The global body for professional accountants

Investments - Alternative accounting Options for Managing a substantial Balance Sheet Item

The global body for professional accountants Accounting for Investments A credit union may invest any of its funds: in securities in which trustees are authorised by law to invest shares deposits or loans to another credit union shares of Industrial and Provident Societies other investments as may be prescribed by the central Bank Other funds on current account with a credit institution Other non-permitted investments to be disposed of within 2 years

The global body for professional accountants Accounting for Investments Investment prescribed by Central Bank: Irish and EMU State Securities Accounts in Authorised Credit Institutions (Irish and Non-Irish based). Bank Bonds Investment in Equities Collective Investment Schemes

The global body for professional accountants Realised profits “…only surpluses realised at the balance sheet date shall be included in the income and expenditure account…” “all income and charges … shall be taken into account without regard to the date of receipt of payment..” The Credit Union Act

The global body for professional accountants Realised profits Realised means received in: 1.Cash 2.An asset that is readily convertible to cash (traded in an active market) 3.accrual of investment income in 2 The Guidance

The global body for professional accountants Realised profits – Practical examples Short term deposits – all realised Long term deposits – encashment value – realised Long term deposits – nominal value - unrealised Government bonds - realised (active market) Bank bonds - active market - realised Bank bonds – in-active market - not realised Bank bonds – encashment value – realised Equities – realised Collective Investment Schemes - encashment value – realised Collective Investment Schemes - nominal value – not realised

The global body for professional accountants Spanish Government Bonds – Extract from investor analysis “At a current price of c , the bond yields c. 2.95% and matures in January • As a comparison, three year Irish Government bonds yield c. 2.10% and a three year deposit with AIB will pay c. 2.05%. • This bond pays a coupon of 3.15% annually which can be distributed. This will diversify counterparty exposure to sovereign risk and reduce the pressure on domestic bank counterparty exposures Over the life of the investment investing in this Spanish Government bond will generate additional income versus a similar 3 year deposit with AIB yielding 2.05% of c. €13.6k”

The global body for professional accountants Accounting for Investments 1/5 Irish and EMU State Securities - criteria Maturity not more than 10 years 30% max in 7+ year bonds Not more than 70% of CU portfolio Fair value Yield = profit Capital gains and losses booked Held to maturity Yield = profit Capital gains and losses ignored Check for impairment Amortised Cost Yield = profit Capital gains and losses booked

The global body for professional accountants Accounting for Investments Irish and EMU State Securities - amortised accounting cost model Issued €0.95Redeemed €1 Yield = coupon + (1-0.95)/6 periods

The global body for professional accountants Accounting for Investments Irish and EMU State Securities - amortised accounting cost model Credit downgrade Redeemed €1 Held to maturity: ignore downgrade (but consider impairment) Cost and fair value: book downgrade – increased yield in future years Issued €0.95

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Accounting for Investments Irish and EMU State Securities - purchase at a premium Nominal value€1.0m Coupon 5.5% Yield 2.556% (monthly yield) Cost to purchase €1,111,600 Redeemed in 2017 for €1m

The global body for professional accountants Accounting for Investments Irish and EMU State Securities - purchase at a premium Nominal €1.0m, Coupon 5.5%, Yield 3.8% (simple) Cost €1,111,600 Redeemed in 2017 for €1m *2 month to coupon date OpeningYieldCouponClosingyear *

The global body for professional accountants Accounting for Investments Irish and EMU State Securities Credit downgrade Redeemed €1 Held to maturity: ignore downgrade (but consider impairment) Cost and fair value: book downgrade – increased yield in future years Issued €

The global body for professional accountants Accounting for Investments 2/5 Irish and EMU State Securities - purchase at a premium Lets be really clear Purchase a €1m bond for €1.1m Investment is €1.1m (not €1m) There is not an expenses of €100k Coupon is a cash flow number and irrelevant to the income statement Yield (to maturity) is the key number

The global body for professional accountants Spanish Government Bonds – Extract from investor analysis “At a current price of c , the bond yields c. 2.95% and matures in January • As a comparison, three year Irish Government bonds yield c. 2.10% and a three year deposit with AIB will pay c. 2.05%. • This bond pays a coupon of 3.15% annually which can be distributed. This will diversify counterparty exposure to sovereign risk and reduce the pressure on domestic bank counterparty exposures Over the life of the investment investing in this Spanish Government bond will generate additional income versus a similar 3 year deposit with AIB yielding 2.05% of c. €13.6k”

The global body for professional accountants Accounting for Investments 2/5 Accounts in Authorised Credit Institutions Maturity not more than 10 years 50% max in 5+ year deposits 20% max in 7+ year deposits Credit rating of A Not more than 25% of CU portfolio

The global body for professional accountants Accounting for Investments Accounts in Authorised Credit Institutions Cost and fair value - short term Interest is income Held to maturity Interest is income Early encashment penalty is non distributable Check for impairment Cost - long term deposits Interest less encashment penalty as income Fair value - long term deposits Interest = income + gains and losses due to credit risk changes

The global body for professional accountants Accounting for Investments 3/5 Bank Bonds Traded on a regulated market Maturity not more than 10 years 30% max in 7+ year deposits Credit rating of A (institute not bond) Not more than 70% of CU portfolio

The global body for professional accountants Accounting for Investments Bank bonds – active market Amortised Cost + Fair value Book yield as profit Capital gains and losses booked Held to maturity Book yield as profit Capital gains and losses ignored Check for impairment Must have an “active market” for gains to be realised

The global body for professional accountants Accounting for Investments Bank bonds – inactive market Amortised Cost Encashment value in excess of cost = income Held to maturity Book yield as profit Encashment value in excess of cost = realised income, balance = unrealised Check for impairment Fair value Yield + capital gains and losses = income Only encashment excess is distributable Possibly Illegal

The global body for professional accountants Accounting for Investments 4/5 Investment in equities Euro denominated, traded on regulated EU market Market capitalisation of €.5bln Not more than 5% of CU portfolio (total) Not more than 1% of CU portfolio (any one share)

The global body for professional accountants Accounting for Investments 4/5 Investment in equities Held to maturity n/a Cost and fair value Dividend and gains + losses as profit (gains not distributable)

The global body for professional accountants Accounting for Investments 5/5 Collective Investment Schemes No property schemes Financial Regulator Authorised schemes only Underlying investments meet requirements in 1-4

The global body for professional accountants Accounting for Investments 5/5 Collective Investment Schemes Amortised Cost Encashment value in excess of cost = income Held to maturity Book yield as profit Encashment value in excess of cost = realised income, balance = unrealised Check for impairment Fair value Yield + capital gains and losses = income Only encashment excess is distributable Possibly Illegal

The global body for professional accountants Investments - key questions Is it on the list of authorised investments for credit unions Is there a deep and liquid market for the product Credit rating of the issuer Credit rating of the bond Will this product be accounted for as a simple financial instrument under Chapter 11 of FRS 102 Or Will this product be accounted for as an other financial instrument under Chapter 12 of FRS 102

The global body for professional accountants Investments - myths debunked Spanish Government bonds are allowed (2.9% yield but be careful of volatility and default) Junk/subordinated bonds from an A credit rated bank are allowed (10% yield but good chance of default) When referring to investment products, the word “guaranteed” is an single word oxymoron

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