference: IAS1.10(c) IAS1.51(b-e) IAS1.106 Statement of changes in equity (Stated in US Dollars, unless otherwise indicated) Share capital OCI reserve Retained earnings Total As at 1 January ,750,000 55,052, ,802,370 IAS1.106(d)(iii) Proceeds from redeemable shares issued 149,663, ,663,840 IAS1.106(d)(iii) Redemption of redeemable shares (24,787,642) (24,787,642) IAS1.106(d)(i) Profit for the period 33,234,438 33,234,438 IAS1.106(d)(iii) Dividends As at 31 December ,626,198 88,286, ,913,006 Adjustment on adoption of IFRS 9 200,000 (200,000) Restated as at 1 January ,626, ,000 88,086, ,913,006 IAS1.106(d)(iii) Proceeds from redeemable shares issued 282,594, ,594,433 Redemption of redeemable shares (47,675,837) (47,675,837) IAS1.106(d)(i) Profit for the period 42,692,663 42,692,663 Net gain from financial assets at fair value through OCI 5,000,000 5,000,000 Profit reclassified on disposal (400,000) (400,000) IAS1.106(d)(iii) Dividends (3,000,000) (3,000,000) As at 31 December ,544,794 4,800, ,779, ,124,265 Statement of changes in equity 5

14 Illustrative IFRS financial statements Investment funds Financial statements for the year ended 31 December 2018 Reference: IAS1.10(d) IAS1.51(b-e) IAS7.1 Statement of cash flows 6 7 (Stated in US Dollars, unless otherwise indicated) IAS IAS7.10, 18(a) IAS7.15 Cash flows from operating activities Purchase of financial assets and settlement of financial liabilities (512,149,893) (136,411,304) IAS7.15 Proceeds from sale of financial assets 131,520, ,269,385 IAS7.15 Purchase of derivative financial instruments (19,830,008) (22,658,943) IAS7.15 Settlement of derivative financial instruments 39,660,016 45,317,886 IAS7.15, 31 Dividends received 2,736,059 4,830,698 IAS7.15, 31 Interest received 28,986,349 17,306,891 Operating expenses paid (12,950,969) (7,893,641) Net cash flow from operating activities (342,027,460) 8,760,972 IAS7.10 Cash flows from financing activities IAS7.17 Distributions paid to holders of redeemable shares (3,000,000) IAS7.17 Proceeds from issue of redeemable shares 282,594, ,663,840 IAS7.17 Redemptions of redeemable shares (47,675,837) (24,787,642) Net cash flow from financing activities 231,918, ,876,198 Net (decrease)/increase in cash and cash equivalents (110,108,864) 133,637,170 Cash and cash equivalents at 1 January ,642,010 6,636 IAS7.28 Exchange gains/(losses) on cash and cash equivalents 52,142 (1,796) Cash and cash equivalents at 31 December ,585, ,642,010 6 The statement of cash flows presented uses the direct method, which is the method encouraged by IAS7. Many entities however use the indirect method which is also acceptable under the standard. 7 The statement of cash flows presented does not include the third standard heading, Cash flows from investing activities on the basis that the investing carried out by the Fund forms part of its operations. 6 Statement of cash flows

15 Illustrative IFRS financial statements Investment funds Reference: IAS1.10(e) IAS1.51(b-e) IAS1.113 Notes to the financial statements (Stated in US Dollars, unless otherwise indicated) IAS1.138(a)(b) IAS1.138(a), (b) 1. General information The Fund is an open ended investment company which is incorporated, as a limited liability company, and domiciled in MS Island. The address of the legal representative and registered office is 150 Presidential Highway, MS Island City. IAS1.138(b) The Fund s objective is to generate long-term absolute growth through diversified investment in long and short positions in North American and European emerging market equities, derivative instruments and both company and sovereign debt. IAS1.17(b) IAS1.112(a) IAS Summary of significant accounting policies 8 The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been applied consistently to all the years presented, unless otherwise stated. IAS1.16 IAS1.17(a) IFRS94.1.2A IAS Basis of preparation The financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ). The company has applied IFRS 9 retrospectively, but has elected not to restate comparative information. As a result, the comparative information provided continues to be accounted for in accordance with the company s previous accounting policy. The financial statements have been prepared on the historical cost basis with the exceptions of financial instruments at fair value through profit or loss, and of financial instruments at fair value through other comprehensive income, both of which have been measured at fair value. They are prepared on a going concern basis. 9 The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise judgement in the process of applying the accounting policies selected for use by the Fund. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in note 4. Use of available information and the application of judgement are inherent in the formation of estimates and, as such, actual outcomes in the future could differ from such estimates. IFRS Consolidated financial statements have not been prepared, even though the fund has control of some of its investors, on the basis that it is an investment entity and hence is exempt from consolidation under IFRS Please note that if the Fund s issued financial instruments are traded in a public market, or the financial statements are filed with a securities commission or other regulator for the purposes of issuing instruments to a public market, the Fund would be required to report segmental information in accordance with IFRS8 Operating Segments and would thus require an additional accounting policy to be included here. 9 Please note that the client may choose to exercise the option to designate a financial asset at fair value through profit and loss under IFRS Debt securities designated as fair value through profit or loss under IAS39 could avoid being reclassified to fair value through other comprehensive income under IFRS A. This irrevocable designation is made at inception and can be applied if doing so eliminates or reduces a measurement or recognition inconsistency. These illustrative financial statements are prepared on the basis that this option has not been exercised. Notes to the financial statements 7

16 Illustrative IFRS financial statements Investment funds Financial statements for the year ended 31 December 2018 IAS21.21 IAS21.23(a) IAS21.23(c) 2.2 Foreign currency translation The Fund has determined that the US$ is its functional currency, as this is the currency of the economic environment in which the Fund predominantly operates. Transactions in currencies other than US$ are recorded at the rate of exchange prevailing on the date of the transaction. At each reporting date, monetary assets and liabilities denominated in currencies other than US$ are retranslated at the rate of exchange prevailing at the reporting date. Gains and losses arising on translation are included in profit or loss and are reported on a net basis. IFRS Revenue recognition Interest income and expense Interest income and expense, including interest income from non-derivative financial assets at fair value through profit or loss, are recognised in profit or loss, using the effective interest method. IFRS7.21, B5(e) IFRS A IAS Dividend income and expense Dividend income is recognised in profit or loss on the date at which the right to receive payment is established. Dividend income is recognised gross of withholding tax with the tax shown separately under current tax in the statement of profit and loss and other comprehensive income. Dividends payable to holders of redeemable shares are recognised as a liability and in retained earnings when they have been authorised. IAS Fees and expenses Fees and other expenses are immediately recognised in profit and loss when they are incurred. IAS Taxation The Fund is domiciled in MS Island. Under the laws of MS Island, no income, capital gains, corporation or other tax is payable by the Fund. Withholding taxes imposed by other jurisdictions on investment income and capital gains are however incurred by the Fund. The income and gains subject to these taxes are presented gross of the withholding tax with the tax incurred presented as a separate line item. IFRS7.21 IFRS IFRS Financial assets and financial liabilities at fair value through profit or loss Classification All the investments in equity and derivatives held by the Fund are classified as financial assets or liabilities at fair value through profit or loss. These investments are categorised as financial assets and liabilities held for trading. Debt investments that qualify for measurement at fair value through other comprehensive income are discussed in note If the option to designate debt securities at fair value through profit and loss under IFRS is exercised at initial recognition the classification would also include a further sub-category financial assets designated at fair value through profit or loss at inception. The designation may only be applied if doing so eliminates or reduces a measurement or recognition inconsistency. However, this is unlikely to apply in the case of funds as their objective is achieved both by collecting contractual cash flows from debt securities and selling financial assets. 8 Notes to the financial statements

17 Illustrative IFRS financial statements Investment funds IFRS IFRS (b) Recognition, derecognition and measurement Regular purchases and sales of financial instruments are recognised on the trade date, being the date on which the Fund commits itself to the purchase or sale. Financial instruments at fair value through profit or loss are initially recognised at fair value, when the Fund becomes party to the contractual provisions of the instrument, with their associated transaction costs being charged immediately, when incurred, to profit or loss. IFRS (c) Subsequent to the initial recognition, financial assets and liabilities at fair value through profit and loss are measured at fair value with the resultant gains and losses being taken to profit or loss. The effect of changes in the fair value of a financial liability attributable to changes in the credit risk of that liability are recognised in other comprehensive income. IFRS9.1.1 IFRS9.1.2 IFRS9.B3.4.5 IFRS Financial assets are derecognised when the contractual rights to the cash flows from the asset expire, or when the Fund has transferred substantially all the risks and rewards of ownership. IFRS Fair value The fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. IFRS13.70 The fair value of assets and liabilities traded in an active market 11 is based on quoted market prices 12 at the close of trading on the reporting date. For quoted financial assets the valuation is based on the closing bid price; for quoted liabilities the closing asking price is applied 13. IFRS13.61 In the event that there is a significant movement in the fair value following the end of trading but before midnight in MS Island on the reporting date, valuation techniques will be applied in order to determine the closing fair value. Where financial instruments are not traded in an active market, the fair value is determined using valuation techniques. The valuation techniques used are dependent on the level of data, the circumstances and the availability of observable inputs for each such financial instrument but may include comparable, recent, arm s length transactions, discounted cash flow analysis and option pricing models. IFRS7.21 IFRS7.B5(e) Net gain or loss from financial assets and liabilities at fair value through profit or loss Net gains or losses from financial instruments at fair value through profit or loss includes all realised and unrealised 14 fair value changes but does not include interest and dividend income. 11 An active market is considered to be one in which transactions take place with sufficient frequency and volume to provide pricing information on an ongoing basis (IFRS 13 Appendix A). 12 Many financial instruments will be traded in multiple active markets. In this case the price used should be that in the principal, or most advantageous, market. This market may be different for different entities with the same financial instrument owing to access to any given market and need not be based on an exhaustive search. A general presumption is that the principal market will be the one in which the entity would normally enter in to the transaction. 13 The application of bid/ask prices to assets/liabilities is permitted by IFRS13, but is not the only option given. Generally, the price within the bid-ask spread which is most representative of fair value should be used, however this does not preclude the use of mid-market pricing or other market accepted pricing conventions. 14 There is no IFRS requirement to disclose the split between the realised and unrealised gains and losses recognised for the period. However, it should be noted that for an EU company, distributions may only legally be made from accumulated realised profits, per the 2nd Company Law Directive. This does not necessarily disqualify fair value gains on assets held at the reporting date from distributable profit. Notes to the financial statements 9

18 Illustrative IFRS financial statements Investment funds Financial statements for the year ended 31 December 2018 IFRS A 2.7 Financial assets at fair value through other comprehensive income Classification All the investments in debt securities held by the Fund are classified as financial assets at fair value through other comprehensive income on the basis that contractual cash flows are solely principal and interest and the objective of the company s business model is achieved both by collecting contractual cash flows and selling financial assets. Assets and liabilities classified as held for trading are those acquired or incurred principally for the purpose of selling or repurchasing in the near term. Information in relation to these assets and liabilities is provided to the Fund on a fair value basis. IFRS IFRS Recognition, derecognition and measurement Regular purchases and sales of financial instruments are recognised on the trade date, being the date on which the Fund commits itself to the purchase or sale. Financial instruments at fair value through other comprehensive income are initially recognised at fair value, when the Fund becomes party to the contractual provisions of the instrument, plus transaction costs that are directly attributable to their acquisition. Subsequent to the initial recognition, financial assets and liabilities at fair value through other comprehensive income are measured at fair value with the resultant gains and losses being taken to other comprehensive income. IFRS Financial assets are derecognised when the contractual rights to the cash flows from the asset expire, or when the Fund has transferred substantially all the risks and rewards of ownership. Upon disposal of these debt investments, any balance within the OCI reserve for these debt investments is reclassified to profit or loss. Please see note for reclassifications of debt investments from FVOCI to amortised cost during the reporting period. IFRS7.21/ IFRS.B5(e) Net gain or loss from financial assets and liabilities at fair value through other comprehensive income Net gains or losses from financial instruments at fair value through other comprehensive income includes all realised and unrealised12 fair value changes. Movements in the carrying amount are taken through OCI, except for the recognition of impairment gains or losses, interest income and foreign exchange gains and losses which are recognised in profit and loss. Interest income from these financial assets is included in finance income using the effective interest rate method. Upon disposal of these debt securities, any balance within OCI reserve for these debt securities is reclassified to profit or loss. IFRS IFRS IFRS (a) 2.8 Due from and due to brokers Amounts due from and to brokers are receivables for securities sold and payables for securities purchased which have been contracted but not settled or delivered at the reporting date. Amounts due from and to brokers are initially recognised at their fair value and, in the case of amounts due from brokers, subsequently stated at their amortised cost. IAS Cash and cash equivalents Cash and cash equivalents consist of cash in hand, balances with banks and investments in money market instruments which are readily convertible, being those with original maturities of three months or less. 10 Notes to the financial statements

19 Illustrative IFRS financial statements Investment funds IAS32.18(a) 2.10 Redeemable shares Redeemable shares are classified as equity in the statement of financial position. All the redeemable shares in issue provide the investors with the right to require redemption, for cash, at the value proportionate to the investor s share in the Fund s net assets at the reporting date Change in accounting policies As explained in note 2.1 above, the company has adopted IFRS 9 as issued in July 2014, which resulted in changes in accounting policies and adjustments to the amounts recognised in the financial statements. In accordance with the transitional provisions in IFRS , comparative figures have not been restated. IFRS9(7.2.3) The accounting policies were changed to comply with IFRS 9 as issued by the IASB in July IFRS 9 replaces the provisions of IAS 39 that relate to the recognition, classification and measurement of financial assets and financial liabilities; derecognition of financial instruments; impairment of financial assets and hedge accounting. IFRS 9 also significantly amends other standards dealing with financial instruments such as IFRS 7 Financial Instruments: Disclosures Classification and measurement of financial instruments The total impact on the company s retained earnings due to classification and measurement of financial instruments as at 1 January 2018 is as follows: Notes Retained earnings As at 31 December 2017 IAS 39 63,286,808 Reclassify debt securities from FVPL to FVOCI (i) (200,000) As at 1 January 2018 IFRS 9 63,086,808 Notes to the financial statements 11

20 Illustrative IFRS financial statements Investment funds Financial statements for the year ended 31 December 2018 IAS8.28(f)(i) and (g) IFRS9.42L On 1 January 2018, the company s management has assessed which business models apply to the financial assets held by the company at the date of initial application of IFRS 9 (1 January 2018) and has classified its financial instruments into the appropriate IFRS 9 categories. The main effects resulting from this reclassification are as follows: Financial assets at 31 December 2017 IAS 39 Notes FVPL Designated FVPL FVOCI Total (i) 473,831,842 46,862, ,694,332 Reclassify debt securities from FVPL to FVOCI Reclassify equity securities designated as FVPL to FVPL Reclassify debt securities designated as FVPL to FVOCI (i) (42,644,866) 42,644,866 (ii) 19,213,621 (19,213,621) (i) (27,648,869) 27,648,869 Opening balance IFRS 9 450,400,597 70,293, ,694,332 Financial liabilities at 31 December 2017 IAS ,587, ,587,845 Opening balance IFRS 9 425,587, ,587,845 (i) Debt securities classified as FVOCI Listed bonds were reclassified from fair value through profit or loss to fair value through other comprehensive income, as the company s business model is achieved both by collecting contractual cash flows and selling of these assets. The contractual cash flows of these investments are solely principal and interest. As a result, listed and unlisted bonds were reclassified to financial assets at fair value through OCI and fair value gains of 200,000 were reclassified from the retained earnings to the financial assets at fair value through OCI reserve on 1 January Liabilities that were designated as fair value through profit or loss on inception were those not held for trading, but which are evaluated on a fair value basis, in accordance with the documented risk and investment management strategy of the Fund. (ii) Other financial assets Equity securities held for trading, non-current equity securities and contingent consideration are all required to be held as FVPL under IFRS 9, except in the case of non-current equity securities where the irrevocable election is taken to hold them as FVOCI. Effect on FVOCI reserve Effect on retained earnings As at 31 December 2017 IAS 39 88,286,808 Reclassify debt securities held for trading from FVPL to FVOCI 200,000 (200,000) As at 1 January 2018 IFRS 9 200,000 88,086, Notes to the financial statements

21 Illustrative IFRS financial statements Investment funds IAS8.28(f)(i) and (g) IFRS9.42L IFRS7.8(a)(e-h) IFRS7.12B The impact of these changes on the company s equity is as follows: (iii) Reclassifications of financial instruments on adoption of IFRS 9 On the date of initial application, 1 January 2018, the financial instruments of the company were as follows, with any reclassifications noted: Measurement category Carrying amount Original New Original New (IAS 39) (IFRS 9) Difference Fixed financial assets held for trading: Equity securities FVPL* FVPL* 369,588, ,588,837 Derivatives FVPL* FVPL* 61,598,139 61,598,139 Debt securities FVPL* FVOCI** 42,644,866 42,644,866 Fixed financial assets designated as FVPL: Equity securities FVPL* FVPL* 19,213,621 19,213,621 Debt securities FVPL* FVOCI** 27,648,869 27,648,869 Current financial assets: Due from brokers Amortised cost Amortised cost 58,578,970 58,578,970 Other receivables and prepayments Amortised cost Amortised cost 27,002,274 27,002,274 Cash and cash equivalents Amortised cost Amortised cost 133,642, ,642,010 Current financial liabilities sold short: Equity securities FVPL* FVPL* 347,765, ,765,497 Traded options FVPL* FVPL* 77,822,348 77,822,348 Due to brokers Amortised cost Amortised cost 5,256,368 5,256,368 Accruals and other payables Amortised cost Amortised cost 1,160,367 1,160, Impairment of financial assets The company has two types of financial assets subject to IFRS 9 s new expected credit loss model: debt investments carried at fair value through OCI, and debt investments carried at amortised cost. The company was required to revise its impairment methodology under IFRS 9 for each of these classes of assets. The impact of the change in impairment methodology on the company s equity is disclosed in the table above. * FVPL = financial assets measured at fair value through profit or loss ** FVOCI = Investments in equity instruments, debt instruments or the credit risk component of the fair value of financial liabilities designated as measured at fair value through other comprehensive income Notes to the financial statements 13

22 Illustrative IFRS financial statements Investment funds Financial statements for the year ended 31 December 2018 IAS Adoption of new and revised International Financial Reporting Standards 3.1 New and amended standards and interpretations effective for periods beginning on or after 1 January 2018 The company has applied IFRS 9 Financial Instruments as issued in July 2014 to the year ended 31 December In accordance with the transitional provisions in IFRS , comparative figures have not been restated with the exception of certain aspects of hedge accounting. See note 26 for further details on the impact of the change in accounting policy. IAS1(110) The company has applied IFRS 9 retrospectively, but has elected not to restate comparative information. As a result, the comparative information provided continues to be accounted for in accordance with the company s previous accounting policy. IAS Standards, amendments and interpretations in issue but not yet effective The following standards and amendments to existing standards have been published and are mandatory for accounting periods of the Fund beginning after 1 January 2017, but which have not been adopted early by the Fund: (a) IFRS 16, Leases, is effective for accounting periods beginning on or after 1 January IFRS 16 defines a lease as a contract that conveys the right to use an asset for a period of time in exchange for consideration. At the commencement of the lease, it requires a lessee will recognize a liability a liability to make a lease payment and an asset representing the right to use the underlying asset during the lease term. Lessees will be required to separately recognize the interest and expense on the lease liability and the depreciation expense on the right-of-use asset. It is not anticipated, given that the Fund has no leases, that the adoption of IFRS16 will have an impact on the financial statements. IAS1.122 IAS Critical accounting estimates and judgments In preparing the financial statements, the investment manager has exercised judgement over the inputs used in the determination of fair value of equities not quoted in an active market. The valuation of these equity securities inevitably involves estimation uncertainty as there is no active market to determine the fair value of the companies or their underlying investments. The availability of valuation techniques and observable inputs can vary from security to security and is affected by a wide variety of factors including, the type of security, whether the security is new and not yet established in the marketplace, and other characteristics particular to the transaction. 14 Notes to the financial statements

23 Illustrative IFRS financial statements Investment funds IFRS7.31 IFRS Financial risk management General The financial instruments held by the Fund at the year-end were classified, in accordance with IFRS 9, as follows: Financial assets: At fair value through profit or loss Marketable securities 799,343, ,802,458 Derivative instruments 25,698,458 61,598, ,041, ,400,597 Financial assets at amortised cost: Due from brokers 23,732,686 58,578,970 Other receivables 38,727,943 17,002,274 62,460,629 75,581,244 Prepayments 10,000,000 10,000,000 Cash and cash equivalents 23,585, ,642,010 Financial assets: At fair value through other comprehensive income Debt securities 207,802,426 70,293, ,802,426 70,293,735 Total financial assets 1,128,890, ,917,586 Financial liabilities: At fair value through profit or loss: Equity securities sold short 282,229, ,765,497 Derivative instruments 246,234,037 77,822, ,463, ,587,845 At amortised cost: Due to brokers 8,660,169 5,256,368 Accruals and other payables 4,642,271 1,160,367 13,302,440 6,416,735 Total financial liabilities 541,765, ,004,580 See note 2.11 for explanations regarding the change of accounting policy and the reclassification of certain investments from available-for-sale to financial assets at fair value through profit or loss, and note 2 for the remaining accounting policies applicable for financial assets. 15 These investments were presented as financial assets at FVPL in the 2017 balance sheet, see note for details about the reclassification of financial assets following the adoption of IFRS 9. Notes to the financial statements 15

24 Illustrative IFRS financial statements Investment funds Financial statements for the year ended 31 December 2018 The fair value of the financial assets and liabilities not measured at fair value is substantially the same as their carrying amount. 16 The Fund has exposure to the following risks from its use of financial instruments: Market risk; price risk; currency risk; interest rate risk; Liquidity risk; Credit risk. IFRS7.33 The Board of Directors has overall responsibility for the establishment and oversight of the Fund s risk management framework. The Board has established a Finance Committee which is responsible for developing and monitoring the Fund s risk management strategy and policies. The Committee reports regularly to the Board of Directors on its activities. There have been no changes to the Fund s exposures to risk or the methods used to measure and manage these risks during the year. The Fund s Audit Committee overseas how management monitors compliance with the Fund s risk management policies and procedures and reviews the adequacy of the risk management framework regarding the risks faced by the Fund. The Fund s financial investments which are measured at fair value consist mainly of long equity, corporate bonds, derivatives and bank deposits. The Fund holds derivative instruments for the purposes of speculation. 5.1 Market risk Price risk The Fund invests in financial instruments, taking positions on listed and unlisted investments, to take advantage of market movements in the equity and fixed income markets. The Fund may also purchase traded options to buy or sell shares. All securities investments present a risk of loss of capital. The investment manager moderates this risk through diversification of the investment portfolio. Except for derivative contracts, the maximum risk resulting from financial instruments is determined by the fair value of the financial instruments. Possible losses from derivatives contracts can be greater. It is the Fund s investment policy to limit investment in any given industry or debt sector to 25% of the net assets attributable to redeemable shareholders and to limit the investment in any individual security to 3% of these net assets. The Fund s overall market positions are monitored on a daily basis by the investment manager. 16 Please note that IFRS7.25 requires fair value disclosure to be made in respect of items not measured at fair value but where the fair value is disclosed. However, where items, such as the above financial assets and liabilities, carrying amounts represent a reasonable approximation of fair value IFRS7.29 permits the fair value disclosures not to be made. 16 Notes to the financial statements

25 Illustrative IFRS financial statements Investment funds IFRS7.40 At 31 December 2018 had equity prices increased by 10%, with all other variables held constant, there would have been an increase in the net assets attributable to the redeemable shareholders of US$10,047,278 (2016: US$3,564,879). Had equity prices fallen by 10% there would have been a corresponding decrease in net assets of US$10,002,395 (2016: US$559,016). IFRS7.B18 Variances of 10% are used when reporting price risk to the Fund s key management personnel and represent management s assessment of the reasonably possible change in equity prices. 17 IFRS Currency risk The Fund holds monetary and non-monetary assets in currencies other than its functional currency, the US Dollar. The value of monetary assets denominated in foreign currencies will fluctuate due to changes in foreign exchange rates. The investment manager monitors the exposure to currency risk on a daily basis and the risk exposure is monitored by the board of directors on a quarterly basis. At 31 December 2018, monetary assets and liabilities were denominated in the following currencies 18 : IFRS (US$) Cash Accounts Receivable Accounts Payable US Dollars 12,500,202 23,732,686 (8,660,169) 27,572,719 Euros 8,254,851 8,283,750 16,538,601 Pounds Sterling 2,830,235 40,444,193 (4,642,271) 38,632,157 Total 23,585,288 72,460,629 (13,302,440) 82,743, (US$) US Dollars 92,212,976 58,578,970 (5,256,368) 145,535,578 Euros 34,746,933 6,480,546 41,227,479 Pounds Sterling 6,682,101 20,521,728 (1,160,367) 26,043, ,642,010 85,581,244 (6,416,735) 212,806,519 IFRS7.B18 At 31 December 2018, had the exchange rates between the US Dollar and the Euro and the US Dollar and the Pound Sterling increased or decreased by 3% (2017: 4%), with all other variables held constant, the respective decrease or increase in net assets attributable to the holders of redeemable shares would amount to US$17,110,194 (2017: US$15,894,124). 3% represents management s best estimate of the reasonably possible shifts in foreign exchange rates. 17 Please note that the use of symmetrical upside and downside variances for sensitivity purposes are not required by IFRS7. If management felt, for instance, that based on market data the reasonably possible changes were +10% and -5% reporting on this basis would be acceptable. 18 Debt instruments held for trading as part of the Fund are not considered to be monetary assets as they are not held for the redemption and interest cash flows. The Fund does not hold currency or interest swaps, however it should be noted that these would be included as monetary items were they held. Notes to the financial statements 17

26 Illustrative IFRS financial statements Investment funds Financial statements for the year ended 31 December 2018 IFRS Interest rate risk Interest rate risk arises where the fair value or future cash flows of a financial instrument will fluctuate due to changes in market interest rates. The Fund is exposed to interest rate risk through its investments in debt securities, associated derivative instruments and its interest bearing current and deposit accounts. The overall exposure to interest rate risk is monitored on a daily basis by the investment manager and is reviewed on a quarterly basis by the board of directors. The table below summarises the Fund s exposure to interest rate risk at 31 December 2018: IFRS7.34 Assets Less than 3 months 3 months to 1 year More than 1 year Non-interest bearing 953,261, ,261,398 Floating rate listed debt 8,704,300 8,704,300 Fixed rate listed debt 34,781,832 12,689,100 92,106, ,577,253 Traded bond index options 3,761,903 3,761,903 Cash and bank balances 23,585,288 23,585,288 Total assets 1,011,628,518 25,155,303 92,106,321 1,128,890,142 Total Liabilities Non-interest bearing 541,765, ,765,877 Net assets attributable to holders of redeemable shares 587,124, ,124,265 Total liabilities 1,128,890,142 1,128,890,142 IFRS7.40 At 31 December 2018, had interest rates on floating rate instruments increased or decreased by 50 basis points (2017: 50) with all other variables held constant, the respective decrease or increase in net assets attributable to the holders of redeemable shares would amount to US$161,448 (2017: US$201,354). The impact on the value of the fixed rate debt held by the Fund of a 50 basis point increase or decrease would be US$44,400 (2017: US$56,100), US$48,900 (2017: US$42,000) and US$701,450 (2017: US$514,900) respectively for the debt maturing within 3 months, 3 months to 1 year and more than 1 year. 50 basis points represents management s best estimate of the reasonably possible shifts in interest rates. 18 Notes to the financial statements

27 Illustrative IFRS financial statements Investment funds IFRS Credit risk Credit risk refers to the risk that a counterparty will be unable to pay amounts in full when they fall due, resulting in a financial loss for the Fund. IFRS7.36(a) The Fund is exposed to credit risk through its investments in debt securities, derivatives and its deposits of cash. In management s opinion the carrying amounts of the financial assets represent the maximum exposure to credit risk at the year end. IFRS7.35F IFRS7.36(c) Credit risk is monitored by the investment manager on a daily basis and the Fund s exposure is reviewed by the board of directors on a quarterly basis. The Fund further manages credit risk through its policy of only investing in debt securities with a minimum credit rating of BBB/Baa as designated by the well-known ratings agency MSRatings. The table below summarises the Fund s exposure to different credit qualities at the reporting date. Rating AAA/Aaa 73% 68% AA/Aa 12% 18% A/A 9% 12% BBB/Baa 6% 2% Total 100% 100% Credit risk in the Fund s dealings with brokers is managed principally by using only approved brokers. Additionally, when purchasing securities, cash is delivered only once the securities have been received by the broker and when selling securities the security is delivered only after the cash is received by the broker. IFRS7.33 When transacting in cash or derivative financial instruments the credit risk is mitigated by dealing only with counterparties which are either regulated entities or have high credit-ratings assigned by recognised ratings agencies. Where an instrument is settled in a foreign currency or where the counterparty operates in a foreign currency, clearing houses are used so that transactions may be settled on a delivery versus payment basis in order to reduce the settlement risk on non-standard transactions. The Fund is exposed to credit risk with the custodian. Should the custodian become insolvent, the operation of the Fund may be subject to delay if the Fund is unable to access its assets. This risk is managed through the choice of a reputable custodian. IFRS Upon adoption of IFRS 9, the component of fair value changes relating to the company s own credit risk is recognised in other comprehensive income. Amounts recorded in OCI related to credit risk are not subject to recycling in profit or loss, but are transferred to retained earnings when realised. Fair value changes relating to market risk are recognised in profit or loss. IFRS7 10(a)(i) The company determines the amount of fair value changes which are attributable to credit risk, by first determining the changes due to market conditions which give rise to market risk, and then deducting those changes from the total change in fair value of the convertible debentures. Market conditions which give rise to market risk include changes in the benchmark interest rate. Fair value movements on the conversion option embedded derivative are excluded from the assessment of market risk fair value changes. IFRS7 10(a)(ii) The company believes that this approach closely represents the amount of change in fair value due to the company s own credit risk, as the changes in factors contributing to the fair value of the bonds other than changes in the benchmark interest rate are not deemed to be significant. Notes to the financial statements 19