FASB and IASB Convergence: Implications for Investment Funds

Schedule of investments: Under U.S. GAAP, registered investment companies are required to provide a full schedule of investments--either in the printed financial statements or their filings with the SEC--listing each investment held by the fund. Non-registered investment partnerships are required to provide a condensed schedule of investments categorizing them by type, geography, industry or other relevant groupings and listing separately each investment that represents more than 5 percent of the fund's net assets. The schedule of investments provides investors with valuable insight into the fund's holdings and the implementation of its investment objective and strategies. IFRS does not require a schedule of investments. Like what you see? Click here to sign up for Securities Technology Monitor's weekly newsletter to get the latest news and analysis that matters to the effective operation of capital markets. Financial highlights: U.S. GAAP requires the presentation of financial highlights, which provide several important measures used by investors to evaluate funds-total return, income ratio, expense ratio and, for registered investment companies, portfolio turnover. In addition, the financial highlights information for registered investment companies and unitized funds includeson a per-unit basis-beginning net asset value, net investment income/loss, realized and unrealized gain/loss, total from investment operations, distributions, and net asset value at the end of the period. IFRS does not require presentation of financial highlights. Income statement: IFRS permits combining interest and dividend income with gains/losses-both realized and unrealized-on securities to determine net income, while investment company GAAP requires separate presentation of investment income, realized gains/losses and unrealized gains/losses on investment securities. Comparative information: IFRS requires comparative balance sheets, income statements, statements of changes in equity, and cash flow statements. In contrast, investment company GAAP generally requires only presentation of the current balance sheet and the statements of operations, changes in net assets and, in certain cases, cash flows for the most recently completed year. Under SEC rules, registered investment companies must provide statements of changes in net assets for two years. Disclosures: IFRS requires extensive disclosures regarding the nature and extent of risks arising from financial instruments to which the fund is exposed at the reporting date. Among the required disclosures are the exposures to risk and how they arise; the entity's objectives, policies and processes for managing the risks and methods used to measure the risks; summary quantitative data about exposure to each type of risk; and a sensitivity analysis showing how profit or loss and equity would have been affected by changes that were reasonably possible in each relevant risk variable. U.S. GAAP requires significant disclosures relative to an entity's use of derivatives and, to a lesser extent, financial instruments generally. However, U.S. GAAP does not contain the same level of disclosure requirements as IFRS for financial instruments. Accounting Differences

In addition to the financial statement presentation differences, IFRS differs from investment company GAAP on certain matters of accounting: Classification of fund shares: Fund shares are treated as equity under investment company GAAP. However, IFRS provides that, with limited exceptions, financial instruments that give the holder the right to put them back to the issuer for cash are liabilities. This may mean that the investor interests in many funds (certain open-end mutual funds, hedge funds, etc.) could be classified as liabilities under IFRS, which could result in these funds having little or no equity. However, the recent amendment to IAS 32 may result in puttable instruments being classified in equity for some investment companies.

Frequently Asked Questions on Schedule of Investments

(1) Should the determination of whether long and short positions in the same security be disclosed on the schedule of Investments be performed on a gross or net basis? (TIS Section 6910) For the purposes of the five percent test, determination should be made on a gross basis. This is because there is market risk if one position is closed before the other or experience loss on disposition. (2) If an investment company has a long position that exceeds five percent of net assets and a short position in the same issuer which is less than five percent, is the investment company required to disclose both the long and short position? (TIS Section 6910) As mentioned earlier, for the purposes of five percent test, long position and short position in any one issuer should be considered separately. If the value of the long position exceeds five percent, disclosure of the long position is required. If the value of the short position is less than five percent, disclosure is not required. (3) How should the disclosure be made on the schedule of investment when the investment company holds one or more types of securities and/or one or more types of derivatives of the same issuer? (TIS Section 6910) The fair value of the securities and derivatives that are classified as assets should be aggregated. To the extent the sum constitutes more than five percent of the net assets, each position must be presented separately in the condensed schedule of investments. Similarly, the fair value of the securities and derivates that are classified as liabilities should be aggregated to determine whether the sum constitutes more than five percent of the net assets. Each position should be then presented separately on the condensed schedule of investments. (4) When comparative financial statements are presented, should the schedule of investments be presented as of the end of each period? (TIA Section 6910) Because the schedule of investments is considered significant relative to the statement of assets and liabilities, for each statement of assets and liabilities presented, a schedule of investment should be also presented.