IFRS/US GAAP/Luxembourg GAAP: A comparison for funds Investment Management

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Brochure / report title goes here | Section title goes here

Foreword 03

International updates 04

Industry-specific guidance for investment funds 09

Financial statement presentation

and disclosure differences for investment funds 12 Selected differences

that impact investment funds 35

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IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

Foreword

We are pleased to present the 4th edition of this publication comparing the application of major generally accepted accounting principles (GAAP) for investment funds—IFRS/US GAAP/Luxembourg GAAP.

This document highlights selected the drafting of this publication, Deloitte The investment management industry differences between the major sets of and the authors will take no faces an ever-increasing demand for accounting standards (IFRS, US GAAP and responsibility for any omissions or transparency by stakeholders. This is Luxembourg GAAP) applied to investment inaccuracies. further amplified in times of crisis. As funds. Although there are other significant We hope that you find this comparison investment managers look for global investment fund jurisdictions, the helpful and encourage you to contact us for opportunities to enter global markets, accounting standards in those other areas further discussions or additional it is essential that any reporting to tend to allow or closely follow the tenets of information. their stakeholders on their strategies IFRS. and products, including through their financial statements, is clearly This summary does not attempt to capture understood, meets local all of the differences that exist or that may requirements, and allows for Best, be material to a particular fund’s financial comparison between the many statements. Our focus is on differences investment products offered. that are often encountered in practice.

Further, the significance of these Although the ambition to move toward a differences—and others not included in set of globally accepted financial reporting this analysis—will vary with respect to standards, which address the needs of Justin Griffiths individual entities, depending on such stakeholders and acknowledge the unique Partn er, Investment factors as the nature of the fund's nature of the fund accounting industry, operations, the class in which it remains an ideal, different accounting invests, and the accounting policy it has standards are still used for preparing the chosen. As a result, reference to the financial statements of investment funds underlying accounting standards globally. is key in understanding the

specific differences. Although Vincent Gouverneur great care has been given to Partner, Investment Management Leader

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IFRS/US GAAP/ Luxembourg GAAP: a comparison for investment funds

International updates

We have created this briefing to provide an overview of the potential accounting differences that exist between International Financial Reporting Standards (“IFRS”), generally accepted accounting principles in the United States (“US GAAP”) and Luxembourg generally accepted accounting principles (“LUX GAAP”) when applied to investment funds.

Before presenting our analysis of the While US GAAP and IFRS are well- selected differences, we highlight below established and recognized sets of certain recent developments affecting accounting standards, LUX GAAP for investment funds in the sets of accounting investment funds is derived from standards under consideration. Luxembourg laws and regulations, and is primarily shaped by the European Union (EU) Undertakings for Collective Investment in Transferable Securities (UCITS) Directive and the Alternative Investment Fund Manager (AIFM) Directive.

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IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

IFRS UPDATES

IFRS 16 & Covid-19-Related Rent (interbank offer rates [IBORs]), the IASB • For hedges of a non-contractually Concessions considered the financial reporting specified benchmark component of implications of the uncertainties about interest rate risk, a company shall IFRS 16 Leases replaced the existing the future of existing interest rate apply the separately identifiable standard IAS 17 Leases becoming benchmarks and identified two groups of requirement only at the inception of effective for reporting periods beginning accounting issues that could have such hedging relationships; and on or after 1 January 2019. financial reporting implications. These • Define the rules in relation to the are: relief granted under the temporary For lessors, the changes introduced by • Phase 1: pre-replacement issues— exemptions from applying specific IFRS 16 are not significant and, except in issues affecting financial reporting in requirements respect of subleases, a lessor is not the period before the replacement during the period of uncertainty required to make any adjustments on of an existing interest rate regarding reform. transition for leases in which it is a lessor. benchmark with an alternative rate; and The amendments are also designed to For lessees, the picture is fundamentally • Phase 2: replacement issues—issues support the of useful financial different. All leases within the scope of that might affect financial reporting information during the period of IFRS 16 (except for short-term leases, i.e., when an existing interest rate uncertainty. a lease term of 12 months or less, and benchmark is replaced with an leases of low-value ) are required alternative rate. The IASB has issued the Interest Rate to be brought on- by Benchmark Reform – Phase 2 lessees, recognizing a right-of-use asset In respect of Phase 1, on 26 September amendment which amends IFRS 9 and the related lease liability at 2019 the IASB issued the Interest Rate Financial Instruments, IAS 39 Financial commencement of the lease, with Benchmark Reform (Amendments to Instruments: Recognition and subsequent accounting generally similar IFRS 9, IAS 39 and IFRS 7), applicable Measurement, IFRS 7 Financial to the finance lease model under IAS 17. from 1 January 2020 (early adoption Instruments: Disclosures, IFRS 4 permitted), which amends some of the Insurance Contracts, and IFRS 16 Leases. Following the Covid-19 pandemic, the existing IFRS requirements for hedge The amendment addresses the following IASB published an amendment entitled accounting. areas: Covid-19- Related Rent Concessions, • Practical expedient for particular which permits lessees, as a practical The amendments apply solely to hedge changes to contractual flows; expedient, not to assess whether accounting requirements that are based • Relief from specific hedge particular rent concessions occurring as on forward-looking analysis and are as accounting requirements; a direct consequence of the Covid-19 follows: • Disclosure requirements; and pandemic are lease modifications and • Assume that the interest rate • Transition and effective date. instead to for those rent benchmark on which hedged cash concessions as if they are not lease flows are based is not altered as a This amendment has not yet been modifications. The amendment does not result of the reform in the probability endorsed by the EU at the date of affect lessors. This amendment is assessment of a forecast transaction; publication of this report. effective for reporting periods beginning • Assume that the interest rate on or after 1 June 2020 with earlier benchmark on which the hedged application permitted and was endorsed item, hedged risk and/or hedging by the European Union (EU) in October instrument are based is not altered 2020. as a result of the interest rate benchmark reform in making the prospective assessment under IFRS 9/IAS 39 IBOR Reform and its hedge accounting; effect on financial reporting • Grant relief from the IAS 39 (80- 125%) retrospective assessment for Following the Financial Stability Board’s hedging relationships directly report setting out recommendations to impacted by the reform on certain reform some major benchmarks conditions;

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Exposure Draft: Primary Financial Statements

In December 2019, the IASB published an Exposure Draft setting out proposals for a draft IFRS Standard on presentation and disclosures in financial statements that, if finalized, will replace IAS 1 Presentation of Financial Statements. The proposals require:

• Additional subtotals in the statement of or loss for transparency, consistency and comparability. • The disaggregation of: operating either by nature or by function in the statement of profit or loss; large “other” balances; and information regarding unusual income and expenses and additional minimum line items in the statement of financial position. • Disclosure of some management- defined performance measures— that is, performance measures not specified by IFRS Standards—with reconciliations between these and subtotals specified by IFRS Standards. • Limited changes to the statement of cash flows.

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IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

US GAAP UPDATES

Modified disclosure requirements In August 2018, the FASB issued (continued): ASU 2018-03, which removes, modifies, and adds disclosure • For in certain entities requirements on that calculate measurements in Topic 820, Fair (NAV), a requirement to disclose Value Measurements. The the timing of liquidation of an purpose is to improve the investee’s assets and the date effectiveness of these disclosure when restrictions from requirements. redemption might lapse only if the investee has communicated the The amendments to the fair value timing to the entity or announced measurement disclosure requirements the timing publicly. include those listed below. The applicability of the changes to a particular entity may Eliminated disclosure requirements: depend on whether it is considered a non- • Amount of and reasons for transfers public entity. between Level 1 and Level 2; • processes for Level 3 fair New disclosure requirements: value measurements; • Changes in unrealized gains or losses • Policy for timing of transfers between included in other comprehensive levels of the fair value hierarchy; and income (OCI) for recurring Level 3 fair • Changes in unrealized gains and value measurements held at the end of losses for the period included in the reporting period; and earnings for recurring Level 3 fair • Range and weighted average used to value measurements held at the end develop significant unobservable inputs of the reporting period. for Level 3 fair value measurements. This ASU is effective for all entities for fiscal The aforementioned new disclosure years beginning after 15 December 2019, requirements are not applicable to including interim periods therein. non-public entities. Further US GAAP updates impacting the Modified disclosure requirements: investment management industry can be • Transfers into and out of Level 3 and found in the 2018 edition of our annual purchases and issues of Level 3 assets update highlighting selected accounting and and liabilities, disclosed in lieu of reporting developments, at the link below: reconciling the opening balances to the https://www2.deloitte.com/us/en/pages/fina closing balances of recurring Level 3 fair ncial-services/articles/us-investment- value measurements; management-accounting-and-financial- • Clarification that the measurement reporting-update-2018.html uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date; and

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IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

UPDATES WITH IMPLICATIONS FOR LUX GAAP

The AIFMD Q&A included new In 2019, the European Securities and questions and answers on: Markets Authority (ESMA) published updated questions and answers • Calculation of the leverage of each documents (Q&A) on the application AIF that the AIFM manages; and of the Undertakings for the Collective • The depositary regime. Investment in Transferable Securities Directive (UCITS) and the Alternative Investment Fund Managers Directive Links to these Q&As can be found here: (AIFMD). https://www.esma.europa.eu/questions-and- answers. The UCITS Q&A included new questions and answers on: In April 2020, ESMA issued guidelines on performance fees for UCITS and certain • Application of disclosure requirements on the remuneration of delegates; and types of retail AIFs which are applicable two months after publication of the • The depositary regime. translation into the official EU languages. ESMA published the translations on November 5, 2020.

Link to: https://www.esma.europa.eu/sites/default/ files/library/esma_34-39- 968_final_report_guidelines_on_performan ce_fees.pdf 8

IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

Industry-specific guidance for investment funds

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IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

IFRS

measured at fair value. IFRS do not provide specific However, an investment entity is still guidance for registered investment Additionally, an IE would typically have required to consolidate a subsidiary that companies or private funds. the following characteristics (although provides services that relate to the Currently, an investment company the absence of any of these would not investment entity’s investment activities. must follow the generic IFRS. disqualify it from being classified as an

IE): For guidance on industry-specific issues, IFRS 10 defines an "investment entity" (IE) • More than one investor; investment companies following IFRS may as an entity that: look to IFRS guidance dealing with similar • Obtains funds from one or more investor for • More than one investment; issues, the current conceptual framework, the purpose of providing those investor(s) • Investors that are not related parties; standards of other standard-setting with investment management services; and bodies and, in certain instances, accepted • Commits to its investor(s) that its business industry practices. • Ownership interests in the form of purpose is to invest funds solely for returns or similar interests. from capital appreciation, investment income, The IASB however, recognizes the concept

of an investment entity (IE) in IFRS 10, or both; and which provides an exemption from the • Measures and evaluates the requirement to consolidate subsidiaries performance of substantially all of its for eligible investment entities, instead investments on a fair value basis requiring such investments to be

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IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

US GAAP/SEC

Specific guidance is available for The Investment Company Act of 1940 and • The fact that the entity is an investment investment companies, principally Regulations S-X provide specific guidance company and is applying the guidance in through the FASB's Accounting and regulation for investment companies ASC 946; Standards Codification (ASC) 946 registered with the Securities Exchange • Information regarding any changes Financial Services-Investment Commission (SEC). in an entity's status as an investment Companies (Topic 946). company; and ASC 946 requires similar characteristics Additionally, the AICPA Audit and to be evaluated in determining if an entity • Information about financial support Accounting Guide for Investment is considered an investment company provided or contractually required Companies provides a comprehensive under US GAAP as are evaluated under to be provided by an investment source of information about operating IFRS. However, there are differences company to any of its investees. conditions and auditing procedures unique related to some of the fundamental and to the investment company industry. typical characteristics. Further, the AICPA Technical Practice Aid section 6910 provides questions and This ASC clarifies the criteria for an entity answers on certain matters related to to be considered an investment company investment companies. These questions and therefore required to measure non- and answers are non-authoritative. The controlling ownership interests in other material is based on selected practice investment companies at fair value rather matters related to investment than using the of companies that were identified by the accounting, and to include the following staff of the AICPA's Technical Hotline disclosures: and various other bodies within the AICPA.

LUX GAAP

Specific guidance is available for • The Law of 23 July 2016 on reserved https://www.esma.europa.eu/questions investment companies. alternative investment funds (RAIF). -and-answers. (v) Certain opinions of the Luxembourg This guidance is mainly found in: (ii) The requirements of the following Commissions des Normes Comptables (i) The following laws and regulations in European Directives: (CNC): Luxembourg: • The UCITS Directive (Directive • CNC Notice 09/002 on the • The Law of 17 December 2010 on 85/611/EEC replaced by Interpretation of Article 1711-8(3)(c) Undertakings for Collective LSC in the specific case of venture Directive 2009/65/EC); and Investment (UCI), as amended; capital/private equity investment • The AIFM Directive (2011/61/EU). • The Law of 13 February 2007 companies. • on Specialized Investment Funds (iii) Guidelines issued by the Association (vi) Guidance provided to members by (SIF), as amended; of the the Luxembourg Institute of Statutory • The Law of 12 July 2013 on Luxembourg Fund Industry (ALFI). Auditors (L’Institute des Réviseurs • Alternative Investment Fund (iv) Guidelines and Q&As issued by the d’Entreprises - IRE). Managers, as amended; European

• Circulars issued by the Luxembourg Securities and Markets Authority

Commission de Surveillance du (ESMA). The link to these Q&As can be found here: Secteur Financier (CSSF); and

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IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

Financial statement presentation and disclosure differences for investment funds

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IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

Components of financial statements

IFRS

01. Statement of financial position. 04. Statement of cash flows. 02. Statement of profit or loss and other 05. Notes, comprising a summary (or two of accounting policies and separate statements). other explanatory notes. 03. Statement of changes in equity (or statement of changes in net assets attributable to holders of redeemable shares if there is no equity).

US GAAP/SEC

01. Statement of assets and liabilities with a 05. Financial highlights for the latest schedule of investments or a statement period consisting of net investment of net assets, which includes a schedule income and ratios, and the of investments therein. total return or internal rate of return. 02. Statement of operations. Per share operating performance 03. Statement of changes in net assets is also required for all investment or statement of changes in partners'/ companies organized in a manner members' capital/equity (depending using unitized net asset value. on structure). SEC registered funds should also 04. Statement of cash flows (unless disclose the portfolio turnover. exempted under US GAAP). 06. Notes to the financial statements.

LUX GAAP

01. Statement of assets and liabilities (or 05. Notes to the financial statements. net assets), including a schedule of 06. Report on the activities of the investments (UCI), or qualitative and/ financial year. The regulation or quantitative information regarding supplementing the AIFMD stipulates the investment portfolio (SIF and RAIF). the disclosure required for AIFs. See 02. Statements of operations. the ALFI Code of Conduct for 03. Statement of changes in net assets. guidance on Board Reports. 04. A comparative table with period-end net asset value data for the last three years.

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IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

Statement of profit and loss and other comprehensive income/ operations

IFRS

Certain line items are required to be understanding of the entity’s financial presented on the face of the statement performance. of comprehensive income. Additional line items should be presented when Expenses are presented based either on such presentation is relevant to the their nature or function within the entity.

US GAAP/SEC

The excess of investment income over Expenses are presented based total expenses should be shown as net on their nature. Funds registered with investment income (or loss). The net the SEC should review the Investment realized gain or loss from investments Company Act of 1940 and Regulation and foreign currency transactions S-X for requirement should be disclosed. The net increase (decrease) in unrealized appreciation or on investments and the translation of assets and liabilities in foreign currencies should be disclosed.

LUX GAAP

Certain line items are required to be presented on the face of the statement of operations.

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IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

Schedule of investments

IFRS

Disclosure of a schedule IFRS 7 requires disclosure of the (or a condensed schedule) of carrying amount of the financial investments is not required. assets an entity has pledged as collateral for liabilities or IFRS 13 Fair Value Measurement contingent liabilities. however requires certain disclosures by IFRS 12 also requires disclosure class for financial assets and liabilities of the following for each measured at fair value, including: unconsolidated subsidiary: • The fair value of that class; • The subsidiary’s name; • The level of the fair value hierarchy • The principal place of business; within which the fair value and measurements are categories in their entirety (Level 1, 2, or 3); • The proportion of ownership interest held. • Information regarding transfers between Level 1 and Level 2 of the If an investment entity is the fair value hierarchy; parent of another investment entity, the parent is required to • A description of the fair valuation disclose the abovementioned techniques and the inputs used in the information for investments that fair value measurements categorized are controlled by the investment within Level 2 and Level 3 of the fair entity subsidiary value hierarchy; and

• For fair value measurements within Level 3 of the fair value hierarchy, additional disclosure may include: 01. A reconciliation between the opening and closing balances, 02. A description of the valuation processes, and 03. A narrative description of the sensitivity of the fair value measurement to changes in unobservable inputs (including the effect of changes to reflect reasonably possible alternative assumptions that would change the fair value significantly)

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IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

US GAAP/SEC

01. Each investment (including short instruments of a particular Disclosure of a schedule of sales) constituting more than 5% of underlying (such as foreign investments (required for SEC net assets, except for derivatives currency, wheat, specified equity registered funds) or a condensed instruments (see (E) and (F)). In index, or schedule of investments is applying the 5% test, total long and US Treasury Bonds) regardless of required. total short positions in any one counterparty, exchange, or

issuer shall be considered delivery date, if fair value exceeds A. Categorize investments by all of separately. 5% of net assets. In applying the the following: 02. All investments in any one issuer 5% test, total long and total short 01. Type (such as common stocks, aggregating more than 5% of net positions in any one issuer shall preferred stocks, convertible assets, except for derivative be considered separately. securities, fixed-income securities, instruments (see (E) and (F)). In government securities, options applying the 5% test, total long and G. Provide both of the following purchased, options written, total short positions in any one issuer additional qualitative warrants, futures, loan shall be considered separately. descriptions for each participations, short sales, other investment in another investment companies, and so D. Aggregate other investments nonregistered investment forth). (each of which is 5% or less of net partnership whose fair value 02. Country or geographic region, assets) without specifically identifying constitutes more than 5% of net except for derivative instruments the issuers of such investments and assets: for which the underlying is not a categorize them in accordance with . the guidance in (A). In applying the 01. The investment objective; and 03. Industry, except for derivative 5%, total long and total short 02. Restrictions on redemption instruments for which the positions in any one issuer shall be (that is, liquidity provisions). underlying is not a security. considered separately. 04. For derivative instruments for Funds registered with the SEC which the underlying is not a E. Disclose the number of contracts, should review the Investment security, by broad category of range of expiration dates, and Company Act of 1940 and underlying (for example, grains and cumulative appreciation Regulation S-X for requirements. feeds, fibers and textiles, foreign (depreciation) for open futures currency, or equity indexes) in contracts of a particular underlying place of the categories in (A)(02) (such as wheat, cotton, specified and (A)(03). equity index, or US Treasury Bonds), regardless of B. Report the percent of net exchange, delivery location, or delivery assets that each such category date, if cumulative appreciation represents and the total fair value (depreciation) on the open contracts and for each category in (A)(01) exceeds 5% of net assets. In applying and (A)(02) the 5% test, total long and total short positions in any one issuer shall be C. Disclose the name, number of considered separately. shares or principal amount, fair value, and type of both of the F. Disclose the range of following: expiration dates and fair value for all other derivative

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IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

LUX GAAP

Disclosure of a schedule of investments is A statement of changes in the required (except for a SIF and RAIF, which composition of the portfolio during the may present qualitative information on reference period is also required the investment portfolio as an (however, in practice a note is added to alternative). explain that this information is available The schedule of investments must distinguish upon request at the registered office of between transferable securities and money the fund). market instruments that are: • Admitted to an official stock exchange listing; Details by category of derivative instruments and efficient portfolio • Dealt in on another regulated market; management techniques utilized by the • Recently issued; and UCITS, and the resulting exposure levels.

• Other transferable securities and money market instruments.

In practice, the first three bullets are merged in the schedule of investments, and may be analyzed in accordance with the most appropriate criteria based on the fund’s investment policy (e.g. in accordance with economic, geographic or currency criteria.

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IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

Statement of cash flows

IFRS

activities, unless they are specifically Required for all investment funds. Interest and income/expenses, identified with financing and investing interest, and actually activities. The cash flows reported during the period received/paid (as opposed to accrued) are classified by operating, investing, and are shown separately in the statement of The impact of exchange rate financing activities. Cash flows from cash flows. movements on cash and cash operating activities can be reported using equivalents held or due in foreign either the direct method or the indirect Cash flows arising from taxes on income currencies is reported in the method. taxes are separately disclosed and are statement of cash flows in order to classified as cash flows from operating reconcile cash and cash equivalents at the beginning and end of the period.

US GAAP/SEC

An investment company may be accordance with Topic 820 as Level 1 average outstanding exempted from presenting a or Level 2 in the fair value hierarchy during the period, in relation to statement of cash flows if certain table, or measures them using the the average total assets; and conditions are met. The practical expedient in paragraph 820- 3. An investment company conditions, in accordance with 10-35-59 to determine their fair provides a statement of Topic 230, are: values and these are redeemable in changes in net assets. 1. An investment company carries the near term at all times; Should a statement be substantially all of its investments at 2. An investment company has required, the direct or indirect fair value and classifies them in little or no debt, based on the method is permitted.

LUX GAAP No requirement for a statement of cash flows.

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IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

Financial highlights

IFRS

IFRS do not require a presentation of requirements under IFRS is insufficient financial highlights. Nevertheless, IFRS to enable users to understand the require additional disclosure when corresponding impact. compliance with specific

US GAAP/SEC

The disclosure of financial highlights For SEC registered funds, the financial is required under US GAAP, for each highlights should be presented in a class of common shares that are not a schedule for the last five fiscal years. management class, either as a separate schedule, or within the notes Unitized and non-unitized funds, to the financial statements. limited-life and perpetual life funds have different disclosure requirements.

LUX GAAP

Disclosure is required of the • The total net asset value. following statistics for each of the last • The net asset value per share for three financial year-ends: each class of share.

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IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

Comparatives

IFRS

IFRS requires comparative information to of financial position at the beginning of be presented in respect of the preceding the preceding period, a third statement period for all amounts reported in the of financial position as at the beginning current period's financial statements. of the preceding period is required.

When an accounting policy has been An entity is also required to include applied retrospectively, or items in the comparative information for narrative and financial statements have been restated descriptive information if it is relevant to or reclassified and these have a material understanding the current period's effect on the information in the statement financial statements.

US GAAP/SEC

Comparatives are not required, except for the statement of changes in net assets for SEC registered funds or funds subject to other regulatory requirements, and the financial highlights requirements for SEC registered funds.

LUX GAAP

Comparatives are not required except for certain statistics discussed above.

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IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

Earnings per share (EPS)

IFRS

Required for publicly traded funds or those in the process of an IPO. The requirement to disclose EPS applies only to those funds whose shares qualify as equity instruments.

US GAAP/SEC

Not applicable, as investment funds are excluded from the scope of ASC 260 .

LUX GAAP

No specific requirement.

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IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

NAV per share

IFRS

Not specifically required. Nevertheless, requirements under IFRS is insufficient is commonly presented for investment as IFRS require additional disclosures to enable users to understand the funds preparing financial statements under when compliance with specific corresponding impact, NAV per share IFRS.

US GAAP/SEC

For unitized funds, NAV per share and per share changes in net assets must be presented in the statement of must be disclosed in the financial assets and liabilities, or in the notes to highlights. the financial statements,

LUX GAAP

The year-end NAV per share/unit and total NAV are required for the last three financial years.

Financial instruments— derivatives disclosures

IFRS

financial instruments. These disclosures IFRS prescribe disclosure of the financial IFRS require disclosure of quantitative and also relate to those items measured at instruments held by an entity, either qualitative information regarding exposure fair value as outlined in the “Schedule of by category of financial instrument or to risks arising from financial instruments investments” section above. by class, taking into consideration the (see risk disclosure on the following page). nature, characteristics, and risks of those

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IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

US GAAP/SEC

Disclosure requirements regarding the by underlying risk exposure (e.g., For derivative financial instruments in effects of offsetting financial assets and interest rate risk, credit risk, foreign private funds, disclosure in the schedule of financial liabilities and related exchange risk, or overall price risk). The investments of the number of contracts, arrangements are consistent with IFRS volume of derivative activity during the range of expiration dates, and cumulative requirements noted in the IFRS column. period must also be disclosed. appreciation/depreciation is required if the derivative exceeds 5% of net assets. Also, ASC 815 Derivatives and Hedging requires For purposes of the fair value hierarchy disclosure is required of the range of qualitative and quantitative disclosure table, derivative instruments must be expiration dates and fair values for all other regarding the investment company's aggregated by underlying risk exposure on derivatives of a particular underlying which objectives for holding and using derivative a gross basis, rather than by contract type exceed instruments. Tabular disclosure of gross (such as swaps, options, etc.), in a manner 5% of net assets. For registered funds, fair value amounts in the statement of consistent with ASC 815. disclosure is required of all details of each assets and liabilities and the location by derivative contract separately. line item, of amounts of gains and losses This type of aggregation differs to the reported in the statement of operations general groupings for derivative instruments within the schedule of investments.

LUX GAAP

Details must be disclosed by category of received by the UCITS to reduce • The proportion of lendable assets; financial derivative instruments, including counterparty exposure; and • Data on collateral concentration; the resulting exposure (UCI). The annual • The arising from efficient report of UCITS using total return swaps • Aggregate transaction data for each portfolio management techniques for the or other financial derivative instruments type of SFT/total return swap, entire reporting period together with the with the same characteristics should including data on collateral; direct and indirect operational and disclose the following: fees incurred. • Data on the reuse of collateral;

• Details on the safekeeping of collateral; and • The underlying exposure obtained See the ESMA publication: Guidelines on through financial derivative instruments; ETFs and other UCITS issues. • Data on return and cost for each type of SFT and total return swap. • The identity of the Disclosure is required of the counterparty/counterparties to these For supplementary disclosure following, in the annual reports of financial derivative instruments; requirements see the Securities AIFs, and in both the half-yearly and Financing Transactions Regulation • The type and amount of collateral annual reports of UCITS: (SFTR) and additional guidance on the ESMA website: https://www.esma.europa.eu/ policy-activities/post- trading/sftr-reporting.

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IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

Balance sheet—offsetting disclosure

IFRS D. The effect of financial instruments Under IFRS, entities are not subject to master netting arrangements permitted to offset assets and or similar agreements not already offset liabilities or income and expenses in the statement of financial position, unless this is required or permitted including related rights to collateral; and by a specific IFRS. Where offsetting is E. The net amount after deducting the required or permitted, disclosure of amount in (D) from the amounts in (C). the following information is required regarding the effects of offsetting Entities are required to present this financial assets and financial information in tabular format, separately liabilities and related arrangements for financial assets and financial liabilities, on an entity's financial position: unless another format is more appropriate.

A. The gross amounts of financial assets In addition, entities must disclose and financial liabilities before offsetting; qualitative information about the nature B. The amounts offset in accordance with of the rights of offset. the related offsetting model; C. The net amounts presented in the statement of financial position, (A) less (B);

US GAAP/SEC

Disclosure requirements regarding agreements and reverse repurchase the effects of offsetting financial agreements, and securities borrowing assets and financial liabilities and and securities lending transactions that related arrangements are consistent are either offset in accordance with with IFRS requirements noted in the ASC 210-20-45 or ASC 815-10-45, or that IFRS column. are subject to an enforceable master netting arrangement or similar agreement. ASC 210-20-50-1 establishes the scope of the offsetting disclosures as The scope of the FASB's requirements recognized derivative instruments includes fewer financial instruments than accounted for in accordance with Topic the scope of the offsetting requirements 815, including bifurcated embedded under IFRS. derivatives, repurchase

LUX GAAP

No specific requirement.

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IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

Cash specifics

IFRS

Overdrafts may be included in cash The accounting policy chosen should be balances, if they are repayable on disclosed in the notes and must be applied demand. consistently.

Where cash and cash equivalent balances

are not available for use, for example due to certain restrictions on the balances, they should be disclosed in the financial statements.

US GAAP/SEC

Overdrafts are generally excluded Amounts held in foreign currencies shall be from cash balances and disclosed disclosed separately at value, with separately. acquisition cost shown parenthetically.

Regulation S-X requires separate disclosure of cash which is restricted as to withdrawal or usage. The provisions of any restrictions should be described in the notes to the financial statements.

LUX GAAP

Overdrafts are generally excluded from cash balances and disclosed separately.

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IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

Realized and unrealized gains / (losses) on investments

IFRS

IFRS require gains and losses to be IFRS 13 Fair Value Measurement requires presented separately for each category of entities to separately disclose the change in financial instrument, either in the the fair value attributable to the unrealized statement of profit or loss and other appreciation/(depreciation) on investments comprehensive income or in the notes. categorized within Level 3 of the fair value The gains and losses on financial hierarchy. instruments designated at fair value must be disclosed separately from the gains and losses on financial instruments measured mandatorily at fair value.

US GAAP/SEC

Net realized gains/(losses) and net There is no requirement to break out changes in unrealized gains/(losses), appreciation/(depreciation) should be appreciation/(depreciation) from disclosed separately. investments and from foreign currency transactions.

LUX GAAP

Net realized gains/(losses) and net The AIFM Directive requires the split changes in unrealized appreciation/ between realized gains and realized losses, (depreciation) are commonly disclosed and unrealized gains and unrealized losses separately for non-AIFs. to be disclosed separately for AIFs.

26

IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

Disclosures on risks arising from financial instruments

IFRS

IFRS 7 Financial Instruments: Disclosures interest rate risk, and currency risk. For has robust and specific quantitative and market risk, a sensitivity analysis must also qualitative risk disclosure requirements. be disclosed, either for each type of The standard requires disclosures market risk, or in the aggregate if an regarding both the significance of is prepared that reflects the instruments, and the nature and extent of interdependencies between risk variables. risks arising from exposure to financial Methods and assumptions used to instruments, including credit risk, liquidity prepare the sensitivity analysis must also risk, and market risk. The standard requires be disclosed. For liquidity risk, a maturity disclosure of the credit risk management analysis for derivative and non-derivative practices and how they relate to the financial liabilities must be disclosed. recognition and measurement of expected credit losses. Market risk is further broken down into price risk,

US GAAP/SEC

In accordance with ASC 825 Financial of Level 3 fair value measurements to Instruments, certain disclosures are changes in unobservable inputs if a change required of concentrations of credit risk in those inputs may result in a significantly arising from financial instruments. different fair value measurement, and a Additional risk disclosures are also description of the interrelationships required for derivatives as outlined under between unobservable inputs, including Topic 815. how such relationships may magnify or mitigate the impact of changes in such Additionally, in accordance with Topic 820, inputs on fair value. public entities are required to disclose a narrative description of the sensitivity

27 IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

LUX GAAP

AUCITS is required to disclose in its annual disclosure to investors: And for AIFs employing leverage: report: • The percentage of the AIF’s assets • Any changes to the maximum level of • The method used to calculate global which are subject to special leverage which the AIFM may employ exposure (the commitment approach, or arrangements arising from their illiquid on behalf of the AIF as well as any right the relative or absolute VaR approach); nature; of re-use of collateral or any guarantee granted under the leveraging • Certain information on VaR if applied; • Any new arrangements for managing the arrangement; and and liquidity of the AIF; and • The total amount of leverage employed. • Leverage levels attained. • The current risk profile of the AIF and the by that AIF. risk management systems employed by Under the AIFMD, the following may be the AIFM to manage those risks. presented in the of an EU AIF as part of its required periodic and regular

28

IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

Remuneration disclosures

IFRS

Disclosure is required of the total Key management personnel are those compensation paid to key persons having authority and responsibility management personnel, as well as for for planning, directing, and controlling the each of the following categories: activities of the entity, directly or indirectly, including any directors (whether executive • Short-term employee benefits; or otherwise) of the entity. • Post-employment benefits; Key management personnel is a related • Other long-term benefits; party of the reporting entity (as per IAS 24) • Termination benefits; and and includes any entity providing key management personnel services to the • Share-based payment. reporting entity or to the parent of the reporting entity.

US GAAP/SEC

In accordance with Topic 946, certain be disclosed. Significant provisions of expenses are commonly reported related-party agreements, including the separately on the , basis for determining management, including the investment management advisory, administration, or distribution fee, administration fees paid to an affiliate, fees and, also other amounts paid to distribution expenses, and director or affiliates or related parties should be trustee fees. described in a note to the financial statements. Any fee reductions or Additionally, under Topic 850, amounts reimbursements are required to be paid to affiliates or related parties should disclosed separately.

29

IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

LUX GAAP

A UCITS must also disclose: A UCITS and an AIF must disclose in their annual report: • A description of how the remuneration and the benefits have • The total amount of remuneration for the financial year, split between fixed and been calculated; variable remuneration, paid by the • The outcome of the required reviews; and AIFM/Management Company to its staff (including the staff of the delegate of a • Any material changes to the adopted remuneration policy. Management Company to whom

investment management functions have been delegated), and the number of beneficiaries. For an AIF, if relevant, carried interest paid by the AIF. For a UCITS, if relevant, any amount paid directly by the UCITS itself, including any performance fee.

• The aggregate amount of remuneration broken down by senior management and members of staff of the AIFM/ Management Company (including staff of the delegate of a Management Company to whom investment management functions have been delegated) whose actions have a material impact on the risk profile of the AIF/UCITS.

• Based on recently issued ESMA guidelines, UCITS and certain retail AIFs must disclose any performance fee charged and the fee as a percentage of the NAV of each relevant share class in their annual and half-year reports. For funds with an existing performance fee, there is a transitional period of six months from the application date. The guidelines apply immediately to any performance fee introduced after the application date.

30

IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

Carried interest

IFRS

IFRS do not specifically address carried Under the ownership model, carried interest. The accounting treatment of interest is accounted for as a re- carried interest under IFRS depends allocation of profits of the partnership on the nature of the carried interest, between the partners, while under the which is typically set out in the entity’s service model, carried interest is offering documents. In practice, there recorded either as a financial liability are two possible accounting models under IFRS 9/IAS 32, or as a provision applicable to carried interest, or , as applicable, depending on their nature: under IAS 37.

• Ownership model, where the Adequate disclosures must be carried interest represents included in the financial statements, remuneration for services regardless of the accounting model provided by the general partner used, detailing when the performance acting in its capacity as owner; or criteria are met in accordance with the applicable standards. • Service model, where the carried interest represents remuneration for services provided by the general partner acting in its capacity as service provider.

US GAAP/SEC

Carried interest may be accounted for Under FASB 946-20-25-10, as: performance fees by an investment adviser under an advisory agreement • NAV allocation: a re-allocation from should be accrued by an investment the limited partners’ capital company at interim dates based on accounts to the general partner’s actual performance through the capital account, calculated as if the date. AICPA Technical investment company had realized Questions & Answers, section all assets and settled all liabilities at 6910.29, Allocation of Unrealized the reporting date, and presented Gain (Loss), Recognition of Carried in the statement of changes in Interest, and Clawback Obligations, partners’ capital. describes this accounting treatment and notes that the allocation of • Expense recognition if structured carried interest is based on the as an incentive or performance fee specific methodology defined in the (most commonly for unitized Limited Partnership Agreement or offshore funds) respective governing documents. This methodology will generally be disclosed, along with other relevant accounting policies, in the notes to the financial statements. 31

IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

LUX GAAP

There is no specific guidance Carried interest is recognized at the provided by Lux GAAP or the moment the performance criteria are relevant product laws with respect met. Disclosure must include a to accounting for carried interest. description of the carried interest mechanism in place, and the From a fund perspective, two accounting policy adopted by the possibilities are generally accepted: entity must be disclosed in the notes to the financial statements, regardless • NAV allocation: carried interest is of whether the triggering event has reallocated from the NAV occurred. attributable to the LP to the NAV attributable to the GP; or

• Expense recognition: carried interest is charged to the profit and loss in the same way as perform ance fees.

32

IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

Segment reporting

IFRS

Segment reporting is required for all domestic and foreign stock exchanges as entities whose debt or equity instruments well as OTC markets and local and are traded in a public market or for those in regional markets. the process of an IPO. Open-ended investment funds that are Only funds that are traded in a public offered and redeemed solely by way of market are included in the scope of IFRS 8 private transactions between the fund Operating Segments. Under IFRS 8 and shareholders are not considered Operating Segments, a public market to be traded in a public market. includes

US GAAP/SEC

In practice, typically not applicable.

LUX GAAP

No specific requirement.

33

IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

Authorization of financial statements

IFRS

An entity shall disclose the date when the financial statements were authorized for issue and who gave that authorization.

US GAAP/SEC

In accordance with ASC 855 subsequent events have been evaluated Subsequent Events, for funds not and whether that is the date on which the registered with the SEC, management financial statements were issued or were must disclose the date through which available to be issued.

LUX GAAP

Financial statements must be authorized, but disclosure is not required in the financial statements of this authorization or the date of authorization.

34

IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

Selected accounting differences that impact investment funds

35

IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

Financial instruments— recording date

IFRS

Transactions in financial instruments in value between the trade date and can be settled as part of a regular or the settlement date of the financial non-regular way purchase or sale instruments through profit or loss for transaction. assets measured at fair value through profit and loss (FVTPL). A change in A regular way transaction is a purchase the fair value of a financial asset that or sale of a financial asset under a is sold on a regular way basis is not contract whose terms require delivery recorded in the financial statements of the asset within the time frame between the trade date and the established by regulation or convention settlement date even if the entity in the relevant marketplace. In contrast, applies settlement-date accounting, a non-regular settlement would have a because the seller’s right to changes shorter or longer settlement cycle. in fair value ceases on the trade date.

A regular way purchase or sale of financial assets or liabilities can be recorded either on a trade-date or settlement-date basis, but the entity must apply this consistently within each category of assets.

When settlement-date accounting is applied for regular way purchases, an entity recognizes any change

36

IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

US GAAP/SEC

Securities transactions for investment funds must be recorded on the trade- date basis.

LUX GAAP

Securities transactions for investment funds are generally recorded on the trade- date basis.

37

IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

Financial instruments— classification

IFRS Financial assets are classified at amortized cost, fair value through profit or loss, or Financial instruments are generally fair value through other comprehensive classified as financial assets and/or financial income, depending on their contractual liabilities measured at FVTPL, presenting cash flows and the business model of the separately those designated upon initial entity. recognition and those held for trading in accordance with IFRS 7 Financial An entity may irrevocably designate a Instruments: Disclosures. financial asset as measured at fair value through profit or loss (also Changes in subsequent measurements of called application of the fair value investments classified at FVTPL are made option) if doing so eliminates or through profit or loss. significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring assets or liabilities or recognizing gains and losses on them on different bases.

US GAAP/SEC

For funds, all investments are accounted Changes in subsequent measurements for at fair value pursuant to Topic 946. are recognized in the statement of operations.

LUX GAAP

All investments are accounted for at Changes in subsequent measurements fair value, except for funds where the are recognized in the statement of management regulations or articles operations. provide otherwise.

38

IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

Financial instruments— fair value measurements

IFRS

IFRS 13 defines fair value on the basis participants as a practical expedient for of an exit price notion and uses a fair fair value measurements within a bid-ask value hierarchy, which results in a spread. market-based, rather than entity- specific, measurement. A significant decrease in the volume or level of activity versus normal market The fair value of a financial instrument activity may result in the quoted price for a on initial recognition is normally the financial asset being unrepresentative of transaction price. For subsequent fair value, e.g., in a crisis situation. measurements, fair value is based on However, such a decrease in activity alone observable market prices or observable does not necessarily indicate that a market data. IFRS 13 specifically indicates quoted price is unrepresentative of fair that if an investment has a bid price and value, or that a transaction in that market an ask price, the price within the bid-ask is not orderly. spread that is most representative of fair value shall be used. The fair value If it is determined that quoted prices do not measurement for investments quoted in represent fair value, an adjustment an active market uses the bid price for to the quoted prices will be necessary if long positions and the ask price for short those prices are to be used as the basis positions. IFRS 13 does not preclude the for measuring fair value. use of mid-market pricing or other pricing conventions used by market

39

IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

US GAAP/SEC

Topic 820 Fair Value Measurements ASC 820-10-35-24A provides detailed establishes the framework for fair guidance on three acceptable valuation value measurement. approaches for measuring financial instruments at fair value. The three Fair value is assumed to be the exit price approaches are the market approach, in an orderly transaction between market the income approach, and the cost participants. approach. Additionally, ASC 820-10-35-59 indicates Investments are measured at fair value that a reporting entity is permitted, as a but methods vary. If an investment has a practical expedient, to estimate the fair bid price and an ask price, the price within value of certain investments in other the bid-ask spread that is most entities using the net asset value per representative of fair value is used, share (or its equivalent) of the investment, although Topic 820 does not if the net asset value per share of the preclude mid-market pricing or other pricing investment (or its equivalent) is calculated in conventions used by market participants. a manner consistent with the measurement The last-traded or mid-market price is principles of Topic 946 as of the reporting commonly used as a practical expedient. entity's measurement date.

LUX GAAP

Unless otherwise provided for in the Unless otherwise provided for in the management regulations or articles of management regulations or founding incorporation of the UCI, the valuation documents of the AIF, the assets of AIFs of listed securities held by the fund are valued at fair value. The valuation shall be based on the last known stock must be determined in accordance with exchange price, unless such price is not the rules set out in the founding representative. documents or management regulations.

For unlisted securities or listed securities for which the latest price is not representative, the valuation shall be based on the probable realization value, estimated with due care and in good faith.

40

IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

Financial instruments— transaction costs

IFRS

Transaction costs that relate to investments recorded at FVTPL are recognized in the income statement. Financial instruments that are not at fair value through profit or loss are initially measured at their fair value plus or minus the transaction costs directly attributable to the acquisition or issue of the financial asset or financial liability.

US GAAP/SEC

Transaction costs are recognized as part of an investment's cost.

LUX GAAP

Transaction costs are commonly costs as part of an investment’s cost recognized as part of an investment's are required to separately disclose cost, except for UCls/AIFs opting to total transaction costs for the year in expense transaction costs. UCITS which the notes to the financial statements apply an accounting policy to recognize or in a footnote. transaction

41

IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

Set-up costs

IFRS

Set-up costs should be expensed when incurred.

US GAAP/SEC

Organization costs should be charged to expense as they are incurred.

Offering costs are treated differently based on the operational nature of the entity, as outlined in Topic 946.

LUX GAAP

Formation expenses can be either expensed, or capitalized and amortized over a maximum period of 60 months.

42

IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

Interest income

IFRS

Interest income is recognized using the effective interest method.

US GAAP/SEC

Interest income is recognized pursuant to of the security. However, there are several ASC 310-20-35-18 and ASC 310-20-35-26 exceptions to this method of recognizing by applying the effective interest method interest income. on the basis of the contractual cash flows

LUX GAAP

Interest income is recognized on a coupon basis.

43

IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

Uncertain tax positions

IFRS The conclusion regarding this probability IAS 12 Income Taxes does not include will affect the method used to measure the explicit guidance regarding the recognition tax uncertainty. If the probability of and measurement of income tax when the acceptance is low, the uncertainty shall be application of tax law to a particular reflected when determining the taxable transaction or circumstance is uncertain. profit. The effect of the uncertainty will be IFRIC 23 Uncertainty over Income Tax determined by using either “the most likely Treatments (effective from 1 January 2019) amount” method or the “expected value” clarifies the accounting for uncertainty in method. IFRIC 23 specifically requires income tax treatments. In assessing disclosure of the judgements, assumptions uncertainty in income tax treatment, the and estimates made in determining entity must use its judgment to determine taxable profit. whether it should consider each uncertain

tax treatment separately or collectively, based on the approach that better predicts resolution of the uncertainty. Judgement is used to determine the probability of the tax authority accepting a tax treatment.

US GAAP/SEC

In accordance with Topic 740, Income processes, based on the technical merits of Taxes, a fund is required to determine the position. The tax benefit to be whether a tax position within the fund recognized is measured as the largest is more likely than not to be sustained amount of benefit that is greater than 50% upon examination by the applicable likely of being realized upon ultimate taxing authority, including resolution settlement. of any related appeals or litigation

LUX GAAP

No specific requirement. However, provisions for liabilities and charges are recognized for losses or of a clearly defined nature, which, at the date of the statement of net assets are either likely to be incurred, or certain to be incurred but uncertain as to their amount or the date on which they will arise.

44

IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

Consolidation

IFRS

Where an entity qualifies as an investment This does not apply to any subsidiaries of entity, it is not required to consolidate a the investment entity providing services subsidiary in accordance with the that relate to the investment entity’s provisions of IFRS 10, but investment activities. must instead measure its investment in the investee at FVTPL in accordance with IFRS 9.

US GAAP/SEC

Consolidation of an investee that is not consolidated by the feeder, but shown an investment company is not using specific presentation requirements as described in Topic 946. appropriate for an investment fund

except in the case of operating Wholly-owned blocker entities should subsidiaries providing services to the generally be consolidated into the investment fund. investment fund. If an investment fund is a master fund within a master/feeder structure, the master fund is generally not

LUX GAAP

Funds subject to the various product If an investment fund is a feeder fund laws in Luxembourg and their within a master/feeder structure, the subsidiaries are exempt from the master fund is generally not consolidated obligation to consolidate companies by the feeder, but presented in owned for investment purposes. accordance with specific requirements (for further details, refer to the section Real estate or private equity funds below: Master-feeder structures ). with subsidiaries often opt to

consolidate.

45

IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

Classification of investor ownership

IFRS

Shareholder interest is classified as has no exchange rights, and its expected equity if it is puttable to the entity at cash flows are based substantially on the fair value and if it entitles the profit and loss of the entity. If shareholder to a share of the entity's one or more of these criteria are not net assets in the event of the entity's met for a puttable instrument, the liquidation, is subordinate to all other instrument is classified as a liability. classes of instruments having identical features,

US GAAP/SEC

Shareholder interest is classified as equity.

LUX GAAP

Shareholder interest is classified as equity.

46

IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

Combined reporting for commonly controlled entities

IFRS

IFRS does not include specific guidance • The reasons for the preparation of on preparing combined financial combined financial statements; statements. Relevant information for • The basis for determining which units are preparing combined financial statements included in the combined reporting; can be found in the Conceptual Framework and other IFRS standards. • The basis of preparation of these financial Combined financial statements may be statements; and prepared for a reporting entity that • The related party disclosures required by comprises two or more entities that are IAS 24. not all linked by a parent-subsidiary relationship. The combined financial Combined reporting should not be confused statement should disclose information for with a business combination, which is the users of the financial statements such addressed by IFRS 3 Business Combinations, as: or with consolidation which is addressed by IFRS 10 Consolidated Financial Statements. • The fact that the financial statement are combined financial statements;

US GAAP/SEC

ASC 810 Consolidation states that there If combined financial statements are are circumstances in which combined prepared, intra-entity transactions and financial statements (as distinguished profits or losses shall be eliminated, and from consolidated financial statements) of non-controlling interests, foreign commonly controlled entities are likely to operations, different fiscal periods, and be more meaningful than their separate income taxes should be treated in the financial statements. For example, such same manner as in consolidated instances may include the following: financial statements.

• If one individual owns a controlling For investment funds, combined financial interest in several entities that financial statements are generally are related in their operations; and presented when the funds are in a series trust or if meeting the criteria described • Entities under common management. above.

47 IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

LUX GAAP

The financial statements of funds with For umbrella RAIFs, the information of multiple sub-funds (commonly referred to sub-funds is generally presented on a as “umbrella funds”) present information combined basis in the primary financial on each sub-fund, as well as combined statements. The relevant information on information on all sub-funds, typically in a each sub-fund regarding the statement of columnar format (i.e. a combined column net assets and portfolio of investments, for the statement of net assets, statement the statement of operations and changes of operations and changes in net assets). in net assets and NAV/share at year-end is The balances of sub-funds presented in then presented in the notes to the non-base currencies should be translated financial statements. If separate financial into the investment fund’s reporting statements for one or several sub-funds currency at the year-end exchange rate. are prepared, these must include not only For the statement of operations and information on the respective sub-fund(s), changes in net assets, the average but also on the combined data of all sub- exchange rate for the year may be used. funds.

Cross sub-fund activity should be While not common, separate funds under eliminated in the combined totals, or a common management or ownership with note should be added disclosing the similar investment objectives may present impact of cross investments on the combined financial statements subject to combined total net assets of the compliance with any regulatory investment fund. requirements.

48

IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

Distributions to fund shareholders

IFRS

Distributions flow through the income Other distributions are recognized as statement as financing costs if related transactions in equity and shown in the instruments are recognized as financial statement of changes in equity. liabilities.

US GAAP/SEC Distributions are recognized as transactions in equity and shown in the statement of changes in net assets.

LUX GAAP

Distributions are recognized as transactions in equity and shown in the statement of changes in net assets.

49

IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

Liquidation

IFRS

Currently, IFRS do not provide explicit Among other things, this requires assets guidance on when or how to apply the to be written down to their recoverable liquidation basis of accounting. According amounts. It also requires recognition of a to IAS 1(25), financial statements should liability for contractual commitments that be prepared on a going-concern basis may have become onerous as a unless management intends either to consequence of the decision to cease liquidate the entity or to cease trading, or trading. has no realistic alternative but to do so. If financial statements are not prepared Accordingly, an entity will depart from on a going-concern basis, the financial the going-concern basis only when it statements should disclose that fact, is, in effect, clear that it is not a going together with the basis on which the concern. However, even if an entity financial statements are prepared, and has ceased trading but wishes to the reason why the entity is not regarded comply with IFRS Standards, its as a going concern. financial statements should be prepared on a basis that is consistent In assessing whether the going-concern with IFRS Standards but amended to assumption is appropriate, management reflect the fact that the going-concern must take into account all available assumption is not appropriate. information about the future, which is at least, but not limited to, twelve months from the end of the reporting period.

50

IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

US GAAP/SEC

An investment fund covered by the scope ASC 205-30 does not provide specific of ASC 205-30 is required to prepare its guidance on whether an entity should financial statements using the liquidation present financial statements for the stub basis of accounting when the entity period, which is the period from the most determines that liquidation is imminent. recent balance sheet date to the date when liquidation is imminent. Instead, an entity Liquidation is imminent when the should consider the requirements of its likelihood is remote that the entity will regulator and the needs of the users of the return from liquidation, and either: financial statements when determining if 01. A plan for liquidation is approved, and financial statements are necessary for the the likelihood that the execution of the stub period. plan will be blocked is remote; or 02. A plan for liquidation is being imposed If a fund presents stub period financial by other forces (e.g., involuntary statements together with its liquidation bankruptcy). basis financial statements, the stub period financial statements (under the going- An investment fund must present, among concern basis of accounting) would include other items, a statement of net assets in (1) a statement of operations; (2) a liquidation, a statement of changes in net statement of changes in partners’ capital or assets in liquidation, the methods and net assets; (3) a statement of cash flows significant assumptions used to measure (when required); and (4) financial highlights, assets and liabilities, the type and amount as well as required disclosures. of costs and income accrued, and the expected duration of the liquidation 1940 Act Funds are automatically scoped process. out, as well as limited life funds, which will follow the plan of liquidation specified at inception (if applicable).

LUX GAAP

Once a fund has been put into liquidation, such a basis requires writing assets down mention of "in liquidation" is added to the to their net recoverable amounts, accruing name of the fund as disclosed throughout for all liquidation costs, and writing off any the financial statements. The accounting unamortized formation expenses. This is principles applied are revised to indicate applicable from the moment the decision that the financial statements are prepared to liquidate is taken. on a basis other than going concern. Among other things,

51

IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

Master-feeder

structures

IFRS The investment entity consolidation exception is mandatory for the parent of An investment entity should consolidate a an investment entity that itself meets the subsidiary that is not itself an investment definition of an investment entity. This entity and whose main purpose and activities means that the parent of an investment are providing services or activities that relate entity is required to account for its to the investment entity’s investment activities, investments in controlled investees at either to the investment entity or to other FVTPL, even if the investment entity parties. If the subsidiary providing the subsidiary was formed for specific investment-related services or activities is regulatory, legal or tax purposes, e.g., in a itself an investment entity, the investment master-feeder structure. The feeder fund entity parent should measure that subsidiary in a master-feeder structure does not at fair value through profit or loss. itself require a potential exit strategy for

its investment in the master fund.

52

US GAAP/SEC

According to the SEC’s Investment • The feeder fund’s statement of assets • General description of the master Management Guidance Update No. and liabilities will show an investment and feeder structure; 2014-11, in the circumstances of a in the master fund, which is the feeder • The feeder’s percentage ownership feeder fund, generally, the SEC staff fund’s sole or primary investment. A share of the particular master fund has taken the position that the schedule of investments is not at the reporting date; financial presentation that is most presented by the feeder fund, unless • A statement that the feeder invests meaningful is unconsolidated. Annual there are other investments aside all of its investable assets in a and semi-annual reports for SEC from the investment in the master corresponding investment registered feeder funds should contain fund company having the same • two sets of financial statements: one The statement of operations for the investment objectives as the feeder feeder fund should disclose the for the master fund and one for the and a reference to the financial feeder fund’s allocated share of feeder fund. Non-registered feeder statements of the master fund, income, expenses, and realized gains funds generally follow the same including the portfolio of and losses from the master fund, presentation. investments; and along with any fund-specific income • Disclosure of, or reference to, the and expenses. Notes to the financial statements of accounting policies of the master

each feeder fund should include the fund that may affect the feeder Notes to the financial statements of a following: fund. feeder fund should include the following:

LUX GAAP

The feeder UCITS financial statements feeder UCITS in the master UCITS at The annual report of the feeder UCITS should disclose: The Law of 17 December year-end; and should indicate where the financial 2010 on Undertakings for Collective statements of the master UCITS are Investment (UCI), as amended; • The total aggregated expenses of the available. feeder UCITS and its share of the total • A description of the master-feeder expenses of the master UCITS, Additional considerations apply when structure; expressed as a percentage of the the feeder UCITS and the master UCITS • The investment objective and policy of average NAV of the master/feeder have different year-ends. the master UCITS; UCITS. • The percentage ownership of the

53

5151

IFRS/US GAAP/Luxembourg GAAP: a comparison for investment funds

Sustainability reporting

IFRS

The IASB has not issue a specific standard A consultation paper was recently issued on on sustainability reporting. Nevertheless, 23 April 2020 by the European Supervisory on several occasions, it has advocated in Authorities (ESA) including ESMA, which favor of an integrated set of sustainability emphasizes the fact that sustainability reports that focus on the investor and on disclosures aim to strengthen protection for the impact of sustainability issues on the end-investors and improve the transparency future returns of the company. of information relating to financial products for a wide range of market participants. ESA As part of its endorsement of IFRS, ESMA recommends that companies should provide has consistently promoted and information focused on how their investment encouraged companies to embrace decisions impact various indicators such as sustainability reporting in their financial the climate, the environment, human rights, statements as part of good corporate social issues, and corruption, amongst an governance practices. overwhelming plethora of matters.

US GAAP/SEC

In recent years, there has been an The Sustainability Accounting Standards increase in the number of US public Board (SASB) is a US-based non-profit companies disclosing policies and organization with the objective of performance regarding sustainability, establishing industry-specific standards for including environmental, social and ESG reporting and disclosure for US-based governance (ESG) issues, and similar public companies. The standards have no matters. There is a clear trend toward legal effect, but aim to identify the more reporting, although the Financial sustainability and ESG information that may Accounting Standards Board (FASB) has be material to investors. not issued any accounting or disclosure standards governing sustainability.

While reporting and disclosure on this topic is largely voluntary, there are ongoing initiatives to create a sustainability disclosure framework.

54

LUX GAAP

The demand for sustainable finance has In Luxembourg, the CSSF is prioritizing the increased with the adoption of the 2030 disclosure of non-financial information in the UN Agenda for Sustainable Development financial statements of certain issuers as and its 17 Sustainable Development indicated by the results of its recent Goals, and the 2018 EU Action Plan: examination of non-financial information for Financing Sustainable Growth. As such, the 2018 financial year. there is an emphasis on integrating (https://www.cssf.lu/en/2020/02/examination- environmental and social considerations of-non-financial-information-published-by- into the investment decision-making certain-issuers-for-2018-financial-year/ ) process to achieve long-term investment The focus on sustainability reporting will goals, and on sustainable activities that increase as the priorities of managing address issues such as climate change, environmental and social challenges shift labor relations, and inequality. towards providing investors with sustainable Public-interest entities and other groups investments. must disclose non-financial information

regarding measures implemented in relation to environmental protection, social responsibility and the treatment of employees, respect for human rights, anti- corruption and bribery, and diversity on

company boards. (Directive 2014/95/EU - https://ec.europa.eu/info/business- economy-euro/company-reporting-and- auditing/company-reporting/non- financial-reporting_en )

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Contacts

Audit Advisory

Justin Griffiths Vincent Gouverneur Partner | Investment Management Partner | Investment Management Leader +352 451 452 692 +352 451 452 451 [email protected] [email protected]

Nick Tabone Martin Flaunet Partner | Private Equity Leader Partner | Accounting and Reporting Advisory +352 451 452 264 +352 451 452 334 [email protected] [email protected]

Lize Griffiths

Partner | Real Estate Leader Lou Kiesch +352 451 452 693 Partner | Regulatory Strategy [email protected] +352 451 452 456 [email protected] Nicolas Hennebert Partner | Investment Management Audit Leader Xavier Zaegel +352 451 454 911 Partner | Capital Markets & Financial Risk Leader [email protected] +352 451 452 748 [email protected] Christiane Chadoeuf Partner | Audit Leader Global +352 45145 2065 Cary Stier [email protected] Partner | Global Investment Management Leader Tax +1 212 436 7371 [email protected] David Bernard Partner | Tax Leader +352 45145 2799 [email protected]

Eric Centi Partner | Tax +352 451 452 162 [email protected]

We would like to thank the following individuals for their contribution to this publication: Virginie Boulot, Jeff Schmit, Jaime Millan, Adina Rockwell, Shadjiah Mooniaruch, Jeremy Pages, Feriel Fekih and Michelle Coombs.

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