3.1 Measurement convention

The financial statements are prepared on the historical cost basis except that the following assets and liabilities are stated at their fair value; financial assets and financial liabilities designated at fair value through profit or loss and derivative financial instruments.

The financial statements are presented in euro (EUR), which is also the Fund’s functional currency.

3.2 Going concern

The financial position of the Fund, its cash flows and liquidity position are detailed in the financial statements. In addition, the notes to the financial statements set out the Fund’s financial risk management objectives, details of its financial assets and financial liabilities and its exposures to market, credit and liquidity risk.

The Agency members have a reasonable expectation that the Fund has adequate resources to continue in operational existence for the foreseeable future. Therefore the Fund continues to adopt the going concern basis of accounting in preparing the financial statements.

3.3 Critical Accounting estimates and judgements

The preparation of financial statements in conformity with FRS 102 requires the use of certain accounting estimates and judgements that management have made in applying the Fund’s accounting policies and that have significant effect on the amounts recognised in the financial statements.

The estimates and associated judgements are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities predominantly relate to the fair value measurement of financial assets with significant unobservable inputs.

3.4 Foreign currency translation

(a) Functional and presentation currency

The Fund is owned by the Minister for Finance, and domiciled in Ireland. The Directed investments held are investments in Irish companies. The primary activity of the Discretionary portfolio is to invest on a commercial basis in a manner designed to support economic activity and employment in the State. The primary users of the financial statements are based in Ireland, and thus the performance of the Fund is measured in and reported in euro.

(b) Transactions and balances

Foreign currency transactions are translated into the functional currency using the spot exchange rates prevailing at the dates of the transactions. Foreign currency assets and liabilities are translated into the functional currency using the exchange rate prevailing at the reporting date.

Foreign exchange gains and losses arising from translation and / or relating to cash and cash equivalents are included in profit or loss in the statement of comprehensive income.

Foreign exchange gains and losses relating to the financial assets and liabilities carried at fair value through profit or loss are presented in the statement of comprehensive income within ‘net gains / (losses) in the statement of comprehensive income’.

3.5 Cash and cash equivalents

For the purposes of the Fund’s cash flow statement, cash and cash equivalents comprise short-term, highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value. Cash and cash equivalents are measured at cost while Treasury bills are measured at fair value.

Cash and cash equivalents also include collateral provided in respect of exchange traded derivatives.

3.6 Interest

Interest income and expense are recognised using the effective interest rate method. The effective interest rate is the rate that exactly discounts the estimated future cash payments or receipts, without consideration of future credit losses, over the expected life of the financial instrument or through to the next market based repricing date to the net carrying amount of the financial instrument on initial recognition.

3.7 Dividend income

Dividend income is recognised on the date on which the right to receive payment is established. For quoted equity securities, this is usually the ex-dividend date. For unquoted investments, income is recognised once confirmed.

3.8 Net gain / (losses) on financial assets and liabilities at fair value through profit or loss (FVTPL)

Net gain/(loss) from financial instruments at FVTPL includes realised and unrealised fair value changes and foreign exchange differences.

3.9 Fees and charges, and other expenses

Fees and charges and other expenses are generally recognised on an accruals basis.

3.10 Measurement of financial assets and liabilities

Fair value measurement

‘Fair value’ is the amount for which an asset could be exchanged, a liability settled or an equity instrument granted could be exchanged between knowledgeable willing parties in an arm’s length transaction.

Financial assets and financial liabilities are initially recognised when the Fund becomes a party to the contractual provisions of the instruments. Financial assets and financial liabilities upon initial recognition are measured at fair value, which is normally the transaction price, excluding transaction costs if measured subsequently at fair value through profit or loss.

Valuation techniques include net present value and discounted cash flow models, comparison with similar instruments for which observable market prices exist and valuation models. Assumptions and inputs used in valuation techniques include risk-free and benchmark interest rates, credit spreads, and other premia used in estimating discount rates, bond and equity prices, foreign currency exchange rates, equity indices, earnings before interest, taxes, depreciation and amortisation (“EBITDA”) multiples and revenue multiples and expected price volatilities and correlations.

Amortised cost measurement

The amortised cost of a financial asset is the amount at which the financial asset is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction in impairment or uncollectability.

Impairment

A financial asset not classified at FVTPL is assessed at each reporting date to determine whether there is objective evidence of impairment. A financial asset or a group of financial assets is ‘impaired’ if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset and that the loss event had an impact on the estimated future cash flows of the asset that can be estimated reliably.

Objective evidence that financial assets are impaired includes significant financial difficulty of the issuer or obligor, a breach of contract, default or delinquency in interest or principal payments, restructuring of the amount due on terms that the Fund would not otherwise consider, indications that a borrower will enter bankruptcy or other financial reorganisation, or adverse changes in the payment status of the borrowers due to adverse national or local economic conditions or adverse change in industry conditions.

An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount and the present value of the estimated cash flows discounted at the asset’s original effective interest rate. Losses are recognised in profit or loss and reflected in an allowance account against receivables. Interest on the impaired asset continues to be recognised. If an event occurring after the impairment was recognised causes the amount of impairment loss to decrease, then the decrease in impairment loss is reversed through profit or loss.

3.11 Financial assets and liabilities

The Fund holds two types of investments:

(a) Discretionary investments

Investments made in accordance with Section 39 of the NTMA Act 2014, whereby the Agency is required to hold or invest the assets of the Fund on a commercial basis in a manner designed to support economic activity and employment in the State.

(b) Directed investments

Agency holds the Directed Investments subject to directions given by the Minister for Finance pursuant to section 43 of the NTMA Act 2014. The holding and management of the Directed Investments, the exercise by the Agency of voting and other rights attaching to the Directed Investments and the disposal by the Agency of the Directed Investments must be conducted in accordance with directions given by the Minister for Finance.

Any interest or other income received in respect of deposits and / or securities held in the Directed portfolio are held or invested by the Agency in line with Ministerial Direction.

i) Valuation of discretionary investments

The Agency has established procedures to periodically review the valuation of investments. Based on its judgement, and relevant information available to it, the Agency may in certain circumstances determine that an adjustment to the external manager’s valuation is appropriate in recording an investment’s fair value.

A Valuation Committee has been set up (Note 15.7(ii)), comprising of the Chief Financial and Operating Officer, Chief Risk Officer, ISIF Director and other senior management personnel, to assist the Agency in the determination of the valuation of investments of the Fund by:

• reviewing the periodic investment valuations and valuation basis for the assets of the fund in accordance with the accounting framework as adopted by the Fund;
• approving the asset valuations for inclusion in the annual financial statements of the Fund;
• supporting the NTMA Audit Committee with their review and approval of the Fund financial statements and other activities that may arise.

Classification, recognition and measurement

Basic financial assets and liabilities

Quoted equities, debt instruments and investment funds

Fair value is the bid market value on the primary exchange or market where the investment is quoted.

Direct private equity and unquoted equities

Investments in preference and ordinary shares are measured initially at transaction price less attributable transaction costs. Subsequent to initial recognition, investments that can be measured reliably are measured at fair value with changes in their fair value recognised in profit or loss. Where it is deemed that fair value cannot be measured reliably, such investments shall be measured at cost less impairment.

Debt instruments

The Fund has designated debt instruments that meet the definition of basic financial instruments as financial assets at fair value through profit or loss at initial recognition as they form part of a group of financial assets that are managed with its performance evaluated on a fair value basis. Other debt instruments not managed or evaluated on a fair value basis are measured at amortised cost.

Unquoted debt instruments

Unquoted bonds are valued at their fair value as estimated by the Manager using bond valuation models based on observable market data.

Investments in property, private equity, forestry and infrastructure funds

The estimated fair value for unquoted investments in property, private equity, forestry and infrastructure funds for which there is not an active market is based on the latest valuation placed on the fund or partnership by the external manager of that fund or partnership in the audited financial statements. Where audited financial statements are not available e.g. in circumstances where the fund or partnership’s year end does not coincide with that of the Fund, the latest available valuation from unaudited financial statements are used.

The valuations of these investments are determined by external managers using accepted industry valuation methods and guidelines published by relevant industry bodies. Such valuation methodologies used by external managers may include considerations such as earnings multiples of comparable publicly traded companies, discounted cash flows, third party transactions, or events which suggest material impairment or improvement in the fair value of the investment. In the first year of ownership, cost is usually considered to be an appropriate estimate of the fair value for these investments unless there is an indication of a impairment in value.

A range of possible values can exist for these investments and estimated fair values may differ from the values that would have been used had there been an active market value for such investments.

The Agency uses external managers’ valuations to determine the fair value of an investment in line with its valuation process as overseen by the Management Valuation Committee.

Unquoted investment funds

Unquoted investment funds are valued at the most recent Net Asset Value as published by the funds’ administrators.

Financial instruments not considered to be basic financial instruments (other financial instruments)

Other financial instruments that do not meet the definition of Basic Financial Instruments are recognised initially at fair value. Subsequent to initial recognition other financial instruments are measured at fair value with changes recognised in profit or loss, except investments in equity instruments that are not publicly traded and where fair value cannot otherwise be measured reliably shall be measured at cost less impairment.

Derivative financial instruments

Derivative financial instruments are recognised at fair value. The gain or loss on remeasurement to fair value is recognised immediately in profit or loss.

Long-term receivables

Long-term receivables are shown at their fair value. The fair value of these receivables is estimated by discounting the contractual future cash flows at the market rate that is currently available to the Fund for similar financial instruments.

Loans and receivables

Loans and receivables subsequent to initial recognition are measured at amortised cost using the effective interest rate method. Basic debt instruments (that are non-interest bearing) that are payable or receivable within one year shall be measured at the undiscounted amount of the cash or other consideration expected to be paid or received (i.e. net of impairment) unless the arrangement constitutes, in effect, a financing transaction. If the arrangement constitutes a financing transaction, the Fund shall measure the debt instrument at the present value of the future payments discounted at a market rate of interest for a similar debt instrument.

Other receivables and payables, cash, amounts due to/(from) broker

Other receivables are recognised initially at transaction prices less attributable transaction costs. Other payables are recognised initially at transaction price plus attributable transaction costs. Subsequent to initial recognition, they are measured at amortised cost using the effective interest rate method, less impairment in the case of trade receivables.

Receivables and payables under sale and repurchase agreements and securities borrowed

When the Fund purchases a financial asset and simultaneously enters into an agreement to resell the same or a substantially similar asset at a fixed price on a future date (reverse sale and repurchase agreement), the arrangement is accounted for as a basic debt instrument at amortised cost, if it qualifies as basic and recognised in the statement of financial position as a receivable from a reverse sale and repurchase agreement, and the underlying asset is not recognised in the Fund’s financial statements.

Receivables from reverse sale and repurchase agreements and payables under sale and repurchase agreements are subsequently measured at amortised cost.

ii) Valuation of directed investments

Ordinary shares

The ordinary shares held as part of the Directed portfolio are valued at fair value. Fair value is the closing market value on the primary exchange or market where the investment is quoted.

Where closing market prices are deemed not to be a reliable estimation of fair value, ordinary shares are valued using appropriate valuation methodologies. Valuation methodologies used include discounted cash flow analysis, total equity analysis, comparable company analysis or precedent transaction analysis.

3.12 Derecognition

The Fund derecognises a financial asset when:

• the contractual rights to the cash flows from the asset are settled or expired;
• it expires, or it transfers to another party substantially all of the risks and rewards of ownership of the financial asset; or
• the Fund has retained some significant risk and rewards of ownership, has transferred control of the asset to another party and the other party has the practical ability to sell the asset in its entirety to an unrelated third party and is able to exercise that ability unilaterally and without needing to impose additional restrictions on the transfer. In this case, the Fund derecognises the asset and recognises separately any rights and obligations retained or created in the transfer.

On derecognition of a financial asset, the carrying amount of the transferred asset shall be allocated between the rights or obligations retained and those transferred on the basis of their relative fair values at the transfer date. Newly created rights and obligations shall be measured at their fair values at that date. Any difference between the consideration received and the amounts recognised and derecognised shall be recognised in profit or loss in the year of the transfer.

If a transfer does not result in derecognition because the Fund has retained significant risks and rewards of ownership of the transferred asset, the Fund shall continue to recognise the transferred asset in its entirety and shall recognise a financial liability for the consideration received. The asset and liability shall not be offset. In subsequent periods, the Fund shall recognise any income on the transferred asset and any expense incurred on the financial liability.

The Fund derecognises a financial liability when its contractual obligations are discharged or cancelled, or expire.

The Fund shall recognise in profit or loss any difference between the carrying amount of the financial liability (or part of a financial liability) extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed.

3.13 Offsetting

Financial assets and financial liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Fund has a legally enforceable right to offset the recognised amounts and it intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.

Income and expenses are presented on a net basis for gains and losses from financial instruments at FVTPL and foreign exchange gains and losses.