AYERS ALLIANCE QUANTUM FUND SP - A SEGREGATED Independent Auditor's Report and Audited Financial Statements For the year ended December 31, 2017
REPORT AND AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 CONTENTS PAGE(S) MANAGEMENT AND ADMINISTRATION 1 INDEPENDENT AUDITOR'S REPORT 2-4 STATEMENT OF FINANCIAL POSITION 5 STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME 6 STATEMENT OF CHANGES IN NET ASSETS ATTRIBUTABLE TO HOLDERS OF PARTICIPATING SHARES 7 STATEMENT OF CASH FLOWS 8 NOTES TO THE FINANCIAL STATEMENTS 9 33
MANAGEMENT AND ADMINISTRATION Directors Wen Cyrus Jun-Ming (Resigned on 23 April 2018) Cheah Kok Leong Tung, Clement Sun Tat (Appointed on 23 April 2018) Registered Office 4 th Floor, Harbour Place 103 South Church Street PO Box 10240 Grand Cayman KY1-1002 Cayman Islands Investment Manager Ayers Alliance Asset Management Limited 4 th Floor, Harbour Place 103 South Church Street Grand Cayman KY1-1002 Cayman Islands Hong Kong Investment Advisor STI Asset Management Limited 3 rd Floor, QRC100 100 Queen's Road Central Central Hong Kong Australian Investment Advisor Ayers Alliance Limited Level 2, Exchange House 10 Bridge Street Sydney NSW 2000 Australia Administrator and Transfer Agent SS&C Fund Services (Asia) Limited Suite 706-7, Central Plaza 18 Harbour Road Wan Chai, Hong Kong Auditor Deloitte & Touche One Capital Place PO Box 1787 Grand Cayman KY1-1109 Cayman Islands Legal Adviser As to matters of Cayman Islands law Harney Westwood & Riegels 3601 Two Exchange Square 8 Connaught Place Central Hong Kong Legal Adviser As to matters of Australian law DLA Piper Australia 201 Elizabeth Street Sydney NSW 2000 Australia Prime Broker UBS AG, London Branch 1 Finsbury Avenue London EC2M 2PP UK - 1 -
Deloitte & Touche One Capital Place PO Box 1787 Grand Cayman, KY1-1109 CAYMAN ISLANDS Tel: +1 (345) 949 7500 Fax: +1 (345) 949 8238 www.deloitte.com/ky INDEPENDENT AUDITOR'S REPORT TO THE BOARD OF DIRECTORS OF AYERS ALLIANCE QUANTUM FUND SP A SEGREGATED Opinion We have audited the accompanying financial statements of Ayers Alliance Quantum Fund SP A Segregated Portfolio of Ayers Alliance SPC (the "Fund") set out on pages 5 to 33, which comprise the statement of financial position as at December 31, 2017, and the statement of profit or loss and other comprehensive income, the statement of changes in net assets attributable to holders of participating shares and the statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies. In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Fund as at December 31, 2017, and its financial performance, its changes in net assets attributable to holders of participating shares and its cash flows for the year then ended in accordance with International Financial Reporting Standards ("IFRSs"). Basis for Opinion We conducted our audit in accordance with International Standards on Auditing ("ISAs"). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Fund in accordance with the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (the "IESBA Code"), and we have fulfilled our other ethical responsibilities in accordance with the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Responsibilities of Management and Those Charged with Governance for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRSs, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Fund's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Fund or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Fund's financial reporting process. - 2 -
INDEPENDENT AUDITOR'S REPORT TO THE BOARD OF DIRECTORS OF AYERS ALLIANCE QUANTUM FUND SP A SEGREGATED - continued Auditor's Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion solely to you, in accordance with the agreed terms of engagement, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional recognized throughout the audit. We also: Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Fund's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Fund to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. - 3 -
INDEPENDENT AUDITOR'S REPORT TO THE BOARD OF DIRECTORS OF AYERS ALLIANCE QUANTUM FUND SP A SEGREGATED continued Auditor's Responsibilities for the Audit of the Financial Statements continued We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. June 28, 2018-4 -
STATEMENT OF FINANCIAL POSITION AS AT DECEMBER 31, 2017 NOTES 2017 2016 ASSETS Financial assets at fair value through profit or loss 4(i) 10,474,958 9,948,974 Financial asset at amortised cost 5 10,000,000 10,000,000 Margin deposits 3,971,906 - Other receivables and prepayments 136,440 92,859 Amounts due from brokers 6 59,622,223 88,951,479 Cash and cash equivalents 1,255,754 563,781 TOTAL ASSETS 85,461,281 109,557,093 LIABILITIES Financial liabilities at fair value through profit or loss 4(i) 13,879,376 8,289,373 Amounts due to brokers 6 19,397,802 20,937,835 Margin deficit 3,003,449 - Other payables 485,200 840,173 Management fee payable 8 241,203 417,743 Performance fee payable 8 84,972 - Deferred income 141,696 700,000 TOTAL LIABILITIES (EXCLUDING NET ASSETS ATTRIBUTABLE TO HOLDERS OF PARTICIPATING SHARES) 37,233,698 31,185,124 NET ASSETS ATTRIBUTABLE TO HOLDERS OF PARTICIPATING SHARES 48,227,582 78,371,968 Management shares 7 1 1 TOTAL LIABILITIES AND EQUITY 85,461,281 109,557,093 Number of participating shares in issue 7 354,019.84 625,860.28 The financial statements on page 5 to 33 were approved and authorised for issue by the Directors of the Fund on June 28, 2018 Notes are an integral part of the financial statements. - 5 -
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED DECEMBER 31, 2017 NOTES 2017 2016 INCOME Dividend income 360,222 226,532 Interest income 1,362,838 1,136,182 Other income 92,097 51 Net foreign exchange gain 4,386,163 7,668,073 Net realised gains on financial assets and liabilities at fair value through profit or loss 4(ii) 659,146 177,655 Net change in unrealised gains (losses) on financial assets and liabilities at fair value through profit or loss 4(ii) 476,626 (187,035) 7,337,092 9,021,458 EXPENSES Management fees 8 1,122,494 1,779,133 Performance fees 8 84,972 2,213 Commission fees 372,844 739,471 Dividend expense 385,949 224,630 Administration fees 10 78,000 88,448 Interest expense 341,935 372,515 Professional fees 6,355 66,000 Auditor's remuneration 40,766 36,000 Directors' fees 9 84,000 96,000 Other operating expenses 278,320 998,810 2,795,635 4,403,220 TAXATION 14,336 18,216 NET INCREASE IN NET ASSETS ATTRIBUTABLE TO HOLDERS OF PARTICIPATING SHARES FROM OPERATIONS 4,527,121 4,600,022 Notes are an integral part of the financial statements. - 6 -
STATEMENT OF CHANGES IN NET ASSETS ATTRIBUTABLE TO HOLDERS OF PARTICIPATING SHARES FOR THE YEAR ENDED DECEMBER 31, 2017 2017 2016 NET ASSETS ATTRIBUTABLE TO HOLDERS OF PARTICIPATING SHARES, BEGINNING OF THE YEAR 78,371,968 83,711,670 Net increase in net assets attributable to holders of participating shares from operations 4,527,121 4,600,022 Issuance of participating shares 149,998 13,291,490 Redemption of participating shares (34,821,505) (23,231,214) NET ASSETS ATTRIBUTABLE TO HOLDERS OF PARTICIPATING SHARES, END OF THE YEAR 48,227,582 78,371,968 Notes are an integral part of the financial statements. - 7 -
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2017 2017 2016 OPERATING ACTIVITIES Net increase in net assets attributable to holders of participating shares from operations 4,527,121 4,600,022 Adjustments for: Dividend income (360,222) (226,532) Interest income (1,362,838) (1,136,182) Interest expense 341,935 372,515 Operating cash flows before movements in working capital 3,145,996 3,609,823 Increase in financial assets at fair value through profit or loss (525,984) (5,785) Increase in financial asset at amortised cost - (7,000,000) Increase in financial liabilities at fair value through profit or loss 5,590,003 655,914 Decrease in other receivables and prepayments 55,018 197,308 Increase in margin deposits (3,971,906) - Increase in margin deficit 3,003,449 - Decrease in amounts due to brokers (1,540,033) (1,859,182) Decrease in amounts due from brokers 29,329,256 12,373,890 Decrease in management fee payable (176,540) (2,366) Increase in performance fee payable 84,972 - Decrease in other payables (354,973) (92,791) (Decrease) increase in deferred income (558,304) 700,000 CASH GENERATED FROM OPERATING ACTIVITIES 34,080,954 8,576,811 Dividend income received 281,617 224,241 Interest received 1,356,095 1,134,301 Interest paid (355,186) (354,242) NET CASH PROVIDED BY OPERATING ACTIVITIES 35,363,480 9,581,111 FINANCING ACTIVITIES Decrease in subscription in advance - (7,416,400) Proceeds from issuance of participating shares 149,998 13,291,490 Payments on redemption of participating shares (34,821,505) (23,231,214) NET CASH USED IN FINANCING ACTIVITIES (34,671,507) (17,356,124) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 691,973 (7,775,013) CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 563,781 8,338,794 CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 1,255,754 563,781 Notes are an integral part of the financial statements. - 8 -
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 1. GENERAL Ayers Alliance Quantum Fund SP A Segregated Portfolio of Ayers Alliance SPC (the "Fund") was incorporated in the Cayman Islands on October 4, 2013 under the Companies Law of the Cayman Islands, as an exempted segregated portfolio company with limited liability and was registered under the Mutual Funds Law of the Cayman Islands on October 10, 2013. The address of its registered office is 4 th Floor, Harbour Place, 103 South Church Street, Po Box 10240, Grand Cayman KY1 1002, Cayman Islands and its principal place of business is 3 rd Floor, QRC100, 100 Queen's Road Central, Central, Hong Kong. There is only one Segregated Portfolio in Ayers Alliance SPC as at December 31, 2017, the Ayers Alliance Quantum Fund SP. The assets, liabilities and equity of the portfolio are kept separated and segregated from the general assets of the Fund. In the case of insolvency with respect to the Fund's general business activities, creditors may be entitled to recourse only to the extent of the Fund's general assets. In the case of insolvency with respect to the portfolio, creditors may be entitled to have recourse only to the assets attributable to such portfolio. The investment objective of the Fund is to achieve long-term capital appreciation by investing its assets into one or more underlying funds or managed accounts managed by professional investment advisors whose investment focus is on the equity securities and derivative financial instruments in Hong Kong, Japan, Singapore, United States, United Kingdom and Australia. Ayers Alliance Asset Management Limited (the "Investment Manager") is granted full discretion over all matters relating to the operation of the Fund. The Investment Manager is entitled to receive performance and management fees. The Fund's books of account are denominated in United States Dollars (""), the functional currency and the currency in which the Fund maintains its financial records. 2. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRSs") Amendments to IFRSs that are mandatorily effective for the current year The Fund has applied a number of amendments to IFRSs issued by the International Accounting Standards Board ("IASB") and the International Financial Reporting Interpretations Committee ("IFRIC") of the IASB for the first time in the current year. Amendments to IAS 7 Amendments to IAS 12 Amendments to IFRS 12 Disclosure initiative Recognition of deferred tax assets for recognized losses As part of the annual improvements to IFRSs 2014 2016 cycle - 9 -
2. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRSs") continued The application of the amendments to IFRSs in the current year has had no material impact on the Fund's financial performance and positions for the current and prior years and/or on the disclosures set out in these financial statements. New and amendments to IFRSs in issue but not yet effective The Fund has not early applied the following new and amendments to IFRSs that have been issued but are not yet effective that are relevant to the Fund: IFRS 9 Financial Instrument 1 IFRS 15 Revenue from Contracts with Customers and the related Amendments 1 IFRS 16 Leases 2 IFRS 17 Insurance Contracts 4 IFRIC - Int 22 Foreign Currency Transactions and Advance Consideration 1 IFRIC - Int 23 Uncertainty over Income Tax Treatments 2 Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions 1 Amendments to IFRS 4 Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts 1 Amendments to IFRS 9 Prepayment Features with Negative Compensation 2 Amendments to IFRS 10 Sale or Contribution of Assets between an Investor and and IAS 28 its Associate or Joint Venture 3 Amendments to IAS 19 Plan Amendment, Curtailment or Settlement 2 Amendments to IAS 28 Long-term Interests in Associates and Joint Ventures 2 Amendments to IAS 28 As part of the Annual Improvements to IFRSs 2014-2016 Cycle 1 Amendments to IAS 40 Transfers of Investment Property 1 Amendments to IFRSs Annual Improvements to IFRSs 2015-2017 Cycle 2 1 Effective for annual periods beginning on or after January 1, 2018 2 Effective for annual periods beginning on or after January 1, 2019 3 Effective for annual periods beginning on or after a date to be determined 4 Effective for annual periods beginning on or after January 1, 2021 Except as describe below, the Directors of the Fund anticipate that the application of these new and revised IFRSs and amendments will have no material impact on the financial statements. IFRS 9 Financial instruments IFRS 9 introduces new requirements for the classification and measurement of financial assets, financial liabilities, general hedge accounting and impairment requirements for financial assets. - 10 -
2. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRSs") continued IFRS 9 Financial instruments - continued Key requirements of IFRS 9: all recognised financial assets that are within the scope of IFRS 9 are required to be subsequently measured at amortised cost or fair value. Specifically, debt investments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortised cost at the end of subsequent accounting periods. Debt instruments that are held within a business model whose objective is achieved both by collecting contractual cash flows and selling financial assets, and that have contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding, are generally measured at fair value through other comprehensive income ("FVTOCI"). All other debt investments and equity investments are measured at their fair value at the end of subsequent accounting periods. In addition, under IFRS 9, entities may make an irrevocable election to present subsequent changes in the fair value of an equity investment (that is not held for trading) in other comprehensive income, with only dividend income generally recognised in profit or loss. with regard to the measurement of financial liabilities designated as at fair value through profit or loss, IFRS 9 requires that the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability is presented in other comprehensive income, unless the recognition of the effects of changes in the liability's credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. Changes in fair value attributable to a financial liability's credit risk are not subsequently reclassified to profit or loss. Under IAS 39, the entire amount of the change in the fair value of the financial liability designated as fair value through profit or loss is presented in profit or loss. in relation to the impairment of financial assets, IFRS 9 requires an expected credit loss model, as opposed to an incurred credit loss model under IAS 39. The expected credit loss model requires an entity to account for expected credit losses and changes in those expected credit losses at each reporting date to reflect changes in credit risk since initial recognition. In other words, it is no longer necessary for a credit event to have occurred before credit losses are recognised. Based on the Fund's risk management policies as at December 31, 2017, the Directors of the Fund anticipate the following impact on initial application of IFRS 9: Classification Based on the Fund's financial instruments and risk management policies as at December 31, 2017, the Directors of the Fund does not anticipate that the application of IFRS 9 in the future may have a material impact on the classification and measurement of the Fund's financial assets. - 11 -
2. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRSs") continued IFRS 9 Financial instruments continued Impairment In general, the Directors of the Fund anticipates that the application of the expected credit loss model of IFRS 9 will result in earlier provision of credit losses which are not yet incurred in relation to the Fund's financial asset measured at amortised cost and other items that are subject to the impairment provisions upon application of IFRS 9 by the Fund. Based on the assessment by the Directors of the Fund, the adoption of the expected credit loss model were to be applied by the Fund, the accumulated amount of the impairment loss to be recognised by the Fund as at January 1, 2018 would be slightly increased as compared to the accumulated amount recognised under IAS 39 mainly attributable to expected credit losses provision on financial asset at amortised cost, margin deposits, other receivables, amounts due from brokers and cash and bank balances. Such further impairment recognised under expected credit loss model would reduce the opening retained profits at January 1, 2018. 3. SIGNIFICANT ACCOUNTING POLICIES Basis of preparation The financial statements have been prepared on the historical cost basis except for certain financial instruments, which are measured at fair values at the end of each reporting period, as explained in the accounting policies set out below. Historical cost is generally based on the fair value of the consideration given in exchange for goods. 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, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Fund takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these financial statements is determined on such a basis. In addition, for financial reporting purposes, fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; - 12 -
3. SIGNIFICANT ACCOUNTING POLICIES continued Basis of preparation - continued Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and Level 3 inputs are unobservable inputs for the asset or liability. The principal accounting policies are set out below: Revenue recognition Revenue is measured at the fair value of the consideration received or receivable. Interest income from a financial asset is recognised when it is probable that the economic benefits will flow to the Fund and the amount of revenue can be measured reliably. Interest income is accrued on a time basis, by reference to the principal outstanding and the effective interest rate applicable, which is the rate that exactly discounts the estimated future cash receipt through the expected life of the financial asset to that asset's net carrying amount on initial recognition. Dividend income from investments is recognised when the shareholders' right to receive payment has been established. Foreign currencies In preparing the financial statements of the Fund, transactions in currencies other than the functional currency of the Fund (foreign currencies) are recorded in its functional currency (i.e. the currency of the primary economic environment in which the entity operates) at the rates of exchange prevailing at that date. At the end of the reporting period, monetary items denominated in foreign currencies are re-translated at the exchange rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are re-translated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are recognised in the profit or loss in the period in which they arise. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit or loss for the period. Financial instruments Financial assets and financial liabilities are recognised on the statement of financial position when the Fund becomes a party to the contractual provisions of the instrument. - 13 -
3. SIGNIFICANT ACCOUNTING POLICIES continued Financial instruments - continued Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in the profit or loss. Financial assets The Fund's financial assets are classified as financial assets at fair value through profit or loss ("FVTPL") and loans and receivables. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. Effective interest method The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant year. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset, or, where appropriate, a shorter year to the net carrying amount on initial recognition. Interest income is recognised on an effective interest basis for debt instruments other than those financial assets classified as FVTPL. Financial assets at FVTPL Financial assets at FVTPL includes financial assets held for trading. A financial asset is classified as held for trading if: it has been acquired principally for the purpose of selling in the near future; or it is a part of a portfolio of identified financial instruments that the Fund manages together and has a recent actual pattern of short-term profit-taking; or it is a derivative that is not designated and effective as a hedging instrument. - 14 -
3. SIGNIFICANT ACCOUNTING POLICIES continued Financial instruments continued Financial assets - continued Financial assets at FVTPL - continued Financial assets at FVTPL are measured at fair value with reference to the last traded price, with changes in fair value recognised directly in the statement of profit or loss and other comprehensive income for the year in which they arise. The net gain or loss recognised in the statement of profit or loss and other comprehensive income excludes any dividend or interest earned on the financial assets. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition, loans and receivables (including financial asset at amortised cost, margin deposits, cash and cash equivalents, amounts due from brokers and other receivables) are carried at amortised cost using the effective interest method less any identified impairment losses (see accounting policies on impairment of financial assets below). Interest income is recognised by applying the effective interest rate, except for short-term receivables when the effect of discounting is immaterial. Impairment of financial assets Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of the reporting period. Financial assets are impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the financial assets have been affected. Objective evidence of impairment could include: significant financial difficulty of the issuer or counterparty; or breach of contract, such as default or delinquency in interest or principal payments; or it becoming probable that the borrower will enter bankruptcy or financial re-organisation. For financial assets carried at amortised cost, an impairment loss is recognised in the statement of profit or loss and other comprehensive income when there is objective evidence that the asset is impaired, and is measured as the difference between the asset's carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. - 15 -
3. SIGNIFICANT ACCOUNTING POLICIES continued Financial instruments continued Impairment of financial assets - continued The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets. Changes in the carrying amount of the allowance account are recognised in the statement of profit or loss and other comprehensive income. Subsequent recoveries of amounts previously written off are credited to the statement of profit or loss and other comprehensive income. If, in a subsequent year, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment loss was recognised, the previously recognised impairment loss is reversed through the statement of profit or loss and other comprehensive income to the extent that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised. Financial liabilities and equity instruments Financial liabilities and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement and the definitions of a financial liability and an equity instrument. Equity instruments An equity instrument is any contract that evidences a residual interest in the assets of the Fund after deducting all of its liabilities. Management shares issued by the Fund are recognised at the proceeds received, net of direct issue costs. Effective interest method The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial liability, or, where appropriate, a shorter year, to the net carrying amount on initial recognition. Interest expense is recognised on an effective interest basis. Financial liabilities at FVTPL Financial liabilities at FVTPL are financial liabilities held for trading. - 16 -
3. SIGNIFICANT ACCOUNTING POLICIES continued Financial instruments continued Financial liabilities and equity instruments - continued Financial liabilities at FVTPL - continued A financial liability is classified as held for trading if: it has been incurred principally for the purpose of repurchasing in the near future; or on initial recognition it is a part of a portfolio of identified financial instruments that the Fund manages together and has a recent actual pattern of short-term profit-taking; or it is a derivative that is not designated and effective as a hedging instrument. Financial liabilities at FVTPL are measured at fair value, with changes in fair value arising on remeasurement recognised directly in profit or loss in the year in which they arise. Other financial liabilities Other financial liabilities including amounts due to brokers, margin deficit, management fee payable, performance fee payable and other payables are subsequently measured at amortised cost, using the effective interest method. Derivative financial instruments The Fund uses derivative financial instruments including futures, interest rate swaps and options for trading and hedging purposes. Derivatives are initially recognised at fair value at the date a derivative contract is entered into and are subsequently remeasured to their fair value at the end of the reporting period. The resulting gain or loss is recognised in the profit or loss immediately. Margin deposits/deficit Margin deposits/deficit represent margin deposits/deficit held with brokers in respect of open exchange-traded futures contracts and other derivative financial instruments. Participating shares The liabilities to holders of participating shares is presented in the statement of financial position as "net assets attributable to holders of participating shares" and is determined based on the residual assets of the Fund after deducting the Fund's other liabilities and management share capital. - 17 -
3. SIGNIFICANT ACCOUNTING POLICIES continued Financial instruments continued Derecognition The Fund derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Fund neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Fund continues to recognise the asset to the extent of its continuing involvement and recognises an associated liability. If the Fund retains substantially all the risks and rewards of ownership of a transferred financial asset, the Fund continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received. On derecognition of a financial asset in its entirety, the difference between the asset's carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognised in other comprehensive income and accumulated in equity is recognised in profit or loss. The Fund derecognises a financial liability when, and only when, the Fund's obligations are discharged, cancelled or have expired. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit or loss. Taxation The Fund is domiciled in the Cayman Islands. Under the current law governing the Fund in the Cayman Islands, the Fund is not subject to tax on income, profits or capital gains or other taxes payable. Income from the investments held by the Fund may be subject to withholding and other taxes levied by the jurisdiction in which the income is sourced. Withholding taxes, if any, are shown as a separate item in the statement of profit or loss and other comprehensive income. Cash and cash equivalents Cash and cash equivalents in the statement of financial position comprises cash at bank. Expenses All expenses, including administration and management fees, are recognised in the statement of profit or loss and other comprehensive income on an accrual basis. - 18 -
4. FINANCIAL ASSETS/LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS (i) Categories of financial assets and liabilities at fair value through profit or loss Financial assets at FVTPL held for trading 2017 2016 Listed equity securities, at fair value (cost 2017: 8,908,388; 2016: 8,781,569) 9,592,644 9,616,964 Derivatives financial instruments 882,314 332,010 Financial liabilities at FVTPL held for trading 10,474,958 9,948,974 2017 2016 Listed equity securities sold short, at fair value (cost 2017: 12,688,080; 2016: 6,899,634) 13,245,798 7,131,717 Derivatives financial instruments 633,578 1,157,656 13,879,376 8,289,373 (ii) Net gains (losses) on financial assets and liabilities at fair value through profit or loss 2017 2016 Net realised gains on financial assets at FVTPL held for trading 356,416 25,853,722 Net realised gains (losses) on financial liabilities at FVTPL held for trading 302,730 (25,676,067) Net realised gains on financial assets and liabilities at FVTPL 659,146 177,655 Net change in unrealised gains on financial assets at FVTPL held for trading 207,968 2,065,883 Net change in unrealised losses on financial liabilities at FVTPL held for trading 268,658 (2,252,918) Net change in unrealised gain (losses) on financial assets and liabilities at FVTPL 476,626 (187,035) - 19 -
4. FINANCIAL ASSETS/LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS - continued (ii) Net gains (losses) on financial assets and liabilities at fair value through profit or loss continued 2017 2016 Net realised gains on Equity securities 1,404,328 1,500,650 Options - (677,986) Futures (86,504) 138,126 Contract for differences (658,678) (783,135) 659,146 177,655 Net change in unrealised gains (losses) on Equity securities (602,627) 474,384 Futures 791 (132) Contract for differences 1,079,553 (666,395) Foreign currency forwards (1,091) 5,108 476,626 (187,035) (iii) Derivative financial instruments At December 31, 2017, the Fund had the following open positions in derivative financial instruments and their respective fair values: 2017 Notional amount Assets Liabilities Contract for differences 3,301,565 878,339 (629,303) Foreign currency forward 4,127,593 3,184 (4,275) Futures 791 - Total derivative financial instruments assets (liabilities) 882,134 (633,578) - 20 -
4. FINANCIAL ASSETS/LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS - continued (iii) Derivative financial instruments - continued At December 31, 2016, the Fund had the following open positions in derivative financial instruments and their respective fair values: 2016 Notional amount Assets Liabilities Contract for differences 90,412,808 321,615 (1,152,369) Foreign currency forward 3,089,086 10,395 (5,287) Total derivative financial instruments assets (liabilities) 332,010 (1,157,656) These derivative financial instruments were stated at fair values at the end of reporting year resulting in unrealised fair value gains and losses. 5. FINANCIAL ASSET AT AMORTISED COST During 2015, the Fund held an unsecured loan note that carried interest at 23.25% per annum, payable quarterly and matured in August 2016. During 2016, the Fund entered into another unsecured loan note with the same counterparty that carries interest at 13% per annum. The loan note was fully repaid in August 2017. In August 2017, the Fund entered into a loan participating agreement with an independent third party (the "Lender") to hold an undivided participating interest in the loan of amount of 10,000,000. The Fund was entitled to an interest rate of 13% and administrative fee of 0.5% charged by the Lender upon the receipt of the first quarter payments from the borrower. The loan will mature on 10 August 2018. None of the assets were past due or impaired at the end of the reporting period. 6. AMOUNTS DUE FROM (TO) BROKERS Amounts are unsecured, repayable on demand and bear interest at market rates. - 21 -
7. SHARE CAPITAL The Ayers Alliance SPC (the "SPC") has an authorised share capital of 50,000 which is made up of (i) 4,999,900 participating non-voting redeemable shares, each with a par value of 0.01 (the "participating shares") and (ii) 100 voting non-redeemable, each with a par value of 0.01 (the "management shares"). The management shares have been issued and are held by the Investment Manager. They carry the right to return of the nominal amount paid up thereon upon the winding up of the SPC. Participating shares of each segregated portfolio are issuable by the directors of the SPC in different classes and series in accordance with the relevant portfolio supplement. Each class of participating shares will be issued by reference to a particular segregated portfolio. Authorised: 100 management shares of 0.01 each, voting non-redeemable 1 Class A 4,999,900 participating shares of 0.01 each, non-voting redeemable 49,999 50,000 2017 2016 Issued and paid: 100 management shares of 0.01 each 1 1 2017 Number of Number of shares shares outstanding at outstanding at December 31, Issuance Redemption December 31, 2016 of shares of shares 2017 Class A participating shares Series 1 546,209.33 - (251,730.23) 294,479.10 2016 Series 1 34,779.55 - (1,094.09) 33,685.46 2016 Series 2 1,272.74 - (1,272.72) 0.02 2016 Series 3 1,052.45 - (1,052.45) - 2016 Series 4 18,930.10 - (331.22) 18,598.88 2016 Series 5 13,820.69 - (11,422.39) 2,398.30 2016 Series 6 2,418.37 - (430.43) 1,987.94 2016 Series 7 2,915.59 - (1,838.79) 1,076.80 2016 Series 8 1,139.23 - (406.86) 732.37 2016 Series 9 3,322.23 - (3,078.54) 243.69 2017 Series 1-316.50 (316.50) - 2017 Series 2-817.28-817.28 625,860.28 1,133.78 (272,974.22) 354,019.84-22 -
7. SHARE CAPITAL - continued 2016 Number of Number of shares shares outstanding at outstanding at December 31, Issuance Redemption December 31, 2015 of shares of shares 2016 Class A participating shares Series 1 639,848.82 65,091.47 (158,730.96) 546,209.33 2015 Series 1 4,491.82 - (4,491.82) - 2015 Series 2 10,269.21 - (10,269.21) - 2015 Series 3 4,239.86 - (4,239.86) - 2015 Series 4 10,966.30 - (10,966.30) - 2015 Series 5 17,342.95 - (17,342.95) - 2015 Series 6 4,167.58 - (4,167.58) - 2015 Series 7 4,024.68 - (4,024.68) - 2015 Series 8 4,328.54 - (4,328.54) - 2015 Series 9 1,571.82 - (1,571.82) - 2015 Series 10 1,383.12 - (1,383.12) - 2015 Series 11 94.16 - (94.16) - 2015 Series 12 2,211.54 - (2,211.54) - 2016 Series 1-62,156.25 (27,376.70) 34,779.55 2016 Series 2-4,502.80 (3,230.06) 1,272.74 2016 Series 3-1,135.32 (82.87) 1,052.45 2016 Series 4-18,930.10-18,930.10 2016 Series 5-14,233.46 (412.77) 13,820.69 2016 Series 6-2,418.37-2,418.37 2016 Series 7-2,915.59-2,915.59 2016 Series 8-1,139.23-1,139.23 2016 Series 9-3,322.23-3,322.23 704,940.40 175,844.82 (254,924.94) 625,860.28-23 -
7. SHARE CAPITAL - continued The net asset value of each series of shares as of December 31, 2017 and 2016 are as follows: 2017 Net Number of Net asset value shares issues asset value per share Class A participating shares Series 1 2014 Series 1 294,479.10 40,098,817.98 136.17 2016 Series 1 33,685.46 4,608,042.91 136.80 2016 Series 2 0.02 2.73 136.30 2016 Series 4 18,598.88 2,532,584.15 136.17 2016 Series 5 2,398.30 326,573.25 136.17 2016 Series 6 1,987.94 270,695.08 136.17 2016 Series 7 1,076.80 146,626.39 136.17 2016 Series 8 732.37 99,725.83 136.17 2016 Series 9 243.69 33,182.94 136.17 2017 Series 2 817.28 111,333.67 136.22 2016 Net Number of Net asset value shares issues asset value per share Class A participating shares Series 1 546,209.33 68,379,946 125.19 2016 Series 1 34,779.55 4,374,572 125.78 2016 Series 2 1,272.74 159,334 125.19 2016 Series 3 1,052.45 131,756 125.19 2016 Series 4 18,930.10 2,369,859 125.19 2016 Series 5 13,820.69 1,730,212 125.19 2016 Series 6 2,418.37 302,756 125.19 2016 Series 7 2,915.59 365,003 125.19 2016 Series 8 1,139.23 142,620 125.19 2016 Series 9 3,322.23 415,910 125.19-24 -
8. MANAGEMENT AND PERFORMANCE FEES The Fund will pay the Manager a Management Fee out of the assets of the Fund, in respect of each calendar quarter, an amount equal to one quarter (¼) of 2 per cent of the average Net Asset Value of each series of Class A Shares during the relevant quarter. The average Net Asset Value of a series will be determined by reference to the Net Asset Value of the relevant series (before making any deduction for accrued Management Fee and Performance Fee) on the last Valuation Day in each month in the relevant quarter. The Management Fee will be payable in US Dollars quarterly in arrears. The Manager will also be entitled to receive a Performance Fee from the Fund in respect of each series of Shares in issue. For each Calculation Period, the Performance Fee in respect of each series will be equal to 20 per cent of the appreciation in the Net Asset Value of the series (adjusted for any redemptions and distributions) during the Calculation Period above the High Water Mark which is in excess of the Hurdle Rate. The Performance Fee will be calculated as at each Valuation Day in respect of each series by reference to the Net Asset Value of such series before deduction for any accrued Performance Fees. The Performance Fee will be paid to the Manager in arrears as soon as reasonably practicable after the end of each Calculation Period and in any event, within 30 days of the finalisation of the Net Asset Value as at the last Valuation Day of each Calculation Period. The Investment Manager reserves the right to waive or rebate any fees to which it is entitled, whether in part or in full and whether in respect of a particular participating shareholder or generally. 9. RELATED PARTY TRANSACTIONS In addition to the related party transactions disclosed elsewhere in the financial statements during the year, the Fund had the following significant transactions with related parties: 2017 2016 During the year ended 31 December, Management fees to Investment Manager 1,122,494 1,779,133 Performance fees to Investment Manager 84,972 2,213 Directors' fees (Note) 84,000 96,000 1,291,466 1,877,346 As at 31 December of the year, Management fees payable to Investment Manager 241,203 417,743 Performance fees payable to Investment Manager 84,972 - Directors' fees payable (Note) 24,000 36,000 Note: 350,175 453,743 Under the agreement dated 1 January 2015, the Fund has engaged a service provider, STI Professional Services Limited, to provide directors' services. - 25 -
10. ADMINISTRATION FEES Citi Fund Service (Asia) Limited (the "Administrator") is the administrator for the Fund to provide administrative services. On 12 March 2016, SS&C Technologies Holdings Inc. completed the acquisition of Citi's Alterative Investor Services business, including its hedge fund and private equity administration business. As a result, Citi was renamed as SS&C Fund Services (Asia) Limited ("SS&C"). The fee is calculated at the following basis: (i) (ii) (iii) 10 basis points per annum whereby the net asset value of the Fund is up to and including 100 million, with a minimum fee of 5,500 per month for the first year; and 8 basis points per annum for the portion of the net asset value of the Fund from 100 to 500 million, with a minimum fee of 5,500 per month for the first year; and 6 basis points per annum for the portion of the net asset value of the Fund that exceeds 500 million, with a minimum fee of 5,500 per month. The fees are accrued on a monthly basis. The Administrator will also be entitled to various transaction and processing fees and to be reimbursed for all out of pocket expenses properly incurred by it in the performance of its duties. 11. CAPITAL RISK MANAGEMENT The Fund manages its capital to ensure that it will be able to continue as a going concern while maximising the return to holders of participating shares. The capital structure of the Fund consists of management shares and participating share interests comprising contributed amounts and accumulated earnings. The Fund does not have any externally imposed capital requirements. 12. FINANCIAL INSTRUMENTS AND ASSOCIATED RISKS Categories of financial instruments 2017 2016 Financial assets Financial assets at FVTPL - held for trading 10,474,958 9,948,974 Loans and receivables (including margin deposits, cash and cash equivalents, amounts due from brokers and other receivables) 74,947,240 99,598,391 85,422,198 109,547,365-26 -
12. FINANCIAL INSTRUMENTS AND ASSOCIATED RISKS - continued Categories of financial instruments - continued 2017 2016 Financial liabilities Financial liabilities at FVTPL - held for trading (13,879,376) (8,289,373) Amortised cost (23,212,626) (22,195,751) Net assets attributable to holders of participating shares (48,227,582) (78,371,968) Financial risk management objectives and policies (85,319,584) (108,857,092) The Fund's major financial instruments include investments in securities and derivative contracts, financial asset at amortised cost, amounts due from brokers, other receivables, cash and cash equivalents, amounts due to brokers, margin deposits, management fee payable, performance fee payable, margin deficit and other payables. Details of the financial instruments are disclosed in the respective notes. The risks associated with these financial instruments include credit risk, liquidity risk and market risk (foreign currency risk, interest rate risk and other price risk). The policies on how to mitigate these risks are set out below. Management manages and monitors these exposures to ensure appropriate measures are implemented in a timely and effective manner. Credit risk Financial assets which potentially subject the Fund to concentrations of credit risk consist principally of derivative financial assets, financial assets at amortised cost, other receivables, amounts due from brokers, cash and cash equivalents and margin deposits. The credit risk on the derivative financial assets, financial assets at amortised cost, amounts due from brokers, margin deposits and other receivables is limited because the counterparties and issuers are corporations with high credit ratings assigned by international credit-rating agencies. None of the receivables are past due and they are normally short term in nature or can be called at the Fund's discretion. No collateral is held against these liquid funds and receivables. The analysis below shows the maximum exposure to credit risk arising from the carrying amount of the respective recognised financial assets as stated in the statement of financial position: 2017 2016 Derivative financial assets 882,314 332,010 Financial asset at amortised cost 10,000,000 10,000,000 Other receivables 97,357 83,131 Amounts due from brokers 59,622,223 84,957,436 Cash and cash equivalents 1,255,754 563,781 Margin deposits 3,971,906 3,994,043 75,829,554 99,930,401-27 -