Questions and Answers

SORP implementation

September 2015
Introduction
Members preparing to implement the 2014 edition of the IMA SORP have asked The
Investment Association a number of questions. These questions are answered in this
document which will be revised in response to future questions raised by members. Questions
should be submitted by email to: mark.sherwin@theinvestmentassociation.org.

Publication
This is the first edition of the document. Changes to this edition will be explained below:

Edition Comments
First edition:
September 2015

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 FIRST-TIME APPLICATION

1. What procedure should be followed to adopt the new SORP early?

TP30 of FCA’s transitional provisions specify that the FCA and the depositary should be
notified of an election to adopt early. Such an election is irreversible and a record must be
kept for six years.

It should be noted that the transitional provisions expire on 31 December 2015 which
means that funds with extended accounting periods in accordance with COLL 6.8.2R that
end after that date, must adopt the new SORP early. In such circumstances notification is
not required because no election is made.

TRANSACTION COSTS

2. Should costs calculated on the basis of a charge per transaction, such as custodial
handling charges, be disclosed as part of direct transaction costs?

No. Such charges do not meet the definition of direct transaction costs and should not be
reported as such. Also, such charges fall within the definition of ongoing charges as they
are payments to the parties listed in paragraph 4(a) of the CESR/10-674 guidelines.
Therefore they are reported as part of operating charges.

3. Is it intended that there is a difference in the treatment of the dilution

levy/adjustment offset when reporting transaction costs under paragraph 3.38
and appendix A?

Yes. The disclosure under paragraph 3.38 is intended to give an account of the total direct
transaction costs incurred during the period without being offset. The offset is not
applicable because it is reported as part of the dilution levy/adjustment line item in the
statement of change in net assets attributable to unitholders. The table in appendix A is
designed to illustrate the net impact of direct transaction costs on a unit in issue
throughout the period.

4. What should happen if the dilution levy/adjustment offset, as permitted by

footnote 7 in appendix A, results in a negative transaction costs figure?

The transaction costs figure in appendix A should be shown as the negative amount and
an explanation of the reason given. Such a situation might arise where there is a timing
difference between inflows and the settlement of the resultant purchases (eg. property
funds).

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5. Should a dilution adjustment be reported separately to amounts for issues and
cancellations in the statement of change in net assets attributable to
unitholders?

Yes. This is the effect of paragraph 3.57.

RISK DISCLOSURES

6. Significance: What amounts to significant?

Significant is not defined because a one-size-fits-all approach is not appropriate.

Significance is a result of both the size of the exposure to a risk factor and its volatility.
The SORP intends to provide the tools to give appropriate disclosure and in m any cases
determining which disclosures are relevant will be straight forward. However, it is intended
that the use of the term significant will require managers to exercise judgement in the
light of specific circumstances. In exercising such judgement, managers may consider it
appropriate to consult with the auditors.

7. Credit risk: are the SORP disclosures always sufficient to satisfy the
requirements of FRS 102.34.25 to 27?

Yes, in general paragraph 3.85 is intended to ensure that the SORP satisfies all the credit
risk requirements in FRS 102 to the extent they are relevant to authorised funds . However,
if financial assets are past due at the end of the reporting period an age analysis of such
assets should be provided in accordance with FRS 102.34.26(a).

The annex illustrates the how the SORP satisfies the requirements of FRS 102.

8. Interest rate risk: has the scope of the disclosure changed to exclude non -
investment assets and liabilities?

The SORP wording is intended to reflect the fact that the risk disclosures relate to financial
instruments rather than all assets and liabilities. Therefore, as a minimum, the disclosure
should be made in respect of investments and cash. However, although the new SORP
does not compel disclosures in relation other assets and liabilities, it does not prohibit the
disclosures from being extended to include other debtors and creditors .

9. Sensitivity analysis: Are the disclosures in 3.81 to 3.84 an alternative to 3.80?

Yes, value-at-risk should be disclosed in accordance with paragraph 3.80 if value-at-risk is

the approach used to calculate global exposure in accordance with COLL 5.3.7R. However,
if value-at-risk is not used, the alternative disclosures about market risk in paragraphs
3.81 to 3.84, to the extent they are relevant, should be made instead. T hese disclosures
are designed to reflect the two alternatives in FRS 102 (34.29 or 34.30).

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 Notwithstanding that the disclosures in paragraphs 3.81 to 3.84 are not required in respect
of market risk when value-at risk is used, paragraph 3.85 requires the disclosures in
paragraph 3.84 to be made in respect of credit risk in order to satisfy FRS 102.34.25(d).

10. Value-at-risk: do VaR disclosures relate to the fund or to each type of risk
variable?

VaR relates to the fund as a whole because it is a measure of the market risk of the
scheme property as specified in COLL 5.3.7R.

Where the risks associated with individual classes are altered significantly, such as may be
the case with currency classes or hedged classes, additional disclosures will be required to
highlight these different risks.

11. How do you reconcile the SORP with CESR guidelines in respect of disclosing
leverage and exposure?

Where the SORP and the CESR guidelines overlap, the SORP disclosures are designed to
be consistent with the guidelines. For example, where value-at-risk disclosures are made
in order to satisfy FRS 102.34.30, 3.80 requires that it is done in accordance with the
guidelines. However, the SORP does not replicate all the CESR requirements in order that
it does not extend UCITS requirements to AIFs, and vice versa. Therefore, for UCITS using
value-at-risk, disclosure of leverage calculated in accordance with the guidelines as the
sum of the notionals is in addition to the SORP requirements.

Where funds do not use value-at-risk, the SORP requires leverage to be given in order to
show the sensitivity to market risk in respect of derivatives – this disclosure is part of the
requirement in FRS 102.34.29 and goes beyond the CE SR disclosure guidelines.

The annex illustrates the application of the SORP requirements and the CESR guidelines.

12. Are comparative figures required for disclosures made in accordance with the
CESR guidelines?

Yes, where figures are disclosed in the financial statements the corresponding amounts for
the preceding financial year are required to be disclosed, unless FRS 102 permits
otherwise.

FAIR VALUE HIERARCHY

13. Is any guidance available to help categorise investments in the fair value
hierarchy?

Yes. IMA guidance was issued in December 2014.

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14. Is IMA guidance binding such that suspended securities are always category 4?

No. There are a number of reasons for routine short-lived suspensions, such as a
suspension pending an announcement, which would not alter the categorisation made
prior to the suspension.

15. How should immovable property be categorised in the fair value hierarchy ?

It is not intended that immoveable property should be included in the hierarchy. The
disclosure requirement in FRS 102.34.22 relates to the portfolio of financial instruments
and, accordingly, the analysis referred to in paragraph 3.100 of the SORP should be read
in that context. Disclosures about property valuations are made in accordance with
paragraph 3.102 instead.

16. Are comparative figures required in the first year the hierarchy is reported ?

Yes, the corresponding amounts for the preceding financial year are required to be
disclosed.

LIABILITIES AND PROVISIONS

17. How should the liability to offset collateral held in respect of derivatives be
shown?

There should not be a liability because collateral held should not be recognised as an
asset. Paragraph 2.37 of FRS 102 sets out the principle underpinning the recognition of
assets: an asset is recognised when it is probable that future economic benefits will flow
to the fund. Where collateral is held as security, the economic benefits (for example,
interest) flows to the counterparty to the arrangement and not to the fund. Paragraph
2.10 of the SORP illustrates the application of the principle to collateral held in respect of
securities on loan and the principle should be applied in the same way in respect of
derivatives. In both cases disclosures are required about the nature and value of collateral
held (paragraphs 3.45 and 3.86).

18. In a bond fund, should tax withheld on interest allocated be shown as income tax
payable?

No. Fundamentally bond funds are gross vehicles and provide for investors basic rate
income tax only in their pricing. The amount shown on the balance sheet as distributions
payable should be the gross amount reflecting that the fund does not have a tax liability.
There is an obligation to withhold basic rate tax from gross distributions that arises after
money has been transferred out of the fund to the distribution account. Depending on the
tax status of the investor, distribution monies are then either paid to the investor gross, or
to the investor net with the tax withheld being paid to HMRC. In the case of accumulation
units the net amount is accumulated and the tax withheld is “distributed” to HMRC.
Therefore the tax withheld will be shown as a distribution payable.

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19. What should be included in the balance sheet under “provisions for liabilities”?

Deferred tax liabilities are the most likely items to be included under this caption.

CONSOLIDATION

20. Should an intermediate holding vehicle be consolidated after the property has
been transferred out to the fund?

No. The purpose of the consolidation is to show the substance of an investment in

property notwithstanding the existence of the intermediate holding vehicle . Once the
property has been transferred to the fund and it is intended that the intermediate holding
vehicle will be wound up, the fund no longer holds property though an intermediate
holding vehicle and the consolidation requirement ceases.

UMBRELLA SCHEMES

21. Do the accounting and distribution policies for an umbrella need to be repeated
for every sub-fund?

No. The accounting policies relate to the umbrella as a whole and apply uniformly to all
sub-funds. Therefore they need only to be shown once in accordance w ith paragraph 3.63
of the SORP. However, where distribution policies are specific to individual sub -fund or
share classes this should be disclosed separately for the sub -fund to which it relates.

22. Should the cross-holdings table required by COLL 4.5.9R (7B) detail each cross-
holding or allow aggregation where a sub-fund is held by more than one other
sub-fund?

COLL requires the value of each holding by another sub-fund to be given. Therefore, every
holding by another sub-fund of the same umbrella should be disclosed with no aggregation
taking place.

23. How should the cross-holdings table be laid out?

Generally, it would be unhelpful to show a matrix table with most cells being blank and in
many instances a list style of table would be more appropriate.

24. Should there be a single cross-holdings table for the umbrella as a whole or a
separate table for each individual sub-fund?

There should be a single table for the umbrella as a whole.

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 PORTFOLIO STATEMENT

25. Does the portfolio statement of a property fund require the value of each
individual property to be disclosed?

No, the minimum details required by paragraph 3.21 should be sufficient to identify each
property (ie. the address) but not to disclose its value . The properties’ addresses should
be listed within the band to which they relate. Each band should be no more that 5% of
the fund value, but there is no limit to the aggregate value of property listed in each band.

COMPARATIVE TABLES

26. What should be included in the comparative table under appendix A when a new
share class launches during the year?

It is recommended that the launch price is used as the opening NAV per unit and the
changes figures are shown for the part of the year to which they relate. Explanations
should be given to make clear the period that is covered.

27. Is the OCF required or permitted in the half-yearly long report?

The OCF is not a requirement of the SORP although Managers are encouraged to include in
the half-yearly long report an annualised percentage operating charges figure calculated
on a basis consistent with the annual report requirement in appendix A.

28. Should dividend collection charges be included in the OCF?

Yes. Such charges are paid to one of the parties listed in paragraph 4 of the CESR/10-674
guidelines and so should be included in the OCF.

29. How do the operating charges in appendix A relate to the OCF?

The operating charges are calculated in accordance with the CESR/10-674 guidelines for
the OCF and when the OCF is calculated based on the last financial year it will be the same
as the operating charges. However, unlike operating charges, the OCF has a futur e
proofing element that might require it to be estimated or calculated based on a more
recent 12-month period. The operating charges expressed both in per unit and percentage
terms include a synthetic element determined in the same way as for the OCF.

30. How should a performance fee be shown in the unit performance table?

A performance fee should be shown separately alongside the operating charges figure to
the extent that it relates to a unit in issue throughout the period . Where a performance
fee is paid during the year as a result of a crystallisation on the cancellation of units, this

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 does not relate to the unit in issue throughout the period and should not be reported in
the unit performance table.

31. Should the property expense ratio (PER) be shown in the unit performance table?

Items included in the PER should be shown as property expenses alongside the operating
charges figure. Notwithstanding regulatory developments in this area, which may result in
some PER items being reclassified as transaction costs (see question 32), it is
recommended that the property section of the IMA guidance on TER calculations continues
to be used in conjunction with the OCF calculation.

32. Is there a standard definition of transaction costs for property funds?

Property transaction costs are the costs resulting from capital expenditure for buying,
selling and maintaining buildings. However, recent actual and proposed regulatory
definitions include the costs of temporary transactions, such as lending and borrowing of
assets. This may lead to a broadening of the definition of transaction costs to include
items such as the costs associated with securing tenants .

33. Should investment trust charges be included in the synthetic figure?

No, as specified in the IMA guidance for calculating the OCF, they should not be included.

SHORT REPORTS

34. What is required for the comparative table after COLL amendment?

The requirement in COLL 4.5.5R (1)(c) is to show a performance record that enables the
results of the investment activities to be put into context. How to present this is a matter
for the manager to determine. IMA guidance on short reports recommends including the
NAV per unit at the beginning and end of the period with the percentage change over the
period. Often, managers elect to include additional information , such as that required in
the long report by COLL 4.5.10R (1).

The removal of COLL 4.5.10R (1) as part of the amendments made to implement the SORP
do not alter the regulatory minimum requirements. Managers that have elected to disclose
additional information should balance changes to the disclosures with investors’
expectations, and should consider the potential impact on investors’ expectations of the
FCA’s intention to consult later this year to remove the requirement to produce a short
report.

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ANNEX: INTERACTION OF REQUIREMENTS FOR DISCLOSING RISK
Requirement 2014 SORP Satisfies UCITS1 NURS and Comments
FRS 102 QIS2
Narratives about risk 3.77 34.24 108.4, 108.5
exposures
Market risk
If using VaR:
VaR utilisation and 3.80 34.30 CESR 3.8.2.b
explanation
Leverage as the sum of the CESR 3.8.2.b UCITS need to disclose in the annual report the level of leverage employed during the
notionals period calculated as the sum of the notionals of the derivatives used.
If not using VaR:
Leverage (gross method) 109.3 NURS and QIS need to disclose the total amount of leverage calculated in accordance with
the gross method, at least at the same time as the annual report is made available.
Leverage (commitment 3.81 34.29 109.3
method)
Currency risk 3.82 34.29
Interest rate risk 3.83 34.29
Credit quality 3.84
Credit risk
Credit risk exposure 34.25(a) No disclosure is required because the carrying amount best represents the maximum
exposure to credit risk.
Collateral held by 3.45 34.25(b) ESMA X.35
counterparty (stock lending)
Collateral held or pledged by 3.86 11.46, 34.25(b) ESMA XI.40
counterparty (derivatives)
Credit quality 3.84 34.25(c), (d)
Age past due 34.26 Age analysis is required for financial assets past due
Taking possession of 3.85 34.27
collateral
Liquidity risk
Maturity profile 3.87 34.28

1
Matters required to be disclosed in the annual report are set out in CESR’s Guidelines on Risk Measurement and the Calculation of Global Exposure and Counterparty Risk for UCITS
(CESR/10-788) and Guidelines on ETFs and other UCITS issues (ESMA/2014/937).
2
Requirements are set out in Commission Delegated Regulation (EU) No 231/2013. These requirements are not required in the annual report but are required to be disclosed at least at the
same time as the annual report is made available. Where these requirements are fulfilled by making disclosures in the financi al statements, comparative figures will be required.