Whether you are a financial statement preparer or auditor, it is critical to understand the complexities of the specialized accounting and regulatory requirements for investment companies. Your industry standard resource, this 2019 edition supports practitioners in a constantly changing industry landscape. Packed with continuous regulatory developments, this guide covers:
- Authoritative how-to accounting and auditing advice, including implementation guidance and illustrative financial statements and disclosures;
- Details on the changes to illustrated financial statements and disclosures resulting from guidance that was recently-issued or became recently effective (for example, SEC's release, "Disclosure Update and Simplification");
- 2019 updates include:References to appropriate AICPA Technical Questions and Answers that address when to apply the liquidation basis of accounting and appendices discussing the new standard for financial instruments, common or collective trusts and business development companies.
Finally, this guide features a schedule of changes which identifies where to find updated content and the associated reasons for the changes.
Table of Contents
1 Overview of the Investment Company Industry .01-.66
Introduction .01-.16
Guide Application .02-.04
Investment Companies Defined - Scope of FASB ASC 946 .05-.16
Types of Investment Companies .17-.20
History .21-.22
Definition and Classification .23-.36
Organizations Providing Services to Investment Companies .37-.44
The Investment Adviser .38-.39
The Distributor .40-.41
The Custodian .42
The Transfer Agent .43
The Administrator .44
Regulation .45-.51
Summary of Relevant SEC Registration and Reporting Forms .47-.51
Financial Reporting to Shareholders .52-.53
Accounting Rules and Policies .54-.55
Effective Date of Transactions .56-.57
Other Rules and Regulations .58-.66
Money Market Reform .58
Other Requirements .59-.61
Jumpstart Our Business Startups Act (JOBS Act) .62-.64
Regulatory Changes for Investment Companies That Invest in Commodities .65-.66
2 Investment Accounts .01-.183
Investment Objectives and Policies .02-.03
Operations and Controls .04-.18
Recordkeeping Requirements .04-.05
Custody of Securities .06-.08
Accounting for Segregated Accounts .09-.11
Routine Investment Procedures .12-.18
Accounting .19-.183
Net Asset Value Per Share .19-.24
Basis of Recording Securities Transactions .25-.30
Valuing Investments .31-.44
Fair Value Determination When the Volume or Level of Activity Has Significantly Decreased .45-.51
Valuation Techniques .52-.60
Present Value Techniques .61-.63
The Fair Value Hierarchy .64-.69
Application of Fair Value Measurements .70-.84
Offsetting Positions in Market Risks or Counterparty Credit Risk .85-.86
Investments in Entities That Calculate Net Asset Value Per Share .87-.99
Money Market Funds .100
Determining Costs and Realized Gains and Losses .101-.109
Accounting for Investment Income .110-.128
Defaulted Debt Securities .129-.130
Accounting for Expenditures in Support of Defaulted Debt Securities .131-.135
Lending of Portfolio Securities and Secured Borrowings .136-.144
Accounting for Derivatives .145-.148
Accounting for Foreign Investments .149-.183
3 Financial Instruments .01-.81
Money Market Investments .02-.07
Repurchase Agreements .08-.09
Reverse Repurchase Agreements .10
U.S. Government Securities (Treasury Bills, Notes, and Bonds) .11-.12
Municipal Notes and Bonds .13-.16
Insured Portfolios .17
To Be Announced Securities .18-.22
When-Issued Securities .23-.24
Synthetic Floaters and Inverse Floaters .25-.28
Mortgage-Backed Securities .29-.31
Adjustable Rate Mortgages .32
Collateralized Mortgage Obligations .33
Real Estate Mortgage Investment Conduits .34
High-Yield Securities .35-.36
Payment-in-Kind Bonds .37-.38
Step Bonds .39-.40
Put and Call Options .41-.44
Warrants .45-.46
Loan Commitments .47-.48
Standby Commitments .49
Commodity and Financial Futures Contracts .50-.54
Forward Contracts .55
Forward Exchange Contracts .56-.57
Interest Rate, Currency, Credit, and Equity Swaps and Swaptions .58-.64
Centrally Cleared Swaps .65-.69
Structured Notes or Indexed Securities .70-.73
Short Positions .74-.76
Mortgage Dollar Rolls .77-.81
4 Capital Accounts .01-.56
Operations and Controls .02-.21
Distributors .02-.07
Orders to Purchase or Redeem .08-.12
Cancellation of Orders .13
Shareholder Transactions .14-.21
Accounting for Capital Share Transactions and Distributions .22-.30
Equalization .28-.30
Auditing Procedures .31-.56
Principal Audit Objectives .31
Obtaining an Understanding of the Entity and Its Environment, Including Internal Control .32-.38
Examination of Transactions and Detail Records .39-.50
Other Auditing Matters .51-.56
5 Complex Capital Structures .01-.96
Operational and Accounting Issues .02-.30
Multiple-Class Funds .02-.17
Master-Feeder Funds .18-.21
Funds of Funds .22-.25
Other Considerations for Investments in Nonpublicly Traded Investees .26-.30
Financial Statement Presentation .31-.63
Multiple-Class Funds .32-.39
Master-Feeder Funds .40-.54
Funds of Funds .55-.63
Audit Considerations .64-.96
Planning .68-.70
Control Environment .71-.74
Investment in Master Fund and Income-Gain Allocations .75-.78
Other Transactions .79
Prospectus Restrictions and Compliance .80-.83
Tax Qualifications and Compliance .84-.87
Financial Statements .88-.90
Funds of Funds .91-.92
Control Environment .93-.96
6 Taxes .01-.134
Overview .01-.02
Financial Statements and Other Matters .03-.16
Income Tax Expense .03-.12
Federal Income Tax Provisions Affecting Investment Accounts .13
Foreign Withholding Taxes .14
Financial Statement Presentation .15
Diversification of Assets .16
RICs .17-.134
General Discussion of the Taxation of RICs .17
Taxation of a RIC’s Taxable Income and Net Capital Gains .18-.24
Taxation of Shareholder Distributions .25-.43
Excess Reported Amounts .44
Qualification Tests .45-.57
Variable Contracts .58-.63
Distribution Test .64-.82
Excise Tax on Undistributed Income .83-.95
Computation of Taxable Income and Gains .96-.125
Offshore Funds .126-.130
Small Business Investment Companies .131-.134
7 Financial Statements of Investment Companies .01-.239
Comparative Financial Statements .05-.07
Consolidation .08-.17
Other Consolidation Considerations .12-.17
Reporting Financial Position .18-.110
Reporting of Fully Benefit-Responsive Investment Contracts .23-.26
Schedule of Investments .27-.46
Assets .47-.68
Liabilities .69-.81
Disclosures Related to Transfers of Financial Assets, Including Repurchase Agreements .82-.83
Fair Value Disclosures .84-.98
Fair Value Option .99-.102
Net Assets .103-.110
Statement of Operations .111-.146
Investment Income .112-.115
Expenses .116-.129
Net Investment Income .130
Net Realized Gain or Loss From Investments and Foreign Currency Transactions .131-.134
Net Increase (Decrease) in Unrealized Appreciation or Depreciation on Investments and Translation of Assets and Liabilities in Foreign Currencies .135-.136
Net Increase From Payments by Affiliates and Net Gains (Losses) Realized on the Disposal of Investments in Violation of Restrictions .137-.143
Net Realized and Unrealized Gain or Loss From Investments and Foreign Currency .144
Net Increase or Decrease in Net Assets From Operations .145
Reporting of Fully Benefit-Responsive Investment Contracts .146
Statement of Changes in Net Assets .147-.152
Subsequent Events .153-.158
Statement of Cash Flows .159-.172
Financial Highlights .173-.187
Other Disclosure Requirements .188-.205
Fully Benefit-Responsive Investment Contract Disclosures .190
Offsetting Assets and Liabilities .191-.205
Interim Financial Statements .206-.212
Auditing Considerations .209-.212
Illustrative Financial Statements of Investment Companies .213-.229
Illustrations of Calculations and Disclosures When Reporting Expense and Net Investment Income Ratios .230
Illustration of Calculation and Disclosure When Reporting the Internal Rate of Return .231
Illustration of Calculation and Disclosure When Reporting the Total Return Ratio .232
Illustration of a Condensed Schedule of Investments .233
Illustrations of Nonregistered Investment Partnerships Schedule of Investments .234
Presentation of Fully Benefit-Responsive Investment Contracts .235
Disclosure - Fair Value Measurements of Investments That Are Measured at Net Asset Value per Share (or its Equivalent) as a Practical Expedient .236
Illustration of Reporting Financial Highlights, Net Asset Value Per Share, Shares Outstanding, and Share Transactions When Investors in Unitized Nonregistered Funds Are Issued Individual Classes or Series of Shares .237
Illustrative Statement of Changes in Net Assets (Changes in Partners’ Capital) of a Nonregistered Investment Partnership That Includes a General Partner and One or More Limited Partners .238
Illustrative Disclosure for a Registered Fund Issuing Consolidated Financial Statements and Relying on CFTC Letter No. 13-51 .239
8 Other Accounts and Considerations .01-.62
Investment Advisory (Management) Fee Expense .01-.03
Expenses .04-.13
Distribution Expenses .14-.23
Organization and Offering Costs .24-.35
Unusual Income Items .36
Business Combinations .37-.48
Diversification of Assets .49-.50
Liquidation Basis of Accounting .51-.62
When to Apply the Liquidation Basis of Accounting .52-.54
Recognition and Measurement Provisions .55-.56
Presentation and Disclosure .57-.62
9 Unit Investment Trusts .01-.22
Fixed-Income and Equity UITs .05-.13
Taxes .14-.15
Illustrative Financial Statements .16-.22
10 Variable Contracts - Insurance Entities .01-.63
Separate Accounts .01-.06
History .07-.10
Product Design .11-.22
Contracts in the Payout (Annuitization) Period .23-.25
SEC Registration .26-.30
Auditing Considerations .31-.37
Taxation of Variable Contracts .38-.55
Illustrative Financial Statements .56-.63
11 General Auditing Considerations .01-.103
Chapter Overview .01-.03
General Audit Planning Considerations .04-.16
Audit Risk .04-.06
Risk Assessment Procedures .07-.12
Risk Assessment and the Design of Further Audit Procedures .13-.16
Other General Considerations for Audits of Investment Companies .17-.56
Internal Control Considerations .27-.32
Going Concern .33
Risk Assessment Procedures and Related Activities .34-.43
Auditor Conclusions .44-.49
Implications for the Auditor’s Report .50-.55
Documentation .56
Auditing Procedures for the Investment Portfolio Accounts .57-.100
Principal Audit Objectives .57
Examination of Transactions and Detail Records .58-.100
Appendix A - Auditor’s Responsibility for Other Information in Documents Containing Audited Financial Statements .101
Appendix B - Reports on Controls at Outside Service Organizations .102
Appendix C - Consideration of Fraud in a Financial Statement Audit .103
12 Independent Auditor’s Reports and Client Representations .01-.54
Introduction .01-.02
Forming an Opinion on the Financial Statements .03-.05
Reports on Financial Statements of Nonregistered Investment Companies .06-.19
Unmodified Opinion .06-.07
Modified Opinions .08-.18
Review Report on Interim Financial Information .19
Reports on Financial Statements of Registered Investment Companies .20-.28
Report for a Registered Investment Company That Includes a Summary Schedule of Investments in the Financial Statements Provided to Shareholders .27-.28
Report on Internal Control Required by the SEC Under Form N-CEN .29-.35
Report on Examinations of Securities Pursuant to Rules 17f-1 and 17f-2 Under the 1940 Act .36-.45
Report on Examinations of Securities Pursuant to Rule 206(4)-2 Under the Investment Advisers Act of 1940 .37-.45
Reports on Processing of Transactions by a Transfer Agent .46-.47
Reporting Pursuant to the Global Investment Performance Standards .48-.51
Illustrative Representation Letter - XYZ Investment Company .52-.54
Nonregistered Investment Company Written Representation .52
Registered Investment Company Written Representation .53-.54
Appendix
A Overview of Statements on Quality Control Standards
B Common or Collective Trusts
C Venture Capital, Business Development Companies, and Small Business Investment Companies
D Computation of Tax Amortization of Original Issue Discount, Market Discount, and Premium
E Illustrative Financial Statement Presentation for Tax-Free Business Combinations of Investment Companies
F Illustrations for Separately Calculating and Disclosing the Foreign Currency Element of Realized and Unrealized Gains and Losses
G References to Technical Questions and Answers
H The New Leases Standard: FASB ASC 842
I Schedule of Changes Made to the Text From the Previous Edition
J Accounting for Financial Instruments
K Asset Management
L New Auditing Standards to Change the Auditor’s Report
Glossary
Index of Pronouncements and Other Technical Guidance
Subject Index
