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Publications

5.10.2018

Asset Management Update: FASB Modifies Fair Value Disclosure Requirements

ASU 2018-13 significantly reduces disclosure requirements related to level 3 investments held by private investment companies

Introduction

In August 2018, the Financial Accounting Standards Board issued Accounting Standards Update No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.i This update is part of the FASB’s larger disclosure framework project intended to improve the effectiveness of financial statement footnote disclosure.  ASU 2018-13 modifies required fair value disclosures related primarily to level 3 investments.  The ASU impacts non-publicii and public entities differently; a summary of changes to disclosure requirements categorized by nonpublic and public entities is presented below.

Nonpublic Entities (including private investment companies such as hedge and private equity funds):

Disclosure Removals

  • Valuation process for level 3 measurements.Insight: Specifically, the ASU deletesiii ASC  820-10-55-105, which required a description of the group responsible for valuation policies and procedures, its methods of calibration and back testing, its process for analyzing changes in fair value measurements, its process for analyzing third-party information used in valuation, and its methods used to develop and substantiate unobservable inputs.

     

  • Policy regarding the timing of transfers between levels in the fair value hierarchy.Insight: ASU 2018-13 eliminates the requirement to disclose this policy, however, entities will still be required to set and consistently follow a policy on transfer timing (typically (a) the date of the event or change in circumstances that caused the transfer, (b) the beginning of the reporting period or (c) the end of the reporting period).

     

  • Changes in unrealized gains and losses for Level 3 fair value measurements still held at the end of the period.Insight: Previously, this disclosure was often presented as a supplement to the “level 3 roll-forward” table.

Disclosure Modifications

  • In lieu of a reconciliation of opening and closing balances “roll-forward” of level 3 fair value measurements, disclosure is required of transfers into and out of level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities.Insight: Each of the elements noted above, purchases, issues, transfers in, and transfers out must be disclosed separately under the ASU.  Similar to existing GAAPiv , the reasons for transfers into or out of level 3 must also be disclosed.

     

  • For investments valued using the practical expedient (unadjusted net asset value), the requirements to disclose (1) an estimate of the timing of liquidity events of the investee and (2) the timing on when limitations on redemptions related to the investee may lapse only apply if the investee has already disclosed this information publicly or directly to the reporting entity.Insight: This modification eliminates the need for entities to make its own estimate on timing of such events. Disclosure is now required only if it is known.
  • Deletion of the words “at a minimum” from the phrase “an entity shall disclose at a minimum” throughout the guidance to promote the appropriate exercise of discretion by entities when considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration of entities and their auditors when evaluating disclosure requirements.Insight: Disclosure of weighted average and range of unobservable (level 3) inputs for nonpublic entities

    Prior to ASU 2018-13, all entities were required to provide quantitative information about significant unobservable inputs for level 3 fair value measurements.  This has not changed under the ASU.  General practice for investment companies has developed such that the range and weighted average of unobservable inputs are generally disclosed to comply with this requirement.  As discussed below, the ASU added an explicit requirement for public entities to disclose range and weighted average of unobservable inputs.  Non-public entities are exempt from this specific requirement, however, the requirement to provide quantitative information about unobservable inputs remains.  Entity management must use judgement in determining the most appropriate quantitative information about unobservable inputs to disclose going forward.

Public Entities (Including 1940 Act mutual funds, BDCs and broker-dealers)

Disclosure Additions

  • Explicit requirement to disclose the range and weighted average of significant unobservable inputs used to develop level 3 fair value measurements and how the weighted average was calculated.  Other quantitative information (such as the median or arithmetic average) may be disclosed in lieu of the weighted average if it is determined to be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop level 3 fair value measurements.
  • Changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting periodInsight: Investment companies will not be significantly impacted by this requirement as under ASC 946, they recognize unrealized gains and losses related to investments on the income statement, not a statement of other comprehensive income.

Disclosure Removals

  • Details on transfers between Level 1 and Level 2 of the fair value hierarchy.Insight: Note that nonpublic entities are exempt from this requirement under current GAAP and ASU 2018-13.
  • Policy regarding the timing of transfers between levels in the fair value hierarchy.
  • Valuation process for Level 3 measurements.

Disclosure Modifications

  • For investments valued using the practical expedient (net asset value), the requirements to disclose (1) an estimate of the timing of liquidity events of the investee and (2) the timing on when limitations on redemptions related to the investee may lapse only apply if the investee has already disclosed this information publicly or directly to the reporting entity.
  • Deletion of the words “at a minimum” from the phrase “an entity shall disclose at a minimum” throughout the guidance to promote the appropriate exercise of discretion by entities when considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration of entities and their auditors when evaluating disclosure requirements.
  • Clarification that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date rather than sensitivity to future changes in fair value.Insight: Note that nonpublic entities are exempt from this requirement under current GAAP and ASU 2018-13.


Effective Date and Transition

ASU 2018-13 is effective for all entities for annual periods beginning after December 15, 2019 and interim periods within those annual periods.  Early adoption is permitted.  Entities are permitted to early adopt any removed or modified disclosures and delay adoption of additional disclosures until their effective date.

The prospective method of adoption is required for additional or modified disclosures related to (1) changes in unrealized gains or losses included in OCI, (2) range and weighted average for significant inputs to level 3 investments and (3) uncertainty in measurement as of the reporting date.  All other disclosure changes resulting from the ASU should be applied retrospectively.


i   Hereafter referred to as the “ASU” or “ASU 2018-13”
ii  A “Nonpublic entity” is an entity that does not meet any of the following conditions:

  1. Its debt or equity securities trade in a public market either on a stock exchange (domestic or foreign) or in an over-the-counter market, including securities quoted only locally or regionally.
  2. It is a conduit bond obligor for conduit debt securities that are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local or regional markets).
  3. It files with a regulatory agency in preparation for the sale of any class of debt or equity securities in a public market.
  4. It is required to file or furnish financial statements with the Securities and Exchange Commission.
  5. It is controlled by an entity covered by criteria (a) through (d)

iii  Accounting Standards Codification
iv  Generally Accepted Accounting Principles


Publications
17.11.2017

Accounting Standards Update (ASU) 2015-09, Disclosures about Short Duration Contracts

 ASU No. 2015-09 focuses on improving existing disclosure requirements to all insurance entities that issue short-duration contracts.  The main improvements provide increased transparency of significant estimates in measuring the liabilities for unpaid claims and claims expenses and provides additional information to analyse the amount, timing and uncertainty of cash flows from insurance contracts and development of claims estimates. An in-depth discussion of these improvements can be found at our website: ASU 2015-09

Amendments

 Required disclosures (RD) to be included in the notes to the financial statements:

  1. Incurred and paid claims development tables by accident year for the most recent reporting period.
  2. A reconciliation of incurred and paid claims development information to the aggregate carrying amount of the liability with separate disclosure of reinsurance recoverable.
  3. For each accident year presented, total of incurred but not reported (IBNR) liabilities plus expected development on reported claims accompanied by description of reserving methodologies (and any changes thereto).
  4. For each accident year presented, quantitative information about claim frequency accompanied by a qualitative description of methodologies used for determining claim frequency information (and any changes thereto).

Required supplementary information (RSI) disclosure to be included either in the notes to the financial statements or as a separate schedule:

  1. Incurred and paid claims development tables by accident year for all years except for the most recent reporting period.
  2. For all claims except health insurance claims, the average annual percentage payout of incurred claims by age.

RD’s plus RSI’s and their audit considerations:

Required disclosures

In forming an opinion, amongst other considerations the auditing standards require the auditor to consider the compliance of the financial statements with accounting principles generally accepted in the United States (US GAAP). If financial statements do not fully comply with US GAAP (including, but not limited to, omissions or errors) the auditor will need to assess the significance of the matter in forming an opinion. Depending on the significance of the matter the auditor may consider modifying the opinion. The auditor will need to assess each scenario individually based on facts and circumstances.

Required supplementary information

The RSI is not part of the basic financial statements, however, the information is considered to be an essential part of financial reporting by the relevant standard setters. In general, standard setters do not expect the auditor’s opinion on the fair presentation of such financial statements in accordance with the applicable financial reporting framework to be affected by the presentation by the entity of the RSI or the failure to present some or all of such RSI.

The audit standards require that the auditor perform some limited procedures on RSI which includes but is not limited to:

  • Inquire of management;
  • Compare the information for consistency with (i) management’s responses to the foregoing inquiries, (ii) the basic financial statements, and (iii) other knowledge obtained during the audit of the basic financial statements; and,
  • Obtain certain written representations from management.

Audit report considerations:

  • If all or some of the RSI is presented, the audit report will include additional communications in an “Other Matter” paragraph that is not considered a modification to the audit opinion as follows:
    • A statement that the RSI is required under US GAAP to supplement the basic financial statements.
    • A statement that the RSI, although not part of the basic financial statements, is required by the Financial Accounting Standards Board (FASB), who considers it an essential part of financial reporting.
    • If we are able to complete the procedures required by auditing standards:
      • A statement that we have applied certain limited procedures to the RSI, including a summary of the basic procedures;
      • A statement that we do not express an opinion or provide any assurance on the RSI.
    • If we are unable to complete the procedures required by auditing standards:
      • A statement that we are unable to apply certain limited procedures to the RSI and the reason;
      • A statement that we do not express an opinion or provide any assurance on the RSI.
    • If some of the RSI is omitted, we will include in the “Other Matter” paragraph the following:
      • A statement that management has omitted the missing RSI required by US GAAP;
      • A statement that such missing RSI, although not part of the basic financial statements, is required by FASB, who considers it an essential part of financial reporting;
      • A statement that our opinion on the basic financial statements is not affected by the missing RSI.
    • If the measurement or presentation of the RSI departs materially from US GAAP, a statement that although the auditor’s opinion on the basic financial statements is not affected, material departures from prescribed guidelines exist, including a description of the departure.
    • If the auditor has unresolved doubts about whether the RSI is measured or presented in accordance with prescribed guidelines, a statement that although our opinion on the basic financial statements is not affected, the results of the limited procedures have raised doubts about whether material modifications should be made to the RSI for it to be presented in accordance with guidelines.
  • If all of the RSI is omitted, the “Other Matter” paragraph should include (e) above.

The auditing standards generally accepted in the United States of America, AU-C Section 730: Required Supplementary Information, contains illustrative examples of Other Matters paragraphs addressing the scenarios discussed above.

AU-C Section 730 par. A3: Illustration 1- The Required Supplementary Information Is Included, the Auditor Has Applied the Specified Procedures, and No Material Departures Have Been Identified

US GAAP requires that the required supplementary information on page XX be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by FASB who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.

 AU-C Section 730 par. A3: Illustration 2 – All Required Supplementary Information Omitted

Management has omitted the required supplementary information that US GAAP requires to be presented to supplement the basic financial statements. Such missing information, although not a part of the basic financial statements, is required by FASB who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. Our opinion on the basic financial statements is not affected by this missing information.

 AU-C Section 730 par. A3: Illustration 3 – Some Required Supplementary Information Is Omitted and Some Is Presented in Accordance With the Prescribed Guidelines

US GAAP requires that the included supplementary information be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by FASB who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with evidence sufficient to express an opinion or provide any assurance. Management has omitted [the missing required supplementary information] that US GAAP requires to be presented to supplement the basic financial statements. Such missing information, although not a part of the basic financial statements, is required by FASB who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. Our opinion on the basic financial statements is not affected by this missing information.


Publications
15.4.2016

GAIM Ops Cayman 2016 Poll Results

The results can be viewed below or a PDF version of the report can be downloaded here: GAIM 2016 Survey Results

Introduction

In March 2016, EisnerAmper had the opportunity to participate in the annual GAIM Ops Cayman conference, one of the hedge fund industry’s leading operations and compliance events.

This year’s gathering brought together close to 500 operations, due diligence and compliance experts from the alternative investment industry. C-level personnel and fund managers made up the largest percentage of the attendees.

Over the course of the conference, the audience was polled on a variety of topics. The following report details those results.
As you review the responses, we want to offer our own insight to provide a more complete and in-depth look at the findings:

The Evolving Business Model for Hedge Funds
Fifty-five percent of respondents indicated the commingled hedge fund is not an endangered species.
While the commingled fund may not become extinct any time soon, the 2×20 pricing structure is long gone for equity based strategies. The 1.5×20 fee structure has grown in popularity due to pressure from the institutional investment community resulting from underperformance in recent years.

We anticipate that you will find hurdle rates incorporated into the incentive fee structure, wherein a manager must outperform a stated rate of return (e.g., 10-year bond) before the incentive can be taken.

Institutional Investor Perspective
More than 75% of respondents would consider increasing or beginning pursuing opportunities through liquid alternative products.
Liquid alternative mutual funds took off like wildfire from 2012-2014 as the number of new funds grew and AUM ballooned. However, for investors looking to gain access to certain strategies, the daily liquidity requirements for a liquid alternative mutual fund often prohibit certain securities and asset classes being included in the fund. These strategies are only accessible in a traditional commingled hedge fund structure.

More than half of the respondents felt it was important to meet personnel beyond the senior management team during operational due diligence (“ODD”) visits.

Post-Madoff, the role of ODD has grown dramatically. Whether investors are assigning the responsibility internally or outsource it to an ODD firm, managers must make sure their firms are of institutional quality from the front-middle-back office, legal/compliance, and infrastructure perspectives to win allocations.

Eric Snyman, Frank Napolitani, EisnerAmper Cayman

Results

(Click images to enlarge)

HEDGE FUND INVESTORS

What’s New and What’s Changed

Will the hedge fund industry continue to grow in assets or will there be consolidation among managers?

2016 GAIM Survey Results EisnerAmper Cayman

What is the biggest challenge facing managers today?

2016 GAIM Survey Results EisnerAmper Cayman

Where are fees heading over the next couple of years?

EisnerAmper GAIM Ops 2016 Results

CALLING ALL REGULATORS

Active and Recently Retired Regulators Prepare You for What’s Next

Insider Dealing: Post-Newman, do you believe congressional action to codify “insider trading” would be beneficial?

EisnerAmper GAIM Ops 2016 Results

Cybersecurity and cyber-related crime: Which elements of a cybersecurity program do you find the most difficult to implement?
EisnerAmper GAIM Ops 2016 ResultsOther policy and regulatory developments: Which of the following developments do you identify as the potential biggest threat to the hedge fund industry (Related to politics and regulations)?
EisnerAmper GAIM Ops 2016 Results

THE EVOLVING BUSINESS MODEL FOR HEDGE FUNDS

Looking at the Future Model of Sustaining, Growing and Innovating

Is the commingled hedge fund an endangered species (and the 2 and 20 fee structure along with it)?

EisnerAmper GAIM Ops 2016 Results

Which investor group(s) represents the most advantageous path for your goals in raising capital?
EisnerAmper GAIM Ops 2016 ResultsShould you increase or start pursuing the opportunity through liquid alternative products?

EisnerAmper GAIM Ops 2016 Results

INSTITUTIONAL INVESTOR PERSPECTIVE

The Future Partnership with Managers

Who do you expect to win the U.S. Presidential election?

Demands for portfolio and operational transparency have increased dramatically over the last few years. How has your organization reacted to those demands?

EisnerAmper GAIM Ops 2016 Results

Who are the most important people to meet during an operational due diligence visit?

EisnerAmper GAIM Ops 2016 Results

Have you had Basel III-related conversations with your prime brokers?

EisnerAmper GAIM Ops 2016 Results

Is your CCO function outsourced to a third-party compliance consultant?

EisnerAmper GAIM Ops 2016 Results


Publications
14.3.2016

Are You a Going Concern?

The rules of US Generally Accepted Accounting Principles (GAAP) are no longer silent on management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and what management should disclose in their financial statements.

In August 2014 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-15, titled Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which provides guidance about management’s responsibilities in this regard.

Guidance has been issued to reduce diversity in timing and content of footnote disclosures. Management need to consider this guidance to produce US GAAP-compliant financial statements.


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9.12.2015

Article on FASB’s Accounting Standards Update (ASU) No. 2015-09

EisnerAmper Cayman Ltd. has posted an article with Captive Insight (www.captiveinsight.ky) and Captive Review (see article here) about the latest FASB ASU No. 2015-09.

Preparers of financial statements need to be aware of the additional disclosure requirements introduced by ASU No. 2015-09, as well as consider the time impact and increased level of detail on reserving and claims data to be compiled in order to enable preparation of financial statements that comply with accounting principles generally accepted in the United States of America (U.S. GAAP).

The article published in Captive Insight can be downloaded through the link below.

 

 


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20.3.2014

Are You Caught In The “Offsetting” Net?

The requirements under International Financial Reporting Standards (IFRS) and US generally accepted accounting principles (GAAP) are almost identical and are required when there is netting on the balance sheet, or when there is the ability to net under an enforceable master netting arrangement or similar agreement


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20.12.2013

Examining Confidence Levels

Funding at a consistent 70 percent confidence level will allow you to weather the ups and downs without the need to respond abruptly, and gradually accumulate equity.


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20.11.2013

Is My Fund an Investment Entity/Company?

This is a follow up on a prevous article detailing the requirements of amendments to IFRS 10, IFRS 12 and IAS 27, issued in October 2012.


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23.1.2013

IFRS for Investment Entities

For the first time the International Accounting Standards Board has issued industry specific guidance for investment entities.

 

 


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16.1.2013

Avoid 6 Critical Errors When Completing the FAR

The Fund Annual Return (“FAR”) is an electronic form that fund operators must use to provide CIMA with general, operating and financial information about their fund. This electronic document must be completed and filed for every regulated fund, together with a pdf version of the audited financial statements within six (6) months of the reporting entity’s year end. Through our review of FARS submitted to CIMA, we’ve been able to build this list of six tips to common yet critical errors to avoid.

 


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