In brief: FASB issues final standard on investment companies (No. 2013-30)

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In brief 06/11/2013 by Assurance services
In brief: FASB issues final standard on investment companies (No. 2013-30)

At a glance

On June 7, 2013, the FASB issued amendments to ASC 946 that modify the definition of an investment company under US GAAP. This In brief article provides an overview of the new guidance.

What's new?

On June 7, 2013, the FASB issued Accounting Standards Update No. 2013-08, Financial Services—Investment Companies (Topic 946): Amendments to the Scope, Measurement and Disclosure Requirements. This final standard modifies the criteria used in defining an investment company under US GAAP. It also sets forth certain measurement and disclosure requirements.

What are the key provisions?

Background

As part of their joint project on consolidation, the FASB and IASB agreed to develop a consistent approach for determining whether an entity is an investment company. The FASB and IASB agreed on a principles-based approach to defining investment entities, but there are differences between the boards’ respective guidance.

The IASB issued its final standard in the form of amendments to existing IFRS standards on October 31, 2012.[1] The amendments focused primarily on creating a narrow exception for certain entities from the consolidation guidance.

The FASB’s definition of an investment company

An entity regulated under the Investment Company Act of 1940 is automatically an investment company under the new US GAAP definition. For all other entities, the FASB decided to apply a blended approach for the definition. That is, the definition includes certain aspects that are required to be present along with additional characteristics that allow for judgment.

  • Required criteria: In order to qualify as an investment company, an entity needs to obtain funds and provide investment management services. Its business purpose and only substantive activities are investing for capital appreciation, investment income or both. And the entity (and its affiliates) does not obtain returns or benefits that are not normally attributable to ownership interests.
  • Typical characteristics: To be an investment company, it is expected that an entity will have the following characteristics:
  • It has more than one investment and more than one investor.
  • It has investors that are not related parties of the entity 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.

An entity will need to apply judgment in situations where one or more characteristics are not present. If an entity is missing a characteristic, it does not automatically preclude it from qualifying as an investment company.

Disclosures and measurement guidance

The FASB’s final standard reaffirms that a noncontrolling interest in another investment company should be measured at fair value instead of the equity method. It also includes additional disclosure requirements for an entity to disclose the fact that it is an investment company, and provide information about changes, if any, in its status as an investment company. An entity will also need to include disclosures around financial support that has been provided or is contractually required to be provided to any of its investees.


[1] Refer to In brief 2012-49, IASB finalizes definition of an “investment entity”

Is convergence achieved?

The FASB’s and IASB’s approaches to the investment company assessment are similar. However, the impact of being considered an investment company under IFRS is narrower than under US GAAP because it provides only an exception to consolidation for controlled investments. Consequently, there are other differences that exist between the FASB’s and the IASB’s accounting and reporting guidance for investment companies. In addition, unlike US GAAP, the accounting by an investment company would not be retained on consolidation by a noninvestment company parent under the IASB's standard.

What’s the effective date?

The requirements of the FASB’s final standard are effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013. Early application is prohibited.

An entity must discontinue application of the guidance in ASC Topic 946 if it is no longer an investment company upon the effective date. The entity is required to present the change in its status as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption.

An entity that is an investment company upon the effective date should apply the guidance prospectively, and will record the effect of applying the amendments as an adjustment to opening net assets for the period of adoption.

Questions?

PwC clients who have questions about this In brief should contact their engagement partner. Engagement teams that have questions should contact the Financial Instruments team in the National Professional Services Group (1-973-236-7803).

Authored by: 

Annette Spicker
Partner
Phone: 1-973-236-4088
Email: annette.p.spicker@us.pwc.com

Luke Wilson
Senior Manager
Phone: 1-973-236-7046
Email: luke.a.wilson@us.pwc.com