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Financial Services Insights – December 2013 - Investment Companies — Scope, Measurement, and Disclosure Requirements

INTRODUCTION

Maulbeck_MatthewIn June 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2013-08, Investment Companies (Topic 946) – Scope, Measurement, and Disclosure Requirements (the “ASU,” “ASU 2013-08”).  The ASU is the result of a joint project on consolidation between the FASB and the International Accounting Standards to develop a consistent approach for determining whether an entity is an investment company for which fair value of investments is the most relevant measurement attribute for the entity’s financial statement users. This ASU updates the requirements in Topic 946 for determining whether an entity is an investment company.1 This ASU (i) clarifies and provides guidance with respect to the characteristics of an investment company and assessing whether an entity meets the definition of an investment company, (ii) requires an investment company to measure a noncontrolling interest in other investment companies as fair value rather than the equity method, and (iii) requires certain additional disclosures in the financial statements of an investment company.

ASSESSMENT OF INVESTMENT COMPANY STATUS

ASU 2013-08 automatically defines an investment company that is an entity regulated under the Investment Company Act of 1940 (the “1940 Act”). Entities that are not regulated under the 1940 Act are required to consider their purpose and design as well as meet all fundamental characteristics and evaluate all typical characteristics of an investment company. (Click here to view “Is it an Investment Company?” PDF) The ASU makes clear that an investment company must have all the fundamental characteristics but that the absence of one or more of the typical characteristics would not necessarily preclude an entity from being an investment company. When an entity does not possess one or more of the typical characteristics, it must assess, by considering all the facts and circumstances, how its activities are consistent with those of an investment company.

Fundamental Characteristics
The fundamental characteristics that an investment company is required to have are as follows:

  1. It is an entity that does both of the following:
    1. Obtains funds from one or more investors and provides the investor(s) with investment management services.
    2. Commits to its investor(s) that its business purpose and only substantive activities are investing the funds solely for returns from capital appreciation, investment income, or both.
     
  2. The entity or its affiliates do not obtain or have the objective of obtaining returns or benefits from an investee or its affiliates that are not normally attributable to ownership interests or that are other than capital appreciation or investment income.

Typical Characteristics
The typical characteristics of an investment company that must be assessed, but are not necessarily required, are as follows:

  • It has more than one investment.
  • It has more than one investor.
  • It has investors that are not related parties of the parent (if there is a parent) or the investment manager.
  • It has ownership interests in the form of equity or partnership interests.
  • It manages substantially all of its investments on a fair value basis.

NEW DISCLOSURE REQUIREMENTS

ASU 2013-08 requires investment companies that meet the definition of an investment company per the ASU disclose that the entity is an investment company applying specialized accounting and reporting per Topic 946.

Change in Status
To the extent there is a change in the status of an entity, the change in status and the reason for the change must be disclosed. An entity that has become an investment company as a result of this ASU must report the effect of the change in status on the fair value of its investments as of the date the change in status occurred.

Financial Support
Financial support provided to an investee is required to be disclosed and disaggregated by financial support it was contractually required to provide and financial support it was not contractually required to provide. Such disclosure must include:

  1. The type and amount of financial support, including when the investment company assists an investee in obtaining financial support, and
  2. the primary reason for providing the financial support.

An investment company is also required to disclose financial support it is contractually required, but has not yet provided its investees. Such disclosure must include:

  1. The type and amount of financial support to be provided, including situations in which the investment company must assist the investee in obtaining financial support, and
  2. The primary reasons for the contractual requirement to provide the financial support.

TRANSITION AND EFFECTIVE DATE

Entities that were investment companies but no longer meet those requirements must discontinue applying investment company accounting upon the effective date, with the change in status being applied retrospectively as a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption.

Entities that were not previously investment companies, but that now meet the requirements, must apply investment company accounting prospectively.

The effective date of the ASU is for all interim and annual periods beginning after December 15, 2013, with early adoption prohibited.


1Prior to the issuance of this update, the AICPA issued AICPA Statement of Position 07-1, Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies (SOP 07-1), to clarify what entities qualify as investment companies and to provide guidance about when the specialized industry-specific accounting applied by an investment company should be retained by a parent or equity method investor that is accounting for its interest in an investment company. The FASB indefinitely deferred SOP 07-1 shortly after its issuance. This ASU supersedes SOP 07-1.

 

Financial Services Insights – December 2013 

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