Investment Companies — FASB Reverses Decision on Accounting for Interests in Other Investment Companies and Amends Disclosure Requirements

Published on: 30 Aug 2012

At its meeting yesterday, the FASB (1) reversed a decision it had made recently on the measurement requirements for an investment company’s interest in another investment company and (2) decided to amend the disclosure requirements for investment companies.

Measurement Requirements for an Interest in Another Investment Company

The FASB decided that rather than requiring an investment company to account for its interest in another investment company at fair value, it would not provide guidance on the measurement of such interests and would instead allow investment companies to continue current industry practice. Although this decision diverges from its recent joint decision with the IASB, the Board highlighted that (1) users are not opposed to current industry practice and (2) its project on applying asset- or entity-based guidance to nonfinancial assets held in an entity may provide additional insight on how to address this issue.

Disclosure Requirements

The FASB decided that to improve transparency about an investment company’s interests in other investment companies, reporting entities should disclose the following information for each significant interest in an unconsolidated investment company:1

  1. Description of investee fund (name and category) and the percentage of the net assets invested in the investee fund
  2. The total assets of the investee fund
  3. The total debt outstanding of the investee fund
  4. The net assets of the investee fund
  5. The expense ratio of the investee fund
  6. The proportionate ownership interest in the investee fund.

This information would only be required for the investment entity’s investees and not for interests in other investment companies held by those investees. Further, reporting entities would disclose the information by including it in the notes to their financial statements or by attaching the investee’s financial statements to theirs.

Editor’s Note: The Board decided that the threshold for determining whether to provide these additional discloses should be based on whether the interest in the other investment company is considered “significant.” The Board acknowledged that views on whether an interest is considered significant may be different depending on whether the investor entity is a regulated or a nonregulated investment company.

The Board also reconfirmed its previous decision that a master fund’s financial statements should be attached to the feeder fund’s financial statements for both regulated and nonregulated entities.

Finally, the Board decided to revise the threshold for the disclosure currently required under ASC 946-210-50-92 from 5 percent to “significant,”3 which is consistent with its other decisions. This disclosure would be required for both regulated and nonregulated investment companies.

[1] See the FASB’s handout for the August 29, 2012, meeting.

[2] FASB Accounting Standards Codification Subtopic 946-210, Financial Services — Investment Companies: Balance Sheet.

[3] Under ASC 946-210-50-9, “If the reporting investment company's proportional share of any investment owned by any individual investee exceeds 5 percent of the reporting investment company's net assets at the reporting date, each such investment shall be named and categorized as discussed in paragraph 946-210-50-6. These investee disclosures shall be made either in the condensed schedule of investments (as components of the investment in the investee) or in a note to that schedule.”

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