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ANNUAL REPORT Notes to Financial Statements Years ended February 28, 2014 and 2013 KV Mortgage Fund Inc. (the "Fund") was incorporated under the laws of the Province of Alberta by articles of incorporation on January 8, 2009. e Fund's head office is in Edmonton, Alberta. e investment objective of the Fund is to provide its preferred shareholders with income generated from a diversified portfolio of mortgage loan investments (also referred to as "mortgages"), while preserving the Fund's capital. KV Capital Inc., as manager of the Fund (the "Fund Manager"), is responsible for the day-to-day operations and providing all general management and administrative services of the Fund's mortgage loan portfolio. KV Capital Inc. is related to the Fund because of the management arrangement, certain common directors and officers, and certain directors and officers of the Fund and KV Capital Inc. whom also control voting shares in both entities. 1. Significant accounting policies: (a) Basis of presentation: ese financial statements have been prepared by management in accordance with Part V of Canadian generally accepted accounting principles ("Canadian GAAP"). e Fund is an investment company, as defined in Canadian GAAP Accounting Guideline 18: Investment Companies. As a result, mortgage and loan investments are recorded at fair value, with changes in the fair value recorded in the statements of operations. (b) Cash and cash equivalents: e Fund considers highly liquid investments with an original maturity of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value to be cash equivalents. (c) Mortgage loan investments: Mortgage loan investments are recorded at fair value. Any unrealized change in the fair value of a mortgage loan investment is recorded in the statements of operations as an unrealized fair value adjustment. A realized change in the fair value of a mortgage loan investment as a result of a disposition or repayment is recorded as a realized fair value adjustment. (d) Revenue recognition: Interest income is accounted for using the effective interest method. Lender fees received are amortized to income over the contractual terms of the specific mortgage loan to which they pertain. Forfeited lender fees are recognized in income at the time a borrower has not fulfilled the terms and conditions of a mortgage commitment and payment has been received. As a result of structural changes made by the Fund during the previous fiscal year it no longer receives lender fees. (e) Income taxes: It is the intention of the Fund to qualify as a mortgage investment corporation ("MIC") for Canadian income tax purposes. As such, the Fund is able to deduct, in computing its income for the taxation year, dividends paid to its shareholders during the year or within 90 days of the end of the year. e Fund intends to maintain its status as a MIC and pay dividends to its shareholders in the year and in future years to ensure that it will not be subject to income taxes. Accordingly, for financial statement reporting purposes, the tax deductibility of the Fund's distributions of dividends result in the Fund being non-taxable and no provision for current or future income taxes has been recorded. 42