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.
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. The amendments focused primarily on creating a narrow exception for certain entities from the consolidation guidance.
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.
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.
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.
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.
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.
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).