FASB Issues Standard Update on Investment Company Status

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. 

When Will the Amendments Be Effective?

According to the FASB, the amendments in ASU No. 2013-08, Financial Services  Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements – are effective for an entity's interim and annual reporting periods in fiscal years that begin after December 15, 2013. Earlier application is prohibited.
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.

You may like these other stories...

Cybersecurity is no longer the domain of an organization's IT staff. It's moved to the boardroom, and in a big way. Accountants and financial managers may have been thinking it's just the province of the tech...
Boehner addresses GOP priorities ahead of midterm electionsHouse Speaker John Boehner (R-OH) on Thursday delivered what amounted to closing arguments ahead of the November elections, laying out a list of Republican...
Former DOJ Tax Division head Kathryn Keneally joining DLA Piper in New YorkGlobal law firm DLA Piper announced on Thursday that Kathryn Keneally, the former head of the US Justice Department Tax Division, is joining the firm...

Already a member? log in here.

Upcoming CPE Webinars

Sep 24
In this jam-packed presentation Excel expert David Ringstrom, CPA will give you a crash-course in creating spreadsheet-based dashboards. A dashboard condenses large amounts of data into a compact space, yet enables the end user to easily drill down into details when warranted.
Sep 30
This webcast will include discussions of important issues in SSARS No. 19 and the current status of proposed changes by the Accounting and Review Services Committee in these statements.
Oct 21
Kristen Rampe will share how to speak and write more effectively by understanding your own and your audience's communication style.
Oct 23
Amber Setter will show the value of leadership assessments as tools for individual and organizational leadership development initiatives.