United States: On The Horizon - June 11, 2013


New guidance clarifies investment company status determination and accounting

The FASB has issued Accounting Standards Update (ASU) 2013-08, Financial Services – Investment Companies: Amendments to the Scope, Measurement, and Disclosure Requirements, with a threefold intent:

  • To provide a two-tiered approach to assess whether a public or private company is an investment company
  • To address accounting by an investment company for noncontrolling interests in other investment companies
  • To require certain additional disclosures

The ASU clarifies that an entity subject to regulation under the Investment Company Act of 1940 is considered an investment company under U.S. GAAP, while all other entities should consider their purpose and design, and assess their individual characteristics to make that determination. After making the initial determination of investment company status, an entity should then reassess its status based on certain future events.

Under the ASU, an entity must possess all of the following fundamental characteristics at formation to be considered an investment company:

  • It obtains funds from investors and provides them with investment management services.
  • Its business purpose and only substantive activities are to invest solely for capital appreciation and / or investment income.
  • Along with its affiliates, it does not obtain, or have the objective of obtaining, returns that are not attributable to ownership interests or that would be other than capital appreciation or investment income.

Further, an investment company typically has the following characteristics:

  • More than one investment
  • More than one investor
  • Investors that are not related parties of the investment advisor or its parent
  • Ownership interests that are equity or partnership interests
  • It manages substantially all of its investments on a fair value basis

An entity not possessing one or more of these characteristics should apply judgment to determine whether its activities are consistent with the activities of an investment company.

In addition, ASU 2013-08 requires an investment company to measure the noncontrolling interests in other investment companies at fair value as opposed to using the equity method.

The guidance also requires increased disclosures regarding an entity's investment company status, any changes in that status, and information about financial support that has been or will be provided under contract to investees.

The amendments in ASU 2013-08 do not apply to real estate investment trusts. The Board decided not to address the applicability of investment company accounting to real estate entities nor to address the measurement of their investments. Accordingly, the ASU does not change practice for real estate entities that apply the measurement principles in FASB Accounting Standards Codification® (ASC) 946, Financial Services – Investment Companies, as a matter of industry practice.

The guidance in ASU 2013-08 is effective prospectively for interim and annual reporting periods in fiscal years beginning after December 15, 2013. Early adoption is prohibited. On the effective date, if an entity is no longer an investment company, it must discontinue application of ASC 946.

The Board has published FASB In Focus, "FASB Issues Standard Clarifying Investment Company Status and Accounting", to provide additional information regarding this ASU.

Meeting held June 6

All decisions reached at Board meetings are tentative and may be changed at future meetings. Decisions are included in an Exposure Draft only after a formal written ballot. Decisions reflected in Exposure Drafts are often changed in redeliberations by the Board based on information received in comment letters, at public roundtable discussions, and from other sources. Board decisions become final after a formal written ballot to issue a final Accounting Standards Update.

In connection with its project on the definition of a nonpublic entity, the Board on June 6 continued discussions on how to clarify and refine the definition of a public company for financial reporting purposes. The Board tentatively decided that a business that meets any one of the following criteria would be considered "public" for financial reporting purposes:

  • Files (or furnishes) financial statements with the Securities and Exchange Commission
  • Files (or furnishes) financial statements with a regulatory agency as part of preparing for the sale or issuance of securities
  • Has issued unrestricted securities that are traded on an exchange or an over-the-counter market, or is a conduit bond obligor for such securities
  • Has unrestricted securities and is required by law or regulation to make U.S. GAAP financial statements publicly available on a periodic basis

The Board also tentatively concluded that the distinction between public and nonpublic should not be made for not-for-profit entities (NFPs); in other words, for financial reporting purposes, an NFP would not be considered public or nonpublic. The Board expects to consider whether accounting and reporting alternatives under U.S. GAAP could be applied by NFPs.

SEC proposes money market fund reforms

On June 5, the SEC issued the Proposed Rule, Money Market Fund Reform, to reform the way money market funds operate, with the objective of mitigating and managing their susceptibility to heavy redemptions while preserving the benefits of a money market fund. The Proposed Rule includes the following alternate reforms that could be adopted independently or in combination:

  • Money market funds would sell and redeem shares based on the current market value of the securities in their underlying portfolios.
  • If the funds' liquidity levels fall below a threshold, the funds would be able to impose a liquidity fee and temporarily suspend redemptions.

The proposal also includes certain diversification measures and disclosure requirements for increasing transparency.

The comment period ends 90 days after publication of the Proposed Rule in the Federal Register.


Conflict minerals Q&As on independence posted online

New questions and answers (Q&As) regarding independence when performing or considering whether to perform an independent private sector audit of an entity's conflict minerals report have been issued on the AICPA Conflict Minerals Resources webpage. The Q&As include information on conflict minerals–related services that can be provided to clients and on whether a mix of services is permissible or prohibited under certain independence rules.

Airlines guide issued

The AICPA has updated the Audit and Accounting Guide, Airlines, to provide industry-specific guidance on accounting and auditing issues in the airlines industry.

OMB issues temporary guidance for 2013 DCF submissions

The U.S. Office of Management and Budget (OMB) has issued guidance for single audits of fiscal periods ending in 2013 that are due before the final 2013 Data Collection Form (DCF) is available, which is expected in summer 2013. In these instances, the OMB has granted an automatic extension to September 30, 2013 for reporting packages due before that date.

HUD revises Chapter 1 of guide

The U.S. Department of Housing and Urban Development (HUD) revised Chapter 1, General Audit Guidance, of the Consolidated Audit Guide for Audits of HUD Programs, to reflect certain changes in Government Auditing Standards and the clarified auditing standards issued by the Auditing Standards Board of the AICPA.

The revised guidance is effective for audits of entities with years ending on or after June 30, 2013.

Comment letter issued

On June 3, the firm issued a comment letter in response to the OMB Uniform Guidance: Cost Principles, Audit, and Administrative Requirements for Federal Awards.

The comment letter is available on the firm's website at grantthornton.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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