Statement of Recommended Practice. Financial Statements of Authorised Funds

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Statement of Recommended Practice

Financial Statements of

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Statement by the Accounting Standards Board

The aims of the Accounting Standards Board (the ASB) are to establish and improve standards of financial accounting and reporting, for the benefit of users, preparers, and auditors of financial information. To this end, the ASB issues accounting standards that are primarily applicable to general purpose company financial statements. In particular industries or sectors, further guidance may be required in order to implement accounting standards effectively. This guidance is issued, in the form of Statements of Recommended Practice (SORPs), by bodies recognised for the purpose by the ASB.

The Investment Management Association (IMA) has confirmed that it shares the ASB’s aims of advancing and maintaining standards of financial reporting in the public interest and has been recognised by the ASB for the purpose of issuing SORPs. As a condition of recognition, the IMA has agreed to follow the ASB’s code of practice for bodies recognised for issuing SORPs.

The code of practice sets out procedures to be followed in the development of SORPs. These procedures do not include a comprehensive review of the proposed SORP by the ASB, but a review of limited scope is performed.

On the basis of its review, the ASB has concluded that the SORP has been developed in accordance with the ASB’s code of practice and does not appear to contain any fundamental points of principle that are unacceptable in the context of present accounting practice or to conflict with an accounting standard or the ASB’s plans for future standards.

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1 Introduction

Status

1.1 This SORP, issued by IMA, supersedes the previous SORP for authorised funds (authorised unit trusts (AUT) and open ended investment companies (OEIC)), setting out recommendations for the preparation of financial statements for unitholders of all authorised funds. Notwithstanding that a SORP describes “recommended” practice, compliance with this SORP is required by the Financial Services Authority’s (FSA’s) Collective Investment Schemes (CIS) Sourcebook and New Collective Investment Schemes (COLL) Sourcebook.1

1.2 The Accounting Standards Board ("the ASB") has approved IMA for the purposes of issuing recognised SORPs for authorised funds. This arrangement requires IMA to follow the ASB's code of practice for the production and issuing of SORPs. 1.3 This code of practice provides the framework to be followed by IMA for the

development of SORPs, but does not entail a detailed examination of the proposed SORP by the ASB. However, a review of limited scope is performed. 1.4 Under Part III of the OEIC Regulations the directors of an investment company

with variable capital (ICVC) are responsible for the preparation of the company's annual and half-yearly reports. In addition, under Chapter 10 of the CIS Sourcebook or Chapter 4 of the COLL Sourcebook, the authorised corporate director (ACD) of the company is responsible for ensuring that the contents of each report comply with FSA rules.

1.5 Under Chapter 10 of the CIS Sourcebook or under Chapters 4 and 8 of the COLL Sourcebook, the manager of an AUT is responsible for the preparation of the AUT’s annual and half-yearly reports.

1.6 The recommendations of this SORP have been arrived at after consideration of the Statements of Standard Accounting Practice (“SSAPs”) and Financial Reporting Standards (“FRSs”) issued before 31 March 2005. This SORP complies with International Financial Reporting Standards (IFRS) only to the extent that UK GAAP has converged with IFRS through FRSs and only to the extent that those FRSs are a requirement for authorised funds. The presentation aspects of FRS 25 became a requirement for authorised funds at 1 January 2005. However, the disclosure requirements of FRS 25 will have to be complied with only when

1_{The CIS Sourcebook in 10.3 and the COLL Sourcebook which has been in effect since 1 April} 2004 refers to the SORP in 4.5.7 and 8.3.5. By 12 February 2007 all authorised funds must comply with the COLL Sourcebook.

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FRS 26 is adopted by the SORP or becomes a requirement for authorised funds. Whilst to be consistent with FRS 26, this SORP introduces the use of bid valuations instead of mid, the SORP does not adopt FRS 26 as there are concerns relating to the impact of FRS 23 which must also be complied with when FRS 26 is adopted. Currently, the ASB is proposing that FRS 26 should apply to authorised funds from 1 January 2007.

Definitions

1.7 The following definitions shall apply in this SORP.

Authorised Corporate Director (ACD)

The director of an ICVC that is the authorised corporate director of the ICVC in accordance with CIS Sourcebook 7.2.1R (The directors) and COLL Sourcebook 6.5.3R (Appointment of an ACD).

Authorised fund

An Investment Company with Variable Capital (ICVC) or an Authorised Unit Trust scheme (AUT).

Authorised Unit Trust (AUT)

As defined in section 237(3) of the Financial Services and Markets Act 2000 (Other definitions), a unit trust scheme which is authorised for the purposes of the Act by an authorisation order.

CIS Sourcebook and COLL Sourcebook

FSA rules relating to authorised funds. See Annex D for relevant extracts.

Depositary

The person to whom is entrusted the safekeeping of all of the scheme property of an ICVC and who has been appointed for this purpose in accordance with Regulation 5 (Safekeeping of scheme property by depositary) of and Schedule 1 (Depositaries) to the OEIC Regulations.

Derivative financial instrument (“Derivative”)

A derivative is a financial instrument or other contract with all three of the following characteristics:

(a) its value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract (sometimes called the ‘underlying’);

(b) it requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors; and

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(c) it is settled at a future date.

Typical examples of derivatives are futures, forwards swap and option contracts. More comprehensive guidance is contained in FRS 26 paragraphs AG 9 – AG 12.

Effective yield

Effective yield is an income calculation that takes account of amortisation of any discount or premium on the purchase price over the remaining life of the security. The calculation uses the effective interest method as defined in FRS 26, paragraph 9 with guidance in paragraphs AG 5 – AG 8.

Instrument constituting the scheme

(a) In relation to an ICVC, the instrument of incorporation; (b) In relation to an AUT, the trust deed.

Investment Company with Variable Capital (ICVC)

A body incorporated under the OEIC Regulations.

Manager

The firm that is the manager of an AUT in accordance with the trust deed.

Market value

For non-derivative securities, it is the fair value which generally is the bid market value.

For futures, it is the unrealised gain or loss at the balance sheet date as this represents the cost of closing out the contract at that date.

For call or put option purchased or written on any short position, it is the price to close out the contract at the balance sheet date.

OEIC Regulations

The Open Ended Investment Companies Regulations 2001 (SI 2001/1228).

Trustee

In accordance with section 237(2) of the Financial Services and Markets Act 2000 (Other definitions), the person holding the property in question on trust for the participants of a unit trust scheme.

Unit

a) In relation to an AUT, a unit representing the rights or interests of the unitholders in the AUT.

b) In relation to an ICVC, a share in the ICVC.

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the sake of simplicity. This should not preclude an ICVC from using the term share or shareholder in situations where it is more appropriate.

Unitholder

The holder of a unit in an AUT or a share in an ICVC.

Value at Risk (VAR)

VAR is the expected loss of portfolio over a specified time period for a set level of probability.

Zero dividend preference shares

Preference shares which carry no entitlement to dividends but the right, on a fixed date or on any earlier redemption, to the repayment of capital and a premium in priority to any capital payment to the holders of ordinary shares. General accounting requirements

1.8 Financial statements should comply with SSAPs, FRSs and Urgent Issue Task Force (UITF) Abstracts. Appropriate disclosure of the accounting policies should be made in the notes to the financial statements. Examples of the accounting policies required are covered in Part II of this SORP. Taken together, these should ensure that the financial statements provide a true and fair view.

Approach

1.9 Explanatory background has been included within the text and all the information about an individual topic can be found in one place. The whole of this statement including the annexes is therefore recommended practice.

Other regulations and rules

1.10 The recommendations of this SORP should be read in conjunction with ASB’s Explanatory Foreword to SORPs, any rules and regulations relating to authorised funds that are in force, and the law relating to these matters. Again, compliance with this SORP is required by FSA rules2_{. In accordance with FRS 18 ‘Accounting} policies’ paragraphs 58 to 61, an authorised fund’s financial statements should state the title of this SORP and whether its financial statements have been prepared in accordance with it. In the event of a departure from the SORP, the authorised fund should give a brief description of how the treatment adopted departs from the recommended practice set out in the SORP, which should include:

(a) the reasons why the director(s) or manager judge the treatment adopted to be more appropriate to the particular circumstances of the authorised fund; and

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(b) details of any disclosures recommended by the SORP that have not been provided, and the reasons why they have not been provided.

1.11 For the sake of completeness, this SORP includes the requirements of the OEIC Regulations and FSA rules coveringthe contents of annual and half-yearly reports to unitholders. The director(s) or the manager are responsible for preparing the reports, and for ensuring that the full financial statements give a true and fair view of the position at the end of the period, and the net income for the period. Future changes

1.12 Where requirements change as a result of changed regulations, legislation, product changes or the publication of FRSs, the implications for this SORP may be dealt with by guidance until such time as the SORP itself is revised. The IMA will keep this SORP under regular review, in accordance with the ASB’s code for SORPs, and will amend it from time to time in the light of developments, for example when it becomes clearer how IFRS will affect authorised funds. Pending such changes being issued, accounts must be prepared on the basis of accounting standards and UITF Abstracts issued after publication of this SORP, from their effective date.

Date from which effective

1.13 Apart from paragraph 2.32 relating to bond income on an effective yield basis, the recommendations of this SORP will be applicable for accounting periods beginning on or after 1 January 2006. However, it should be noted that the FRS 25 presentation requirements became effective for accounting periods beginning on or after 1 January 2005.

1.14 In order to allow sufficient preparation time, the requirements of paragraph 2.32 relating to bond yields will be expected for accounting periods beginning on or after 1 January 2007. Earlier compliance is encouraged.

Transitional provisions

1.15 Restatement of prior year comparatives is not required in respect of changes required by the SORP relating to bid valuations and effective yield. If comparatives are not restated, preparers of reports should:

a) apply the existing accounting policies to the comparative information;

b) disclose this fact together with the basis used to prepare this information; and

c) disclose the nature of the main adjustments that would make the information comply with the new requirements, but these adjustments need not be quantified.

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2 Contents of financial statements

Annual reports and accounts of the fund

2.1 The annual report to unitholders should contain the audited financial statements, a statement of net asset value per unit, the number of units of each class in issue, a comparative table and the information required to be disclosed by Chapter 10 of the CIS Sourcebook or Chapters 4 and 8 of the COLL Sourcebook. It should also contain the investment report together with reports of the auditor and depositary or trustee. Statements of responsibilities of each of the auditor, ACD or manager, and depositary or trustee should also be included. Special requirements relating to umbrella funds are also set out in Chapter 10 of the CIS Sourcebook and Chapter 4 of the COLL Sourcebook, which require each report of the fund to be signed by the ACD or manager (see paragraph 2.10).

2.2 In relation to ICVCs, if there are other directors, the ACD and at least one other director must sign the report on behalf of the Board. Regulation 66(3) of the OEIC Regulations requires the director(s) to lay copies of the annual report before the company in general meeting where the companies hold general meetings.

Content of the financial statements

2.3 The audited annual financial statements should contain appropriate information on the transactions of the fund during the accounting period, and on the amount and disposition of the fund’s assets and liabilities at the end of the period.

2.4 This information should be presented in the form of: • a statement of total return

• a statement of change in shareholders’ net assets • a portfolio statement

• a balance sheet

• a summary of material portfolio changes

• a statement of the material accounting policies used in preparing the

financial statements

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• a distribution table

Comparative figures should be given for the previous period for all items in the statement of total return, statement of change in shareholders’ net assets, balance sheet, and the notes to each, and for sector percentage totals in the portfolio statement. In the portfolio statement, comparatives at security level would be unhelpful, and FRS 28 paragraph 11 allows non-disclosure of these details.

2.5 If a fund meets the criteria of the special exemptions in the revised FRS 1, a cash flow statement is not required. Paragraph 5(d) of the revised FRS 1 is most likely to apply. This grants exemption to open ended investment funds that meet all the following conditions:

i) substantially all of the entity’s investments are highly liquid;

ii) substantially all of the entity’s investments are carried at market value;

iii) the entity provides a statement of change in net assets.

When funds use derivatives extensively, consideration should be given to whether the liquidity condition continues to be met.

2.6 Pro forma financial statements that meet the recommendations set out above are included in Annex A. The pro forma is a minimum recommendation and, although the order of the statements is not prescribed, it is recommended that the headings used within the statements be adhered to in the order shown.

Additional disclosure is recommended to reflect any special circumstances and to ensure that the financial statements show a true and fair view.

Half-yearly reports and accounts of the fund

2.7 The half-yearly report to unitholders should contain the half-yearly financial statements, a statement of the net asset value per unit, and the number of units of each class in issue. It should also contain the investment report and the information required to be disclosed by Chapter 10 of the CIS Sourcebook or Chapter 4 of the COLL Sourcebook. The report should be signed by the director or manager in accordance with Chapter 10 of the CIS Sourcebook or Chapter 4 of the COLL Sourcebook. The half-yearly financial statements, which are not required to be audited, should be prepared using the same accounting policies and format as the annual financial statements (although this does not preclude preparers from making a change of accounting policy in the half-yearly financial statements) and include the following items:

• a statement of total return

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• a portfolio statement • a balance sheet

• a summary of material portfolio changes

• a statement of the material accounting policies used in preparing the financial statements

• further details in notes to the financial statements • a distribution table (if appropriate)

2.8 Comparative figures should be given for all items in the statement of total return, statement of change in shareholders’ net assets and balance sheet, and the notes to each, and for sector percentage totals in the portfolio statement. They should be the equivalent figures for the same half-yearly period in the previous year for the statement of total return, but the last audited figures (i.e. at the end of the last full accounting period) for the other statements. Comparative figures are not required at security level in the portfolio statement.

Short form accounts in reports of the fund

2.9 If using the CIS sourcebook, at the discretion of the director(s) or manager, short form accounts may be sent or supplied to unitholders for any period instead of the full accounts specified in paragraphs 2.1 and 2.7. If so, it must be made clear when such accounts are sent or supplied that unitholders are entitled to apply for and receive the full accounts. The information shown in short form accounts may be limited to give unitholders a clear and simple picture of the performance of their investment over the period. The short form accounts should be designed to give the average unitholder a clear simplified picture of first the total return and amount distributed or accumulated, and the amount taken out by way of expenses and, second, of where his funds were invested. 2.10 Every annual and half-yearly report to unitholders containing short form accounts

should include a statement of the net asset value per unit and the information required to be disclosed by Chapter 10 of the CIS Sourcebook, in a form appropriate for short form accounts. The director’s or manager’s report included in a report containing short form accounts should cover everything required by Chapter 10 of the CIS Sourcebook, though not necessarily in the same amount of detail. In addition, a report that relates to an annual accounting period should include a comparative table, giving the same information as required by Chapter 10 of the CIS Sourcebook for reports containing the full accounts. It should also contain the report of the depositary or trustee, and a copy of the auditor’s statement on the short form accounts. The reports, including the short form accounts should be signed by the director(s) or manager, as set out in

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paragraphs 2.1 and 2.2. Statements of responsibilities of each of the ACD or manager, auditor and depositary or trustee should also be included as appropriate.

2.11 Reports to unitholders containing short form accounts must form a separate stand-alone document that does not include any extraneous material. Short form accounts should contain the following items (with comparatives on the same basis as for the full accounts):

• a statement of change in shareholders’ net assets • a statement of investments and other assets • a distribution table

2.12 Pro forma short form accounts that meet the recommendations set out above are included in Annex B. The pro forma is a recommendation and although the order of statements is not prescribed, headings used within the statements should be adhered to in the order shown. It is not intended that notes to the financial statements will be included but additional disclosure is recommended where there is a need to reflect any special circumstances.

2.13 There are no provisions within the COLL Sourcebook for short form accounts.

Short

reports

2.14 The COLL Sourcebook Chapter 4 introduces Short Reports as the default reporting. This is a consumer focused six monthly document and should not be confused with short form accounts. Where Short Reports are issued following the COLL Sourcebook reporting requirements, short form accounts must not be produced. For funds operating under the CIS Sourcebook, where the manager or the director(s) do not elect to produce Short Reports, short form accounts may still be produced and made available until 12 February 2007. Short report requirements are detailed in Chapter 4 of the COLL Sourcebook. The information provided in the Short Reports must be consistent with long reports.

2.15 All retail funds operating under the COLL Sourcebook must produce short reports, which must be provided to investors. The long form reports and accounts must be provided to investors upon request.

2.16 Qualified Investment Schemes (QIS) operating under the COLL Sourcebook do not have to produce Short Reports but must produce long form report and accounts which must be provided upon request (COLL chapter 8.3.5).

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Reports and accounts of umbrella funds

2.17 The annual and half yearly report to unitholders of an umbrella fund should contain reports and accounts relating to each of its sub-funds, prepared in the reporting currency of the fund, together with the other information set out in paragraphs 2.3 and 2.7, as appropriate. The reports should also contain the other information specifically required by Chapter 10 of the CIS Sourcebook or Chapter 4 of the COLL Sourcebook for sub-funds. An aggregation of the accounts of each sub-fund must also be prepared, together with the additional information specifically required by Chapter 10 of the CIS Sourcebook or Chapter 4 of the COLL Sourcebook for an umbrella fund. The aggregated financial statements should comprise:

• a statement of change in shareholders’ net assets • a balance sheet

• a statement of the material accounting policies used in preparing the financial statements

• appropriate notes to the aggregated financial statements

2.18 If the fund is operating under the CIS Sourcebook, the director(s) or manager can elect to send to unitholders a report on the relevant sub-fund only. This is currently not an option under the COLL Sourcebook. Where only sub-fund reports are provided, a report on the umbrella fund as a whole must be made available to unitholders on request. Chapter 10 of the CIS Sourcebook also permits the director(s) or manager to elect to produce short form accounts in reports sent to unitholders of umbrella funds. Where this is the case, copies of the report containing the full accounts of the umbrella fund as a whole (which include the full accounts for each sub-fund) must be made available to unitholders on request.

Funds or sub-funds with different unit classes

2.19 Where there are different unit classes, the investments of the fund or sub-fund remain as one pool, and are not separately allocated to unit classes. Where there is a different charging structure for each class, such differences will be reflected in the price of each unit class and the proportion of the pool of investments attributable to each class. The prices will determine the amount receivable or payable by the fund or sub-fund in respect of issues and cancellations of units, but these amounts need not be analysed by class in the statement of change in shareholders’ net assets. The share of the fund’s or sub-fund’s net assets, the net asset value of each unit in each class (at the

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beginning and end of the period) and the distributions attributable to each class should be included in the accounts. The different rights and terms attaching to each unit class, including the rights on winding-up and the policy for allocating taxation and distributable income, should be summarised in the notes to the accounts.

Statement of total return

2.20 A statement of total return should be prepared. This will set out the total return, comprising net investment gains or losses together with net income after tax, and will then identify that part of the total return that is to be distributed in accordance with FSA rules.

2.21 The statement of total return should show, with corresponding figures for the preceding equivalent period:

• Net gains/losses on investments during the period • Other gains/losses

• Net income/expense after taxation for the period showing separately income, total expenses, interest costs and the tax charge

• Total return for the period before distributions • Distributions

• Change in net assets attributable to unitholders

2.22 As Annex A shows, the statement of total return incorporates investment gains/losses and income after tax, showing the various components separately and distributions.

2.23 The headings used in paragraph 2.21 are summary components only, to keep the principal statement clear and simple. The main components should be analysed in more detail in notes to the financial statements, in particular, the net gains/losses on investments, other gains/losses, and net income/expense after taxation, examples of which are also at Annex A.

Net gains/losses on investments

2.24 The investment gains/losses should be analysed in the notes to show the gains from derivatives, FX contracts and other investments. Any special dividends regarded as capital in nature (see paragraph 2.39) should be included within gains. Any movement on zero dividend preference shares, which are generally issued at a discount to compensate the investor for the lack of dividend, should

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be included within net gains/losses on investments.

Other gains/losses

2.25 Other gains/losses should be explained (in the notes if not on the face of the statement) and may include such items as gains/losses on back-to-back loans, gains/losses on forward foreign exchange contracts, and other currency movements relating to capital items other than investments. Gains/losses on forward foreign exchange contracts relating to investments are included within net gains/losses on investments (see paragraph 2.24).

Net income/expense after taxation

2.26 The net income/expense after taxation should show income, total expenses and taxation, with details of these individual components given in the notes. An example of recommended disclosure is at Annex A.

Total return for the period

2.27 Where there is a material difference between net income after taxation shown in the statement of total return and the amount distributed, an explanation of the difference should be included in the notes.

It is expected that the director’s or manager’s report will explain the investment strategy, the result of which has led to this material difference.

Derivatives

2.28 The treatment of derivatives in the balance sheet is dealt with under “portfolio statement,” paragraphs 2.71 to 2.74. For the purposes of the statement of total return, the inclusion of gains or losses from derivative products in net gains or losses on investments or in net income before taxation will depend upon the nature of the transaction. Where positions are undertaken to protect or enhance capital return, the gains or losses should be dealt with in gains or losses on investments; where they are for generating or protecting income, the costs or income should be dealt with in net income before taxation. Therefore, both motives and circumstances in the use of derivatives are important in determining whether items should be treated as income or capital. If, for example, the direct impact of entering a derivative transaction is to decrease the value of the existing income of the fund, the costs and revenues and any other impact associated with that transaction should be matched and therefore be taken against income. If appropriate, other indicators of motive should be considered in order to establish what the motive was. Examples of accounting for different derivatives are given at Annex C.

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2.29 Income from equities should be accounted for when it is earned. In the case of quoted equity investments, and non-equity shares

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the income should be regarded as earned when the security is quoted ex-dividend (i.e. when the price quoted falls to reflect the value of the dividend concerned). In the case of unquoted equity investments, income should be regarded as earned when the dividend is declared, and the amount at which the investments are shown in the portfolio statement will need to reflect any such income. Dividends received should be stated net of irrecoverable tax credits.

2.30 Application of the accruals concept means that a return (whether in respect of dividends, in respect of redemption, or otherwise) on a non-equity share (such as a preference share) should, in principle, be recognised as income and accrued on a time-apportionment basis. However, because of the practical difficulties arising from the requirement to undertake daily valuations for pricing purposes (such as the lack of availability of pricing information that achieves an accurate allocation between capital and income for these shares), this is impractical for authorised funds. Therefore, income from non-equity shares should be recognised on the same basis as equities. This paragraph does not apply to zero dividend preference shares, the treatment for which is stated in paragraph 2.24.

Interest and income on other securities

2.31 Interest and income on other securities should be recognised as earned. To achieve this, accrued interest purchased and sold on interest-bearing securities should be excluded from the capital cost of these securities and dealt with as part of the income of the scheme.

2.32 For accounting periods beginning on or after 1 January 2007, income should be accounted for on an effective yield basis, irrespective of the level of discount or premium, and it should be calculated with reference to the purchase price. Any movement in the fair value at balance sheet date not accounted for through amortisation of the discount or premium must be shown as a capital gain/loss. 2.33 When this requirement is first being implemented, in the possible event that

amortised purchase prices cannot be obtained without undue cost and effort, a suitable alternative basis of calculation should be agreed and appropriately disclosed.

Debt securities issued at a discount or premium

2.34 For accounting periods beginning before 1 January 2007, in the case of investments in debt securities issued at a significant discount or premium to the maturity value, the total income arising on such securities, taking into account the amortisation of such a discount or premium, should be spread over the life of the security on an appropriate basis, having regard to applicable accounting standards. A discount or premium is significant if greater than the lower of:

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• x% of the redemption price, where x is equal to half the number of years of the issue term;

• 15% of the redemption price.

Income recognition

2.35 If it is expected that income receivable at the balance sheet date will not be received, a provision should be made for the relevant amount.

Deduction of tax

2.36 In cases where income is received after the deduction of withholding tax, the income should be shown gross of taxation, and the tax consequences should be shown within the tax charge.

Scrip dividends

2.37 For certain securities, the holder may elect to receive a dividend in the form of shares rather than cash. In most cases, the value of the shares to be received will approximate to the amount of the cash dividend (an “ordinary” scrip dividend), any small difference being attributable to the movement of the share price between the dividend declaration and the shares being quoted ex dividend. In a few cases, an enhancement may be offered such that the value of the shares significantly exceeds the cash dividend (an “enhanced” scrip dividend). 2.38 In the case of an ordinary scrip dividend, the whole amount should be recognised

as income, on the basis of the market value of the shares on the date they are quoted ex dividend. In the case of an enhanced scrip dividend, the value of the enhancement, calculated as the amount by which the total market value of the shares on the date they are quoted ex dividend exceeds the cash dividend, should be treated as capital. Scrip dividends may not need to form part of the distribution, and the fund’s distribution policy for this item should be stated, i.e. that the ordinary element of scrip dividends is treated as income but does/does not form part of the distribution. If the ordinary element of scrip dividends does not form part of the distribution, a statement that the distribution is in accordance with the CIS sourcebook should be disclosed.

Special dividends, share buy-backs and additional share issues

2.39 Whether a special dividend, share buy-back or additional share issue is income or capital by nature depends very much on the facts of each particular case. For example, it is likely that where the receipt of a special dividend results in a significant reduction in the capital value of the holding, then the special dividend should be regarded as capital in nature so as to ensure that the matching principle is applied to gains and losses. Otherwise, the special dividends should

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be regarded as income.

Underwriting commission

2.40 Underwriting commission should be taken to income and be recognised when the issue takes place, except where the fund is required to take up all or some of the shares underwritten, in which case an appropriate proportion of the commission received should be deducted from the cost of those shares.

Stock lending

2.41 Any fees arising from stock lending should be recognised as income on an accruals basis.

2.42 Unless disclosed elsewhere within the report, there should be a note in the accounts disclosing the gross amount and any fees that have been paid to arrive at the net stock lending income amount.

Expenses

2.43 To facilitate comparability between funds, all expenses, including interest on borrowing (other than the direct costs of purchase and sale of investments, for example commission, and stamp duty reserve tax arising on sales and repurchases of units in the company), should be charged against income, regardless of any alternative treatment that may be permitted in determining the distribution. To the extent that such expenses can be borne ultimately by capital, the distribution will reflect this, and be higher than the net income as disclosed in the financial statements. Expenses should be analysed to show those payable to the ACD or manager, the depositary or trustee, related parties and third parties. 2.44 Where there is directly or indirectly any fee sharing between the manager, the

depositary or an affiliate of either, this must be disclosed with the relevant details.

Performance fees

2.45 Where performance fees are charged, the basis of the charge should be disclosed.

2.46 Performance fees should be accrued in accordance with accounting standards and, in the first instance, charged against income. Where all or part is offset against capital for distribution purposes, the basis for the determination of such amounts should be disclosed.

2.47 Where there are known circumstances that may affect future performance fees, for instance a “high water mark”, this information should be disclosed.

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Guaranteed funds

2.48 Where a premium is paid to a third party(ies) for a guarantee, the accounting treatment follows the nature of the transaction. Where a third party(ies) guarantee to protect investments, the gains or losses should be dealt with in gains or losses on investments; where it guarantees to protect income, the costs or income should be dealt with in net income before taxation. Where the nature of the guarantee is to limit or cap the expenses of the fund, any receipt from the third party(ies) should be shown as a deduction against expenses rather than income. Any such deduction should be disclosed in the notes. The cost of the premium should be recognised in the statement of total return over the period to which the guarantee relates. The treatment of any recoveries from third parties follows the treatment of the premium. Because there will be instances where professional judgement will be required and other factors might have to be taken into account (for example the ability of third parties to honour their guarantees), there should be sufficient narrative disclosure to enable the user properly to understand the nature of the receipt.

Taxation

2.49 The following items should be separately identified within the notes to the financial statements together with any other material components of the tax charge:

• UK corporation tax • Overseas taxation • Double tax relief • Overseas tax credits • Deferred tax

• Adjustments in respect of previous periods

2.50 In general, the tax accounting treatment should follow that of the principal amount, with charges or reliefs allocated using the marginal basis. Under the marginal basis, tax charges or reliefs are allocated to capital or income to the extent that there remains a liability to corporation tax after relief has been made for all expenses attributed directly to the income and capital accounts. In calculating how much tax relief should be allocated, revenue expenses are matched first against taxable income arising in the revenue account, and tax deductible capital expenses are matched first against taxable income arising in the capital account. Tax relief should be allocated to the capital account only to the extent that expenses in the capital account (if any remain after offsetting these expenses against taxable income in the capital account) are required to reduce or eliminate taxable profits. Similarly, tax relief should be allocated only to the revenue account to the extent that expenses in the revenue account (if any

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remain after offsetting these expenses against taxable income in the revenue account) are required to eliminate taxable profits. The fact that a fund is not in an overall taxpaying position is not, in itself, a reason not to allocate tax relief on expenses.

2.51 For example, a fund with £100 of taxable income and £120 of relievable expenses, £50 of which are offset to capital, would take full relief for the £70 of expenses borne by income before allocating relief of £6 (being £100 less £70 = £30 at 20%) to the capital account.

Overseas taxation

2.52 Overseas withholding tax suffered net of expected recoveries under any relevant double tax treaty, to the extent that a valid claim is or is expected to be made, should be separately disclosed in the financial statements. In addition, there may be a large amount of overseas taxation recoverable under double tax treaties. There may often be a significant time lag between the receipt of the overseas dividend net of taxation and the receipt of the tax refund. Whether the distribution should assume that all tax claims would be recovered in full will depend on the circumstances and recovery experience in respect of the investments and territories involved. If provision is considered necessary, owing to significant uncertainty as to receipt, this should be deducted from the amount receivable and disclosed as part of overseas taxation. The estimated expense of recovering the taxation should also be provided for and included within expenses.

Interest distributions

2.53 Where an authorised fund opts to pay an interest distribution, the amount paid out or invested in respect of accumulation units is allowed as a deduction against the fund’s taxable profit for the period. In effect, where all such income is paid out or invested in respect of accumulation units, there should be no charge to tax within the fund in respect of that income. However, except where an interest distribution is paid gross to unitholders, it will nevertheless be a responsibility of the fund to deduct income tax at source at the appropriate rate on payment of the interest distribution to the unitholder. Withholding tax on interest distributions should be shown within ‘other creditors’ and not as part of the fund’s liability to corporation tax, since it will be settled from amounts transferred to the distribution account.

Deferred taxation

2.54 There may be timing differences between the accounting treatment of certain items and their taxation. Because it is important to maintain equity in entitlements between accounting periods, deferred taxation should be provided on all temporary timing differences (that are not specifically exempted by FRS 19 paragraphs 9-33) that have originated but not reversed by the balance sheet date. Details of any deferred tax assets and liabilities should be given in the

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notes to the financial statements in accordance with FRS 19 ‘Deferred tax’.

Value added tax (VAT)

2.55 The VAT recovery position will vary from fund to fund. As for all other items in the financial statements, the recovery of VAT should be accounted for on an accruals basis. IrrecoverableVAT should be included as part of the relevant cost.

Distributions

2.56 Details of the type of distribution being paid should be given in the notes to the accounts. Irrespective of the type of distribution, under FRS 25, units in a trust or shares in an OEIC are not treated as equity. Therefore, all distributions made are shown in the statement of total return under the heading of finance costs.

Statement of change in shareholders’ net assets

2.57 The statement of change in shareholders’ net assets should summarise the movements in the total value of the fund.

2.58 This statement reconciles the changes in net assets during the period in summary form. It draws on the statement of total return for the net increase/decrease in assets attributable to the investment activities and shows the extent to which the fund has grown or contracted as a result of the issue or cancellation of units. An example of this statement is given at Annex A.

2.59 The statement of change in shareholders’ net assets should be presented on the same page of the financial statements as the statement of total return, thereby providing unitholders, on one page, with a summary of the principal features of the fund’s results for the period.

Dilution levy

2.60 Any dilution levy charged (in the case of issue and sale of units) or deducted (in the case of redemption and cancellation) should be shown separately.

Stamp Duty Reserve Tax (SDRT)

2.61 SDRT arising as a result of redemptions of units in the fund should be shown separately where the cost is borne by the fund.

Portfolio statement and balance sheet

2.62 The reports to unitholders must include a balance sheet, which includes all assets and liabilities, and a portfolio statement, which shows the disposition of a fund’s investment portfolio.

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Portfolio statement

Investments in securities – valuation

2.63 Investments of the fund should be stated at market value at the balance sheet date.

2.64 Investments should always be valued to exclude any element of accrued income. The value of overseas securities should be translated into the reporting currency at exchange rates prevailing at the balance sheet date. Where, in view of exceptional circumstances, for example the suspension of the market, the last quoted price is not used, the notes should describe clearly the basis of valuation and the reasoning behind it.

2.65 The accounting system used for valuing the investments for financial statements purposes at the period end will normally be the same as that used for valuation purposes. Where daily valuations are produced for the purposes of pricing, it is acceptable to use that valuation of the property of the fund for the purposes of the financial statements, rather than perform an additional valuation, provided that the valuation point is sufficiently near to the close of business on the balance sheet date, such that any distortion arising from price movements or as a result of subsequent deals is clearly immaterial. The precise valuation point should be disclosed in the notes to the financialstatements.

2.66 For most funds, the determination of the market value of the portfolio should be reasonably straightforward, since the values are readily available through published sources. However, in certain situations, the value of a security may not be readily determinable, as will often be the case where the investment is not an approved security within the meaning of FSA rules. Where the value cannot be readily determined, the securities should be stated at the director’s or manager’s valuation, arrived at in accordance with the fund’s instrument constituting the scheme. The notes to the financial statements should include adequate details about the basis of the valuation, including the identity of those who carried out the valuation and a statement on how the valuation was reached. This statement should make it clear that the intention of the valuation was to estimate market value.

Investment in securities – presentation

2.67 For each holding in the portfolio, the percentage of the value of the fund or sub-fund property that the holding represents should be shown. The percentage should also be shown for each category of holding in the property of the fund or sub-fund, in addition to the individual holdings. These categories should be the most appropriate in the light of the investment policy of the fund, for example economic, geographical or by currency. A suggested format for the portfolio

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statement is set out at Annex A.

2.68 In addition, if a fund invests in more than one class of asset (for example, bonds and equities) and asset class is not a category used in presenting the portfolio statement, the split between each asset class must be made clear at the foot of the portfolio statement. Such an analysis is not recommended for an asset class if that asset class represents less than 5% of the fund’s value. For example:

Market value

£000s

% Bonds 25,987 72.48 Equities 9,865 27.52 Portfolio of investments 35,852 100.00

2.69 For bond funds, where credit rating is not a category used in presenting the portfolio statement, the listing of bonds should be in sectoral categories, similar to the way that the analysis is performed for equities. Where this is the case, there should also be an analysis at the foot of the portfolio statement showing the investments in bonds in credit rating blocks unless licence agreements with credit rating agencies do not permit publication of this information in reports. For example:

Rating block Market value

£000s

AAA 5,987 AAB 10,000 CCC 7,000 Unrated 3,000 Total bonds 25,987 Equities 9,865 Portfolio of investments 35,852

2.70 The portfolio statement should distinguish between those securities admitted to official stock exchange listing, and traded on or under the rules of an eligible securities market, and those that are unapproved.

Derivatives

2.71 This statement sets out the general principles that should be followed. As a principle, derivatives should be accounted for in the same way as any other investment (see paragraph 2.28).

2.72 Interest received or paid relating to margin deposits must be separately disclosed.

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2.73 Derivatives should be included in the balance sheet and portfolio statement at market value. The portfolio statement should not net positive market values against negative market values. However, aggregation of derivatives of the same asset type and terms is permitted.

2.74 Recommended disclosures for the notes to the accounts are described in sections 2.93 to 2.101.

Investment in units in another collective investment scheme

2.75 Where a fund invests in another collective investment scheme, the following valuation bases should apply:

• For collective investment schemes managed or operated by the ACD or manager or an associate of the ACD or manager, holdings should be valued at cancellation price for dual priced funds and at the single price for single priced funds.

• For collective investment schemes operated by other management groups, holdings should be valued at bid price for dual priced funds and at the single price for single priced funds. Valuation should take into account any agreed rate of redemption charge.

2.76 Where the units are held in an accumulation form, the accumulation of income relating to the holding should be recognised in the income account, including any withholding taxes but excluding tax credits.

2.77 In accordance with FSA rules, equalisation on distributions received may be passed through to unitholders in their distribution rather than being deducted from the cost of the investment. The equalisation policy adopted should be disclosed within the accounting policies.

Immovable property

2.78 Immovable property should be valued at open market value.

2.79 An open market value for each immovable property in the fund should be commissioned from the Standing Independent Valuer of the fund to support the balance sheet carrying values (COLL 5 sets out the valuation rules).

2.80 The value of each individual property need not be shown in the portfolio statement. Rather, properties may be aggregated in bands, each of which represents not more than 5% of the total value of immovable properties. Details of individual properties should be given within each band, but the actual valuation figure for each property need not be shown.

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2.81 The name and qualifications of the valuer should be given by way of note to the financial statements, together with details of the basis of valuation of the properties.

Balance sheet

Stock lending activities

2.82 Securities lent should be included in the financial statements, and no account should be taken of any collateral held. In order that the unitholder is aware of the extent to which the fund’s securities are the subject of stock lending arrangements, disclosure should be given in a note to the financial statements of the aggregate value of securities on loan at the balance sheet date, and the nature and value of collateral held in respect thereof analysed by asset class.

Securities awaiting settlement

2.83 Purchases and sales of investments should be accounted for on the trade date. Balances owing to and due from brokers in respect of these trades should be separately disclosed in the balance sheet under debtors and creditors. Balances due to and from the same broker shall be netted only where required by FRS 25 ‘Financial Instruments: Disclosure and Presentation’.

Borrowings

2.84 Funds are permitted to borrow only in accordance with Chapter 5 of the CIS Sourcebook or Chapters 5 and 8 of the COLL Sourcebook. Where a foreign currency borrowing is entered into to hedge the value of an investment denominated in that currency, a deposit is required to be held to match such borrowing. Back-to-back loans should be shown separately, in order to give an indication of the total value of the portfolio for which the currency risk has been hedged. The deposits against which such loans were made should also be shown separately from other cash and deposit balances, because they are not available for investment. The required information on interest rate risk should be given in the portfolio statement or in the notes to the accounts (see 2.93).

Summary of material portfolio changes

2.85 Details of significant changes in the disposition of the assets of the fund should be provided.

2.86 The summary of material portfolio changes should identify the value of purchases or sales of a security exceeding 2% of the net assets of the fund or sub-fund at the start of the period (or, for the first period, 2% of the fund at the end of the period). In any event, at a minimum, the 20 largest purchases and 20 largest sales must be shown.

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2.87 To provide information about the extent of investment activity, the total cost of purchases and net proceeds from sales of investments during the period should be disclosed.

Notes to the financial statements

2.88 The notes should include the accounting policies used, together with any other information that is required for the accounts to give a true and fair view.

Contingent liabilities and commitments

2.89 FRS 12 ‘Provisions, contingent liabilities and contingent assets’ sets out when a provision should be recognised, and distinguishes between provisions and contingent liabilities. A provision should be recognised when the entity has a present obligation (legal or constructive) as a result of a past event, it is probable that a transfer of economic benefits will be required to settle the obligation, and a reliable estimation can be made of the amount of the obligation. Contingent liabilities are defined in FRS 12.

2.90 Where, for example, an entity has a possible obligation to subscribe for shares pursuant to an underwriting, placing or similar agreement, and the existence of that obligation will be confirmed only by the occurrence of one or more future events not wholly within the entity’s control, the aggregate possible underwriting commitments should be disclosed as a contingent liability. A fund may have a possible obligation under a placing agreement that is contingent on certain resolutions being passed by the issuing company, which are events not wholly within the fund’s control. Where placing agreement resolutions have not been passed at the balance sheet date, the fund’s aggregate commitment under the placing should be disclosed as a contingent liability.

2.91 A fund may have a contingent liability with respect to partly paid shares, nil paid shares and warrants. Even though it may be intended to sell these shares before the calls become due, a possible obligation exists, and the aggregate commitment should be disclosed as a contingent liability for partly paid shares, nil paid shares and warrants.

Related party transactions

2.92 Transactions and balances with related parties should be set out in the accounts, as required by FRS 8 ‘Related party disclosures’. The director(s) or manager should identify the related parties. Related parties will include, in the case of an ICVC, the ACD, and in the case of an AUT, the manager and trustee, and may include parties by reason of their relationship with the ACD, manager or trustee. Material unitholders will be related parties to the extent that they are in a position to control the company, and disclosure should be given in accordance

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with FRS 8. Disclosure of other material unitholders may also be desirable. Material dealing in the units and investments of the fund carried out with or through related parties should also be disclosed.

Derivatives and other financial instruments

Disclosure

of

objectives, policies, and strategies

2.93 Part C of FRS 13 ‘Derivatives and other Financial Instruments: Disclosures’ requires funds to discuss the risks that arise in connection with financial instruments and to describe how those risks are managed. For funds, these risks will typically include credit risk, interest rate risk, currency risk, liquidity risk and market price risk.

2.94 The main narrative disclosure required by FRS 13 is an explanation of the role that financial instruments have had during the period in creating or changing the risk a fund faces in its activities. This should include an explanation of the objectives and policies for holding financial instruments and the strategies for achieving those objectives that have been followed during the period.

Numerical

disclosures

2.95 FRS 13 also requires funds to provide certain numerical disclosures about their exposure to interest rate risk, currency risk, liquidity risk and market price risk; about their hedging activities; and about the fair value of financial instruments that they hold. The FRS provides certain exemptions from the disclosures for assets and liabilities within its definition of short-term debtors and creditors. 2.96 The required information for the numerical disclosure for interest rate risk should

be set out in the notes. When calculating the weighted average interest rate the redemption yield basis should be used.

2.97 Currency risks will relate to funds with exposure to foreign currencies, where they will arise both on the portfolio of investments and on cash, debtors, and creditors. The required numerical information on the currency risk exposures should be incorporated in the notes and based on the fund’s net exposure.

2.98 FRS 13 also requires the fair value of all financial instruments to be disclosed. For investments, this requirement will be met by stating them in the accounts at bid-market value. Fair values will need to be disclosed for other financial instruments, including debtors and creditors.

2.99 Notes to the accounts should contain sufficient information to aid understanding of the use of derivatives and other financial instruments. The disclosures should be as detailed as necessary to communicate the relevant information of the potential impact on the fund through the use of all derivatives in the portfolio.

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Sensitivity analysis showing the impact of market changes on the fund should be shown unless the use of these instruments is not significant. Where the use of derivatives is extensive and complex, it may also be appropriate to show value at risk. Where sensitivity or value at risk is not shown, there should be a disclosure stating that the fund holds no derivatives that could impact the fund significantly. 2.100 Margins paid to or receivable from brokers and other counter parties should be

recorded as cash within the net asset statement and separately identified in a note to the accounts.

Disclosure in umbrella schemes

2.101 The numerical disclosures recommended by paragraphs 2.95 to 2.100 above should be included in the accounts of each sub-fund of an umbrella scheme. The aggregated accounts should provide the narrative disclosure recommended by paragraphs 2.93 and 2.94, together with a cross-reference to the numerical disclosures contained in the sub-fund accounts. Where sub-fund accounts are sent to unitholders separately, they should include the narrative as well as the numerical disclosure.

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ANNEX A

Typical Open Ended Investment Company

Annual Report and Financial Statements

31 December 2005

The figures included in this pro forma report are provided for illustrative purposes only.

This example applies equally to the annual report and financial statements of a typical authorised unit trust although differences in terminology used should arise from the differences in structure between a trust and a company. For information, pages two and three of this Annex include equivalent disclosures for authorised unit trusts.

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Open Ended Investment Companies Authorised Unit Trusts

AUTHORISED CORPORATE

DIRECTOR MANAGER

OTHER DIRECTORS

DIRECTORS OF THE AUTHORISED CORPORATE DIRECTOR

(OPTIONAL)

DIRECTORS OF THE MANAGER (OPTIONAL)

INVESTMENT ADVISER INVESTMENT ADVISER

DEPOSITARY TRUSTEE REGISTRARS REGISTRARS STANDING INDEPENDENT VALUER

(FOR PROPERTY FUNDS) STANDING INDEPENDENT VALUER (FOR PROPERTY FUNDS) AUDITORS AUDITORS

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CONTENTS

Open Ended Investment Companies Authorised Unit Trusts DIRECTORS’ REPORT *

AUTHORISED CORPORATE DIRECTOR’S INVESTMENT REPORT*

MANAGER’S INVESTMENT REPORT* NET ASSET VALUE PER SHARE AND

COMPARATIVE TABLE * NET ASSET VALUE PER UNIT AND COMPARATIVE TABLE * TOTAL EXPENSE RATIOS** TOTAL EXPENSE RATIOS** AUTHORISED STATUS * AUTHORISED STATUS * STATEMENT OF AUTHORISED CORPORATE DIRECTOR’S RESPONSIBILITIES* STATEMENT OF MANAGER’S RESPONSIBILITIES* STATEMENT OF DEPOSITARY’S

RESPONSIBILITIES * STATEMENT OF TRUSTEE’S RESPONSIBILITIES * DEPOSITARY’S REPORT * TRUSTEE’S REPORT * CERTIFICATION OF ACCOUNTS BY

DIRECTORS*

CERTIFICATION OF ACCOUNTS BY DIRECTORS OF MANAGER* AUDITOR’S REPORT * AUDITOR’S REPORT *

FINANCIAL STATEMENTS FINANCIAL STATEMENTS

Statement of total return Statement of total return Statement of change in

shareholders’ net assets Statement of change in shareholders’ net assets Portfolio statement Portfolio statement

Balance sheet Balance sheet

Summary of material portfolio

changes Summary of material portfolio changes Notes to the financial statements Notes to the financial

statements Distribution table Distribution table

*Specimen wording not provided, as either this is dealt with by the Regulations or each

reporting entity will have its own specific standard wording.

** For all funds sold to retail investors, TER calculation as described in COB 6 Annex 2 should

be shown with comparatives in annual and interim reports for each unit/share class as part of the performance information. TERs shown in interim reports should relate to the relevant period on a consistent basis with short reports.

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Statement of total return

For the period (specify) ended 31 December 2005

2005 2004

Notes £000 £000 £000 £000

Net gains/(losses) on investments during the

period 2 8,525 (2,325)

Other gains/(losses) 3 200 (100)

Income 4 954 862

Expenses 5 (581) (555)

Finance costs: Interest 7 (7) 0

Net income/(expense) before taxation 366 307

Taxation 6 (78) (63)

Net income/(expense) after taxation ₂₈₈ ₂₄₄

Total return before distributions _9,013 _(2,181)

Finance costs: Distributions 7 (289) (261)

Change in net assets attributable to

shareholders 8,724 (2,442)

Statement of change in shareholders' net assets For the period (specify) ended 31 December 2005

2005 2004

Notes £000 £000 £000 £000

Net assets at the start of the period 43,106 44,366

Movement due to sales / repurchases of shares

Amounts receivable on issue of shares 3,703 2,718

Less: Amounts payable on cancellation of

shares (5,002) (1,638)

(1,299) 1,080

Dilution levy charged 25 17

Stamp duty reserve tax (3) 0

Change in net assets attributable to shareholders (see statement of total return above)

8,724 (2,442)

Retained distribution on accumulation shares 97 85

Unclaimed distributions 0 0

Other items (specify) 0 0

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Portfolio statement As at 31 December 2005 Holding or nominal Market Percentage value of positions value of total at 31 December £000 net assets % JAPAN (25.64%, 2004 - 26.89%) Japan A 17,000 371 0.73 Japan B* 25,000 102 0.20

[etc - list all securities] 12,514 24.71 Total Japan 12,987 25.64 UNITED KINGDOM (26.75%, 2004 - 27.14%) BP futures (10,000) (5) (0.01)

RBS March 2006 puts (purchased) 10,000 9 0.02 RBS March 2006 puts (written) (10,000) (5) (0.01)

FTSE 100 March futures 100 300 0.59

UK B 6,000 298 0.59

[etc - list all securities] 12,953 25.57

Total UK 13,550 26.75

UNITED STATES (40.94%, 2004

36.40%)

Microsoft Feb 2006 25 calls

(purchased) 100,000 50 0.10

Microsoft Feb 2006 calls (written) 100,000 0 -

USA B 60,000 583 1.15

Total USA 20,735 40.94

OTHER COUNTRIES (3.33%,

2004 – 3.51%)

Portfolio of investments ** 48,958 96.66

Net other assets 1,692 3.34

Net assets 50,650 100.00

* Not an approved security

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Balance sheet As at 31 December 2005 2005 2004 Notes £000 £000 £000 £000 ASSETS Portfolio of investments 48,968 40,495 Debtors 8 230 200

Deposits matching currency

loans 770 390

Cash and bank balances 9 2,518 3,726

Total other assets 3,518 4,316

Total assets 52,486 44,811 LIABILITIES Derivative liabilities (10) (0) Creditors 10 (906) (1,120) Bank overdrafts (50) (95)

Currency loans matched by

deposits (770) (390)

Distribution payable on

income shares (100) (100)

Total other liabilities (1,826) (1,705)

Total liabilities (1,836) (1,705)

Net assets attributable

to shareholders 50,650 43,106

Summary of material portfolio changes

For the period (specify) ended 31 December 2005

Purchases Cost Note Sales Proceeds

£000 £000

Total for the period 9,283 14 Total for the

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Notes to the financial statements as at 31 December 2005

1. ACCOUNTING POLICIES

(1) Basis of accounting

The financial statements have been prepared under the historical cost basis, as modified by the revaluation of investments, and in accordance with the Statement of Recommended Practice for Authorised Funds issued by the IMA [in month/year].

(2) Recognition of income (3) Treatment of stock dividends

(4) Treatment of expenses (including management expenses and performance fees)

(5) Allocation of income and expense to multiple share classes

(6) Taxation/deferred taxation (7) Distribution policy

(8) Basis of valuation of investments (9) Exchange rates

(10) Set up costs

2. NET GAINS / (LOSSES) ON INVESTMENTS

The net gains / (losses) on investments during the period comprise:

2005 2004

£000 £000

Non-derivative securities 8,604 (2,271)

Derivative contracts 0 0

Forward currency contracts (79) (54)

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3. OTHER GAINS/(LOSSES)

Other gains/(losses) comprise: 2005 2004

£000 £000

Net gains/(losses) on back-to-back loans 83 (67)

Other currency gains/(losses) 117 (33)

Other (specify) -

-Other gains/ (losses) 200 (100)

4. INCOME 2005 2004 £000 £000 UK dividends 276 274 Overseas dividends 500 450 Scrip dividends 11 17

Interest on debt securities 17 11

Bank interest 94 54 Underwriting commission 56 56 Other (specify) - -Total income 954 862 5. EXPENSES 2005 2004 £000 £000

Payable to the Authorised Corporate Director, associates of the Authorised Corporate Director and agents of either or them:

Authorised Corporate Director’s periodic charge 503 490

Registration fees 10

-Safe custody fees -

-Other (specify) -

-513 490

Payable to depositary, associates of the depositary, and agents of either of them:

Depositary’s fees 40 37

Handling charges -

-Registration fees - 7

Safe custody fees 13 12

Other (specify) 2 2 55 58 Other expenses FSA fee 1 1 Audit fee 6 5 Registration fees 0 0 Other (specify) 6 1 13 7 Total expenses 581 555

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6. TAXATION

a) Analysis of charge in year

2005 2004

£000 £000

Corporation tax 16 3

Double tax relief (16) (3)

Overseas tax 75 68

Adjustments in respect of prior periods 3 (3)

Total current tax (note 6b) 78 65

Deferred tax - origination and reversal of timing differences 0 (2)

Total taxation 78 63

Corporation tax has been provided at a rate of 20% (2004:20%)

b) Factors affecting current tax charge for year

The tax assessed for the period is higher than the standard rate of corporation tax in the UK for an open ended investment company (20%). The differences are explained below:

2005 2004

£000 £000

Net income before taxation 366 307

Corporation tax at 20% 73 61

Effects of:

Income not subject to taxation (57) (58)

Expenses not deductible for tax purposes Utilisation of excess management expenses Tax deductible interest distributions

Higher tax rates on overseas earnings 59 65

Adjustments in respect of previous periods 3 (3)

Current tax charge for year (note 6a) 78 65

c) Deferred tax

2005 2004

£000 £000

Provision at start of year 9 11

Deferred tax charge in the year 0 (2)