Disclosures Updates for Fund’s Investments in Another Investment
Posted on 01.24.14
By: Scott Hoffmann, CPA
Business Assurance & Advisory Services Senior Associate
In October 2013, the Financial Standards Accounting Board (“FASB”) met to advance proposed changes to required disclosures for investment companies when invested in other underlying investment companies. A typical example of the investment companies that would be affected by the proposed changes would be “fund of funds” and “master-feeder funds.” The staff of the FASB has released summary information from their meeting on October 23rd, including the project objective, scope, proposed disclosures, and expected date of the Exposure Draft. The proposed changes to the required disclosures will be officially released with the Exposure Draft, after which there will be a comment period before the final ruling is issued. Although the changes described below are subject to change before the release of the Exposure Draft and the ultimate final ruling, we can expect to see some of the changes in some form in the final ruling.
The objective of the project is to require disclosures in an investment company’s financial statements that will provide transparency into the risks, returns, and expenses of an investee that is also an investment company. The new disclosures would be required for both investments in unconsolidated investment companies, and the first level of investments in another investment company (e.g., for a fund of funds, the investee fund’s first level of investments). The proposed disclosures discussed during the meeting included several changes.
A reporting investment company would disclose the following about each investment in another investment company (i.e., an investee fund) that has a carrying value that equals or exceeds 5% of the reporting company’s net assets as of the date of its statement of financial position:
- The reporting investment company’s share of the dollar amounts of management fees and incentive fees associated with the investee fund. If the reporting investment company cannot obtain information about the dollar amount of its share of the fees, it would disclose instead the percentage amounts and computational basis for each such fee.
- The reporting investment company’s fair value of, and its share of income/loss from, its investment in an investee fund.
- For investments in which the reporting investment company owns more than 20% of an investee fund, the reporting investment company would disclose whether its ownership percentage is between 20 to 50% of the net assets of the investee fund or whether its ownership percentage is greater than 50% of the net assets of the investee fund.
A reporting investment company would not be required to disclose information about leverage within an investee fund. This decision would remove FASB’s previous decision that would have required disclosure of the total assets, total debt outstanding and net assets of an investee fund. In a master-feeder structure, a feeder fund would be required to attach to the master fund’s financial statements along with its financial statements, which would satisfy the new disclosure requirements.
For structures that are not master-feeder structures, an investment company would be permitted to attach the investee fund’s financial statements along with its financial statements to satisfy the disclosure requirements. Also, all investment companies (regulated and non-regulated) would be required to disclose information about each investment owned by an investee fund that exceeds 5% of the reporting investment company’s net assets at the reporting date. The information disclosed about the investment would be the requirement in paragraph 946-210-50-9, that investment strategy, country or geographic region, investor liquidity, percentage of net assets, and fees generally are disclosed for investee funds greater than 5% of net assets of the investing fund. FASB also makes clear that the investment company would provide disclosures for an investee fund’s financial statements that includes a schedule of investments, thereby allowing the investee fund’s interim information to be reported on the reporting investment company’s annual financial statements.
FASB’s next step in advancing the proposed changes in releasing an Exposure Draft, expected in the first quarter 2014. We will continue to monitor information released from FASB as well as current industry practices for adopting the new rules, and will continue to keep you informed as they occur.
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