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Audit and Accounting Guide: Investment Companies, 2018



Audit and Accounting Guide: Investment Companies, 2018


ISBN: 978-1-948-30618-8 September 2018 752 Pages

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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. This 2018 guide provides authoritative how-to accounting and auditing advice, including implementation guidance and illustrative financial statements and disclosures.

This guide is the industry standard resource, supporting practitioners in a constantly changing industry landscape packed with continuous regulatory developments.

Updates include:
  • References to appropriate AICPA Technical Questions and Answers that address when to apply the liquidation basis of accounting.
  • Appendices discussing the new standards for financial instruments, leases and revenue recognition.
  • Appendices discussing common or collective trusts and business development companies.

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 0405

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 31-4

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 01-240

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

Illustration of Deferred Fees 236-237

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 238

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 239

Illustrative Disclosure for a Registered Fund Issuing Consolidated Financial Statements and Relying on

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 01-55

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-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 46-48

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


A Overview of Statements on Quality Control Standards

B Common or Collective Trusts

C Venture Capital, Business Development Companies, and Small Business

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 The New Revenue Recognition Standard: FASB ASC 606

J Accounting for Financial Instruments

K Asset Management

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


Index of Pronouncements and Other Technical Guidance

Subject Index