Financial Reporting Principles of Mutual Funds

December 2016 Selen Öztürk
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Introduction

The financial reporting principles of mutual funds are regulated under the Communique on the Financial Reporting Principles of Mutual Funds (II-14.2) (“Communique”)[1] . The Communique determines the principles, procedures and basis regarding the preparation of financial reports. While the Communique sets forth the requirements that mutual funds have to abide by, it does not cover foreign mutual funds and, thus, foreign mutual funds are not obliged to abide by any principle pursuant to the Communique. The financial reporting obligations of foreign mutual funds are limited to the country legislation under which the mutual funds are bound. This month’s newsletter article examines the financial reporting principles as specified under the Communique. This newsletter article will not examine the distinct principles regarding umbrella funds and real estate mutual funds.

Financial Reports

Mutual funds are obliged to prepare various reports and tables in order to fulfill their financial reporting obligations. Accordingly, mutual fund obligations also include the preparation of financial tables, value reports and asset allocation tables. Besides, venture capital mutual funds and real estate mutual funds are also obliged to have consolidated financial tables prepared. Such funds must also have unconsolidated, individual financial tables prepared, along with consolidated tables within such financial table preparation period.

Obligation to Prepare Financial Reports

Financial tables are prepared annually. However, real estate mutual funds and venture capital mutual funds that disclose participation shares more than once in an accounting year are also obliged to prepare semi-annual interim period financial tables. Financial tables are prepared in accordance with the Turkish Accounting Standards / Turkish Financial Reporting Standards brought into effect by the Public Oversight Accounting and Auditing Standards Authority. On the other hand, mutual funds are obliged to prepare asset allocation tables monthly, and value reports daily. The preparation principles of asset reports will be explained in detail, below.

Liability Arising from Financial Tables

Members of the board of directors must resolve to adopt financial reports prepared in accordance with the Communique. Moreover, pursuant to Article 7 of the Communique, financial tables and portfolio reports that will be disclosed to public, along with financial tables, should include a statement by the board member responsible for internal controls, and the fund manager that specifies i) financial tables and portfolio reports are examined by them, ii) with respect to the information known to them within their capacity, financial tables and portfolio reports do not include any false disclosures in significant matters, or as of the date of disclosure, do not include any deficiency that may lead to the disclosure being rendered misleading, iii) with respect to the information known to them within their capacity, the financial tables prepared in accordance with this Communique fairly reflect the actives and passives of the fund, along with its financial situation, and profit and loss and portfolio reports are prepared in compliance with the internal regulations and prospectus of the fund and the relevant legislation.

Pursuant to Article 7 of the Communique, the incorporator, and the board of directors of the incorporator, mutadis mutandis, are liable for the preparation and submission of financial tables and portfolio reports that will be disclosed to public with such, and the truth and authenticity thereof.

Value Reports to be prepared within the Context of Portfolio Reports

The value reports to be prepared pursuant to the Communique are in standard form and prepared in compliance with the format attached to the Communique. The value reports cover asset valuation tables and the total value/net asset value table, which forms a basis for the calculation of the share prices.

A portfolio valuation table is a table prepared for the calculation of the portfolio value. The principles regarding the calculation of the portfolio value are explained in detail under Article 9 of the Communique. Some of the significant principals taken into consideration while valuing the assets in the portfolio are as follows[2]: i) the assets taken to the portfolio are registered with the purchase price. If the assets are purchased with foreign currency, the purchase price shall be calculated by multiplying the value of the foreign currency on the purchase day with the selling rate of exchange of the Central Bank of the Republic of Turkey, ii) the assets in the portfolio that are traded at the exchange shall be valued according to the weighted average price and ratios formed at the valuation date starting from the purchase date. As to the shares that are traded at the exchange, but that are not subject to purchase or sale at the valuation date, they shall be valued at the stock exchange price on the final transaction date. Debt instruments, reverse repos and repos are valued at the internal rate of return on the last transaction day, iii) fund participation ratio shall be valued based on the last prices disclosed as of the valuation day.

Total value/net asset value tables are prepared in order to determine the total value/net asset value and the participation share. Pursuant to Article 8 of the Communique, total value/net asset values shall be calculated by the addition of other assets and receivables, if any, to the portfolio value and subtraction of the debts; and the participation ratio shall be calculated by dividing the total value/net asset value to the participation ratio. This table should be prepared in accordance with the principles determined by the Capital Markets Board (“CMB”).

Asset Allocation Reports prepared as part of Portfolio Reports

Asset allocation reports, which must be prepared in accordance with the format attached to the Communique, are prepared in standard form like the value reports. Funds that sell their shares only to qualified investors are exempt from preparing asset allocation reports. The Communique sets forth various issues that have to be included in the asset allocation reports. Article 10 of the Communique stipulates such requirements as providing information on i) securities lending and derivatives transactions, ii) for index funds, correlation coefficient calculated with respect to last monthly and quarterly periods, for trade exchange investment funds, tracking differences and tracking errors calculated for the last annual period, and where there is a material rise in tracking differences and tracking errors, the reasons of such.

Public Disclosure of Financial Reports

Article 11 of the Communique sets forth the public disclosure of financial reports. Accordingly, financial tables of investment funds are disclosed to the public within 60 days following the termination of the relevant accounting or investment period, and asset allocation tables are disclosed to the public within six business days following such month.

The Communique also requires the disclosure of such financial reports on the Public Disclosure Platform (“PDP”). In accordance with Article 12 of the Communique, financial reports, along with independent audit reports, shall be disclosed on the PDP within six business days following the date upon which the board of directors resolved for the public disclosure of financial reports by the incorporator, after such reports have reached the incorporator with the signature of the person authorized to represent and bind the independent auditing company. The asset allocation reports shall also be submitted to the PDP and disclosed to the public.

In addition to the obligation to submit financial reports to the PDP, the financial reports, other than the portfolio report, shall be published on the website of the incorporator, and be easily accessible to the investors, and shall be retained on the website at least for five years. Nonetheless, value report is not required to be disclosed to the public.

According to the Communique, financial reports and the portfolio reports to be prepared from such periods are subject to independent auditing. On the other hand, as explained above, semi-annual internal financial tables of venture capital mutual funds that disclose participation shares more than once in an accounting year, as well as real estate mutual funds, are subject to limited independent auditing[3].

Conclusion

The Communique determines the principles and procedures with respect to financial reports prepared by mutual funds. The Communique, along with comprising the principles of the financial reports, also comprises provisions regarding liability.

[1] Published in the Official Gazette dated 30 December 2013 and numbered 28867 (Reiterated).

[2] The newsletter article does not include all of the valuation principles, but only constitutes the main principles.

[3] The Communique also sets forth regulations on capital-guaranteed funds and hedge funds.

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