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Journal entry — Investment companies — FASB and IASB continue redeliberations

Published on: Jun 14, 2012

At their joint board meeting yesterday, the FASB and IASB continued to redeliberate their project on investment companies. The boards tentatively agreed on the measurement requirements for an investment company’s interest in another investment company. In addition, the boards reached different decisions about retaining an investment company’s specialized accounting in its noninvestment company parent’s consolidated financial statements.

Measurement Requirements for an Investment Company’s Interest in Another Investment Company

The FASB tentatively decided that an investment company would measure its interests in another investment company at fair value. This decision is a significant departure from the guidance in the FASB’s exposure draft (ED), which would have required an investment company to consolidate a controlling financial interest in another investment company. Similarly, the IASB decided that an investment company should measure its controlling financial interests in another investment company at fair value.

However, the FASB requested that its staff investigate whether its decision conflicts with either the requirements under the Investment Company Act of 1940 (the “1940 Act”) or those of the SEC’s Division of Investment Management. At a future meeting, the FASB will separately discuss such potential conflicts (including current industry practice in which investment companies consolidate wholly owned investment company subsidiaries).

Editor’s Note: At previous meetings, the FASB expressed concerns about how an investment company should account for its investment in another investment company when it owns 100 percent of the other investment company, particularly when the investment company subsidiary is established for regulatory or tax purposes (commonly referred to as a “blocker entity”). As a result of these concerns, provisions in the FASB’s ED state that an investment company should always consolidate a controlling financial interest in another investment company.

The FASB also decided to codify industry practice regarding master-feeder structures in which the master fund’s financial statements are attached to the feeder fund’s financial statements. Although such practice is currently required under the 1940 Act, it is not prescribed for nonregistered investment companies. The FASB also requested its staff develop a definition of a master-feeder structure as well as to discuss at a future meeting other situations (e.g., a fund-of-funds structure) in which attaching an investee’s financial statements may be appropriate.

Retention of an Investment Company’s Specialized Accounting by Its Noninvestment Company Parent

The FASB and IASB also reaffirmed their decisions in their respective EDs on whether a noninvestment company parent should retain, after consolidation, the specialized accounting of its investment company subsidiary. Like current U.S. GAAP, the FASB’s ED would require that a noninvestment company parent retain the specialized accounting applied by its investment company subsidiary within its consolidated financial statements. In contrast, under the IASB’s ED, a noninvestment company parent would not retain the specialized accounting applied by its investment company subsidiary. The boards’ guidance on this topic is expected to remain significantly different.

Some IASB board members expressed concerns about situations in which “unwinding” the specialized accounting may obscure the parent entity’s financial statements. However, others noted that allowing the specialized accounting to be retained by the noninvestment company parent would create potential structuring opportunities to circumvent consolidation accounting.

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