At their joint meeting this week, the FASB and IASB continued discussing how an entity determines whether it is an investment company. The discussion focused on (1) the relationship between the proposed definition of an investment company and the “typical characteristics” of an investment company as discussed at the boards’ May 2012 meeting¹ and (2) further development of the “unit ownership” characteristic.

Assessment of the Typical Characteristics

At their May meeting,  the boards tentatively decided that the definition of an investment company should (1) incorporate the “nature of investment activities” and the “express business purpose” criteria proposed in the boards’ respective exposure drafts and (2) include a requirement that entities obtain funds from an investor or investors to provide the investor(s) with professional investment management services. In addition, the boards decided that an entity would need to consider certain typical characteristics of investments companies as part of its overall assessment of whether it is an investment company.

At this week’s meeting, the boards further discussed the relationship between the definition of an investment company and the typical characteristics of an investment company. Both boards ultimately determined that the definition of an investment company should “stand alone” (i.e., that the typical characteristics should not be part of the definition). The boards agreed that the typical characteristics should instead be treated as indicators in an entity’s assessment of whether the entity satisfies the definition of an investment company. Further, investment companies that do not possess one or more typical characteristics would need to explain how they meet the definition of an investment company.

Ownership Interests

At the May meeting, some board members expressed concerns about the unit ownership characteristic. Certain board members indicated that the characteristic should be eliminated; others questioned whether entities with significant debt ownership (e.g., securitization vehicles) should qualify as investment companies.

At this week’s meeting, the boards further discussed whether and, if so, how unit ownership should be incorporated into the overall investment company definition. They tentatively decided that, despite earlier concerns, they would retain the concept of unit ownership and agreed that an entity should not be included in or excluded from the scope of investment company guidance solely because of the form of its ownership interests. Accordingly, unit ownership would be a characteristic that an entity would need to consider in its assessment of whether it is an investment company (and not part of the definition of an investment company).

[1] For additional details of the boards’ May meeting, refer to Deloitte’s May 25, 2012, journal entry.

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