By Jason Bramwell
The Financial Accounting Standards Board (FASB) has developed a new guideline for determining whether a public or private company is an investment company, for which fair value of investments is the most relevant measurement for the company's financial statement users.
The Accounting Standards Update (ASU) No. 2013-08, Financial Services – Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements – also clarifies the characteristics and sets measurement and disclosure requirements for an investment company.
Under the new FASB standard, a public or private company regulated under the Investment Company Act of 1940 would be classified as an investment company for accounting purposes, John Pappas, FASB spokesperson, told AccountingWEB.
"All other companies must assess whether they have fundamental and typical characteristics to be considered an investment company", he said.
According to the FASB, the characteristics that a company must assess for it to be considered an investment company include:
- The company obtains funds from investor(s) and provides the investor(s) with investment management services.
- The company 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.
- The company 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 outcome.
- The company has multiple investments.
- The company has multiple investors.
- The company has investors that are not related to the parent or investment manager.
- The company's ownership interests are in the form of equity or partnership interests.
- The company manages substantially all of its investments on a fair-value basis.
"If a public or private company does not possess one or more of the typical characteristics, it must apply judgment and determine – considering all facts and circumstances – how its activities continue to be consistent, or are not consistent, with those of an investment company", Pappas said.
An investment company also will be required to measure noncontrolling ownership interests in other investment companies at fair value rather than using the equity method of accounting, according to the FASB.
In addition, an investment company will be required to make the following additional disclosures:
- The fact that the company is an investment company and is applying specialized guidance.
- Information about changes, if any, in a company's status as an investment company.
- Information about financial support provided or contractually required to be provided by an investment company to any of its investees.
"Investment companies have reported their investments at fair value for decades under US GAAP, and this standard does not change that basic principal", FASB Chairman Leslie Seidman said in a written statement. "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."
In October 2012, the International Accounting Standards Board (IASB) issued Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27). While the FASB approaches to the investment company assessment are similar, the scope of investment company guidance under International Financial Reporting Standards (IFRS) is narrower because it provides only an exception to consolidation guidance, the FASB stated.
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.