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Fiduciary Services
Citicorp Trustee Company Limited
Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB
NEWSFLASH
1 February 2006
SUMMARY OF THE STATEMENT OF RECOMMENDED PRACTICE (SORP)

Introduction

The SORP on Financial Statements of Authorised Funds (for both AUTs and OEICs) issued by the IMA, applies to accounting periods that began on or after 1st January 2006. However, the provisions for bond yields (i.e. where income will be accounted for on an effective yield basis and with reference to the purchase price) will be applicable to accounting periods beginning on or after 1st January 2007.

This SORP supersedes the previous SORP and has been approved by the Accounting Standards Board (ASB). Compliance with it is required by both the CIS and COLL Sourcebooks.

Presenting Financial Statements

The SORP details how audited annual statements should be presented as follows:

(a) Statement of total return (net investment gains or losses and net income after tax- ultimately showing the amount that is to be distributed)

(b) Statement of change in shareholder's net assets (this summarises the movements in total value of the fund)

(d) Balance sheet

(e) Summary of material portfolio changes

(f) Statement of material accounting policies used to prepare the financial statements

(g) Additional details in notes to the financial statements

(h) Distribution table

Comparatives should be provided for the previous period for (a), (b), (d), above and notes to each and for sector percentage totals in the portfolio statement. Note that comparatives at security level do not have to be shown.

If the special exemptions in the revised FRS1 'Cash Flow Statements' are met, a cash flow statement is not required. The exemptions apply to OEICs that meet all of the following conditions:

· Substantially all of the entity's investments are highly liquid;

· Substantially all of the entity's investments are carried at market value and;

· The entity provides a statement of change in net assets (SORP p. 9)

Unaudited interim statements should include (a) to (h) above plus comparatives. Note that for (a) above, comparatives should be for the last interim statements, but for the other statements above, comparatives should be the last audited statements. No comparatives are required at security level.

Short Form Accounts

If the scheme falls under CIS only then short form accounts may be sent to unitholders instead of full accounts, to give a simplified assessment of the fund performance. Unitholders can still apply for full accounts. Annual and interim financial reports containing short form accounts should still contain information required by Chapter 10 of the Sourcebook. Reports containing short form accounts should contains the following statements:

- Statement of total return

- Statement of change in shareholders' net assets

- Statement of investments and other assets

- Distribution table

Note that there are no provisions within COLL Sourcebook for short form accounts.

Short Reports

If the fund is subject to COLL rules, Chapter 4 of the COLL Sourcebook details Short Reports as the "default reporting". This is not to be confused with short form accounts; the short report is a bi-annual consumer-focused document. As mentioned earlier, short form accounts are not provided for under COLL. If you still have a CIS Scheme and you do not elect to produce short reports, short form accounts can be produced until 12th February 2007.

All retail funds under COLL must produce short reports to provide to investors, with long form reports and accounts provided upon request. COLL QIS Schemes do not have to produce short reports but must produce long form report and accounts upon request.

With an umbrella fund under CIS, unitholders need only be provided with a report on a particular sub-fund only. This is not an option currently under COLL - if only sub-fund reports are provided, a report on the umbrella fund as a whole must be made available to unit holders, upon request.

Derivatives

Derivatives are dealt with in the Balance Sheet under 'portfolio statement'.

They should be shown in the Balance Sheet and Portfolio Statement at their market value.

The SORP stresses that both 'motives and circumstances' in the use of derivatives are important to determine whether an item should be treated as capital or income. Annex C to the SORP details a number of derivative examples and how to account for them. The SORP emphasises that it is important to determine whether the derivative creates an obligation or a right to the fund.

Interest received or paid in relation to margin deposits should be separately disclosed.

The SORP details that FRS 13 'Derivatives and other Financial Instruments: Disclosures' (which was issued in 1998), requires an assessment of what risks arise in relation to financial instruments and how associated risks are managed. Such risks include interest rate, credit, currency, liquidity and market price risk. FRS 13 also requires a narrative disclosure note on the role that financial instruments have played during the period under review, and whether they have altered the risk profile of the fund. Note that the objectives and policies for holding derivatives must be detailed, as well as the strategies.

Effective Yield

Where you have accounting periods starting on or after 1st January 2007, income should be accounted for on an effective yield basis (i.e. an income calculation taking into account the amortization of any discount or premium on the purchase price over the remaining life of the security). If there has been a movement in the fair value at the balance sheet date, which is not accounted for through amortisation of the discount or premium, this must be shown as a capital gain/ loss. The SORP recognises that when first implemented, there is a possibility that the amortised purchase price cannot be obtained without effort and cost. In this event, an "alternative basis of calculation should be agreed and appropriately disclosed…" (SORP p. 15)

Debt Securities

For accounting periods beginning on or after 1st January 2007, where funds invest in debt securities that are issued at a significant discount or premium to the maturity value, the total income should be spread over the life of the security on an appropriate basis. The amortisation of a discount or premium must be taken into account also. The SORP defines 'significant' in relation to a discount or premium if it is greater than the lower of:

- X% of the redemption price, X being half the number of years of the issue term and;

- 15% of the redemption price. (SORP p. 16)

Stocklending

Fees gained from stock lending should be recognised as income on an accruals basis. The gross amount and any fees that have been paid to arrive at the net stock lending income amount, should be detailed in a note- unless disclosed elsewhere in the report.

Performance Fees

The basis of performance fee charges must be disclosed as must circumstances that are known that may affect future performance fees.

Taxation

Under Taxation, the following should be shown separately within the notes: UK CT, Overseas taxation, double tax relief, overseas tax credits, deferred tax and any adjustments in respect of previous periods.

Dilution Levy

Dilution levy charged or deducted should be shown separately, as should SDRT, where the cost is borne by the fund.

Investment in CIS

Where a fund invests in other CIS that are managed/ operated by the ACD or an associate, holdings should be valued at cancellation price for dual priced funds and at single price for single priced funds. Where the investment is in CIS that are operated by other manager groups, holdings should be valued at bid for dual priced funds and single price for single priced funds.

This document is solely for information and Citibank will not be responsible for updating any information contained herein. It is not intended to provide specific advice on any other matter. If advice is required you should consult your own advisors, legal or otherwise. No responsibility for any loss occasioned as a result of using this document is accepted. Under no circumstances is it to be considered an offer to sell or a solicitation to buy any investment or product.

Contents

Fiduciary Services Citicorp Trustee Company Limited Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB NEWSFLASH 1 February 2006 SUMMARY OF THE STATEMENT OF RECOMMENDED PRACTICE (SORP)

Fiduciary Services
Citicorp Trustee Company Limited
Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB
NEWSFLASH
1 February 2006
SUMMARY OF THE STATEMENT OF RECOMMENDED PRACTICE (SORP)