June 10, 2013
Volume 20, Issue 16
Heads Up
In This Issue:
• Requirements to Qualify as an
Investment Company
• Measurement of Underlying
Investments
• Investments Held by
Noninvestment Companies
• Reassessment
• Disclosure Requirements
• Effective Date
Redefining Moment
FASB Finalizes Amendments to
Investment Company Guidance
by Trevor Farber, Elsye Putri, and Sean Prince, Deloitte & Touche LLP
On June 7, 2013, the FASB issued a final ASU1 that amends the criteria for an entity
to qualify as an investment company under ASC 946.2 While the ASU is not expected
to significantly change which entities qualify for the specialized investment company
accounting in ASC 946, it (1) introduces new disclosure requirements that apply to all
investment companies and (2) amends the measurement criteria for certain interests in
other investment companies. The ASU also amends the requirements in ASC 810 related
to qualifying for the “investment company deferral” in ASU 2010-103 as well as the
requirements in ASC 820 related to qualifying for the “net asset value practical expedient”
in ASU 2009-12.4
Editor’s Note: The ASU is the result of a joint project with the IASB to converge the
guidance on investment companies. In October 2012, the IASB introduced the concept
of an investment entity to IFRSs in its amendments to IFRS 10,5 IFRS 12,6 and IAS 27.7
The requirements in the ASU are similar to the definition of an investment entity under
the IASB’s amendments. However, differences remain between the FASB’s and IASB’s
models, particularly related to (1) their scope, (2) how an investment company should
account for an interest in another investment company, and (3) how a noninvestment
company parent should account for investments held by its investment company
subsidiaries in its consolidated financial statements.
Deloitte Dash
Investment
Companies — the
FASB’s Revised
Definition
Listen to a brief discussion
about the FASB’s new
investment company standard.
Requirements to Qualify as an Investment Company
Entities that are regulated under the Investment Company Act of 1940 (the “1940 Act”)
are within the scope of ASC 946 regardless of whether they meet the revised criteria to
qualify as an investment company. For entities that are not regulated under the 1940
Act, the ASU requires an evaluation of whether the entity has both of the following
fundamental characteristics:
a. 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
FASB Accounting Standards Update No. 2013-08, Financial Services — Investment Companies (Topic 946): Amendments to
the Scope, Measurement, and Disclosure Requirements.
2
For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s “Titles of Topics and Subtopics in the
FASB Accounting Standards Codification.”
3
FASB Accounting Standards Update No. 2010-10, Consolidation (Topic 810): Amendments for Certain Investment Funds.
4
FASB Accounting Standards Update No. 2009-12, Fair Value Measurements and Disclosures (Topic 820): Investments in
Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).
5
IFRS 10, Consolidated Financial Statements.
6
IFRS 12, Disclosure of Interests in Other Entities.
7
IAS 27, Separate Financial Statements.
1
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.
b. 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.[8]
In addition to the fundamental characteristics noted above, an investment company
would generally display the following “typical” characteristics:
a. It has more than one investment.
b. It has more than one investor.
c. It has investors that are not related parties of the parent (if there is a parent) or the
investment manager.
d. It has ownership interests in the form of equity or partnership interests.
e. It manages substantially all of its investments on a fair value basis.
To qualify as an investment company, an entity must display all of the fundamental
characteristics described in the ASU. If an entity does not display one or more of the
typical characteristics, it is not necessarily precluded from qualifying as an investment
company. However, it will need to determine how its activities are consistent with those
of an investment company. An entity should consider its purpose and design when
evaluating whether it displays the characteristics of an investment company.
To qualify as an
investment company,
an entity must
display all of the
fundamental
characteristics
described in
the ASU.
The ASU also provides extensive implementation guidance on evaluating whether entities
qualify as investment companies.
Editor’s Note: The FASB decided on a two-tiered approach for developing the
characteristics of an investment company on the basis of feedback received on its
original proposal, which would have required an entity to meet all of the proposed
requirements to qualify as an investment company. However, an entity will need to
use judgment in determining whether it qualifies as an investment entity when it only
displays some of the typical characteristics.
The existing scope exception for real estate investment trusts (REITs) is retained in
the ASU. In addition, the ASU states that the “Board does not intend for the amendments
. . . to change practice for real estate entities.” However, as part of a separate project, the
FASB plans to revisit the accounting for real estate investments and whether REITs should
be subject to this guidance.
Measurement of Underlying Investments
An investment company is required to measure all of its investments in noninvestment
company investees at fair value (including controlled investments and equity method
investments). However, an investment company is exempted from this requirement if
it has an interest in an operating entity that provides services related to the investment
company’s investment activities (e.g., an investment advisor or transfer agent). The equity
method or consolidation would be used to account for such investments depending on
the investment company’s level of influence.
The ASU also prohibits the use of the equity method for interests in other investment
companies. This is a change for investment companies that have historically applied
the equity method of accounting to such investments. In addition, the FASB decided
not to provide specific guidance on how an investment company should account for a
controlling interest in another investment company. The ASU’s basis for conclusions states
that “the Board decided not to amend Topic 946 regarding an investment company’s
application of consolidation guidance in Topic 810, Consolidation.”
ASC 946-10-55-8 provides examples of relationships and activities that would indicate that an entity obtains benefits that are
not normally attributable to ownership interests or that are other than capital appreciation or investment income.
8
2
Editor’s Note: Under the FASB’s original proposal, an investment company would
have been required to consolidate another investment company in which it held a
controlling financial interest. That decision was based on the Board’s concerns about
transparency of the risks, obligations, and expenses of an investee fund. The Board
ultimately agreed to not amend the requirements for controlling interests in other
investment companies; however, it decided that as part of a separate project, it may
develop additional disclosures to enhance transparency.
Investments Held by Noninvestment Companies
The ASU also provides guidance on how a noninvestment company parent should
account for the investments held by its investment company subsidiaries or equity
method investees in its consolidated financial statements. Under the ASU, a
noninvestment company parent must retain the specialized industry-specific guidance
applied by its investment company subsidiary or equity method investee in its
consolidated financial statements.
The ASU requires an
investment company
to disclose that it is
an investment
company and that it
is applying the
specialized guidance
in ASC 946.
Editor’s Note: ASU 2010-10 provides an indefinite deferral from the consolidation
requirements in ASU 2009-179 for interests in certain investment companies (or entities
that account for their investments under ASC 946). In addition, ASU 2009-12 provides
a practical expedient for determining the fair value of investments in certain entities.
The ASU amends the criteria for qualifying for the deferral and for the practical
expedient. Therefore, a reporting entity will need to reevaluate whether its interest
in another entity continues to qualify for the deferral in ASU 2010-10 or the practical
expedient in ASU 2009-12. However, the overall effect of those amendments is not
expected to be significant.
Reassessment
The assessment of whether an entity meets the investment company criteria should be
made upon formation of the entity and reassessed only if there is a subsequent change
in the purpose and design of the entity or if the entity is no longer regulated under the
1940 Act. A change in an entity’s status as an investment company should be accounted
for prospectively from the date of the change (as opposed to from the beginning of the
reporting period).
If an entity is no longer an investment company, it should account for the change
prospectively by applying other GAAP. The fair value of an investment as of the date of
the change would be the investment’s new carrying amount. If, upon reassessment, the
entity becomes an investment company, it should recognize the effect as a cumulativeeffect adjustment to net assets as of the date of the change in status.
Disclosure Requirements
The ASU requires an investment company to disclose that it is an investment company
and that it is applying the specialized guidance in ASC 946. It also requires an entity
to disclose whether there has been a change in its status as an investment company
and, if so, the reasons for the change. Finally, the ASU requires an investment company
to disclose information related to whether it has provided financial support (e.g.,
type, amount, and reasons for the financial support) to any of its investees or that it is
contractually required to provide such support.
Effective Date
The ASU is effective for an entity’s interim and annual reporting periods in fiscal years that
begin after December 15, 2013. Earlier application is prohibited.
FASB Accounting Standards Update No. 2009-17, Consolidations (Topic 810): Improvements to Financial Reporting by
Enterprises Involved With Variable Interest Entities.
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