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Investment Companies - AICPA Audit and Accounting Guide
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This guide summarizes new standards, guidance, and practices, and delivers "how-to" advice for handling audit and accounting issues common to investment companies.
Updated with conforming changes as of May 1, 2010, the guide includes relevant guidance contained in official standards and other technical sources, including the FASB Accounting Standards Codification™. The guide provides background on the investment company industry as well as interpretive guidance for both new and existing rules. Topics covered include investment valuation; financial instruments; capital accounts; and complex capital structures, such as master-feeder funds, unit investment trusts, and separate accounts of life insurance entities. Additionally, because many investment companies are subject to regulation under the Investment Company Act of 1940, rules under that act are discussed extensively. The guide also offers practical guidance on recent developments in areas such as risk assessment, fair value measurements, and internal controls. Further, the guide includes illustrative reports on examinations of securities pursuant to Rule 206(4)-2 of the Investment Advisers Act of 1940 that have been updated for the new SEC custody rules (Release Nos. IA-2968 and IA-2969). All content is reviewed by industry experts and approved by the appropriate AICPA senior technical committees.
The following pieces of guidance are particularly significant to this guide and are reflected in this edition:
- FASB ASU No. 2009-12, Fair Value Measurements and Disclosures (Topic 820): Investments in Certain Entities That Calculate Net Asset Value per Share (or its Equivalent)
- SEC Release Nos. IA-2968, Custody of Funds or Securities of Clients by Investment Advisers, and IA-2969, Commission Guidance Regarding Independent Public Accountant Engagements Performed Pursuant to Rule 206(4)-2 Under the Investment Advisers Act of 1940
- FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133 (FASB ASC 815-10)
- FASB Statement No. 141(R), Business Combinations (FASB ASC 805)
- TIS sections 6910.16-.33 and 2220.18-.27
- FASB Statement No. 165, Subsequent Events, and FASB ASU No. 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements
For a topical listing of subject matter by chapter, click on the Table of Contents tab.
Table of Contents
- Chapter 1 - The Investment Company Industry
- Kinds of Investment Companies
- History
- Definition and Classification
- Organizations Providing Services to Investment Companies
- The Manager
- The Distributor
- The Custodian
- The Transfer Agent
- The Administrator
- Regulation
- Financial Reporting to Shareholders
- Accounting Rules and Policies
- Valuation of Investments
- Definition of Fair Value
- Application to Assets
- Application to Liabilities
- Valuation Techniques
- Present Value Techniques
- The Fair Value Hierarchy
- Fair Value Determination When the Volume or Level of Activity Has Significantly Decreased
- Disclosures
- Effective Date of Transactions
- Other Rules
- Chapter 2 - Investment Accounts
- Investment Objectives and Policies
- Operations and Controls
- Recordkeeping Requirements
- Custody of Securities
- Accounting for Segregated Accounts
- Routine Investment Procedures
- Accounting
- Net Asset Value Per Share
- Basis of Recording Securities Transactions
- Methods of Valuing Investments
- Determining Costs and Realized Gains and Losses
- Accounting for Investment Income
- Defaulted Debt Securities
- Accounting for Expenditures in Support of Defaulted Debt Securities
- Lending of Portfolio Securities
- Accounting for Derivatives
- Accounting for Foreign Investments
- Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement
- Consideration of Fraud in a Financial Statement Audit
- The Importance of Exercising Professional Skepticism
- Discussion Among Engagement Personnel Regarding the Risks of Material Misstatement Due to Fraud
- Examples of Fraud Risk Factors
- Obtaining the Information Needed to Identify the Risks of Material Misstatement Due to Fraud
- Identifying Risks That May Result in a Material Misstatement Due to Fraud
- Assessing the Identified Risks After Taking Into Account an Evaluation of the Entity’s Programs and Controls That Address the Risks
- Responding to the Results of the Assessment
- Evaluating Audit Evidence
- Responding to Misstatements That May Be the Result of Fraud
- Communicating About Possible Fraud to Management, the Audit Committee, and Others
- Documenting the Auditor’s Consideration of Fraud
- Practical Guidance
- Auditing Procedures
- Principal Audit Objectives
- Obtaining an Understanding of the Entity and Its Environment, Including Internal Control
- Examination of Transactions and Detail Records
- Chapter 3 - Financial Instruments
- Money Market Investments
- Repurchase Agreements
- Reverse Repurchase Agreements
- U.S. Government Securities (Treasury Bills, Notes, and Bonds)
- Municipal Notes and Bonds
- Insured Portfolios
- When-Issued Securities
- Synthetic Floaters
- Mortgage Backed Securities
- Adjustable Rate Mortgages
- Collateralized Mortgage Obligations
- Real Estate Mortgage Investment Conduits
- High-Yield Securities
- Payment-in-Kind Bonds
- Step Bonds
- Put and Call Options
- Third-Party Credit Enhancements
- Standby Commitments
- Commodity and Financial Futures Contracts
- Forward Contracts
- Forward Exchange Contracts
- Structured Notes or Indexed Securities
- Interest Rate, Currency, and Equity Swaps and Swaptions
- Short Positions
- Mortgage Dollar Rolls
- Chapter 4 - Capital Accounts
- Operations and Controls
- Distributors
- Orders to Purchase or Redeem
- Cancellation of Orders
- Shareholder Transactions
- Accounting for Capital Share Transactions and Distributions
- Equalization
- Auditing Procedures
- Principal Audit Objectives
- Obtaining an Understanding of the Entity and Its Environment, Including Internal Control
- Examination of Transactions and Detail Records
- Other Matters
- Reports on Controls at Outside Service Organizations
- Operations and Controls
- Chapter 5 - Complex Capital Structures
- Operational and Accounting Issues
- Multiple-Class Funds
- Master-Feeder Funds
- Funds of Funds
- Other Considerations for Investments in Nonpublicly Traded Investees
- Financial Statement Presentation
- Multiple-Class Funds
- Master-Feeder Funds
- Funds of Funds
- Audit Considerations
- Planning
- Control Environment
- Investment in Master Fund and Income-Gain Allocations
- Other Transactions
- Prospectus Restrictions and Compliance
- Tax Qualifications and Compliance
- Financial Statements
- Funds of Funds
- Control Environment
- Operational and Accounting Issues
- Chapter 6 - Taxes
- Overview
- Financial Statements and Other Matters
- Income Tax Expense
- Federal Income Tax Provisions Affecting Investment Accounts
- Withholding Taxes
- Financial Statement Presentation
- Diversification of Assets
- Taxation of Regulated Investment Companies
- General Discussion of the Taxation of RICs
- Taxation of an RIC’s Taxable Income and Net Capital Gains
- Taxation of Shareholder Distributions
- Qualified Dividend Income
- Qualification Tests
- 50 Percent and 25 Percent Asset Diversification Tests
- Variable Contracts
- Distribution Test
- Excise Tax on Undistributed Income
- Computation of Taxable Income and Gains
- Offshore Funds
- Small Business Investment Companies
- Chapter 7 - Financial Statements of Investment Companies
- Comparative Financial Statements
- Consolidation by Investment Companies
- Reporting Financial Position
- Reporting of Fully Benefit-Responsive Investment Contracts
- Schedule of Investments
- Assets
- Liabilities
- Fair Value Disclosures
- Fair Value Option
- Net Assets
- Statement of Operations
- Investment Income
- Expenses
- Net Investment Income
- Net Realized Gain or Loss From Investments and Foreign Currency Transactions
- Net Increase (Decrease) in Unrealized Appreciation or Depreciation on Investments and Translation of Assets and Liabilities in Foreign Currencies
- Net Increase From Payments by Affiliates and Net Gains (Losses) Realized on the Disposal of Investments in Violation of Restrictions
- Net Realized and Unrealized Gain or Loss From Investments and Foreign Currency
- Net Increase or Decrease in Net Assets From Operations
- Reporting of Fully Benefit-Responsive Investment Contracts
- Statement of Changes in Net Assets
- Subsequent Events
- Statement of Cash Flows
- Financial Highlights
- Other Disclosure Requirements
- Fully Benefit-Responsive Investment Contract Disclosures
- Interim Financial Statements
- Illustrative Financial Statements of Investment Companies
- Illustrations of Calculations and Disclosures When Reporting Expense and Net Investment Income Ratios
- Illustration of Calculation and Disclosure When Reporting the Internal Rate of Return
- Illustration of Calculation and Disclosure When Reporting the Total Return Ratio
- Illustration of Deferred Fees
- 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
- Chapter 8 -Other Accounts and Considerations
- Investment Advisory (Management) Fee
- Expenses
- Distribution Expenses
- Minutes
- Organization and Offering Costs
- Unusual Income Items
- Form N-SAR
- Business Combinations
- Diversification of Assets
- Auditor’s Responsibility for Other Information in Documents Containing Audited Financial Statements
- Chapter 9 - Unit Investment Trusts
- Fixed-Income and Equity UITs
- Taxes
- Illustrative Financial Statements
- Chapter 10 - Variable Contracts—Insurance Entities
- Separate Accounts
- History
- Product Design
- Contracts in Payout (Annuitization) Period
- SEC Registration
- Auditing Considerations
- Taxation of Variable Contracts
- Illustrative Financial Statements
- Chapter 11 - Independent Auditor’s Reports and Client Representations
- Report on Financial Statements of Nonregistered Investment Companies
- Reports on Financial Statements of Registered Investment Companies
- Reports for a Registered Investment Company That Issues a Condensed Schedule of Investments in the Financial Statements Provided to Shareholders
- Review of Semiannual Financial Statements
- Report on Examinations of Securities Pursuant to Rules 17f-1 and 17f-2 Under the Investment Company Act of 1940
- Report on Examinations of Securities Pursuant to Rule 206(4)-2 Under the Investment Advisers Act of 1940
- Report on Internal Control Required by the SEC Under Form N-SAR
- Report for a Closed-End Fund Security Agency Rating
- Reports on Processing of Transactions by a Transfer Agent
- Reporting Pursuant to the Global Investment Performance Standards
- Illustrative Representation Letter—XYZ Investment Company
- Illustrated Updated Representation Letter—XYZ Investment Company
- Appendix A - Venture Capital and Small Business Investment Companies
- Appendix B - Computation of Tax Amortization of Original Issue Discount, Market Discount, and Premium
- Appendix C - Internal Revenue Code Worksheets
- Appendix D - Worksheet for Diversified Management Investment Companies (as defined in Section 5(b)(1) of the Investment Company Act of 1940)
- Appendix E - Illustrative Financial Statement Presentation for Tax-Free Business Combinations of Investment Companies
- Appendix F - Illustrations for Separately Calculating and Disclosing the Foreign Currency Element of Realized and Unrealized Gains and Losses
- Appendix G - References to AICPA Technical Practice Aids
- Appendix H - International Financial Reporting Standards
- Appendix I - Schedule of Changes Made to the Text From the Previous Edition
- Glossary
- Contents
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Excerpts
Preface
About AICPA Audit and Accounting Guides
This AICPA Audit and Accounting Guide has been developed by the AICPA Investment Companies Guide Task Force to assist management in the preparation of their financial statements in conformity with U.S. generally accepted accounting principles (GAAP) and to assist auditors in auditing and reporting on such financial statements.
This guide describes operating conditions and auditing procedures unique to the investment company industry and illustrates form and content of investment company financial statements and related disclosures. Chapter 1, "The Investment Company Industry," discusses the kinds of companies considered to be investment companies to which the provisions of this guide apply. Because many investment companies are subject to regulation under the Investment Company Act of 1940, rules under that act are discussed extensively in this guide. However, the rules, regulations, practices, and procedures of the investment company industry have changed frequently and extensively in recent years. The independent auditor should keep abreast of those changes as they occur.
The financial accounting and reporting guidance contained in this guide, when developed by the original task force or committee, was approved by the affirmative vote of at least two-thirds of the members of the Accounting Standards Executive Committee (AcSEC), which is the senior technical body of the AICPA authorized to speak for the AICPA in the areas of financial accounting and reporting. Conforming updates made to the financial accounting and reporting guidance contained in this guide in years subsequent to the original development are reviewed by select AcSEC members, among other reviewers where applicable.
This guide does the following:
Identifies certain requirements set forth in Financial Accounting Standards Board (FASB) Accounting Standards Codification™ (ASC). Describes AcSEC's understanding of prevalent or sole industry practice concerning certain issues. In addition, this guide may indicate that AcSEC expresses a preference for the prevalent or sole industry practice, or it may indicate that AcSEC expresses a preference for another practice that is not the prevalent or sole industry practice; alternatively, AcSEC may express no view on the matter. Identifies certain other, but not necessarily all, industry practices concerning certain accounting issues without expressing AcSEC's views on them. Provides guidance that has been supported by AcSEC on the accounting, reporting, or disclosure treatment of transactions or events that are not set forth in FASB ASC. Accounting guidance for nongovernmental entities included in an AICPA Audit and Accounting Guide is a source of nonauthoritative accounting guidance.
As discussed later in this preface, FASB ASC is the authoritative source of U.S. accounting and reporting standards for nongovernmental entities, in addition to guidance issued by the Securities and Exchange Commission (SEC). Accounting guidance for governmental entities included in an AICPA Audit and Accounting Guide is a source of authoritative accounting guidance described in category (b) of the hierarchy of GAAP for state and local governmental entities, and has been cleared by Governmental Accounting Standards Board (GASB). AICPA members should be prepared to justify departures from GAAP as discussed in Rule 203, Accounting Principles (AICPA, Professional Standards, vol. 2, ET sec. 203 par. .01).
AICPA Audit and Accounting Guides also include guidance from the questions and answers section of AICPA Technical Practice Aids. These questions and answers are not sources of established authoritative accounting principles as described in FASB ASC and GASB Statement No. 55, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments, the authoritative sources of GAAP for nongovernmental and governmental entities, respectively. This material is based on selected practice matters identified by the staff of the AICPA's Technical Hotline and various other bodies within the AICPA and has not been approved, disapproved, or otherwise acted upon by any senior technical committee of the AICPA.
Auditing guidance included in an AICPA Audit and Accounting Guide is recognized as an interpretive publication pursuant to AU section 150, Generally Accepted Auditing Standards (AICPA, Professional Standards, vol. 1). Interpretive publications are recommendations on the application of Statements on Auditing Standards (SASs) in specific circumstances, including engagements for entities in specialized industries. An interpretive publication is issued under the authority of the Auditing Standards Board (ASB) after all ASB members have been provided an opportunity to consider and comment on whether the proposed interpretive publication is consistent with the SASs. The members of the ASB have found this guide to be consistent with existing SASs.
The auditor should be aware of and consider interpretive publications applicable to his or her audit. If an auditor does not apply the auditing guidance included in an applicable interpretive publication, the auditor should be prepared to explain how he or she complied with the SAS provisions addressed by such auditing guidance.
This AICPA Audit and Accounting Guide, which also contains attestation guidance, is recognized as an interpretive publication pursuant to AT section 50, SSAE Hierarchy (AICPA, Professional Standards, vol. 1). Interpretive publications include recommendations on the application of Statements on Standards for Attestation Engagements (SSAEs) in specific circumstances, including engagements for entities in specialized industries. Interpretive publications are issued under the authority of the ASB. The members of the ASB have found this guide to be consistent with existing SSAEs.
A practitioner should be aware of and consider interpretive publications applicable to his or her attestation engagement. If the practitioner does not apply the guidance included in an applicable AICPA Audit and Accounting Guide, the practitioner should be prepared to explain how he or she complied with the SSAE provisions addressed by such guidance.
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