The Ontario Securities Commission has published a staff notice setting out its stance on the implications of new accounting and disclosure rules for labour sponsored investment funds.

Historically, LSIFs have been permitted to pay sales commissions out of fund assets. “The practice of many LSIFs has been to record sales commissions paid out of fund assets as an asset (deferred charge) on a fund’s statement of net assets and to amortize this amount to retained earnings on a straight line basis over eight years,” it explains.

However, in July, the Accounting Standards Board of the Canadian Institute of Chartered Accountants changed the accounting rules, for financial years beginning after October 1.

The OSC notes that under the new rules the LSIF industry will no longer be able to treat the sales commissions paid by the fund as an asset on their statement of net assets.

The problem for the OSC is that, after this accounting change, a labour fund that calculates its pricing net asset value in accordance with its prospectus will have a pricing NAV that is different from the net asset value determined in its financial statements.

The OSC says that its new rule on fund disclosure will require the pricing NAV for all investment funds, including LSIFs, to be calculated in accordance with GAAP. It is intended that the proposed rule will be published for a second comment period later this year, and will take effect July 1, 2004.

For transitional purposes, this new rule will propose limited exemptive relief from the proposed requirement to calculate Pricing NAV in accordance with GAAP for LSIFs that cease adding new sales commissions to the existing deferred charge by December 31.

“Relief will be limited to allowing Pricing NAV to be determined on the basis that the deferred charge existing at Dec. 31, 2003 will continue to be amortized over its remaining amortization period,” the OSC explains. “It is expected that all other elements of the calculation of the Pricing NAV will be in accordance with GAAP.”

The OSC says that the implication of its position is that, for up to eight years, the Pricing NAV for those LSIFs that are granted exemptive relief will differ from the NAV in the financial statements prepared in accordance with GAAP.

“However, the relief proposed will limit the amount of that difference,” it says. “LSIFs that follow this transitional method will be required to provide in the notes to their financial statements a reconciliation between the NAV calculated for financial statement purposes and the Pricing NAV.”

It also notes that LSIFs will be expected to inform existing and new investors of the changes to the accounting for sales commissions paid out of fund assets and the impact of this change on the fund and investors.

http://www.osc.gov.on.ca/en/Regulation/Rulemaking/Notices/staffnotices/sn_20031003_81-706-treatment-sales.htm