US GAAP Illustrative Financial Statements 2015
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Transcript of US GAAP Illustrative Financial Statements 2015
Investment fundsIllustrative US GAAP fi nancial statements
December 31, 2015
www.moorestephens.com PREC ISE . PROVEN . PERFORMANCE .
Illustrative financial statements – Investment funds
i
Introduction
We present the first annual update to our well-received illustrative US GAAP financial
statements for investment funds, and we hope that they will continue to assist when
tackling the disclosure, regulatory and presentational issues which arise each year.
These US GAAP financial statements follow on from our well-received illustrative accounts
prepared under International Financial Reporting Standards. Having advised international
investment funds for many years, our professional teams at Moore Stephens understand
not only the content required by the differing accounting frameworks, but also best
practice presentation.
Regardless of where you are based globally, we would be delighted to assist with any
queries or equally delighted to hear any feedback you have to offer.
US GAAPFinancial statements for the year ended December 31, 2015
ii
Our team
Americas
Grand Cayman
Karl Jordan – [email protected]
New York
Barry Goodman – [email protected]
San Francisco
Matt Armanino – [email protected]
Chicago
Timothy J. Quinn – [email protected]
Europe
London
Geoff Woodhouse – [email protected]
Lorraine Bay – [email protected]
Tim West – [email protected]
Monaco
Andrew Gallagher – [email protected]
Patricia Osborne – [email protected]
Geneva
Jacques Grossen – [email protected]
Dublin
Andy Quinn – [email protected]
Cormac Reilly – [email protected]
Jersey
Phillip Callow – Partner [email protected]
Nicholas Solt – [email protected]
Luxembourg
Anna Skornik – [email protected]
Holger Stölben – [email protected]
Far East
China
Liang Chun – [email protected]
Zhou Long – [email protected]
Singapore
Mei Leng Lao – [email protected]
Mick Aw – [email protected]
Middle East
Dubai
John Adcock – [email protected]
Kuwait
Idris Atcha – [email protected]
Muscat
Prasad Inna – [email protected]
Illustrative financial statements – Investment funds
iii
Contents
US GAAP ................................................................................................................................1Statement of assets and liabilities ........................................................................................................................................................2
Statement of operations .....................................................................................................................................................................3
Statement of changes in partners’ capital1 ..........................................................................................................................................4
Statement of cash flows2 ....................................................................................................................................................................5
Condensed schedule of investments3 ..................................................................................................................................................6
Notes to the financial statements ......................................................................................................................................................11
1. Nature of organization ..................................................................................................................................................................11
2. Summary of significant accounting policies ..................................................................................................................................11
2.1 Basis of presentation .............................................................................................................................................................11
2.2 Use of estimates ...................................................................................................................................................................11
2.3 Cash and cash equivalents ....................................................................................................................................................11
2.4 Investment valuation ............................................................................................................................................................11
2.5 Foreign securities .................................................................................................................................................................11
2.6 Capital withdrawals payable .................................................................................................................................................12
2.7 Investment transactions and related income ..........................................................................................................................12
2.8 Income taxes .........................................................................................................................................................................12
3. Investment valuation and fair value measurements ........................................................................................................................13
3.1 Investments in securities and securities sold short, but not yet purchased (common,
preferred stock and exchange traded funds) .........................................................................................................................14
3.2 Corporate bonds ..................................................................................................................................................................14
3.3 Government bonds ...............................................................................................................................................................14
3.4 Derivative instruments ...........................................................................................................................................................14
3.4.1 Option contracts ..........................................................................................................................................................14
3.4.2 Futures contracts .........................................................................................................................................................14
3.4.3 Warrants ......................................................................................................................................................................15
3.4.4 Interest rate swaps .......................................................................................................................................................15
3.5 Investments in private operating companies ..........................................................................................................................15
3.6 Fair value – valuation processes .............................................................................................................................................17
4. Due from broker and custody concentrations ................................................................................................................................17
5. Securities sold, but not yet purchased ...........................................................................................................................................18
1 Supplementary information on partners’ capital account balances is not required.2 Statement of cash flows may not be required if the fund qualifies under FASB ASC 230 – Statement of Cash Flows.3 The schedule of investments can be either prepared as “condensed” or all investments may be disclosed.
US GAAPFinancial statements for the year ended December 31, 2015
iv
Illustrative financial statements – Investment funds
v
6. Derivative contracts .......................................................................................................................................................................18
6.1 Option contracts ...................................................................................................................................................................18
6.2 Warrants ...............................................................................................................................................................................19
6.3 Interest rate swaps ................................................................................................................................................................19
6.4 Futures contracts ..................................................................................................................................................................19
6.5 Volume of derivative activities: .............................................................................................................................................20
7. Partners’ capital ............................................................................................................................................................................20
7.1 Contributions .......................................................................................................................................................................20
7.2 Withdrawals .........................................................................................................................................................................20
8. Related party transactions ............................................................................................................................................................21
9. Administration .............................................................................................................................................................................21
10. New issues ..................................................................................................................................................................................21
11. Indemnification and concentration of risks ..................................................................................................................................21
12. Financial highlights .....................................................................................................................................................................22
13. Subsequent events ......................................................................................................................................................................23
About Moore Stephens .........................................................................................................24
Contents (continued)
US GAAPFinancial statements for the year ended December 31, 2015
vi
Illustrative financial statements – Investment funds
1
US GAAP
Investment funds Illustrative US GAAP financial statementsDecember 31, 2015
2
US GAAPFinancial statements for the year ended December 31, 2015
Statement of assets and liabilities
Reference:ASC 2104
ASC 9465
ASC 8506
Statement of assets and liabilities(Stated in US Dollars, unless otherwise indicated)
2015
Assets
Assets
946-210-45-15 Investments in securities, at fair value (cost $99,062,000) 104,875,000
Investments in private operating companies, at fair value (cost $15,000,000) 18,000,000
Due from broker 3,775,000
946-305-45-1 Cash and cash equivalents 300,000
Dividends and interest receivable 50,000
946-210-45-16 Total assets 127,000,000
Liabilities and partners’ capital
Liabilities
Securities sold, but not yet purchased, at fair value (proceeds $800,000) 1,090,000
Dividends and interest payable 35,000
Capital contributions received in advance 3,020,000
Management fee payable 50,000
850-10-50-2 Capital withdrawals payable 100,000
Accrued expenses 30,000
946-210-45-16 Total liabilities 4,325,000
946-210-45-5 Partners’ capital 122,675,000
946-210-45-16 Total liabilities and partners’ capital 127,000,000
See accompanying notes to financial statements.
4 FASB ASC 210 – Balance Sheet.5 FASB ASC 946 – Financial Services: Investment Companies.6 FASB ASC 850 – Related policy disclosures.
Illustrative financial statements – Investment funds
3Statement of operations
Reference:ASC 2257
ASC 9468
ASC 8159
Statement of operations(Stated in US Dollars, unless otherwise indicated)
2015
Investment income
Interest 100,000
Dividends (net of withholding taxes of $6,500) 1,200,000
Total investment income 1,300,000
Expenses
Interest 35,000
Dividends on securities sold, but not yet purchased 70,000
Management fee 1,040,000
Administrative fee 50,000
Professional fees and other 75,000
Total expenses 1,270,000
946-225-45-5 Net investment income 30,000
946-225-45-6 Realized and unrealized gain on investments
815-10-45-9 Net realized gain on securities 3,295,000
Net realized gain from derivative contracts 45,000
Net change in unrealized gain on securities 142,000
Net change in unrealized gain from derivative contracts 13,000
Net change in unrealized gain on investments in private operating companies 150,000
Total realized and unrealized gain on investments 3,645,000
946-225-45-9 Net income 3,675,000
See accompanying notes to financial statements.
7 FASB ASC 225 – Income Statement.8 FASB ASC 946 – Financial Services: Investment Companies.9 FASB ASC 815 – Derivatives and hedging.
4
US GAAPFinancial statements for the year ended December 31, 2015
Statement of changes in partners’ capital
Reference:ASC 94610
Statement of changes in partners’ capital(Stated in US Dollars, unless otherwise indicated)
General partner
Limited partners
Total
Balance at January 1, 2015 10,000,000 90,000,000 100,000,000
946-505-50-3 – Capital contributions – 20,000,000 20,000,000
– Capital withdrawals – (1,000,000) (1,000,000)
Transfers of capital (1,000,000) 1,000,000 –
Allocation of net income
– Pro rata allocation 350,000 3,325,000 3,675,000
– Incentive reallocation 665,000 (665,000) –
Balance at December 31, 2015 10,015,000 112,660,000 122,675,000
See accompanying notes to financial statements.
10 FASB ASC 946 – Financial Services: Investment Companies.
Illustrative financial statements – Investment funds
5Statement of cash flows
Reference:ASC 23011
Statement of cash flows(Stated in US Dollars, unless otherwise indicated)
2015
Cash flows from operating activities
Net income 3,675,000
Adjustments to reconcile net income to net cash used in operating activities:
– Purchases of investments in securities (13,500,000)
– Proceeds from sale of investments in securities 15,755,000
– Purchases of investments in private operating companies (5,000,000)
– Proceeds from sale of investments in private operating companies 2,625,000
– Net realized gain on securities (3,295,000)
– Net realized gain from derivative contracts (45,000)
– Net change in unrealized gain on securities (142,000)
– Net change in unrealized gain from derivative contracts (13,000)
– Net change in unrealized gain on investments in private operating companies (150,000)
Changes in assets and liabilities:
– Due from broker (525,000)
– Dividends and interest receivable 10,000
– Dividends and interest payable 300,000
– Capital contributions received in advance (25,000)
– Management fee payable (120,000)
– Accrued expenses (125,000)
Net cash used in operating activities (575,000)
Cash flows from financing activities
Capital contributions 20,000,000
Capital withdrawals (19,200,000)
Net cash provided by financing activities 800,000
Net changes in cash and cash equivalents 225,000
Cash and cash equivalents at January 1, 2015 75,000
Cash and cash equivalents at December 31, 2015 300,000
230-10-50-2 Supplemental disclosure of cash flow information
230-10-50-3 Cash paid during the year for interest 35,000
Supplemental disclosures of noncash financing activities
Capital withdrawals payable 100,000
See accompanying notes to financial statements.
11 FASB 230 – Statement of Cash Flows Statement of cash flows is required for hedge funds given liquidity constraints of certain types of investments.
6
US GAAPFinancial statements for the year ended December 31, 2015
Condensed schedule of investments
Reference:ASC 94612
Condensed schedule of investments(Stated in US Dollars, unless otherwise indicated)
Number of shares
% of partners’ capital
Fair value
946-210-45-18 Investments in securities
946-210-50-6 Common stock
• United States
– Consumer goods 8.27 10,150,000
– Defense 5.16 6,325,000
– Distribution 4.08 5,000,000
– Energy 6.11 7,500,000
– Financial services
- ABC Financial13 1,200 12.23 15,000,000
- Other 0.08 100,000
– Health care 1.63 2,000,000
– Manufacturing 2.45 3,000,000
– Media and entertainment 2.85 3,500,000
– Miscellaneous financial 2.04 2,500,000
– Real estate 2.04 2,500,000
– Service 8.52 10,450,000
– Technology 7.77 9,529,000
Total United States (cost $77,000,000) 63.23 77,554,000
• Korea
– Consumer products 1.63 2,000,000
– Industrials 0.82 1,000,000
Total Korea (cost $2,500,000) 2.45 3,000,000
• Japan
– Consumer products 2.04 2,500,000
Total Japan (cost $1,500,000) 2.04 2,500,000
Total common stocks (cost $81,000,000) 67.72 83,054,000
See accompanying notes to financial statements.
12 FASB ASC 946-210-50 for specific disclosure requirements.13 Individual investment accounts for greater than 5% of partners’ capital should be disclosed separately.
Illustrative financial statements – Investment funds
7Condensed schedule of investments
Reference:ASC 94612
Condensed schedule of investments(Stated in US Dollars, unless otherwise indicated)
Principal amount/shares
% of partners’ capital
Fair value
Investments in securities
Corporate bonds
• United States
– Banking
- Banking Company 10.25%, 7/15/203112 12,000,000 11.41 14,000,000
- Other 0.16 200,000
– Manufacturing 0.49 600,000
Total United States (cost $12,000,000) 12.06 14,800,000
• United Kingdom
– Consumer products 4.08 5,000,000
– Industrials 1.35 1,650,000
Total United Kingdom (cost $5,715,000) 5.43 6,650,000
Total corporate bonds (cost $17,715,000) 17.49 21,450,000
Government bonds
• United States
– US Treasury Bills, 4.75%, 4/1/2015 (cost $40,000) 0.04 50,000
Total government bonds (cost $40,000) 0.04 50,000
Preferred stocks
• United States
– Banking (cost $10,000) 0.01 13,000
Total preferred stocks (cost $10,000) 0.01 13,000
Exchange traded funds
• United States
– Real estate (cost $12,000) 0.01 8,000
Total exchange traded funds (cost $12,000) 0.01 8,000
See accompanying notes to financial statements.
8
US GAAPFinancial statements for the year ended December 31, 2015
Condensed schedule of investments
Reference: Condensed schedule of investments(Stated in US Dollars, unless otherwise indicated)
Expiration dates
Number of contracts
% of partners’ capital
Fair value
Investments in securities
Derivative contracts – assets
• Interest rate swaps
– United States
- Floating/fixed 0.02 25,000
- Fixed/floating 0.06 75,000
Total interest rate swaps (cost $95,000) 0.08 100,000
• Warrants purchased
– United States
- Financial 0.01 15,000
- Telecommunications 0.03 35,000
Total warrants purchased (cost $48,000) 0.04 50,000
• Futures contracts
– United States
- Indices
- S&P 500 Mar-May 2018 2,000 0.01 15,000
- Telecommunications 0.03 35,000
Total futures contracts (cost $48,000) 0.04 50,000
Option contracts purchased
• Call options purchased
– United States
- Healthcare 0.01 15,000
- Financial 0.03 35,000
Total call options purchased (cost $47,000) 0.04 50,000
• Put options purchased
– United States
- Healthcare 0.01 15,000
- Financial 0.03 35,000
Total put options purchased (cost $47,000) 0.04 50,000
Total option contracts purchased (cost $94,000) 1.00 100,000
Total derivative contracts – assets (cost $285,000) 3.00 300,000
Total investments in securities (cost $99,062,000) 85.51 104,875,000
See accompanying notes to financial statements.
Illustrative financial statements – Investment funds
9Condensed schedule of investments
Reference: Condensed schedule of investments(Stated in US Dollars, unless otherwise indicated)
Number of shares
% of partners’ capital
Fair value
Investments in private operating companies
United States
• Financial
– ABC Company – Series A Preferred Stock 3,000,000 8.15 10,000,000
– Other 0.16 200,000
Total financial (cost $10,000,000) 8.31 10,200,000
• Technology
– DEF Company – Common Stock 500,000 5.95 7,300,000
– Other 0.41 500,000
Total technology (cost $5,000,000) 6.36 7,800,000
Total investments in private operating companies (cost $15,000,000)
14.67 18,000,000
See accompanying notes to financial statements.
US GAAPFinancial statements for the year ended December 31, 2015
10 Condensed schedule of investments
Reference: Condensed schedule of investments(Stated in US Dollars, unless otherwise indicated)
Number of shares
% of partners’ capital
Fair value
Securities sold, but not yet purchased
Common stocks
• United States
– Consumer goods 0.07 80,000
– Defense 0.08 100,000
– Distribution 0.05 60,000
– Energy 0.03 40,000
– Health care 0.02 23,000
– Manufacturing 0.05 66,000
– Media and entertainment 0.07 84,000
– Miscellaneous financial 0.05 57,000
– Real estate 0.10 121,000
– Service 0.11 132,000
– Technology 0.03 33,000
Total United States (proceeds $600,000) 0.66 796,000
• Korea
– Consumer products 0.05 65,000
– Industrials 0.07 88,000
Total Korea (proceeds $100,000) 0.12 153,000
• Japan
– Consumer products 0.06 75,000
Total Japan (proceeds $50,000) 0.06 75,000
Total common stocks (proceeds $750,000) 0.84 1,024,000
Preferred stock
• United Kingdom
– Consumer goods 0.02 26,000
– Defense 0.03 40,000
Total preferred stocks (proceeds $50,000) 0.05 66,000
Total securities sold, not yet purchased, (proceeds $800,000) 0.89 1,090,000
See accompanying notes to financial statements.
Illustrative financial statements – Investment funds
11Notes to the financial statements
Reference: Notes to the financial statements(Stated in US Dollars, unless otherwise indicated)
ASC 27214
1. Nature of organizationFund L.P. (the “Partnership”), was organized in the State of Delaware as a limited partnership for the purpose of
trading and investing in securities. The Partnership shall continue until December 31, 2018 unless sooner
terminated or extended as provided for in the Partnership Agreement (the “Agreement”).
The investment objective of the Partnership is to seek appreciation over the long term, principally through long
or short positions in equity and equity-related securities and other financial instruments. Management L.P. (the
“General Partner”), a Delaware limited liability partnership, serves as the general partner of the Partnership and
has overall responsibility for the affairs of the Partnership. The Partnership’s investing activity is the responsibility
of Advisers LLC (the “Investment Manager”), a Delaware limited liability company, which is a registered
investment adviser. The General Partner and the Investment Manager are controlled by the same principals.
Custodial Brokers LLC (the “Prime Broker”) is the prime broker and custodian. The administration of the
Partnership is delegated to Fund Admin Limited (the “Administrator”).
ASC 23515
ASC 275
946-305-45-1
2. Summary of significant accounting policies 2.1 Basis of presentationThe financial statements have been prepared in conformity with accounting principles generally accepted in the
United States of America (“US GAAP”).
2.2 Use of estimatesThe preparation of financial statements in conformity with US GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates and these differences could be material.
2.3 Cash and cash equivalentsCash and cash equivalents include short-term, highly liquid investments, such as certificates of deposit or money
market funds that are readily convertible to known amounts of cash and have original maturities of three
months or less. All cash balances are held by major banking and broker institutions.
2.4 Investment valuation As more fully described elsewhere in the notes to the financial statements, all investments are recorded at their
estimated fair value.
2.5 Foreign securities The values of securities and cash and cash equivalents which are denominated in currencies other than the U.S.
Dollar are stated using the exchange rate in effect as of the reporting date.
14 FASB ASC 272-10-50-3 requires limited liability companies to disclose the following:
– a description of any limitation of its members’ liability;
– difference classes of members’ interest and respective rights; and
– if the limited liability company has a finite life/date cease to exist.15 FASB ASC 235 – Notes to Financial Statements.
US GAAPFinancial statements for the year ended December 31, 2015
12 Notes to the financial statements
ASC 48016
The Partnership does not isolate that portion of the results of operations resulting from foreign exchange gains
or losses arising from holding or selling foreign currencies, currency gains or losses realized between the trade
and settlement dates on securities transactions, and the difference between the amount of foreign dividends,
interest, and withholding taxes recorded on the Partnership’s books and the U.S. Dollar equivalent of the
amount actually received or paid. Nor does the Partnership isolate unrealized or realized foreign exchange gains
or losses arising from change in the fair values of assets and liabilities including investments. All such foreign
exchange gains and losses are included in the net realized and net change in unrealized gains and losses on
securities and derivative contracts in the statement of operations.
2.6 Capital withdrawals payableWithdrawals are recognized as liabilities, net of expenses and performance allocation, if applicable, when the
amount requested in the withdrawal notice becomes fixed or determinable. This generally may occur either at
the time of the receipt of the notice, or on the last day of a fiscal period, depending on the nature of the
request. As a result, withdrawals paid after the end of the year, but based upon year-end capital balances, are
reflected as capital withdrawals payable as of December 31, 2015. Capital withdrawals payable may be treated
as capital for purposes of allocations of gains and losses until the close of business on the effective withdrawal
date, pursuant to the Agreement.
ASC 60517 2.7 Investment transactions and related incomeInvestment transactions are accounted for on a trade date basis. Realized gains and losses and movements in
unrealized gains and losses are recognized in the statement of operations and determined on a first-in, first-out
basis. Movements in fair values are recorded in the statement of operations at each valuation date. Dividend
income is recognized on the ex-dividend date and is presented net of withholding taxes. Dividends declared on
short positions held on the ex-dividend date are recorded as dividend expense. Interest income and expense are
recognized on an accrual basis except for securities in default for which interest is recognized on a cash basis.
Premiums and discounts on debt securities are amortized using the effective interest method. Withholding taxes
on foreign dividends have been provided for in accordance with the Partnership’s understanding of the
applicable country’s tax rules and rates.
ASC 74018
2.8 Income taxesNo provision for federal, state and local income taxes has been made in the accompanying financial statements,
as individual partners are responsible for their proportionate share of the Partnership’s taxable income. Interest,
dividends and other income realized by the Partnership from non-US sources and capital gains realized on the
sale of securities of non-US issuers may be subject to withholding and other taxes levied by the jurisdiction in
which the income is sourced.
16 FASB ASC 480-10-25 – liabilities should be recognized when withdrawal requests have been approved by the General Partner.17 FASB ASC 605 – Revenue Recognition.18 FASB ASC 740 – Income Taxes.
Illustrative financial statements – Investment funds
13Notes to the financial statements
The Partnership recognizes a tax benefit from an uncertain position only if it is more likely than not the position
is sustainable, based solely on its technical merits and consideration of the relevant taxing authority’s widely
understood administrative practices and precedents. If this threshold is met, the Partnership measures the tax
benefit as the largest amount of benefit that is greater than fifty percent likely being realized upon ultimate
settlement. The Partnership is subject to potential examination by taxing authorities in various jurisdictions. The
tax years that remain subject to examination by taxing authorities are 2010, 2011 and 2012. The Partnership
recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the
statement of operations. The Partnership determined that there are no uncertain tax positions which would
require adjustments or disclosures in the financial statements.
ASC 82019
3. Investment valuation and fair value measurementsThe Partnership utilizes various methods to measure the fair value of its investments on a recurring basis. US
GAAP establishes a hierarchy that prioritizes the inputs to valuation methods. The three levels of input are:
Level 1
Inputs are based on unadjusted quoted prices in active markets that the Partnership has the ability to access for
identical assets or liabilities.
Level 2
Observable inputs other than quoted prices in active markets included in Level 1 that are observable for the
similar asset or liability, either directly or indirectly. These inputs may include quoted prices for the identical
instrument in an inactive market, prices for similar instruments, interest rates, prepayment speeds, credit risk,
yield curves, default rates and similar data.
Level 3
Unobservable inputs for the asset or liability, to the extent relevant observable inputs are not available
representing the Partnership’s own assumptions about the assumptions a market participant would use in
valuing the asset or liability, based on the best information available.
In determining fair value, the Partnership uses various valuation approaches. Inputs that are used in determining
fair value of an instrument may include price information; quotations received from market makers, brokers,
dealers and/or counterparties (when available and considered reliable); credit data; volatility statistics and other
factors. Inputs, including price information, may be provided by independent pricing services or derived from
market data. Inputs can either be observable or unobservable.
The availability of observable inputs can vary from security to security and is affected by a wide variety of factors,
including, for example, the type of investment, whether the investment is new and not yet established in the
marketplace, the liquidity of markets, and other characteristics particular to the transaction. To the extent the
valuation is based on models or inputs that are less observable or unobservable in the market, the determination
of fair value requires more judgment. Because of the inherent uncertainty of valuation, those estimated values
may be materially higher or lower than the values that would have been used had a ready market for the
investments existed. Accordingly, the degree of judgment exercised by the Partnership in determining fair value
is greatest for instruments categorized in Level 3 of the fair value hierarchy.
19 FASB ASC 820 – Fair Value Measurements and Disclosures.
US GAAPFinancial statements for the year ended December 31, 2015
14 Notes to the financial statements
The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for
disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls in its
entirety, is determined based on the lowest level input that is significant to the fair value measurement.
Transfers between levels are recognized at the end of the reporting period.
A description of the valuation techniques applied to the Partnership’s major categories of assets and liabilities
measured at fair value on a recurring basis are as follows:
3.1 Investments in securities and securities sold short, but not yet purchased (common, preferred stock and exchange traded funds) Investments in securities and securities sold, but not yet purchased which are traded on national securities
exchanges are valued at the last reported sales price as of the valuation date. Investments in securities and
securities sold, but not yet purchased which are traded in the over-the-counter (“OTC”) market are valued at the
last reported bid and asked prices, respectively. To the extent these securities are actively traded and valuation
adjustments are not applied, they are categorized in Level 1 of the fair value hierarchy. Securities traded in
inactive markets or valued by reference to similar instruments are generally categorized in Level 2 of the fair
value hierarchy.
3.2 Corporate bonds The fair value of corporate bonds is estimated using recently executed transactions, market price quotations
(where observable), bond spreads, or credit default swap spreads. The spread data used is for the same maturity
as the bond. If the spread data does not reference the issuer, then data that references a comparable issuer is
used. When observable price quotations are not available, fair value is determined based on cash flow models
using yield curves, bond or single name credit default swap spreads, and recovery rates based on collateral
values as key inputs. Corporate bonds are generally categorized in Level 2 of the fair value hierarchy. In instances
where significant inputs are unobservable, they are categorized in Level 3 of the fair value hierarchy.
3.3 Government bondsThe fair value of sovereign government bonds is generally based on quoted prices in active markets. When
quoted prices are not available, fair value is determined based on a valuation model that uses inputs that include
interest rate yield curves, cross-currency basis index spreads, and sovereign credit spreads similar to the bond in
terms of issuer, maturity and seniority. Sovereign government bonds are generally categorized in Level 1 or Level
2 of the fair value hierarchy.
3.4 Derivative instruments3.4.1 Option contracts
The fair value of options which are listed on major securities exchanges are valued at their last reported sales
price as of the valuation date or based on the midpoint of the bid/asked spread at the close of business.
Depending on the frequency of trading, options are generally categorized in Level 1 or Level 2 of the fair value
hierarchy.
3.4.2 Futures contracts
Futures contracts which are listed on major securities exchanges are valued at their last reported sales price as of
the valuation date. Listed futures contracts are generally categorized in Level 1 of the fair value hierarchy.
Illustrative financial statements – Investment funds
15Notes to the financial statements
3.4.3 Warrants
Warrants which are listed on major securities exchanges are valued at their last reported sales price as of the
valuation date. The fair value of OTC warrants is valued using the Black-Scholes option pricing model, a
valuation technique that follows the income approach. This pricing model takes into account the contract terms
(including maturity) as well as multiple inputs, including, time value, implied volatility, equity prices, interest rates
and currency rates. Warrants are generally categorized in Level 2 or Level 3 of the fair value hierarchy.
3.4.4 Interest rate swaps
Interest rate swaps that are traded on major securities exchanges are valued at their last reported sales price as
of the valuation date. These listed interest rate swaps are generally categorized in Level 1 or Level 2 of the fair
value hierarchy. Interest rate swaps are also traded on the OTC market. The fair value for interest rate swaps is
derived using a pricing model that is widely accepted by marketplace participants. The pricing model takes into
account the contract terms (including maturity) as well as multiple inputs, including, where applicable, interest
rates, prepayment speeds and currency rates. Many inputs into the model do not require material subjectivity as
they are observable in the OTC market. Interest rate swaps are generally categorized in Level 2 of the fair value
hierarchy.
3.5 Investments in private operating companiesInvestments in private operating companies consist of direct private common and preferred stock investments.
The transaction price, excluding transaction costs, is typically the Partnership’s best estimate of fair value at
inception. When evidence supports a change to the carrying value from the transaction price, adjustments are
made to reflect expected exit values in the investment’s principal market under current market conditions.
Ongoing reviews by the Partnership’s management are based on an assessment of trends in the performance of
each underlying investment from the inception date through the most recent valuation date.
These assessments typically incorporate valuation techniques using the income approach or the market
approach. The income approach measures the present worth of anticipated future economic benefits (i.e. net
cash flows). The net cash flows is forecast over the expected remaining economic life and discounted to present
value using an appropriate risk-adjusted discount rate. The market approach includes an analysis of valuation
metrics of comparable public companies and recent merger and acquisition transactions for the development of
multiples used in valuations. In certain instances, the Partnership may use multiple valuation techniques for a
particular investment and estimate its fair value based on a weighted average or a selected outcome within a
range of multiple valuation results. These investments in private operating companies are categorized in Level 3
of the fair value hierarchy.
Inputs relied upon by the income approach include annual projected cash flows for each investment through their
respective investment horizons. These cash flow assumptions may be probability-weighted to reflect the risks
associated with achieving expected performance levels across various business scenarios. Investments valued
using a market approach utilized valuation multiples times the annual earnings before interest, taxes, depreciation
and amortization (“EBITDA”), or another performance metric such as revenues or net earnings. The selected
valuation multiples were estimated through a comparative analysis of the performance and characteristics of each
investment within a range of comparable companies or transactions in the observable marketplace.
US GAAPFinancial statements for the year ended December 31, 2015
16 Notes to the financial statements
The following table summarizes the inputs used to value the Partnership’s assets and liabilities measured at fair
value as of December 31, 2015:
Level 1 Level 2 Level 3 Total
Assets
Description
• Common stocks 83,054,000 – 8,000,000 91,054,000
• Corporate bonds – 21,450,000 – 21,450,000
• Government bonds – 50,000 – 50,000
• Preferred stocks 13,000 – 10,000,000 10,013,000
• Exchange traded funds 8,000 – – 8,000
• Interest rate swaps – 100,000 – 100,000
• Options – 100,000 – 100,000
• Warrants – 50,000 – 50,000
• Futures 50,000 – – 50,000
Total assets 83,125,000 21,750,000 18,000,000 122,875,000
Level 1 Level 2 Level 3 Total
Liabilities
Description
• Common stocks 1,024,000 – – 1,024,000
• Preferred stocks 66,000 – – 66,000
Total liabilities 1,090,000 – – 1,090,000
The following is a reconciliation of the Partnership’s Level 3 investments for which significant unobservable
inputs were used to determine fair value.
Opening balance
January 1, 2015
Total gain or loss
(realized & unrealized)
Purchases SalesTransfers
into level 3
Transfers out of level 3
Closing balance
December 31, 2015
• Common stock
7,475,000 150,000 3,000,000 (2,625,000) – – 8,000,000
• Preferred stock
8,000,000 – 2,000,000 – – – 10,000,000
Total 15,475,000 150,000 5,000,000 (2,625,000) – – 18,000,000
The amount of gains/losses included in income attributable to the change in unrealized gains/losses
relating to assets still held at December 31, 2015
Common Stock 150,000
Illustrative financial statements – Investment funds
17Notes to the financial statements
3.6 Fair value – valuation processesThe Partnership establishes valuation processes and procedures to ensure that the valuation techniques for
investments that are categorized within Level 3 of the fair value hierarchy are fair, consistent, and verifiable. The
Partnership designates a Valuation Committee (the “Committee”) to oversee the entire valuation process of the
Partnership’s Level 3 investments. The Committee comprises various Partnership personnel who are separate
from the Partnership’s portfolio management and trading functions, and the Committee reports to the
Partnership’s management. The Committee is responsible for developing the Partnership’s written valuation
processes and procedures, conducting periodic reviews of the valuation policies, and evaluating the overall
fairness and consistent application of the valuation policies.
The Committee meets on a monthly basis, or more frequently as needed, to determine the valuations of the
Partnership’s Level 3 investments. Valuations determined by the Committee are required to be supported by
market data, third-party pricing sources, industry accepted pricing models, counterparty prices, or other
methods the Committee deems to be appropriate, including the use of internal proprietary pricing models.
The Partnership periodically tests its valuations of Level 3 investments through performing back testing of the
sales of such investments by comparing the amounts realized against the most recent fair values reported, and if
necessary, uses the findings to recalibrate its valuation procedures. On an annual basis, the Partnership engages
the services of a nationally recognized third-party valuation firm to perform an independent review of the
valuation of the Partnership’s Level 3 investments, and may adjust its valuations based on the recommendations
from the valuation firm.
The following table summarizes the valuation techniques and significant unobservable inputs used for the
Partnership’s investments that are categorized within Level 3 of the fair value hierarchy as of December 31, 2015:
Fair value December 31,
2015
Valuation technique
Unobservable inputs
Range of inputs (weighted average)
Assets
Investments in securities
• Common stock $8,000,000Market
comparable companies
EBITDA multiples 6x-10x (8x)
• Preferred stock $10,000,000Market
comparable companies
EBITDA multiples 8x-10x (9x)
ASC 82520
4. Due from broker and custody concentrationsThe amount due from broker in the statement of assets and liabilities includes cash held at the clearing broker
and collateral balances. Securities and cash held by the broker serve as collateral for securities sold short, but not
yet purchased.
20 FASB ASC 825-10-50-21 requires disclosure of the maximum amount of loss due to credit risks, based on the gross fair value of the financial instruments, that the entity would incur if the parties to the financial instruments that make up the concentration failed completely to perform, according to the terms of the contracts and the collateral or other security, if any, for the amount due proved to be of no value to the entity.
US GAAPFinancial statements for the year ended December 31, 2015
18 Notes to the financial statements
In the normal course of business, the Partnership maintains its cash balances in financial institutions, which at
times may exceed federally insured limits. The Partnership is subject to credit risk to the extent any financial
institution with which it conducts business is unable to fulfill contractual obligations on its behalf. Management
monitors the financial condition of such financial institutions and does not participate any losses from these
counterparties.
5. Securities sold, but not yet purchasedThe Partnership sells securities that it does not own and it will therefore be obligated to purchase such securities
at a future date. The value of the open short position is recorded as a liability, and the Partnership recorded an
unrealized gain or loss to the extent of the difference between the proceeds received and the value of the open
short position. The Partnership records a realized gain or loss when a short position is closed out. By entering
into short sales, the Partnership bears the market risk of increases in the value of the security sold short in excess
of the proceeds received. Possible losses from short sales differ from losses that could be incurred from
purchases of securities because losses from short sales may be unlimited whereas losses from purchases cannot
exceed the total amount invested.
815-10-50-521
6. Derivative contractsIn the normal course of business, the Partnership enters into derivative contracts for investment purposes.
Typically, derivative instruments serve as components of the Partnership’s investment strategies and are utilized
primarily to structure the portfolio to economically match the investment strategies of the Partnership. These
instruments are subject to various risks, similar to non-derivative instruments, including market, credit, liquidity
and operational risks. The Partnership manages these risks on an aggregate basis along with the risks associated
with its investing activities as part of its overall risk management policy.
The Partnership’s derivative trading activities are primarily the purchase of futures contracts, warrants, options
and swaps. All derivatives are reported at fair value in the statement of assets and liabilities and changes in fair
value are reflected in the statement of operations. The amounts representing the fair value of derivative
contracts appearing on the condensed schedule of investments are shown based on whether the derivative is in
a net gain or loss position. These amounts are gross by product type and do not represent the credit risk of the
Partnership’s outstanding credit exposure.
The Partnership traded in the following types of derivative instruments during the year ended December 31, 2015:
6.1 Option contractsThe Partnership may buy or sell short put and call options through listed exchanges and OTC markets. The buyer
has the right to purchase (in the case of a call option) or sell (in the case of a put option) a specified quantity of
a specific security or other underlying asset at a specified price prior to or on a specified expiration date. In
connection with selling options short, the Partnership is exposed to the risk of loss if the market price of the
underlying asset declines (in the case of a put option) or increases (in the case of a call option). The market and
credit risk associated with purchasing put and call options is limited to the amount originally paid.
Amounts paid on purchasing options are recorded as assets while proceeds received from selling options short
are recorded as liabilities on the statement of assets and liabilities, which are both subsequently adjusted to fair
value. The difference between the fair value of an option and the amount paid or proceeds received is treated as
unrealized gain/loss on investment, net.
21 FASB ASC 815 – Derivatives and Hedging.
Illustrative financial statements – Investment funds
19Notes to the financial statements
6.2 WarrantsThe Partnership may receive warrants in connection with its investment in the debt or equity of certain
companies or may purchase warrants on the open market. A warrant is a security that entitles the holder to buy
stock of the company that issued it at a specified price with a pre-determined time period. The warrants provide
the Partnership with exposure and potential gains upon equity appreciation of the portfolio company’s share
price.
6.3 Interest rate swapsThe Partnership is exposed to interest rate risk when there is an unfavorable change in the value of investments
as a result of adverse movement in the market interest rates. The Partnership enters into interest rate swaps to
protect against such adverse movements in the interest rates. Interest rate swaps are contracts whereby
counterparties exchange different rates of interest on a specified notional amount netted against each other,
with the difference being paid by one party to the other. The differential to be paid or received on the interest
rate swap is recognized over the term of the agreement as a realized gain or loss with the payments made or
received on a net basis on the stated payment dates. Unrealized gains are reported as an asset and unrealized
losses are recorded as a liability in the statement of assets and liabilities.
6.4 Futures contractsThe Partnership may use futures to gain exposure to, or hedge against, changes in the value of equities and
commodities, interest rates or foreign currencies. A futures contract represents a commitment for the future
purchase or sale of an asset at a specified price on a specified date. Initial margin deposits, in either cash or
securities, are required to trade in the futures market. Futures contracts are marked to market daily and an
appropriate payable or receivable for the change in value (“variation margin”) is recorded by the Partnership.
Unrealized appreciation or depreciation on futures contracts is recognized to reflect the fair value of the
contracts and is included as a component of the net change in unrealized appreciation (depreciation) on
derivatives on the Partnership’s statement of operations. Variation margin is received or paid, depending on
whether unrealized appreciation or depreciation is incurred. When the contract is terminated, the Partnership
recognizes a realized gain or loss equal to the difference between the value of the contract at the time it was
entered into and the time it was closed.
The following tables summarize the fair value of derivative instruments on the statement of assets and liabilities
and the effect of derivative instruments on the statement of operations:
Asset derivative
Derivative Classification Fair value
Options Investments in Securities 100,000
Warrants Investments in Securities 50,000
Futures Investments in Securities 50,000
Interest Rate Swaps Investments in Securities 100,000
Total 300,000
For additional detail on the above derivative instruments, see the accompanying condensed schedule of
investments.
Effect of trading activities on the statement of operations for the year ended December 31, 2015
Type of instrument Classification Trading revenue
Options Net realized gain 45,000
Warrants Net change in unrealized gain 13,000
US GAAPFinancial statements for the year ended December 31, 2015
20 Notes to the financial statements
6.5 Volume of derivative activities: At December 31, 2015, the volume of the Partnership’s derivative activities based on their notional amounts and
number of contracts, categorized by derivative, are as follows:
Long exposure
Derivative type Notional amounts (a) Number of contracts
• Equity price:
– Futures contracts 2,300,000 2,700
– Options contracts 1,500,000 675
– Equity swaps 500,000 575
– Warrants 1,000,000 725
• Interest rate:
– Interest rate swaps 5,000,000 1,000
Total 10,300,000
(a) Notional amounts are presented net of identical offsetting derivative contracts.
The Partnership frequently trades options throughout the year as an important part of their trading strategy. The
Partnership entered into $75,000 long and $30,000 short contracts during the year.
ASC 50522
7. Partners’ capitalIn accordance with the Agreement, profits and losses of the Partnership are allocated to partners according to
their respective interests in the Partnership. Subject to certain limitations, generally 20% of the net income
allocated to the limited partners is reallocated to the General Partner at the end of each calendar year. As
discussed in the Agreement, if there is a loss for an accounting period, the additional allocation will not apply to
future periods until the loss has been recovered.
Limited partners have redemption rights which contain certain restrictions with respect to rights of withdrawal
from the Partnership as specified in the Agreement. The early redemption fee represents the amount charged to
limited partners withdrawing capital prior to expiration of their agreed upon lock-up period. Refer to the
Agreement for more information.
7.1 Contributions Capital contributions to the Partnership may be accepted on the first day of each calendar quarter or on such
other days that the General Partner approves in advance in its sole discretion.
7.2 WithdrawalsA limited partner may, upon at least 30 calendar days’ prior written notice, withdraw all or any part of the
capital in its capital account on the last business day of each calendar quarter. Any limited partner who
withdraws capital prior to the first anniversary of the investment of such capital in the Partnership may, in the
discretion of the General Partner, be assessed a withdrawal fee up to 3% on such withdrawn amount, payable
to the Partnership. For the year ended December 31, 2015, there were no withdrawal fees assessed.
22 FASB ASC 505 – Equity.
Illustrative financial statements – Investment funds
21Notes to the financial statements
The General Partner may suspend or restrict the rights of limited partners to make withdrawals under certain
circumstances. In particular, if withdrawal requests are received for any withdrawal date aggregating more than
25% of the value of the capital accounts of the limited partners as of such date, the General Partner may, in its
sole discretion, reduce all such withdrawal requests pro rata in accordance with the respective values of the
withdrawing limited partners’ capital accounts so that only 25% of the value of the capital accounts of the
limited partners of the Partnership is withdrawn as of such date.
Capital withdrawals payable represent amounts due to partners based on withdrawals effective through
December 31, 2015. Capital withdrawals payable was $100,000 at December 31, 2015.
850-10-50-123
8. Related party transactions Under the terms of the Agreement, the Partnership pays the General Partner a management fee at a rate of
0.25% of the net asset value of the limited partners’ capital at the end of each quarter (1% per annum). The
General Partner may waive or reduce the management fee for certain limited partners. For the year ended
December 31, 2015, the General Partner earned a management fee of $1,040,000, of which $50,000 remained
payable at December 31, 2015.
9. Administration The Partnership has entered into an Administration Agreement with Administrator Inc (the “Administrator”).
Under this agreement, the Administrator is responsible for various administrative, registrar, and transfer agency
services, including calculation of the partners’ capital balances of the Partnership and the processing of
contributions, withdrawals, and transfers of the Partnership’s capital.
FINRA
Rule 5130
10. New issuesParticipation by partners in investments in “new issues” (defined, in part, as equity securities which are the
subject of a public distribution) are allocated to non-restricted partners and to the extent allowed, to restricted
partners in accordance with the Conduct Rules of the Financial Industry Regulatory Authority.
11. Indemnification and concentration of risksIn the normal course of business, the Partnership enters into contracts that contain a variety of representations
and warranties and which provide general indemnifications. The Partnership’s maximum exposure to these
arrangements is unknown as this would involve future claims that may be made against the Partnership that
have not yet occurred. However, based on experience, the Partnership expects the risk to be remote.
The General Partner seeks to manage the Partnership’s market risk on a continuous basis within a rigorous risk
management framework by shorting securities to offset long positions, by investing in markets that have
traditionally not been highly correlated to each other, by limiting the Partnership’s exposure to each country and
issuer, and by utilizing other hedging strategies. Details of the Partnership’s investment portfolio at December
31, 2015 are disclosed in the condensed schedule of investments. Each separate investment exceeding 5% of
net assets is disclosed separately.
The Partnership maintains its cash and cash equivalents at one institution which is insured by the Federal Deposit
Insurance Corporation. The Partnership is subject to credit risk to the extent any financial institution which it
conducts business is unable to fulfil contractual obligation on its behalf.
23 FASB ASC 850 – Related Party Disclosures.
US GAAPFinancial statements for the year ended December 31, 2015
22 Notes to the financial statements
Counterparty credit risk is generally the risk of counterparty default. Counterparty credit risk is generally higher
when a non-exchanged-traded financial instrument, such as an OTC derivative, is involved because the
counterparties for non-exchange-traded financial instruments are not backed by an exchange clearing house.
However, counterparty credit risk exists whenever another entity has possession and/or use of assets belonging
to the Partnership. The amount of exposure to credit risk is represented by the carrying amount of the assets on
the statement of assets, liabilities and partners’ capital and the possible inability to replicate these contracts at
market price. Substantially all financial instruments are cleared through or held in custody by the Prime Broker.
When the Partnership uses non-exchange-traded derivative instruments, the Partnership is exposed to the
counterparty’s credit risk: the risk that derivative counterparties may not perform in accordance with the
contractual provisions. This risk is offset by the value of collateral received from the counterparty, if any. The
Partnership’s exposure to credit risk associated with counterparty non-performance at any point in time is
generally limited to the unrealized gains, inherent in such transactions, at such time that they are recognized in
the statement of assets, liabilities and partners’ capital, plus the amount of any collateral pledged by the
Partnership to the counterparty to support these transactions. The Partnership seeks to minimize its credit and
counterparty risk through continuous monitoring of the credit rating of the different issues. The Partnership will
seek to minimize downside risk and protect principal by maintaining a diversified portfolio with respect to
industry and the size of individual holdings and actively monitoring the risk of each of the investments and risk
of portfolio correlation among assets.
The Partnership may borrow funds in order to increase the amount of capital available for investment. The use
of leverage can substantially improve the return on invested capital; however, such use may also increase the
adverse impact to which the portfolio of the Partnership may be subject. Borrowings will usually be from
securities brokers and dealers and will typically be secured by the Partnership’s securities and other assets. Under
certain circumstances, such a broker-dealer may demand an increase in the collateral that secures the
Partnerships obligations and if the Partnership were unable to provide additional collateral, the broker-dealer
could liquidate assets held in the account to satisfy the Partnership’s obligations to the broker-dealer. Liquidation
in this manner could have extremely adverse consequences. In addition, the amount of the Partnership’s
borrowings and the interest rates on those borrowings which will fluctuate, could have a significant effect on
the Partnership’s profitability.
ASC 94624
12. Financial highlightsFinancial highlights for the year ended December 31, 2015 are as follows:
Ratio of expenses to average limited partners’ capital %
• Expenses 1.34
• Performance reallocation 0.70
Total expenses and performance reallocation 2.04
Net investment income 0.03
• Total return before performance reallocation 4.08
• Performance reallocation (0.70)
Total return 3.38
24 FASB ASC 946-205-50 – Non-Registered Investment Partnership – Financial Highlights.
Illustrative financial statements – Investment funds
23Notes to the financial statements
The expense and performance reallocation ratios, the net investment income ratio, and the total return
percentage are calculated for the limited partners taken as a whole. The computation of such ratios and return
based on the amount of expenses charged to, and performance fee reallocated from, any specific limited
partner may vary from the overall ratios presented in the financial statements as a result of such items as
differing management fee and performance reallocation arrangements, loss carryforwards, eligibility for new
issue income, and the timing of capital contributions and withdrawals. The net investment income ratio does
not reflect the effects of any performance reallocations.
ASC 85525
13. Subsequent eventsFrom January 1, 2016 to February 25, 2016, the Partnership accepted capital contributions of $20,000,000 and
has had capital withdrawals of $5,000,000. The Partnership has evaluated all events or transactions that
occurred after December 31, 2015 through the date of these financial statements, which is the date that the
financial statements were available to be issued. Management has determined that there are no material events
that would require adjustment to or disclosure in the Partnership’s financial statements.
25 FASB ASC 855 – Subsequent events. Disclose significant capital transactions occurring subsequent to year end.
US GAAPFinancial statements for the year ended December 31, 2015
24
About Moore Stephens
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We believe the information in this report to be correct at the time of going to press but we cannot accept any responsibility for any loss occasioned to any person acting or refraining from acting as a result of any item herein. The information contained in this report is the property of Moore Stephens LLP, and may not be reproduced in any format by anyone without prior written approval from Moore Stephens LLP. Printed and published by © Moore Stephens LLP, a member firm of Moore Stephens International Limited, a worldwide network of independent firms. MSIL and its member firms are legally distinct and separate entities. Moore Stephens LLP is registered to carry on audit work in the UK and Ireland by the Institute of Chartered Accountants in England and Wales. Authorised and regulated by the Financial Conduct Authority for investment business. DPS29426 October 2015
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