NOTE
1
-
SIGNIFICANT
ACCOUNTING
P
OLICIES
Basis
of
P
reparation
The fund is an investment company and follows accounting and
reporting guidance in the Financial Accounting Standards Board
Accounting Standards Codification
Topic 946 (ASC 946). The accompanying financial statements were prepared
in accordance with accounting principles generally accepted in the United States
of America (GAAP), including but not limited to ASC 946. GAAP requires the use
of estimates made by management. Management believes that estimates and
valuations are appropriate; however, actual results may differ from those
estimates, and the valuations reflected in the accompanying financial statements
may differ from the value ultimately realized upon sale or maturity.
Investment
Transactions,
Investment
Income,
and
Distributions
Income and expenses are recorded on the accrual basis.
Premiums and discounts on debt securities are amortized for financial reporting
purposes. Dividends received from mutual fund investments are reflected as
dividend income; capital gain distributions are reflected as realized gain/loss.
Earnings on investments recognized as partnerships for federal income tax
purposes reflect the tax character of such earnings. Dividend income and capital
gain distributions are recorded on the ex-dividend date. Income tax-related
interest and penalties, if incurred, would be recorded as income tax expense.
Investment transactions are accounted for on the trade date. Realized gains and
losses are reported on the identified cost basis. Distributions to shareholders
are recorded on the ex-dividend date. Income distributions are declared and paid
annually. Capital gain distributions, if any, are generally declared and paid by
the fund annually.
Rebates
Subject to best execution, the fund
may direct certain security trades to brokers who have agreed to rebate a
portion of the related brokerage commission to the fund in cash. Commission
rebates are reflected as realized gain on securities in the accompanying
financial statements.
Credits
Credits are earned on the funds temporarily uninvested cash balances
held at the custodian, and such credits reduce the amount paid by the manager
for custody of the funds assets. In order to pass the benefit of custody
credits to the fund, the manager has voluntarily reduced its investment
management and administrative expense in the accompanying financial
statements.
Redemption
Fees
A 0.5% fee is assessed on redemptions of fund shares held for
90 days or less to deter short-term trading and to protect the interests of
long-term shareholders. Redemption fees are withheld from proceeds that
shareholders receive from the sale or exchange of fund shares. The fees are paid
to the fund and are recorded as an increase to paid-in capital. The fees may
cause the redemption price per share to differ from the net asset value per
share.
New
Accounting
Guidance
On January 1, 2013, the fund
adopted new accounting guidance, issued by the Financial Accounting Standards
Board, that requires an entity to disclose information about offsetting and
related arrangements to enable users of its financial statements to understand
the effect of those arrangements on its financial position. Adoption had no
effect on the funds net assets or results of operations.
NOTE
2
-
VALUATION
The funds financial instruments are
valued, and its net asset value (NAV) per share is computed at the close of the
New York Stock Exchange (NYSE), normally 4 p.m. ET, each day the NYSE is open
for business.
Fair
Value
The funds financial instruments are reported at fair value, which GAAP
defines as the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the
measurement date. The T. Rowe Price Valuation Committee (the Valuation
Committee) has been established by the funds Board of Directors (the Board) to
ensure that financial instruments are appropriately priced at fair value in
accordance with GAAP and the 1940 Act. Subject to oversight by the Board, the
Valuation Committee develops and oversees pricing-related policies and
procedures and approves all fair value determinations. Specifically, the
Valuation Committee establishes procedures to value securities; determines
pricing techniques, sources, and persons eligible to effect fair value pricing
actions; oversees the selection, services, and performance of pricing vendors;
oversees valuation-related business continuity practices; and provides guidance
on internal controls and valuation-related matters. The Valuation Committee reports to the funds Board; is
chaired by the funds treasurer; and has representation from legal, portfolio
management and trading, operations, and risk management.
Various valuation techniques and inputs
are used to determine the fair value of financial instruments. GAAP establishes
the following fair value hierarchy that categorizes the inputs used to measure
fair value:
Level 1 quoted prices (unadjusted) in
active markets for identical financial instruments that the fund can access at
the reporting date
Level 2 inputs other than Level 1 quoted
prices that are observable, either directly or indirectly (including, but not
limited to, quoted prices for similar financial instruments in active markets,
quoted prices for identical or similar financial instruments in inactive
markets, interest rates and yield curves, implied volatilities, and credit
spreads)
Level 3 unobservable inputs
Observable inputs are developed using
market data, such as publicly available information about actual events or
transactions, and reflect the assumptions that market participants would use to
price the financial instrument.
Unobservable
inputs are those for which market data are not available and are developed using
the best information available about the assumptions that market participants
would use to price the financial instrument. GAAP requires valuation techniques
to maximize the use of relevant observable inputs and minimize the use of
unobservable inputs. When multiple inputs are used to derive fair value, the
financial instrument is assigned to the level within the fair value hierarchy
based on the lowest-level input that is significant to the fair value of the
financial instrument. Input levels are not necessarily an indication of the risk
or liquidity associated with financial instruments at that level but rather the
degree of judgment used in determining those values.
Valuation
Tec
h
niques
Equity securities listed or regularly traded on a securities exchange or
in the over-the-counter (OTC) market are valued at the last quoted sale price
or, for certain markets, the official closing price at the time the valuations
are made. OTC Bulletin Board securities are valued at the mean of the closing
bid and asked prices. A security that is listed or traded on more than one
exchange is valued at the quotation on the exchange determined to be the primary
market for such security. Listed securities not traded on a particular day are
valued at the mean of the closing bid and asked prices. Actively traded
domestic equity securities generally are
categorized in Level 1 of the fair value hierarchy. OTC Bulletin Board
securities and equity securities traded in inactive markets generally are
categorized in Level 2 of the fair value hierarchy.
Debt securities generally are traded in
the OTC market. Debt securities with remaining maturities of less than one year
at the time of acquisition generally use amortized cost in local currency to
approximate fair value. However, if amortized cost is deemed not to reflect fair
value or the fund holds a significant amount of such securities with remaining
maturities of more than 60 days, the securities are valued at prices furnished
by dealers who make markets in such securities or by an independent pricing
service. Generally, debt securities are categorized in Level 2 of the fair value
hierarchy; however, to the extent the valuations include significant
unobservable inputs, the securities would be categorized in Level 3.
Investments in mutual funds are valued at
the mutual funds closing NAV per share on the day of valuation and are
categorized in Level 1 of the fair value hierarchy. Financial futures contracts
are valued at closing settlement prices and are categorized in Level 1 of the
fair value hierarchy. Assets and liabilities other than financial instruments,
including short-term receivables and payables, are carried at cost, or estimated
realizable value, if less, which approximates fair value.
Thinly traded financial instruments and
those for which the above valuation procedures are inappropriate or are deemed
not to reflect fair value are stated at fair value as determined in good faith
by the Valuation Committee. The objective of any fair value pricing
determination is to arrive at a price that could reasonably be expected from a
current sale. Financial instruments fair valued by the Valuation Committee are
primarily private placements, restricted securities, warrants, rights, and other
securities that are not publicly traded.
Subject to oversight by the Board, the
Valuation Committee regularly makes good faith judgments to establish and adjust
the fair valuations of certain securities as events occur and circumstances
warrant. For instance, in determining the fair value of an equity investment
with limited market activity, such as a private placement or a thinly traded
public company stock, the Valuation Committee considers a variety of factors,
which may include, but are not limited to, the issuers business prospects, its
financial standing and performance, recent investment transactions in the
issuer, new rounds of financing, negotiated transactions of significant size
between other investors in the company, relevant market valuations of peer
companies, strategic events
affecting the
company, market liquidity for the issuer, and general economic conditions and
events. In consultation with the investment and pricing teams, the Valuation
Committee will determine an appropriate valuation technique based on available
information, which may include both observable and unobservable inputs. The
Valuation Committee typically will afford greatest weight to actual prices in
arms length transactions, to the extent they represent orderly transactions
between market participants; transaction information can be reliably obtained;
and prices are deemed representative of fair value. However, the Valuation
Committee may also consider other valuation methods such as market-based
valuation multiples; a discount or premium from market value of a similar,
freely traded security of the same issuer; or some combination. Fair value
determinations are reviewed on a regular basis and updated as information
becomes available, including actual purchase and sale transactions of the issue.
Because any fair value determination involves a significant amount of judgment,
there is a degree of subjectivity inherent in such pricing decisions, and fair
value prices determined by the Valuation Committee could differ from those of
other market participants. Depending on the relative significance of
unobservable inputs, including the valuation technique(s) used, fair valued
securities may be categorized in Level 2 or 3 of the fair value
hierarchy.
Valuation
Inputs
The following table summarizes the funds financial instruments, based
on the inputs used to determine their fair values on December 31,
2013:
There were no material transfers between
Levels 1 and 2 during the year.
Following is a reconciliation of the
funds Level 3 holdings for the year ended December 31, 2013. Gain (loss)
reflects both realized and change in unrealized gain/loss on Level 3 holdings
during the period, if any, and is included on the accompanying Statement of
Operations. The change in unrealized gain/loss on Level 3 instruments held at
December 31, 2013, totaled $(7,000) for the year ended December 31, 2013.
Transfers into and out of Level 3 are reflected at the value of the financial
instrument at the beginning of the period. During the year, transfers into Level
3 resulted from a lack of observable market data for the security.
NOTE
3
-
DERIVATIVE
INSTRUMENTS
During the year ended December 31, 2013,
the fund invested in derivative instruments. As defined by GAAP, a derivative is
a financial instrument whose value is derived from an underlying security price,
foreign exchange rate, interest rate, index of prices or rates, or other
variable; it requires little or no initial investment and permits or requires
net settlement. The fund invests in derivatives only if the expected risks and
rewards are consistent with its investment objectives, policies, and overall
risk profile, as described in its prospectus and Statement of Additional
Information. The fund may use derivatives for a variety of purposes, such as
seeking to hedge against declines in principal value, increase yield, invest in
an asset with greater efficiency and at a lower cost than is possible through
direct investment, or to adjust credit exposure. The risks associated with the
use of derivatives are different from, and potentially much greater than, the
risks associated with investing directly in the instruments on which the
derivatives are based. The fund at all times maintains sufficient cash reserves,
liquid assets, or other SEC-permitted asset types to cover its settlement
obligations under open derivative contracts.
The fund values its derivatives at fair
value, as described in Note 2, and recognizes changes in fair value currently in
its results of operations.
Accordingly, the fund
does not follow hedge accounting, even for derivatives
employed as economic hedges. Generally, the fund accounts for its
derivatives on a gross basis. It does not offset the fair value of derivative
liabilities against the fair value of derivative assets on its financial
statements, nor does it offset the fair value of derivative instruments against
the right to reclaim or obligation to return collateral. As of December 31,
2013, the fund held equity futures with cumulative unrealized gain of $1,453,000
and cumulative unrealized loss of $0; the value reflected on the accompanying
Statement of Assets and Liabilities is the related unsettled variation
margin.
Additionally, during the year ended
December 31, 2013, the fund recognized $7,766,000 of realized gain on Futures
and a $1,097,000 change in unrealized gain/ loss on Futures related to its
investments in equity derivatives; such amounts are included on the accompanying
Statement of Operations.
Counterparty
Risk
and
Collateral
The fund invests in
exchange-traded or centrally cleared derivative contracts, such as futures,
exchange-traded options, and centrally cleared swaps. Counterparty risk on such
derivatives is minimal because the clearinghouse provides protection against
counterparty defaults. For futures and centrally cleared swaps, the fund is
required to deposit collateral in an amount equal to a certain percentage of the
contract value (margin requirement), and the margin requirement must be
maintained over the life of the contract. Each clearing broker, in its sole
discretion, may adjust the margin requirements applicable to the
fund.
Collateral may be in the form of cash or
debt securities issued by the U.S. government or related agencies. Cash and
currencies posted by the fund are reflected as cash deposits in the accompanying
financial statements and generally are restricted from withdrawal by the fund;
securities posted by the fund are so noted in the accompanying Portfolio of
Investments; both remain in the funds assets. As of December 31, 2013,
securities valued at $1,665,000 had been posted by the fund for exchange-traded
and/or centrally cleared derivatives.
Futures
Contracts
The fund is subject to equity price risk in the normal course
of pursuing its investment objectives and uses futures contracts to help manage
such risk. The fund may enter into futures contracts as an efficient means of
maintaining liquidity while being invested in the market, to facilitate trading,
or to reduce transaction costs. A futures contract provides for the future sale
by one party and purchase by another of a specified amount of a particular
underlying financial instrument at an agreed-upon price, date, time, and place.
The fund currently invests only in exchange-traded futures, which generally are
standardized as to maturity date, underlying
financial instrument, and other contract terms. Payments are made or received by
the fund each day to settle daily fluctuations in the value of the contract
(variation margin), which reflect changes in the value of the underlying
financial instrument. Variation margin is recorded as unrealized gain or loss
until the contract is closed. The value of a futures contract included in net
assets is the amount of unsettled variation margin; net variation margin
receivable is reflected as an asset and net variation margin payable is
reflected as a liability on the accompanying Statement of Assets and
Liabilities. Risks related to the use of futures contracts include possible
illiquidity of the futures markets, contract prices that can be highly volatile
and imperfectly correlated to movements in hedged security values, and potential
losses in excess of the funds initial investment. During the year ended
December 31, 2013, the funds exposure to futures, based on underlying notional
amounts, was generally less than 1% of net assets.
NOTE
4
-
OTHER
INVESTMENT
TRANSACTIONS
Consistent with its investment objective,
the fund engages in the following practices to manage exposure to certain risks
and/or to enhance performance. The investment objective, policies, program, and
risk factors of the fund are described more fully in the funds prospectus and
Statement of Additional Information.
Securities
Lending
The fund lends its securities to approved brokers to earn
additional income. Its securities lending activities are administered by a
lending agent in accordance with a securities lending agreement. It receives
collateral in the form of cash or U.S. government securities, valued at 102% to
105% of the value of the securities on loan. Collateral is maintained over the
life of the loan in an amount not less than the value of loaned securities; any
additional collateral required due to changes in security values is delivered to
the fund the next business day. Cash collateral is invested by the lending
agent(s) in accordance with investment guidelines approved by fund management.
Additionally, the lending agent indemnifies the fund against losses resulting
from borrower default. Although risk is mitigated by the collateral and
indemnification, the fund could experience a delay in recovering its securities
and a possible loss of income or value if the borrower fails to return the
securities, collateral investments decline in value and the lending agent fails
to perform. Securities lending revenue consists of earnings on invested
collateral and borrowing fees, net of any rebates to the borrower, compensation
to the lending agent, and other administrative costs. In accordance with GAAP,
investments made with cash collateral are reflected in the accompanying
financial statements, but collateral received in
the form of securities is not. At December 31, 2013, the value of loaned
securities was $53,724,000, including securities sold but not yet settled, which
are not reflected in the accompanying Portfolio of Investments; the value of
cash collateral and related investments was $55,684,000.
Ot
h
er
Purchases and sales of portfolio securities other than short-term
securities aggregated $216,523,000 and $116,399,000, respectively, for the year
ended December 31, 2013.
NOTE
5
-
FEDERAL
INCOME
TA
X
ES
No provision for federal income taxes is
required since the fund intends to continue to qualify as a regulated investment
company under Subchapter M of the Internal Revenue Code and distribute to
shareholders all of its taxable income and gains. Distributions determined in
accordance with federal income tax regulations may differ in amount or character
from net investment income and realized gains for financial reporting purposes.
Financial reporting records are adjusted for permanent book/tax differences to
reflect tax character but are not adjusted for temporary differences.
The fund files U.S. federal, state, and
local tax returns as required. The funds tax returns are subject to examination
by the relevant tax authorities until expiration of the applicable statute of
limitations, which is generally three years after the filing of the tax return
but which can be extended to six years in certain circumstances. Tax returns for
open years have incorporated no uncertain tax positions that require a provision
for income taxes.
Reclassifications to paid-in capital
relate primarily to a tax practice that treats a portion of the proceeds from
each redemption of capital shares as a distribution of taxable net investment
income or realized capital gain. For the year ended December 31, 2013, the
following reclassifications were recorded to reflect tax character (there was no
impact on results of operations or net assets):
Distributions during the years ended
December 31, 2013 and December 31, 2012, were characterized for tax purposes as
follows:
At December 31, 2013, the tax-basis cost
of investments and components of net assets were as follows:
The difference between book-basis and
tax-basis net unrealized appreciation (depreciation) is attributable to the
deferral of losses from wash sales and the realization of gains/losses on
certain open derivative contracts, for tax purposes.
NOTE
6
-
RELATED
P
ARTY
TRANSACTIONS
The fund is managed by T. Rowe Price
Associates, Inc. (Price Associates), a wholly owned subsidiary of T. Rowe Price
Group, Inc. (Price Group). The investment management and administrative
agreement between the fund and Price Associates provides for an all-inclusive
annual fee equal to 0.40% of the funds average daily net assets. The fee is
computed daily and paid monthly. The all-inclusive fee covers investment
management, shareholder servicing, transfer agency, accounting, and custody
services provided to the fund, as well as fund directors fees and expenses.
Interest, taxes, brokerage commissions, and extraordinary expenses are paid
directly by the fund.
Additionally, the fund is one of several
mutual funds in which certain college savings plans managed by Price Associates
may invest. As approved by the funds Board of Directors, shareholder servicing
costs associated with each college savings plan are allocated to the fund in
proportion to the average daily value of its shares owned by the college savings
plan. Shareholder servicing costs allocated to the fund are borne by Price
Associates, pursuant to the funds all-inclusive fee agreement. At December 31,
2013, approximately 1% of the outstanding shares of the fund were held by
college savings plans.
The fund may invest in the T. Rowe Price
Reserve Investment Fund, the T. Rowe Price Government Reserve Investment Fund,
or the T. Rowe Price Short-Term Reserve Fund (collectively, the Price Reserve
Investment Funds), open-end management investment companies managed by Price
Associates and considered affiliates of the fund. The Price Reserve Investment
Funds are offered as short-term investment options to mutual funds, trusts, and
other accounts managed by Price Associates or its affiliates and are not
available for direct purchase by members of the public. The Price Reserve
Investment Funds pay no investment management fees.
Report of Independent Registered
Public Accounting Firm
|
To
t
h
e
Board
of
Directors
of
T.
Rowe
P
rice
Index
Trust,
Inc.
and
S
h
are
h
olders
of
T.
Rowe
P
rice
Extended
Equity
Market
Index
Fund
In our opinion, the accompanying statement
of assets and liabilities, including the portfolio of investments, and the
related statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
T. Rowe Price Extended Equity Market Index Fund (one of the portfolios
comprising T. Rowe Price Index Trust, Inc., hereafter referred to as the Fund)
at December 31, 2013, and the results of its operations, the changes in its net
assets and the financial highlights for each of the periods indicated therein,
in conformity with accounting principles generally accepted in the United States
of America. These financial statements and financial highlights (hereafter
referred to as financial statements) are the responsibility of the Funds
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 2013
by correspondence with the custodian and brokers, and confirmation of the
underlying funds by correspondence with the transfer agent, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
Baltimore,
Maryland
February 14, 2014
Tax Information (Unaudited) for the
Tax Year Ended 12/31/13
|
We are providing this information as
required by the Internal Revenue Code. The amounts shown may differ from those
elsewhere in this report because of differences between tax and financial
reporting requirements.
The funds distributions to shareholders
included:
-
$6,098,000 from short-term capital
gains,
-
$12,276,000 from long-term capital gains, subject
to the 15% rate gains category.
For taxable non-corporate shareholders,
$4,307,000 of the funds income represents qualified dividend income subject to
the 15% rate category.
For corporate shareholders, $4,004,000 of
the funds income qualifies for the dividends-received deduction.
Information on Proxy Voting Policies,
Procedures, and Records
|
A description of the policies and
procedures used by T. Rowe Price funds and portfolios to determine how to vote
proxies relating to portfolio securities is available in each funds Statement
of Additional Information. You may request this document by calling
1-800-225-5132 or by accessing the SECs website, sec.gov.
The description of our proxy voting
policies and procedures is also available on our website, troweprice.com. To
access it, click on the words Social Responsibility at the top of our
corporate homepage. Next, click on the words Conducting Business Responsibly
on the left side of the page that appears. Finally, click on the words Proxy
Voting Policies on the left side of the page that appears.
Each funds most recent annual proxy
voting record is available on our website and through the SECs website. To
access it through our website, follow the above directions to reach the
Conducting Business Responsibly page. Click on the words Proxy Voting
Records on the left side of that page, and then click on the View Proxy Voting
Records link at the bottom of the page that appears.
How to Obtain Quarterly Portfolio
Holdings
|
The fund files a complete schedule of
portfolio holdings with the Securities and Exchange Commission for the first and
third quarters of each fiscal year on Form N-Q. The funds Form N-Q is available
electronically on the SECs website (sec.gov); hard copies may be reviewed and
copied at the SECs Public Reference Room, 100 F St. N.E., Washington, DC 20549.
For more information on the Public Reference Room, call 1-800-SEC-0330.