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[20489]
October 16, 2006
TO: ACCOUNTING/TREASURERS COMMITTEE No. 15-06
INTERNATIONAL COMMITTEE No. 28-06
RE: DRAFT INSTITUTE COMMENT LETTER ON IASB PROPOSAL TREATING FUND
SHARES AS EQUITY
As we previously advised you, the International Accounting Standards Board issued proposed
amendments to IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial
Statements.1 Currently, IAS 32 requires shares issued by open-end investment companies to be treated
as liabilities on the balance sheet. The proposed amendments to IAS 32 would permit these shares to
be treated as equity under certain circumstances. The attached draft comment letter strongly supports
the proposed amendments to IAS 32.
Comments on the proposal are due to the IASB by October 23rd. Please provide your comments
on the draft letter to the undersigned no later than Thursday, October 19th by phone (202/326-
5851) or e-mail (smith@ici.org).
The draft letter indicates that IAS 32’s current characterization of fund shares as liabilities
causes funds to report no equity or net assets in the Statement of Financial Position. Further, changes
in the fair value of the “liability” are recognized in profit or loss. Accordingly, when the value of the
fund’s securities increases, the value of the liability increases, requiring loss recognition in the Statement
of Operations. The draft letter indicates that such presentation is counter-intuitive and confusing to
shareholders, who understand their investment in fund shares to be an equity ownership interest in the
fund’s underlying securities.
The draft letter notes that fund shares entail many of the economic characteristics and legal
rights associated with equity ownership. For example, fund shares represent a residual interest in the
assets of the fund after deducting all of its liabilities. Fund shares entitle the holder to participate in the
fund’s profits and losses, to receive distributions of investment income and realized gains, and to receive
1 See Institute Memorandum to Accounting/Treasurers Committee No. 10-06, and International Committee No. 20-06 [No. 20244],
dated August 3, 2006.
2
their pro rata share of assets in liquidation. The letter argues that the proposed characterization of fund
shares as equity results in financial reporting that more accurately portrays the financial position and
results of operations of the fund.
Gregory M. Smith
Director – Operations/
Compliance & Fund Accounting
Attachment (in .pdf format)