Summary of accounting policies
Basis of preparation
The annual accounts have been prepared in accordance with special purpose generally accepted accounting principles ("GAAP") and the remainder of this chapter describes the specific accounting policies applied. The accounts have been prepared under the historical cost convention.
Significant estimates and assumptions and judgements
In preparing the annual accounts management is required to make estimates and assumptions affecting reported income, expenses, assets, liabilities and disclosure of contingent assets and liabilities. Use of available information and application of judgment is inherent to the formation of estimates. Although these estimates are based on management’s best knowledge of current events and actions, actual results could differ from such estimates and the differences may be material to the annual accounts.
Foreign currency translation
The Fund uses the euro as the unit for presenting its annual accounts. All amounts are denominated in thousands of euros unless stated otherwise. Foreign currency transactions are translated to euro at the exchange rate prevailing on the date of the transaction. At the balance sheet date, monetary assets and liabilities are reported using the closing exchange rate. Non-monetary assets that are not measured at cost denominated in foreign currencies are reported using the exchange rate that existed when fair values were determined. Exchange differences arising on the settlement of transactions at rates different from those at the date of the transaction and unrealized foreign exchange differences on unsettled foreign currency monetary assets and liabilities, are recognized in the profit and loss account under ‘results from financial transactions’ when necessary.
Offsetting financial instruments
Financial assets and liabilities are offset and the net amount is reported in the balance sheet when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.
Fair value of financial instruments
Fair value is the price that would be received when selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When available, the fair value of an instrument is measured by using the quoted price in an active market for that instrument. If there is no quoted price in an active market, valuation techniques are used that maximize the use of relevant observable inputs and minimize the use of unobservable inputs.
Amortized cost and gross carrying amount
The amortized cost ("AC") of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured on initial recognition minus the principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between that initial amount and the maturity amount and, for financial assets, adjusted for any expected credit loss allowance. The gross carrying amount of a financial asset is the AC of a financial asset before adjusting for any expected credit loss allowance.
Development capital costs
Development capital contributions that do not contain performance obligations or stipulations are recognized as an expense in the period incurred.
Contributions under enforceable agreements with performance obligations and multi-year contracts with conditions attached are recognized on an accrual basis as the performance obligations are satisfied.
In certain instances, conditions are attached to these contributions whereby the amount distributed becomes repayable with a premium upon meeting the attached conditions. A contribution receivable meets the definition of an asset if the Fund has the ability to control the resource and future economic benefits are expected to arise from the resource. As a result, the accounting treatment of the financial asset with regards to recognition and measurement is based on accounting policies for financial assets set out below.
Classification of Financial Assets
On initial recognition, a financial asset is classified as measured at AC, FVOCI or FVPL.
A financial asset is measured at AC if it meets both of the following conditions and is not designated as at FVPL:
It is held within a business model whose objective is to hold assets to collect contractual cash flows; and
Its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding.
A debt instrument is measured at FVOCI only if it meets both of the following conditions and is not designated as at FVPL:
It is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and
Its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding.
For equity investments that are not held for trading an irrevocable election exists (on an instrument-by-instrument basis) to present subsequent changes in fair value in OCI.
All financial assets not classified as measured at AC or FVOCI as described above are measured at FVPL. In addition, on initial recognition The Fund may irrevocably designate a financial asset that otherwise meets the requirements to be measured at AC or at FVOCI as at FVPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise.
A financial asset is initially measured at fair value plus, for an item not at FVPL, transaction costs that are directly attributable to its acquisition.
Business model assessment
The Fund has made an assessment of the objective of the business model in which a financial asset is held at a portfolio level because this best reflects the way the business is managed and information is provided to management. The information that is considered includes:
How the performance of the portfolio is evaluated and reported to management of the Fund;
The risks that affect the performance of the business model (and the financial assets held within that business model) and how those risks are managed;
The frequency, volume and timing of sales in prior periods, the reasons for such sales and expectations about future sales activity. However, information about sales activity is not considered in isolation, but as part of an overall assessment of how the Fund stated objective for managing the financial assets is achieved and how cash flows are realized.
Financial assets whose performance is based on a fair value basis are measured at FVPL because they are neither held to collect contractual cash flows nor held both to collect contractual cash flows and to sell financial assets.
Financial assets can be only reclassified after initial recognition in very infrequent instances. This happens if the business model for managing financial assets has changed and this change is significant to the Funds operations.
Cash and cash equivalents
Cash and cash equivalents consist of bank balances and the current account maintained with FMO. There is no restriction on these financial instruments and the Fund has on demand full access to the carrying amounts.
Fund Capital
This special purpose reserve contains the capital provided by the State to finance the investments and contributions.
Undistributed results previous years
The undistributed results consist of the part of the annual results that the Fund is accumulating to maintain the revolvability of the Fund.
Interest income and expense
Interest income and expense are recognized in the profit and loss account for all interest-bearing instruments on an accrual basis using the ‘effective interest’ method based on the fair value at inception. Interest income and expense also include amortized discounts and premiums.
Statement of cash flows
The statement of cash flows from operations are presented using the direct method.
Taxation
The DA programme contributes to the overall income of the Ministry of Foreign Affairs and this income is considered business income subject to corporate income tax. No separate tax calculation is performed for DA in the preparation of the annual financial statements. The results of the Fund are included in the Ministry's overall calculation of tax payable. The Ministry’s overall calculation of tax payable is not allocated back to the Fund as an expense.