Investment Company Disclosure Requirements

By Courtney K. Johnson, CPA, Business Assurance & Advisory Services Senior Associate | Financial Services Industry Team

The Financial Accounting Standards Board (FASB) recently discarded a project from its agenda that would have required additional disclosures about an investment company’s investments in other investment companies.

In October 2011, as part of the investment companies’ project, the FASB issued a proposed Update, Financial Services – Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements.  The Update would have required an investment company to consolidate investments in other investment companies where it had a controlling financial interest in a fund-of-funds structure.  Public comments from the proposed Update revealed that stakeholders disagreed with the consolidation requirement.  They stated that transparency about the assets, liabilities, income, and expenses of an investee fund would be more effective through expanded disclosures in the notes to the financial statements.   Stakeholders believed that these disclosures should be required for investments that are significant to the net assets of the reporting investment company and not just those investments that are controlled.  The FASB revisited its decision and decided not to retain the consolidation requirements but to continue to require the equity method.  It decided that transparency could be attained through certain disclosure requirements.

New Disclosure Requirements

The Board discussed several disclosure requirements for an investment company with significant investments in another investment company (investee fund).  These included:

• Description of the investee fund (name and category)
• Percentage of reporting investment company’s net assets invested in the investee fund
• Total assets of investee fund
• Total debt outstanding of investee fund
• Net assets of investee fund
• Expense ratio of investee fund
• Proportionate ownership interest in investee fund
• The reporting investment company’s share of management fees and incentive fees associated with the investee fund
• 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 percent of an investee fund, whether its ownership percentage is between 20 to 50 percent of the net assets of the investee fund or whether its ownership percentage is greater than 50 percent

The Board concluded that these disclosure requirements could be satisfied by attaching the investee fund’s financial statements to the reporting investment company’s financial statements.

In December, 2014, the FASB issued, for public comment, the Exposure Draft of these proposed Updates to Topic 946.  All investment companies within the scope of Topic 946 that have investments in other investment companies would be affected by the proposed Update.  This includes investment companies regulated under the Investment Company Act of 1940 (regulated investment companies) and those not regulated under the Act (non-regulated investment companies).  The Exposure Draft proposed two major Updates:

• A feeder fund in a master-feeder arrangement would be required to provide the master fund’s financial statements along with its own financial statements. Current Securities and Exchange Commission (SEC) guidance already required this for regulated investment companies.  The amendments in the proposed Update would require similar presentation for non-regulated investment companies.
• An investment company would be required to disclose certain information about investments held by investee funds whose fair values exceed 5 percent of the reporting company’s net assets. Current GAAP already required this for non-regulated investment companies.  The amendments in the proposed Update would require those disclosures to be provided by regulated investment companies, as well.

Businesses, auditors, and other professional groups criticized both aspects of the proposal.  The Board learned that almost all non-regulated feeder funds already provided master fund financial statements consistent with the proposal.  Many organizations believed that the proposal to require information about stakes worth more than 5 percent of the investment company’s net assets was redundant.  Regulated investment companies are required to include their summary portfolio schedule of investments to shareholders.

After reviewing public comments on the Exposure Draft, the FASB concluded that the costs of providing these proposed disclosures would outweigh the benefits of the information.  The project was removed from the FASB’s agenda.

For more information, please visit the FASB webpage.

Questions on this topic? Contact your Keiter representative or information@keitercpa.com | 804.747.0000

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Resources: FASB