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Audit and Accounting Guide: Investment Companies, 2017

ISBN: 978-1-945498-48-0
688 pages
October 2017
Audit and Accounting Guide: Investment Companies, 2017 (194549848X) cover image

Description

Whether a financial statement preparer or auditor, it is critical to understand the complexities of the specialized accounting and regulatory requirements for investment companies. This guide supports practitioners in a constantly changing industry landscape. It provides authoritative how-to accounting and auditing advice, including implementation guidance and illustrative financial statements and disclosures. Packed with continuous regulatory developments, this guide has been updated to reflect certain changes necessary due to the issuance of authoritative guidance since the guide was originally issued, and other revisions as deemed appropriate.

The updates for this 2017 edition include extensive changes to the illustrated financial statements for registered investment companies that result from SEC's issuance of the release Investment Company Reporting Modernization and related amendments to Regulation S-X. Other updates to the 2017 edition include changes to illustrated attestation reports that result from AICPA's issuance of Statement on Standards for Attestation Engagements (SSAE) No. 18, Attestation Standards: Clarification and Recodification. Further updates include:

  • References to appropriate AICPA Technical Questions and Answers that address when to apply the liquidation basis of accounting
  • Appendixes discussing the new standards for financial instruments, leases, and revenue recognition
  • Appendixes discussing common or collective trusts and business development companies
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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 01-184

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 19-184

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  87-100

Money Market Funds  101

Determining Costs and Realized Gains and Losses  102-110

Accounting for Investment Income  111-129

Defaulted Debt Securities 130-131

Accounting for Expenditures in Support of Defaulted

Debt Securities   132-136

Lending of Portfolio Securities and Secured Borrowings  137-145

Accounting for Derivatives   146-149

Accounting for Foreign Investments  150-184

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   64-90

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 91-96

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  213-228

Illustrations of Calculations and Disclosures When Reporting Expense and Net Investment Income Ratios   229

Illustration of Calculation and Disclosure When Reporting the Internal Rate of Return   230

Illustration of Calculation and Disclosure When Reporting the Total Return Ratio  231

Illustration of a Condensed Schedule of Investments  232

Illustrations of Nonregistered Investment Partnerships Schedule of Investments  233

Presentation of Fully Benefit-Responsive Investment Contracts  234

Illustration of Deferred Fees  235

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 01-61

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  37-47

Diversification of Assets  48-49

Liquidation Basis of Accounting  50-61

When to Apply the Liquidation Basis of Accounting 51-53

Recognition and Measurement Provisions  54-55

Presentation and Disclosure   56-61

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 01-64

Separate Accounts  01-06

History  07-10

Product Design 11-22

Contracts in the Payout (Annuitization) Period   23-25

SEC Registration  26-31

Auditing Considerations  32-38

Taxation of Variable Contracts   39-56

Illustrative Financial Statements  57-64

11 General Auditing Considerations 01-80

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 17-33

Internal Control Considerations   27-32

Going Concern  33

Auditing Procedures for the Investment Portfolio Accounts  34-77

Principal Audit Objectives   34

Examination of Transactions and Detail Records  35-77

Appendix A—Auditor’s Responsibility for Other Information in Documents Containing Audited Financial Statements 78

Appendix B—Reports on Controls at Outside Service Organizations  79

Appendix C—Consideration of Fraud in a Financial Statement Audit  80

12 Independent Auditor’s Reports and Client Representations 01-55

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-SAR  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  46-48

Reporting Pursuant to the Global Investment Performance Standards  49-52

Illustrative Representation Letter—XYZ Investment Company 53-55

Nonregistered Investment Company Written Representation   53

Registered Investment Company Written Representation  54-55

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 AICPA Technical Questions and Answers

H The New Leases Standard: FASB ASU No. 2016-02

I The New Revenue Recognition Standard: FASB ASC 606

J Accounting for Financial Instruments

K Schedule of Changes Made to the Text From the Previous Edition

Glossary

Index of Pronouncements andOther Technical Guidance

Subject Index

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