FASB Issues Investment Company Standard
June 13, 2013
On June 7, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-08, "Financial Services-Investment Companies (Topic 946): Amendments to the Scope, Measurement and Disclosure Requirements." The ASU is the culmination of a joint effort by the FASB and International Accounting Standards Board to develop a consistent approach to defining investment companies. When originally exposed for public comment in 2011, FASB also released a companion proposal that addressed Real Estate Investment Property Entities. In the end, the board decided not to change current practice for real estate entities for which it is industry practice to issue financial statements using the measurement principles in topic 946. This decision is a positive one for colleges and universities that use the net asset value (NAV) practical expedient to value real estate investments held by a fund or trust.
An investment company typically manages substantially all of its investments on a fair value basis and transacts with investors on the basis of NAV. The amendments in ASU 2013-08 change the assessment of whether an entity is an investment company. This is important for independent institutions and NFP foundations affiliated with public institutions that use the practical expedient to value alternative investments. If an investment fund no longer meets the definition of an investment company, the practical expedient cannot be used.
In general, under the ASU, to be considered an investment company an entity must obtain funds from investors, provide them with investment management services, and have objectives designed solely for capital appreciation and/ or investment income. An investment company typically has the following characteristics:More than one investor
- More than one investment
- Ownership interests that are equity or partnership interests
- Investors that are not related parties of the investment advisor
The ASU provides additional implementation guidance for the assessment. There are also new disclosure requirements that provide financial statement users with added information about an entity's status as an investment company and financial support provided or contractually required to be provided by an investment company to its investees. The requirements in the ASU are effective in FY15.
The ASU, an article, and Podcast information are available on FASB's Web site.
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