The Financial Accounting Standards Board (FASB) has issued an Accounting Standards Update (ASU) for determining whether a public or private company is an investment company. The update also clarifies the characteristics and sets measurement and disclosure requirements for investment companies.
The FASB and the International Accounting Standards Board (IASB) want to develop consistency when determining whether a company is an investment company, with fair value of investments being the most relevant measurement for the company’s financial statement users.
The Update affects the scope, measurement, and disclosure requirements for investment companies under US GAAP.
FASB chairman Leslie Seidman said: "Investment companies have reported their investments at fair value for decades under US GAAP, and this standard does not change that basic principle. However, over the years, different types of companies have engaged in investing activities, making the scope of that guidance less clear. This standard clarifies the characteristics of an investment company and provides comprehensive implementation guidance for companies that have those characteristics."
Under the update, a company regulated under the Investment Company Act 1940 is an investment company for accounting purposes. All other companies must assess whether they have the following characteristics to be considered an investment company:
1. It obtains funds from investor(s) and provides the investor(s) with investment management services;
2. It commits to its investor(s) that its business purpose and only substantive activities are investing the funds for returns solely from capital appreciation, investment income, or both;
3. The company or its affiliates don’t 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;
4. It has multiple investments;
5. It has multiple investors;
6. It has investors that are not related to the parent or investment manager;
7. The company’s ownership interests are in the form of equity or partnership interests.
8. It manages substantially all of its investments on a fair value basis.
To be an investment company, a company must have all the fundamental characteristics of (1) through (3) above. Typically, an investment company also has characteristics (4) through (8). However, if a company does not possess one or more of the typical characteristics, it must apply judgment and determine, considering all the facts and circumstances, how its activities continue to be consistent (or inconsistent) with those of an investment company.
An investment company will also be required to measure non-controlling ownership interests in other investment companies at fair value, rather than using the equity method of accounting. In addition, investment companies must make the following additional disclosures:
(a) The fact that the company is an investment company and is applying specialised guidance;
(b) Information about changes, if any, in a company’s status as an investment company; and
(c) Information about financial support provided or contractually required to be provided by an investment company to any of its investees.
In October 2012, the IASB issued Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27). While the approaches to the investment company assessment are similar, the scope of investment company guidance under IFRS is narrower because it provides only an exception to consolidation guidance. The guidance under IFRS requires a controlled investee to be present for a company to be eligible for the investment entity exception to consolidation guidance. In contrast, longstanding US GAAP has provided comprehensive accounting and reporting guidance for investment companies.
¬ASU No. 2013-08, Financial Services – Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements is effective for fiscal years beginning after 15 December 2013, and earlier application is prohibited.