Example Managed Investment Scheme Annual Report

Transcription

1 Example Managed Investment Scheme Annual Report 30 June 2006 ADVISORY

2 2006 KPMG, an Australian partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative. All rights reserved. The KPMG logo and name are trademarks of KPMG. June 2006 Disclaimer: Under the Corporations Act 2001, the directors of a scheme have sole responsibility for the preparation and true and fair presentation of the financial report and for ensuring that they meet all the requirements of the Corporations Act 2001, Accounting Standards, UIG Interpretations and any other relevant requirements such as the ASX Listing Rules, if applicable. In preparing the financial report, schemes may choose to use Example Managed Investment Scheme 30 June 2006 Annual Financial Report to assist them, however its use cannot and does not purport to guarantee that the financial report will comply with all aspects of the relevant legislation and guidance. Should entities choose to rely on Example Managed Investment Scheme 30 June 2006 Annual Financial Report when preparing their financial reports they do so at their own risk. KPMG will accept no responsibility or liability to entities in respect of Example Managed Investment Scheme 30 June 2006 Annual Financial Report or any use to which it may be put. While we have taken all reasonable care in its preparation, it is possible that this version of the Example Managed Investment Scheme 30 June 2006 Annual Financial Report may contain errors or omissions. Commonwealth of Australia, 2006 All legislation herein is reproduced by permission but does not purport to be the official or authorised version. It is subject to Commonwealth of Australia copyright. The Copyright Act 1968 permits certain reproduction and publication of Commonwealth legislation. In particular, s182a of the Act enables a complete copy to be made by or on behalf of a particular person. For reproduction or publication beyond that permitted by the Act, permission should be sought in writing from the Commonwealth, available from the Australian Accounting Standards Board. Requests in the first instance should be addressed to the Administration Director, Australian Accounting Standards Board, PO Box 204, Collins Street West, Melbourne, Victoria, 8007.

3 Contents 1. Purpose and basis of this publication 1 2A. Financial reporting developments 4 2B. AIFRS impacts for Schemes 8 3. Annual report 18 Directors report 21 Income statement 31 Statement of changes in equity 33 Balance sheet 37 Statement of cash flows 39 Index to notes to the financial statements 41 Notes to the financial statements 45 Directors declaration 103 Audit report 105 Lead auditor s independence declaration 109 Appendices 1. Consolidated example disclosure Index and list of AASBs, AASs and UIG interpretations at 30 April Additional guidance and amendments to IFRS that are not considered to comply with IFRS 139 Page of KPMG.

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5 Example Managed Investment Scheme 30 June 2006 Annual Financial Report June Purpose and basis of this publication Purpose The purpose of this publication is to assist you in preparing your first annual financial statements in accordance with Australian Equivalents to International Financial Reporting Standards ( AIFRS ) 1 which apply to reporting periods commencing on or after 1 January It illustrates one possible format for annual financial statements, based on a fictitious unlisted managed investment scheme adopting AIFRS as its primary basis of accounting at 30 June In some cases existing methods of presentation for certain disclosure requirements may conform with AIFRS and would not require modification to be consistent with this illustrative financial report. AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards has been applied in making the transition from previous Australian GAAP to AIFRS. A number of exposure drafts have been released recently by the IASB and future editions of this publication will reflect the requirements of these future standards. In the case of AASB 1, a number of implementation choices exist and only one possible combination is illustrated. The publication does not repeat all the requirements of AASB 1 and should be read in conjunction with the standard and related implementation guidance, including KPMG s AASB 1 Guide. A list of the standards and interpretations that comprise AASBs as illustrated in this publication is contained in Appendix 2. While these illustrative financial statements provide a valuable demonstration of AIFRS, they should not be used as a substitute for referring to the standards and interpretations themselves, particularly where a specific requirement is not addressed in this publication or where there is uncertainty regarding the correct interpretation of an AIFRS. This publication does not address specific not-for-profit requirements included in AIFRS. Scope This publication is based on the International Financial Reporting Standards ( IFRS ) developed by the International Accounting Standards Board ( IASB ) as modified by the Australian Accounting Standards Board ( AASB ). The modifications to IFRS: eliminate application of choices permitted between alternative accounting treatments. Where choices exist in IFRS, the AASB has generally retained the existing Australian treatment. provide additional guidance on the application of specific paragraphs in Australia, including the use of examples in appendices provide exemptions or modified application to particular accounting requirements for not-for-profit entities provide exemptions to the parent entity from particular disclosure requirements increase the number of disclosures required in the financial report. In addition to the above, some references required modification to accommodate the Australian legislative environment. Also, as the AASB has retained AASB 1031 Materiality, references to this standard have been included in AIFRS. AIFRS contains additional commentary and guidance by the AASB, considered to be of benefit to users of AIFRS. Such guidance may, for example, deal with situations commonly encountered in the Australian environment but not covered by IFRS. Compliance with additional Australian Guidance in the appendices is not mandatory as it does not form part of the relevant accounting standard. Example Managed Investment Scheme June 2006 Annual Financial Report reflects Australian modifications made to IFRS and related interpretations issued to 31 March These standards are based on the stable platform of standards issued by the IASB as at 31 March Refer to the latest KPMG Flash Report Current AASB/IASB projects and timetable for a list of KPMG s recommendations of the amendments to be early adopted at transition date. Details of main financial reporting developments impacting the 30 June 2006 financial reporting period are included in Section 2A of this publication. Any subsequent changes and additional requirements will need to be considered when preparing financial reports in accordance with Australian equivalents to AIFRS. 1 1 The term Australian Equivalent to International Financial Reporting Standards ( AIFRS ) has been used in this publication to distinguish Australian Accounting Standards (AASBs) under the old Australian GAAP and under the new IFRS regime. In future, reference will only be made to Australian Accounting Standards (AASBs).

6 kpmg 2 Further information To assist you in preparing financial statements in accordance with AIFRS, the following publications are also recommended: Insights into IFRS, 2005/2006 edition and Insights into IFRS: Australian Addendum dated December 2005 Australian equivalents to IFRS: Disclosure checklist, dated October 2005 Example Managed Investment Scheme 2005/2006 interim financial report dated January 2006 AASB 1 guide dated November 2005 References The Example Managed Investment Scheme financial statements for first-time adoption are set out on the odd-numbered pages of this publication. The even-numbered pages include explanatory comments and notes that may be useful. However, these pages are not intended to be an exhaustive commentary. Extensive accounting policies have also been provided, more than required by AIFRS. However, this will provide you with greater choice and flexibility in deciding upon your own accounting policies. To the left of each item disclosed, reference has been made to the AIFRS that requires or recommends that disclosure. For example, the reference AASB 1.8(b) means that the disclosure is required by paragraph 8(b) of AASB 1. The references generally relate to disclosure only. However, in the accounting policies section of the financial statements, references have also been given to relevant recognition and measurement requirements of AIFRS. Where we have illustrated disclosures that while not required, are considered, in our view to be best practice, this is noted in the Explanatory Notes. Major changes from the December 2005 interim edition are highlighted by a double line border running down the left margin of the text within this document. Keep in contact and stay up to date Changes to disclosure requirements will occur as the Corporations Act 2001 and Regulations 2001 and ASX Listing Rules are amended, further Accounting Standards are issued, and as new interpretations are issued by the Urgent Issues Group. Example Managed Investment Scheme will be updated again in December 2006 for interim financial report and developments in the intervening period are discussed in detail in KPMG s Flash Reports as they occur. KPMG s Flash Reports are available to clients of the firm, either via or in hard copy. Please speak to your KPMG contact partner to arrange to receive KPMG s Flash Reports. Example Managed Investment Scheme June 2006 Annual Financial Report has been produced by KPMG Australia s Department of Professional Practice. For more information on IFRS, please visit where you will find up-todate technical information and a briefing on our IFRS conversion resources. For analysis and interpretation of the requirements of AIFRS, please speak to your usual KPMG contact.

7 Example Managed Investment Scheme 30 June 2006 Annual Financial Report June References The following abbreviations, followed by the particular section, clause or paragraph number are used to refer to the source of the disclosure requirements: AAS AB AGS ASIC ASX ASX Appendix ASX CGC IAS IFRS Australian Accounting Standards issued jointly by the Australian Accounting Bodies Accounting Bulletins issued by the Australian Accounting Research Foundation Auditing Guidance Statements Australian Securities and Investments Commission Practice Notes, Policy Statements and Class Orders Australian Stock Exchange Limited Official Listing Rules. This refers to information, which must be included in the annual report. Appendix Australian Stock Exchange Limited Appendix 4E. This refers to information that must be disclosed in the Preliminary Final Report. There is no requirement for this information to be disclosed in the annual report. Australian Stock Exchange Limited Corporate Governance Council principles and recommendations International Accounting Standards issued by the predecessor of the International Accounting Standards Board ( IASB ), the International Accounting Standards Committee, and amended by the IASB. International Financial Reporting Standards issued by the IASB Reg Corporations Regulations 2001 S Section, Corporations Act 2001 SIC UIG Interpretation Interpretations of International Accounting Standards issued by the International Financial Reporting Interpretations Committee ( IFRIC ) of the IASB (formerly Standing Interpretations Committee ( SIC )) Urgent Issues Group Interpretations issued by the Urgent Issues Group relating to Australian equivalents to International Financial Reporting Standards (applicable for reporting periods beginning on or after 1 January 2005) The UIG Interpretations numbering convention is as follows: UIG Interpretations are those Australian interpretations equivalent to an Interpretation issued by IFRIC (UIG 1 is the Australian equivalent to IFRIC 1) UIG Interpretations 101 onwards are those Australian interpretations equivalent to an interpretation issued by SIC (UIG 112 is the Australian equivalent to SIC 12) UIG Interpretations 1000 onwards are those domestic UIG Abstracts that are retained on adoption of AIFRS (UIG Interpretation 1052 is the AIFRS equivalent to UIG Abstract 52) Australian GAAP Australian Generally Accepted Accounting Principles (applicable for reporting periods ended 30 June 2005) AIFRS AASB Australian equivalents to International Financial Reporting Standards 1 issued by the Australian Accounting Standards Board (applicable for reporting periods beginning on or after 1 January 2005) Accounting Standards issued by the AASB. The AASB Accounting Standards numbering convention is as follows: AASB 1 AASB 7 represent Accounting Standards issued by the AASB equivalent to an IFRS issued by the IASB (AASB 1 is the Australian equivalent to IFRS 1) AASB 101 onwards represent Accounting Standards issued by the AASB equivalent to an IAS issued by the IASB (AASB 136 is the Australian equivalent to IAS 36) AASB 1004 onwards are those domestic Australian Accounting Standards that are retained on adoption of AIFRS In the absence of a reference to any of the above sources, the disclosures are in accordance with current best practice. 1 The term Australian Equivalent to International Financial Reporting Standards ( AIFRS ) has been used in this publication to distinguish Australian Accounting Standards (AASBs) under the old Australian GAAP and under the new IFRS regime. In future, reference will only be made to Australian Accounting Standards (AASBs).

8 kpmg 4 2A. Financial reporting developments This section includes a discussion of significant changes effective for 30 June 2006 annual financial reports, and of other significant developments likely to affect future reporting periods. For half-year financial reports refer to Example Managed Investment Scheme 2005/2006 Interim Financial Report. This section is structured as follows: changes for 30 June 2006 annual financial reports, including developments in Australian Accounting Standards and UIG Interpretations other regulatory requirements effective for 30 June 2006, including the regulatory framework, ASIC surveillance 2005/06 impact of adoption of AIFRS. The information is current at 31 March Changes for 30 June 2006 annual financial reports Key management personnel disclosures by disclosing entities The AASB issued revised AASB 124 Related Party Disclosures on 20 December Key changes made include: the withdrawal of AASB 1046 Directors and Executive Disclosures by Disclosing Entities and inclusion in AASB 124 Related Parties Disclosures of the additional disclosures for disclosing entities previously required by AASB 1046, in amended format the revised standard is effectively in two parts: - the first part, paragraphs 1 to 22, applies to all reporting entities except for not-for-profit public sector entities, irrespective of whether they are corporate or non-corporate entities. - the second part, paragraphs Aus25.1 to Aus25.9, only applies to disclosing entities and is similar to the former AASB 1046 requirements and requires disclosing entities to disclose additional information about Key Management Personnel (KMP). The disclosure of this additional information is required only on consolidated basis. For managed investment schemes KPMG s view in most instances the Responsible Entity will be the KMP and not the directors/executives of the Responsible Entity. Accordingly, these disclosures are only required when there is a direct payment by a Scheme to a director of the Responsible Entity, or directors/executives are specified in the management agreement with the Responsible Entity. extending the requirements to disclose details of KMP including names, positions held and changes in KMP to disclosing entities applying AASB 124. the removal of the parent entity relief in relation to paragraphs 1 to 22 in order to achieve IFRS compliance by parent entities. This means entities will have to make disclosures about KMP compensation and other KMP transactions in both the parent and consolidated financial statements. the AASB 1046 definition of specified director, executive and specified executive, including the requirement to specify at least five executives with the highest authority has been removed. AASB 124 instead relies solely on the definitions of KMP. The change in the definition may result in different individuals being identified as KMP compared to those previously identified as specified directors or specified executives. The revised AASB 124 is applicable to annual reporting periods ending on or after 31 December Early adoption of the revised AASB 124 is not permitted for the periods beginning before 1 January Transitional provisions The revised AASB 124 does not include any transitional provisions. The change in definitions may result in remuneration disclosures for some KMP previously not considered to be specified directors or specified executives, and therefore comparative information will be required for such individuals if they were a KMP in the prior period. Additionally there may be changes in compensation calculations as a result of changes in definitions and reference back to AASB 119 and AASB 2 for measurement principles. Refer to KPMG Flash Report 06FR-002 for detailed guidance on changes made to the revised version of AASB 124.

9 Example Managed Investment Scheme 30 June 2006 Annual Financial Report June Other regulatory requirements effective for 30 June 2006 Regulatory framework overview The Corporations Act 2001 requires a financial report to include the following: the financial statements for the year S295(1)(a); notes to the financial statements S295(1)(b); and the directors declaration about the statements and notes S295(1)(c). The Corporations Act also specifies that: the financial statements for the year are the financial statements in relation to the entity reported and where applicable, of the consolidated entity, as required by accounting standards S295(2). the notes to the financial statements are disclosures required by the regulations, notes required by the accounting standards and any other information necessary to give a true and fair view S295(3). the directors declaration is a declaration by the directors whether, in the directors opinion, there are reasonable grounds to believe that the entity will be able to pay its debts as and when they become due and payable; whether in the directors opinion the financial statements and notes are set in accordance with the Act, including compliance with accounting standards and true and fair view, and if the entity is listed, that the directors have been given the declarations required from the CEO and CFO under S295A S295(4). Section 292 of the Corporations Act 2001 requires the preparation of a directors report for all disclosing entities, public companies, large proprietary companies and registered schemes. A directors report is also required for small proprietary companies that are directed to do so under S293 or S294 or are controlled by a foreign company for all or part of the year and are not consolidated into any other financial statements that are lodged with ASIC. ASX Listing Rule requires the preparation of a Corporate Governance Statement by all listed entities. One possible format for presentation and disclosure requirements of the directors report has been illustrated in this publication. Also, refer to KPMG Australia Disclosure Checklist (February 2005) for all disclosure requirements. Australian Securities and Investments Commission (ASIC) ASIC financial report surveillance ASIC Media Release (dated 6 October 2005) announced ASIC s focus on the adoption of AIFRS when conducting its financial reporting surveillance program. ASIC will review financial reports for years ended 31 December 2005 to 31 March 2006 for compliance with AIFRS. Given that AIFRS will first apply to listed entity half-year financial reports, ASIC will also review selected financial reports for half years ended 30 June 2005 to 31 March 2006 for compliance with AIFRS. Following the review of the first financial reports prepared under AIFRS, ASIC will assist preparers and users to better understand areas of concern. Compliance with the standards maintains a properly informed market, particularly concerning the major impact of AIFRS, and promotes investor confidence in the market. ASIC will also consider appropriate intervention in relation to significant non-compliance with the standards. ASIC Class Orders and Practice Notes ASIC has reviewed its stable of practice notes, policy statements and Class Orders to ensure they remain relevant under the AIFRS framework and is in the process of updating any references to accounting standards to the AIFRS equivalent. KPMG Flash Report 05FR-032 discusses some of the amendments noted in ASIC Information Release IR05-42 Changes to ASIC Class Orders, Practice Notes and Guidelines relating to new financial reporting requirements. Relief of ASIC CO 05/643: Combining registered scheme financial reports We understand that ASIC recently informed the Investment and Financial Services Association that a new class order is expected to be released in the later part of 2006 to provide relief from CO 05/643. The new relief will allow a single financial report to include a number of managed investment scheme financial statements in adjacent columns irrespective of whether the investors are able to switch between the schemes.

10 kpmg 6 The new relief, however, is expected to include conditions such as: the format of the reports must be in the interest of members; all schemes must have the same auditor; all schemes must have the same year end date; the financial report must identify which RE relates to which Scheme; and the financial report must identify which schemes are open and which are closed. Any further amendments will be noted by way of future KPMG Flash Reports. Adoption of AIFRS Compliance with IFRS AASB specifically requires an entity whose financial statements and notes comply with IFRS to make an explicit and unreserved statement of such compliance in the notes. It is important to note that entities that comply with AIFRS are not automatically in compliance with IFRS, particularly where the Australian specific exemptions for parent entity, notfor-profit and public sector entities are utilised. For example, AASB 132.Aus94.1 exempts application of AASB 132 and AASB 139 to the parent entity separate financial report. Similarly, use of additional guidance issued by the AASB may not enable dual AIFRS/IFRS compliance. The AASB based standards contain additional commentary and guidance by the AASB, considered to be of benefit to users of AIFRS. Such guidance may, for example, deal with situations commonly encountered in the Australian environment but not covered by IFRS. Compliance with additional Australian Guidance in the appendices is not mandatory as it does not form part of the relevant accounting standard. Where Australian guidance and additional commentary has been used, it is imperative that reference is made to the Insights into IFRS: Australian Addendum dated December This addendum highlights Australian modifications made to IFRS and related interpretations which, if adopted, would prohibit companies from claiming compliance with IFRS. Appendix 4 provides a summary of all the modifications that are not considered to comply with IFRS. Note: At its April 2006 meeting the AASB considered the Australian Guidance attached to AIFRS and agreed that most of it should be removed effective immediately. Refer to KPMG Flash Report 06FR-018 for further details. Each entity will need to perform its own assessment of whether it should and/or can also claim compliance with IFRS. The financial statements and notes should not be described as complying with IFRS unless they comply with all the requirements of IFRS. This statement of compliance is also typically included in the Significant Accounting Policies note of the financial report, under the statement of compliance with Australian Accounting Standards. By complying with AASB 101, it is our view that the directors declaration and audit report are not required to comment on compliance with IFRS. This view has been adopted and illustrated in this publication. However, if the directors make an assessment that it should and/or can in fact claim dual AIFRS/IFRS compliance, a statement to that effect can be made in the directors report and audit report. Financial instruments comparative information An entity preparing its first annual financial report in accordance with AIFRS can take advantage of the AASB 1 exemption from restating financial instruments comparative information. An entity that chooses to present comparative information that does not comply with AASB 132 Financial Instruments: Disclosure and Presentation and AASB 139 Financial Instruments: Recognition and Measurement in its first year of transition is required to comply with AASB 1.36A and shall: a) apply its previous GAAP in the comparative information to financial instruments within the scope of AASB 132 and AASB 139; b) disclose this fact, together with the basis used to prepare this information; and c) disclose the nature of the main adjustments that would make the information comply with AASB 132 and AASB 139. The entity need not quantify those adjustments. However, the entity shall treat any adjustment between the balance sheet at the comparative period s reporting date (i.e. the balance sheet that includes comparative information under previous GAAP) and the balance sheet at the start of the first Australian-equivalents-to-IFRS reporting period (i.e. the first period that includes information that complies with AASB 132 and AASB 139) as arising from a change in accounting policy and give the disclosures required by AASB (a)-(e) and (f)(i)).

11 Example Managed Investment Scheme 30 June 2006 Annual Financial Report June To comply with AASB 1.36A(c), AASB requires disclosure of: a) the title of the Australian Accounting Standard; b) that the change in accounting policy is made in accordance with AASB 1 transitional provisions; c) the nature of the change in accounting policy; d) when applicable, a description of the transitional provisions; e) when applicable, the transitional provisions that might have an effect on future periods; f) for the current period and each prior period presented, to the extent practicable, the amount of the adjustment: i) for each financial statement line item affected in the balance sheet at the end of the comparative reporting period. For the purpose of this publication, it is assumed that the Scheme has chosen to take advantage of AASB 1 exemption from restating financial instruments comparative information in compliance with AASB 132 and AASB 139. AIFRS and amendments to stable platform of standards The AASB approved the Australian equivalents to International Financial Reporting (AIFRS) based on the IASB standards, the stable platform, in July The AASB s general policy has been that with certain exceptions (i.e. AASB 6 Exploration for and Evaluation of Mineral Resources) amendments subsequent to the stable platform will be applicable in Australia for reporting periods commencing on or after 1 January 2006, however early adoption will be permitted. All early adopted standards and amendments should be clearly identified in the accounting policies note. Early adoption is ONLY permitted if an election has been made by the Board of Directors in accordance with subsection 334(5) of the Corporations Act. S334(5) states that a company, registered scheme or disclosing entity may elect to apply the accounting standard to an earlier period unless the standard says otherwise. The election must be made in writing by the directors. AASB requires the possible impact of standards and amendments that are available for early adoption that have not been applied to be disclosed in the annual financial report. The AASB s general policy on consequential amendments to AIFRS is to make omnibus standards numbered in a series using the year of issue and a generic title. For example, AASB Amendments to Australian Accounting Standards includes consequential amendments to other standards as a result of AASB 6 Exploration for and Evaluation of Mineral Resources. The AASB s website version is updated for changes in the omnibus standards and also includes history notes. Where an IFRS has an appendix showing consequential amendments, the Australian equivalent will include a similar appendix as a signpost to the changes made in the relevant omnibus standard. In addition, since the issue of the stable platform of standards in July 2004, the AASB have made a number of editorial changes. A list of affected standards can be located on the AASB homepage ( Note: where an amending standard covers more than one topic, all topics must be early adopted together. The latest version of the KPMG Flash Report Current AASB-IASB projects and timetable highlights the standards that have been amended since the finalisation of the stable platform and additional standards that have since been approved. This Flash Report must be reviewed to identify those standards that are mandatory at AIFRS transition and those that may need to be early adopted.

12 kpmg 8 2B. AIFRS impacts for schemes Change in measurement basis for financial assets under AASB 139 Financial Instruments: Recognition and Measurement Managed investment schemes exist to hold investment assets which generate returns. With the exception of direct property funds, all managed investment schemes will hold financial assets. Under AIFRS, the measurement basis of each individual financial instrument depends on the classification of the financial instrument. Therefore the nature and function of each individual financial asset will need to be reviewed to determine their appropriate classification under AASB 139: Financial Instruments: Recognition and Measurement. The previous GAAP treatment under AASB 1041 Revaluation of Non-Current Assets for managed investment schemes was to measure financial assets at net market value and recognise gains and losses on revaluation through the profit and loss. All financial assets will need to be classified into one of the four categories of financial assets defined by the standard Category Assets included Measured at Changes in carrying amount Fair value through profit or loss A financial assets or financial liability at fair value through profit or loss must meet either of the following conditions: Fair value Profit and loss It is classified as held for trading, if it is: an asset acquired principally for the purpose of selling in the near term. an asset that is part of a portfolio of similar assets that are managed together and for which there is evidence of a recent actual pattern of short-term profittaking. derivatives which are not designated as effective hedging instruments.

13 Example Managed Investment Scheme 30 June 2006 Annual Financial Report June Category Assets included Measured at Changes in carrying amount Fair value through profit or loss (continued) If it is not classified as held for trading it may be designated as an instrument measured at fair value with changes in fair value recognised in profit or loss, subject to meeting the appropriate criteria. Fair value Profit and loss As noted in Section 2A, KPMG recommends that AASB Amendments to Australian Accounting Standards is early adopted at transition date. The amendments restrict the use of fair value option in AASB 139 to the following three situations: Financial assets or liabilities classified as held for trading Where the use of the option results in more relevant information because it eliminates or significantly reduces a measurement or recognition inconsistency that would arise from measuring the assets or liabilities, or recognising gains or losses, on a different basis and/or a group of financial assets or liabilities is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy Contracts that contain embedded derivatives.

14 kpmg 10 Category Assets included Measured at Changes in carrying amount Fair value through profit or loss (continued) Therefore on the basis that an unlisted scheme s liabilities are measured at fair value, the scheme s assets may also be measured at fair value through the 2 nd leg of the fair value option. In addition it is likely that they would meet the risk management or investment strategy criteria. Listed schemes that do not have their units classified as liabilities are likely to meet the risk management and investment strategy criteria. Fair value Profit and loss Use of the fair value option is elective, subject to the criteria being met. Once an election is made for a financial instrument it cannot be reversed. Category Assets included Measured at Changes in carrying amount Loans and receivables Non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Excludes those the entity intends to sell immediately or in the near term (would be classified as fair value through profit and loss). This category would be applicable for mortgage schemes which originate loans or purchase non-quoted loans and receivables. Amortised cost using the effective interest method. Note Whenever there is objective evidence that a financial asset measured at amortised cost may be impaired the amount of any impairment loss must be calculated and recognised in the income statement. Note if an originated loan or receivable is fair value hedged, the asset must be fair valued, with gains and losses recognised in the profit and loss. Profit and loss Gain or loss recognised in profit and loss when the financial asset is derecognised or impaired and through the amortisation process. Note In the amortisation process, interest income is calculated using the effective interest rate method. The effective interest rate is the rate that exactly discounts the expected stream of future cash payments or receipts through to maturity or the next marketbased repricing date to the current net carrying amount of the financial asset or financial liability on initial recognition.

15 Example Managed Investment Scheme 30 June 2006 Annual Financial Report June Category Assets included Measured at Changes in carrying amount Held-to-maturity Non-derivative financial assets with fixed or determinable payments, fixed maturity and the Scheme has a positive intent and ability to hold to maturity. Asset cannot be available to meet liquidity requirements. This is unlikely to be available to open-ended schemes which have liquidity requirements due to immediate right to redemption by unitholders. Amortised cost using the effective interest method. Note Whenever there is objective evidence that a financial asset measured at amortised cost may be impaired the amount of any impairment loss must be calculated and recognised in the income statement. Profit and loss Gain or loss recognised in profit and loss when the financial asset is derecognised or impaired and through the amortisation process. Note In the amortisation process, interest income is calculated using the effective interest rate method. The effective interest rate is the rate that exactly discounts the expected stream of future cash payments or receipts through to maturity or the next marketbased repricing date to the current net carrying amount of the financial asset or financial liability on initial recognition. If an asset classified as held-tomaturity prior to maturity (in other than rare circumstances) is disposed of, the category is tainted and cannot be used again for 2 years. The entire portfolio is reclassified as available-for-sale and fair valued with changes recognised directly in equity. Category Assets included Measured at Changes in carrying amount Available-for-sale Financial assets that are not: fair value through the profit or loss held-to-maturity loans and receivables Fair value Note Whenever there is objective evidence that a financial asset measured at fair value with changes recognised in equity may be impaired, the amount of any impairment loss must be calculated and recognised in the income statement. Equity defer recognition of unrealised gains and losses, (except those relating to impairment) to equity and then recycle cumulative total to profit and loss on sale. Foreign exchange gains or losses on a monetary asset are recognised directly in the profit and loss. Note Where an available-forsale item is fair value hedged, gains and losses attributable to the hedged risk must be recognised in the profit and loss. Note Where an impairment loss is reversed, the reversal is through equity not the income statement.

16 kpmg 12 One-dollar funds For financial reporting purposes, the financial assets classification and measurement under AASB 139 will mean that one-dollar funds such as cash management trusts which previously measured assets at amortised cost to maintain their one-dollar status will need to measure their assets at fair value. Whilst one-dollar funds may hold assets to maturity, it is doubtful that they would be able to classify their financial assets as held-to-maturity and continue to measure their financial assets at amortised cost, unless they meet the strict criteria set out in AASB 139. A held-to-maturity asset is one that has a fixed maturity and fixed or determinable payments and that the entity has the positive intent and ability to hold until maturity. The intent and ability to hold an asset to maturity must be assessed at each balance-sheet date. Generally, the held-to-maturity portfolio is tainted under AASB 139 if an entity sells or reclassifies more than an insignificant amount of assets from its held-to-maturity portfolio such as where a managed investment scheme sells a financial asset to meet liquidity requirements from unitholders redemptions. An entity will then be prohibited from classifying financial instruments as held-to-maturity investments for two years. Therefore, one-dollar funds are likely to classify their financial assets as fair value through the profit or loss. Fair value under AASB 139: Financial Instruments: Recognition and Measurement Managed investment schemes will have to classify financial assets as either fair value through the profit and loss, loans and receivables or available for sale. The loans and receivables category would typically be available to mortgage schemes that originate loans and or purchase non-quoted loans and receivables. We expect that managed investment schemes will classify their financial assets as fair value through the profit or loss, that is, measuring their financial assets at fair value, with changes in fair value recognised in the income statement. Previous GAAP, measuring financial assets at net market value using the last sale price net of disposal costs, is inconsistent with the fair value concept in AASB 139. AASB 139 defines fair value as the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction. Financial assets should be measured at their fair values without any deduction for transactions costs that may be incurred on sale or other disposal. The fair value of a financial asset that is quoted in an active market is its quoted price. For financial assets, the current market bid price must be used. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available and those prices represent actual and regularly occurring market transactions on an arm s length basis. There is no further detailed guidance on how to determine whether there is an active market for a financial instrument. A market would be considered inactive if there is very little trading volume or if significant trading volume is between related parties, or if there are restrictions on trading. If the market for the financial asset is not active, the Scheme will need to establish fair value by using a valuation technique prescribed by AASB 139. Valuation techniques include using recent arm s length market transactions between knowledgeable, willing parties, if available, reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis, and option pricing models. If there is a valuation technique commonly used by market participants to price the instrument and that technique has been demonstrated to provide reliable estimate of prices obtained in actual market transactions, the entity is able to use that technique. Transaction Costs AASB 139 requires that the initial measurement on acquisition of a financial asset shall not include directly attributable transactions costs such as brokerage, as was the case previously under AGAAP. AIFRS requires that transaction costs should be expensed as incurred in the profit and loss. The measurement requirements of AASB 139 will require changes to systems and accounting policies.

17 Example Managed Investment Scheme 30 June 2006 Annual Financial Report June Classification of unitholders funds as debt under AASB 132 Financial Instrument Disclosure and Presentations Under the previous GAAP, unitholders funds were classified as equity in the balance sheet. Under AIFRS, units on issue in an unlisted managed investment scheme give the holder a right to immediate redemption at a price based on the fair value of the net asset value of the Scheme on that date and therefore meet the definition of a puttable instrument. Because of this requirement, units on issue will generally be classified as a liability under AASB 132 Financial Instrument Disclosure and Presentation. While the puttable instrument must be classified as a financial liability, it is possible to use descriptors such as net asset value attributable to unitholders and to include additional note disclosure to demonstrate the composition of net asset value attributable to unitholders. ASIC IR ASIC facilitates removing termination date from property trust deeds was released on 6 June The ASIC relief will apply to listed schemes and unlisted schemes that are not subject to a mandatory redemption requirement. This ASIC relief allows changes to the scheme constitution to remove their limited lives without requiring a special resolution of members. The impact of this is that the units may no longer meet the definition of a puttable instrument and units may be permitted to be classified as equity under AASB 132. This is not likely for an unlisted scheme. Impact on Scheme operations This change in classification from equity to liability in the balance sheet under AIFRS will reduce net assets to nil and impact the way these schemes operate, as a scheme s constitution will refer to the use of generally accepted accounting principles or accounting standards for operational purposes. This includes determining net assets for the purposes of setting the unit price and to calculate the fees paid to investment managers and responsible entities. However, ASIC Class Order 04/1575 Managed investment schemes: unit pricing has the effect of relieving responsible entities from the requirement to convene unitholders meetings to approve changes in the constitutions where: the change is only in relation to reference to accounting principles or accounting standards for operational purposes such as working out the value of the scheme s assets and liabilities, unit pricing and fees payable the change does not affect unitholders rights, that is, unitholders rights are substantially the same before and after the modification to the constitution The actions required will be determined by the content of the individual constitution, for example: where a constitution defines the calculation of net assets by reference to Accounting Standards, the constitution will require an amendment through the application of the class order where a constitution defines net assets with no reference to Accounting Standards, no amendment is required where a constitution uses terms which are defined in the Accounting Standards but does not refer to Accounting Standards for the definition, these constitutions will require an amendment through application of the class order. For those managed investment schemes which require an amendment to their constitution, if the responsible entity elects to amend the scheme s constitution, the class order means that while AIFRS will apply to financial reports of managed investment schemes for periods beginning 1 January 2005, for operational purposes, such as unit pricing, the generally accepted accounting practice and accounting standards that were in force as at 31 December 2004 can continue to be applied. The application of the class order relief will enable these schemes to operate the way they currently do for operational purposes, however they will be required to maintain two sets of valuation data to facilitate AIFRS financial reporting. A responsible entity that makes modifications to a scheme s constitution for this purpose must give each unitholder of the scheme a notice in writing that sets out the reason for, and the effect of, the modifications. Refer KPMG Flash Report 05FR- 003 ASIC Class Order Relief for further detail. Valuation of the financial liability As units meet the definition of a puttable instrument and are therefore classified as a financial liability, they must be measured at the amount payable on demand, discounted from the first date that the amount may be required to be paid. For schemes where unitholders can demand redemption at anytime, unitholders funds will be measured at an amount equal to the number of units on issue multiplied by the redemption price as at reporting date.

18 kpmg 14 For most schemes, the redemption price includes an allowance for transaction costs which would be incurred by the scheme on disposal of its assets required to fund the redemption. This transaction cost factor is normally a percentage, and represents the average transaction costs incurred by the scheme on disposal of its assets. As a result of the transaction cost factor, there will be a difference between the carrying amount of the net assets of the scheme (excluding the unitholders funds classified as a financial liability) and the contractual amount payable to unitholders which is based on the redemption price. Example: Scheme has $1,000 of assets (at fair value) and $nil Liabilities (prior to recognising the liability arising from puttable instruments) Units on issue: 1,000 Transaction cost factor for scheme pricing: 0.5% Redemption price (bid price): $0.995 ($1,000/1,000 x 99.5%) Total Net Assets $1,000 Net assets attributable to unitholders liability: $1,000 Being Net assets attributable to unitholders contractually payable $995 (1,000 units x $0.995) Adjustments arising from different unit pricing and AIFRS valuation principles $5 This balancing item essentially represents the differences in AIFRS valuation principles. KPMG s view is that this balancing item should be classed as a liability and included in the valuation of Net assets attributable to unitholders. Control of a scheme A scheme may need to consolidate schemes which are under its control. Control AASB 127 Consolidated and Separate Financial Statements notes that a subsidiary is not excluded from consolidation simply because the investor is a venture capital organization, mutual fund, unit trust or similar entity. Control exists when there is: more than 50% of the voting power power over more than half of the voting rights by virtue of an agreement with other investors power to govern the financial and operating policies of the entity under a statute or an agreement power to appoint or remove the majority of the members of the board of directors or equivalent governing body and control of the entity is by that board or body power to cast the majority of votes at meetings of the board of directors or equivalent governing body and control of the entity is by that board or body. The control criteria in AASB 127 require that where the investor has greater than 50% of the voting rights, the scheme should be consolidated. To determine whether the investor has greater than 50% of the voting rights, they need to be considered with respect to the regulatory and operating structure of the scheme. However, even where ownership interest is less than 50%, control may still exist where there is control of the financial and operating policies. Reference should be made to UIG 112 Consolidation Special Purpose Entities as a scheme will typically meet the definition of a special purpose entity where it has been created to accomplish a narrow and well-defined objective. The four indicators of control in UIG 112 are: the activities of the SPE are being conducted on behalf of the entity according to its specific business needs the Scheme has the decision-making powers to obtain the majority of the benefits of the activities of the SPE

19 Example Managed Investment Scheme 30 June 2006 Annual Financial Report June the Scheme has rights to obtain the majority of the benefits of the SPE and therefore maybe exposed to risks incident to the activities of the SPE the Scheme retains the majority of the residual or ownership risks related to the SPE or its assets in order to obtain benefits from its activities. Investor control of a registered scheme An investor with greater than 75% ownership and therefore greater than 75% voting rights is able to modify the constitution. An investor with greater than 50% ownership and therefore greater than 50% voting rights is able to remove the Responsible Entity. Therefore control of a registered scheme will exist according to AASB 127 and UIG 112 when an investor has greater than 50% voting rights. Whenever there is ownership interest you need to consider the power to govern to determine if there is control. Investor control of an unregistered scheme An investor in an unregistered scheme who has greater than 50% ownership and therefore greater than 50% of the voting rights, will usually have the ability under the investment mandate / trust deed to convene an extraordinary general meeting. Therefore control of an unregistered scheme will exist according to AASB 127 and UIG 112 when an investor has greater than 50% voting rights. Whenever there is ownership interest you need to consider the power to govern to determine if there is control. Consolidation issues When consolidating schemes which have no equity, there will not be any minority interest recorded where the parent does not have 100% of the subsidiary s units. The change in net assets attributable to the external unitholders is recorded as a finance cost in the income statement and the net assets attributable to external unitholders are shown as a liability in the balance sheet. Consolidation of feeder funds Different classes of investors in the funds management industry may establish a master feeder structure. Under this structure investors with different profiles invest in turn to the master fund. Generally all the funds will be managed by the same entity. See diagram below: Investors All managed by the same entity Feeder fund Master fund