1. finance
2. accounting and auditing

Financial reporting for funds
December 2014
David Lynch and Maura Cronin
Grant Thornton
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Agenda
•
•
•
•
•
AIFMD
FRS 102
UCITS / AIF's update
IFRS
US GAAP
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What's happened?
• lot's!
– EMIR
– Central Bank MMIF returns
– AIFMD
– loan originating QIAIF's
– ICAV
– CP 86
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AIFMD update
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AIFMD
What is it?
• Alternative Investment Fund Managers Directive
("AIFMD")
• EU legislation aimed to:
– increase investor protection; and
– reduce systemic risk.
• establish a harmonised EU frame work for
regulating Alternative Investment Funds ("AIF's").
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AIFMD
Who's impacted?
• subject to AIFMD if
– managing alternative funds in or from the EU regardless
of fund domicile, or
– marketing alternative funds in or into the EU regardless
of fund domicile
• impacts from
– date of authorisation as an AIFMD
– 21 July 2014.
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AIFMD
Chapter IV transparency requirements
• Article 22 – annual report
• Article 23 – disclosure to investors
• Article 24 – reporting obligations to competent
authorities.
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AIFMD
Level 2 implementing regulation
• Article 103 – general principles for the annual report
• Article 104 – content and format of the balance sheet and
income statement
• Article 105 – report on activities of the financial year
• Article 106 – material changes
• Article 107 – remuneration disclosures
• Article 108 – periodic disclosure to investors
• Article 109 – regular disclosure to investors
• Article 110 – reporting to competent authorities
• Article 111 – use of leverage on a substantial basis.
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AIFMD
Annual reporting requirement
• annual report must be provided to investors on
request
• annual report must be made available to the
Central Bank of Ireland
• must be available no later than six months after the
year end
• follow the accounting standards of the AIF's home
state or where it is established.
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AIFMD
Contents of the annual report
•
•
•
•
•
balance sheet
income and expenditure account
report on activities for the financial year
material changes in investor pre-sale information
information on remuneration of AIFM staff.
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AIFMD
Balance sheet disclosures
• assets
– investments
– cash and cash equivalents
– receivables
• liabilities
– payables
– borrowings
– other liabilities
• net assets.
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AIFMD
Income and expenditure account disclosures
• income
‒ investment income
‒ realised gains on investment
‒ unrealised gains on investment
‒ other income
• expenses
‒ investment advisory or management fees
‒ other expenses
‒ realised loss on investments
‒ unrealised loss on investments
• net income or expenditure.
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AIFMD
Report on the activities for the financial year
• include at least
‒ overview of investment activities during the year
‒ overview of the portfolio at the year end
‒ overview of the performance of the fund
• report must
‒ give a fair balanced view of the activities and performance of
the AIF
‒ principal risks and investment or economic uncertainties, and
‒ include both financial and non-financial key performance
indicators where relevant
• material changes in pre-sale information provided to investors
(Article 106).
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AIFMD
Material changes – it’s a long list!
•
•
•
•
•
•
•
investment strategy/objectives
types of assets
investment techniques and risks
investment restrictions
leverage – use/types/restrictions/max level
various legal/constitutional information
AIFM's professional liability requirements.
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AIFMD
Material changes – it’s a long list!
•
•
•
•
•
•
•
delegated functions
valuation procedures and pricing methodologies
liquidity risk management/redemption rights
permitted fees and charges
terms of issue of units
latest NAV or market price of units
historical performance of the AIF.
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AIFMD
Remuneration disclosures in the annual report
• total remuneration paid by the AIFM to its staff for the year split by
– fixed and variable remuneration
– number of beneficiaries
– aggregate amount of AIFM remuneration code staff broken by
senior management and members of staff
• where disclosure at AIFM level
– breakdown provided in relation to each AIF insofar as this is
available
– description of how breakdown is derived
• general information relating to financial and non-financial criteria
of the remuneration policies.
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AIFMD
Remuneration disclosures application date
• ESMA Q&A confirmed
– applies for performance periods following that in
which the AIFM submits an application for
authorisation.
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AIFMD
Disclosures where there is a choice of where
to disclose
• disclose immediately
‒ changes in liquidity management system and
procedures (e.g. gates, side-pockets, suspensions)
‒ changes to the maximum level of leverage
calculated in accordance with both the gross and
commitment method.
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AIFMD
Disclosures where there is a choice of where
to disclose
• periodic disclosures
‒ % of AIF's net assets subject to special arrangements
‒ current risk profile of the AIF and its sensitivity to its
most relevant risks
‒ main features of the risk management systems
employed by the AIFM to manage current profile risks
‒ amount of leverage employed calculated in
accordance with both the gross and commitment
methods.
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AIFMD
Disclosures where there is a choice of where
to disclose
• where to disclose
‒ on the AIFM's website so that they are easily
accessible to investors
‒ add to the disclosures currently included in the
financial statements
‒ disclose elsewhere in the annual report (e.g. the
report on the activities for the year)
‒ make additional information available separately
at the time of the annual report.
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AIFMD
How we see it
• be aware of impacts
‒ application date
‒ realised/unrealised split out
‒ effective yield
• investment manager input paramount
‒ prepare AIFMD checklist.
• consideration of where to disclose
‒ audited v unaudited.
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FRS 102 – New Irish and UK
GAAP
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What choices do our clients have?
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The new accounting framework - timeline
Early adoption
permitted
1 1Jan
Jan
2013
2013
30
30Jun
Jun
2013
2013
Transition
date
1 1Jan
Jan
2014
2014
Opening balance
sheet for
1 January 2014
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31
31Dec
Dec
2014
2014
Comparative year
balance sheet for
31 December 2014
31
31Dec
Dec
2015
2015
Financial statements
for the year ended
31 December 2015
IFRS vs FRS 102
Relevant accounting standards
IFRS
FRS 102
IAS 39: financial instruments:
recognition and measurement
Section 11: basic financial instruments
IFRS 9: financial instruments
Section 12: other financial instrument
Issues
IFRS 7: financial instruments:
disclosures
Section 34: specialised activities
or
recognition and measurement provision
of IAS 39 (IFRS 9) and disclosure
requirements of Section 11 and 12
IFRS 13: fair value measurement
IFRS 7: amendment for offsetting
N/A
IFRS 10: investment entities
consolidation exemption
Section 12: held for subsequent resale
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Key differences: classification of financial assets
IFRS
Classified into four
primary categories
• at fair value through
profit or loss
• available for sale
• loans and receivables
• held to maturity.
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FRS 102
Classified into two primary
categories
• basic (Section 11)
‒ e.g cash
‒ loan/receivable
• non-basic (Section 12)
‒ all financial
instruments
‒ with exceptions.
Key differences: subsequent measurement
IFRS
• depends on classification of
assets
– fair value
• fair value through profit
or loss
• available for sale
– amortised cost
• loans and receivables
• held to maturity.
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FRS 102
•
depends on classification of
assets
– basic
• amortised cost
– non-basic
• fair value through profit
or loss.
Key differences: definition of fair value
IFRS
• IFRS 13
– fair value
• exit price approach
– flexible guidance on
pricing
• within bid/ask spread
• bid/ask
• mid not precluded.
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FRS 102
•
FRS 102 2:34
– less market based
– quoted price is the bid
price (FRS 102 11:27)
•
accounting policy choice
– Section 11 and 12
– full measurement and
recognition principles of
IAS 39 / IFRS 9.
Key differences: disclosures
IFRS
• IFRS 13
– requires greater disclosures
on level 3 financial assets
and liabilities
– non-recurring fair value
measurements
– valuation techniques Level
2/3
– transfers between level 1
and 2.
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FRS 102
• generally less disclosures
• meets definition of
financial institution
– similar to IFRS 7.
Key differences: fair value hierarchy
IFRS
• IFRS 13
– level 1
• unadjusted quoted price
– level 2
• observable inputs
– level 3
• unobservable inputs.
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FRS 102
• FRS 102 11:27
– A, quote price
– B, price of recent
transaction
– C, valuation technique.
• could result in more
classifications as level 3
investments.
Key differences: consolidation exemption
IFRS
FRS 102
• amendments to IFRS 10, 12
and IAS 27
– exception to consolidation
for "Investment Entities"
– measured at fair value
through profit or loss.
• consolidation required unless
being "held for subsequent
resale"
• value to investor is through
fair value as part of a directly
or indirectly held basket of
investments rather than as a
media through which the
investor carries out business.
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Key differences: statement of cash flows
IFRS
• statement of cash flow's is a
primary statement
– required for all IFRS
accounts.
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FRS 102
• exempt where:
– substantially all the entities
investments are highly
liquid
– substantially all the entities
investments are carried at
fair value
– the entity provides a
statement of changes in
net assets.
Other considerations
IFRS
• more internationally
recognised;
– greater transparency
– satisfy investor needs
– reduced costs potentially.
FRS 102
• primary statements required
to be presented under IAS 1:
– must follow Companies
Acts format.
• FRC committed to
amendments of FRS 102 on
three year cycles
• Already amendments
- FRED 54
• transition disclosure required.
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How we see it
• no significant impact for funds
• potentially more level 3 investments under FRS
102
• clients using this as an opportunity to transition to
IFRS
• IFRS more internationally recognised.
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UCITS and NON-UCITS
update
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Related party transactions
• yearly and half-yearly reports must state that the board of
directors of the management company or the self-managed
investment company is satisfied that there are
arrangements in place (which are evidenced by written
procedures) to ensure that any transaction carried out with
a connected party is carried out as if negotiated on an
arm’s length basis and is in the best interests of the unit
holders
• connected parties (being the promoter, investment
manager, trustee and associated entities).
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Related party transactions
• in addition, the board must be satisfied that all such
transactions with the connected parties during the relevant
period covered by the accounts comply with these
obligations
• in reviewing accounts it will be necessary for boards to
understand what arrangements are in place to monitor
transactions with connected parties so as to ensure that
these statements can be properly made in the accounts.
• these new requirements will apply for all accounting periods
beginning after 30 April 2013.
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How we see it
• liaise early with fund boards to inform them of
procedures in place
• reviews may be required around custodian and
broker agreements
• consider presentation – in the notes or just in
directors report (audited versus unaudited).
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IFRS update
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IFRS - New accounting pronouncements
Effective date 1 January 2014
IFRS 10 - investment entities (amendments)
IAS 32
- offsetting financial assets and financial
liabilities
Effective date 1 January 2018
IFRS 9
- financial instruments
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IFRS 10 investment entities (amendments)
• effective for periods on or after 1 January 2014
• introduces an exception for investment entities to
the principal that a parent must consolidate its
subsidiary
• requirement to present adjusted comparatives is
limited to the immediately preceding period
• amendments set out to
– define the term "investment entity".
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IFRS 10 investment entities (amendments) continued
– requires investment entities to measure
controlling interests in another entity at fair value
through profit or loss in accordance with IFRS 9
– specify disclosure requirements (IFRS 12).
• significant judgement may be required.
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IFRS 10 investment entities (amendments)
Definition
• an investment entity is an entity that
‒ obtains funds from one or more investors for
the purpose of providing those investors with
investment management services
‒ invests funds solely for returns from capital
appreciation, investment income, or both
‒ measures substantially all investments at fair
value.
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IFRS 10 investment entities (amendments)
Typical characteristics
• has more than one investment
• has more than one investor
• investors are not related parties of the entity
• ownership interests in the form of equity or similar
interests.
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IFRS 10 investment entities (amendments)
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IFRS 10 investment entities (amendments)
Examples
• investment entity parent of an investment entity (e.g.
master/feeder)
‒ measures investment entity at fair value
• parent entities that are not investment entities
‒ consolidate all entities it controls
• investment entity with subsidiary providing investment
related services to the investment entity
‒ exception
‒ must consolidate its interests in the subsidiary.
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IFRS 10 investment entities (amendments)
A parent need not present consolidated financial statements if:
• it is itself a wholly-owned subsidiary;
• its securities are not publicly traded or in the process of
becoming publicly traded; and
• its parent publishes IFRS-compliant financial statements
that are available to the public.
This is also the case for a partly-owned subsidiary if its other
owners have been informed about, and do not object to, it not
presenting consolidated financial statements.
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How we see it
• judgement required in interpretation of definition of
an investment entity
• separate financial statements needed for master
fund
– comparative information required
• discuss options with investment manager
• slight difference in definition v US GAAP.
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IAS 32 offsetting financial assets and financial
liabilities
Offsetting - a financial asset and a financial liability
should be offset and the net amount reported when,
and only when, an entity:
• has a current legal enforceable right to set off the
amounts; and
• intends either to settle on net basis, or to realise
the asset and settle the liability simultaneously.
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IAS 32 offsetting financial assets and financial
liabilities
• analysis required – review of contracts, transactions
through clearing houses, may require legal assistance
• review of ISDA agreements for legal rights to offset
• is the right to offset in the normal course of business
available in the event of default, insolvency, bankruptcy?
both counterparty or own event?
• entities are required to apply the clarified offsetting
requirements retrospectively – any changes in contract?
jurisdiction?
• third statement of financial position may be required if the
effect of the preceding period is material.
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How we see it
• no significant impact
• judgement is required
• review contracts for terms of agreement to offset.
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IASB's annual
improvements project
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2010 – 2012 cycle
Effective 1 July 2014:
• IFRS 2 share- based payments: definition of vesting
conditions
• IFRS 3 business combinations: accounting for contingent
consideration in a business combination
• IFRS 8 operating segments: aggregation of operating
segments
• IAS 16 property, plant and equipment and IAS 38 intangible
assets: revaluation method—proportionate restatement of
accumulated depreciation and amortization
• IAS 24 related party transactions: key management
personnel services.
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2011 – 2013 cycle
Effective 1 July 2014:
• IFRS 1 first-time adoption of International Financial
Reporting Standards: meaning of 'effective IFRSs'
• IFRS 3 business combinations: scope exceptions for joint
ventures
• IFRS 13 fair value measurement: scope of paragraph 52
(portfolio exception)
• IAS 40 investment property: clarifying the
interrelationship of IFRS 3 and IAS 40 when classifying
property as investment property or owner-occupied
property.
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2012 – 2014 cycle
Effective 1 January 2016:
• IFRS 5 non-current assets held for sale and discontinued
operations: change in methods of disposal
• IFRS 7 financial instruments - disclosures: applicability of
the amendments to IFRS 7 to condensed interim
financial statements
• IAS 19 employee benefits - discount rate: regional
market issue
• IAS 34 interim financial reporting: disclosure of
information 'elsewhere in the interim financial report'.
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CFTC update
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Disclosures on financial statements
• usually a statement on the cover page
• oath of affirmation – required to be signed by a
CPO
• income statement specifics
– gross amount of realised gains/losses on
commodity positions
– management and incentive fees, interest
income and expense, brokerage commissions
on commodity interests.
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US GAAP update
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ASB 2013-08 topic 946
Amendments related to investment companies
• determining whether an entity is an investment
company
• additional measurement and disclosure
requirements for investment entities
• effective for years beginning after 15 December
2013.
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ASB 2013-08 topic 946 (continued)
Amendments related to investment companies
• amends the criteria for an entity to qualify as an
investment company under ASC 946
• not expected to significantly change which entities
qualify for the specialised investment company
accounting in ASC 946.
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ASB 2013-08 topic 946 (continued)
Defines an investment company:
• entities regulated under the Investment Company Act of
1940 remain within scope of ASC 946 regardless of
whether they meet the revised criteria
• investment company is an entity which
• a) does both of the following
– obtains funds from one or more investors and provides
investors with investment management services
– invests funds solely for returns from capital appreciation,
investment income, or both.
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ASB 2013-08 topic 946 (continued)
• b) does not obtain or have the objectives to obtain
returns/benefits from investees/affiliates that are not
normally attributable to ownership interests or that are other
than from capital appreciation / investment income
• investment company would display the following "typical"
characteristics:
– has more than one investment
– has more than one investor
– investors are not related parties of the parent or the
investment manager
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ASB 2013-08 topic 946 (continued)
– ownership interests in the form of equity or partnership
interests
– managements substantially all of investments on a fair
value basis.
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ASB 2013-08 topic 946 (continued)
Additional disclosure requirements include:
• status as an investment company
• any financial support/funding provided to any investees
during the period, including the type of support, and
reasons for providing this support. Contractual versus non
contractual
• any contractual obligations/agreed funding not yet paid
including details on type, amount and situation when
payment will be required.
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How we see it
• similar to IFRS 10
• no significant impact
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ASU 2014-11 topic 860
• repurchase-to-maturity transactions, repurchase financings
and disclosures
• changes the accounting for repurchase-to-maturity
transactions and linked repurchase financings to secured
borrowing accounting,
• introduce new disclosure requirements for certain
transactions that involve a transfer of a financial asset
accounted for as a sale, and for repurchase agreements,
securities lending transactions and repurchase-to-maturity
transactions accounted for as secured borrowings.
Effective for years beginning after 15 December 2014.
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ASU 2014-15 topic 205-40
Disclosures related to uncertainties about going concern
Amended to provide guidance about management's
responsibility to evaluation whether there is substantial doubt
about an entity's ability to continue as a going concern or to
provide related footnote disclosures.
Effective for years beginning after 15 December.
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ASU 2014-20
Preparation of client financial statements: revised firm
policies
The SEC OCA Staff has recently clarified that preparation of
financial statement information also includes printing and
binding the client’s financial statements, including providing
financial statement templates to the client that are not publicly
available. Accordingly, the firm cannot be engaged to perform
any of these non-audit services to audit clients where the SEC
independence rules apply.
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SEC Guidance Update No. 2014-11
Presentation of consolidated financial statements
• who? - certain investment companies ("RICs") registered
under the Investment Company Act 1940 and investment
companies that have elected to be treated as business
development companies under the 1940 Act ("BDCs") that
have wholly owned subsidiaries
• what? - consider consolidated financial statements where
one entity directly or indirectly has a controlling financial
interest in another entity
• exempt – master/feeder and fund of funds structures.
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Contact us
David Lynch
E [email protected]
T +353 (0)1 680 5923
Maura Cronin
E [email protected]
T +353 (0)1 680 5947
Offices in Dublin, Belfast, Cork, Galway, Kildare and Limerick
@GrantThorntonIE
www.grantthornton.ie
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Questions
& feedback
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