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What U.S. Fund Managers Need To Know About Year-End Financial Reporting for Their Irish Domiciled Funds

Oct 16, 2017

This article provides an overview of the changes in financial reporting and regulatory compliance requirements and provides U.S. fund managers with practical information about year-end financial reporting for their Irish domiciled funds.

1. Changes which Impact the 2017 Year-End

a. Companies (Accounting) Act 2017

The Companies (Accounting) Act 2017 (the "Act") came into effect on 9 June 2017. The main impact on investment companies was that they must now file the following documents with the Company Registration Office (the "CRO"):

  • the statutory financial statements of the company for the financial year;
  • the directors' report for the financial year; and
  • the statutory auditors' report on those financial statements and the directors' report.

It should be noted that Irish Collective Asset-Management Vehicle ("ICAV") structures do not apply Companies Act legislation and thus are not impacted by this Act.

b. Securities Financing Transactions Regulation ("SFTR") Update

The SFTR financial reporting disclosure requirements were first applicable for annual and semi-annual financial statements of Undertakings for Collective Investment in Transferable Securities Funds ("UCITS") and annual financial statements of Alternative Investment Funds ("AIFs"), published after 13 January 2017.

SFTR requires information on the use of securities financing transactions ("SFTs") and total return swaps to be disclosed in these financial statements. It should be noted that the information is not accounting information and therefore does not form part of the financial statements. Industry practice has included these SFTR disclosures within the supplementary information section of the financial statements. As such, comparative information is not required and the information is not subject to audit.

The funds industry raised the question of whether contracts for differences ("CFDs") should be considered to be a form of total return swap. The Investment Association, which is the trade body that represents U.K. investment managers, found that in Annex I of the Alternative Investment Fund Managers Directive ("AIFMD") delegated regulation, which provides substantially the same definition of total return swaps as the SFTR, CFDs are a different type of derivative. The existence of this separate and discrete definition of total return swaps and CFDs led them to believe that CFDs should not be considered to be total return swapsfor the purpose of the SFTR.

c. Central Bank Regulations

In December 2016, the Central Bank of Ireland ("Central Bank") clarified the requirements for the preparation and submission of two separate sets of unaudited financial statements of the management company covering a) the first six months of the financial year and b) the full 12 months of the financial year, both to be filed with the Central Bank within two months of the relevant financial statements period end date.

Over the past six months, there were some practical challenges around the Online Reporting ("ONR") filing of the 12-month unaudited financial statements concerning the location of the filing on ONR itself and what exactly needed to be filed with ONR.

The Irish Funds Industry Association ("Irish Funds") have confirmed with the Central Bank that the 12-month unaudited financial statements are required to be filed with the Central Bank in the prescribed format via a Financial Reporting ("FINREP") return structure through ONR.

2. Changes Which Come into Effect for the 2018 Year-End

a. U.S. GAAP ASU 2016-18: Statement of Cash Flows (Topic 230) – Restricted Cash

In November 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-18 which requires "restricted cash and restricted cash equivalents" to be included within the cash and cash equivalents line in the Statement of Cash Flows.

The new standard requires that the Statement of Cash Flows explains the change during the period in cash and cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Entities will also be required to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions.

Effective date:

  • Public business entities – fiscal years beginning after 15 December 2017 and interim periods within those fiscal years.
  • All other entities – fiscal years beginning after 15 December 2018 and interim periods within fiscal years beginning after 15 December 2019. Early adoption is permitted.

b. U.S. GAAP 2017-08: Receivables –Non-Refundable Fees and Other Costs (Subtopic 310-20) – Premium Amortization on Purchased Callable Debt Securities

In March 2017, FASB issued ASU 2017-08 which accelerates the amortization period to the earliest call date for certain purchased callable debt securities held at a premium. Under current generally accepted accounting principles ("GAAP"), entities usually amortise the premium as an adjustment of yield over the contractual life of the instrument. Callable debt securities are generally priced in a model that considers calls, so the update is deemed to better align the amortisation period to those pricing models. Therefore premiums on purchased callable debt securities, that have explicit, non-contingent call features and are callable at fixed prices on pre-set dates, will now be amortized to the earliest call date.

Fund administrators should ensure that their accounting systems are updated to amortise premiums on callable debt securities to the first call date, while continuing to amortize discounts on callable debt securities to the contractual maturity date.

Effective date:

  • Public business entities – fiscal years beginning after 15 December 2018 and interim periods within those fiscal years.
  • All other entities – fiscal years beginning after 15 December 2019 and interim periods within fiscal years beginning after 15 December 2020.
  • Early adoption is permitted.

c. IFRS 9: Financial Instruments (replacement of International Accounting Standard 39 ["IAS 39"])

The impact of the change from IAS 39 to IFRS 9 is not expected to be significant for investment funds as the majority of the financial assets are currently being carried at fair value through the profit or loss ("FVTPL").

However IFRS 9 may have a more significant impact for investment funds who currently classify their financial assets as:

  • Available for sale ("AFS") – as this classification is no longer available under IFRS 9.
  • Loans and receivables at amortized cost – as a new "expected credit loss" impairment methodology will apply.

Effective date:

  • Accounting periods beginning on or after 1 January 2018.

Practical Steps to Consider Over 2017

We recommend that the fund managers contact their service providers to assess the impact of the above items. For any decisions that need to be considered and agreed, establish how these decisions will impact financial statements and regulatory compliance.

Asset Management Intelligence – Q4 2017

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