# ASC 946-20-05: Financial Services—Investment Companies — Investment Company Activities — 05 Overview and Background Source: FASB Accounting Standards Codification, Basic View [Read online](https://asc.understandingaccounting.org/asc/946/20/#05-overview-and-background) Study and research edition. Verify current requirements with the official source. Summaries, enrichment, and tags are machine-generated study aids. Paragraph html preserves source markup; snippet is abbreviated. Pending content is not necessarily effective. Tables and mathematical or amendment markup are retained as HTML where Markdown would lose structure. Source downloaded (UTC): 2026-09-10T02:19:31.828Z to 2026-09-10T02:19:31.828Z Record version: sha256:019a5288735b8dc88d66530882d575fc9b5cfac8061648dfbc0053923ceaba8a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 946-20-05: 05 Overview and Background [Read section](https://asc.understandingaccounting.org/asc/946/20/#05-overview-and-background) SEC content: no ##### [946-20-05-1](https://asc.understandingaccounting.org/asc/946/20/#946-20-05-1) Pending content: no Source downloaded (UTC): 2026-09-10T02:19:31.828Z to 2026-09-10T02:19:31.828Z Record version: sha256:c10bd2365a6b576162398df4d436a4997f0667ae860634aa700993855147dcdc Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Subtopic addresses accounting for certain activities engaged in by investment companies. 1. a [Subparagraph superseded by Accounting Standards Update No. 2013-08](https://asc.understandingaccounting.org/updates/asu-2013-08/). 2. b [Subparagraph superseded by Accounting Standards Update No. 2013-08](https://asc.understandingaccounting.org/updates/asu-2013-08/). 3. c [Subparagraph superseded by Accounting Standards Update No. 2013-08](https://asc.understandingaccounting.org/updates/asu-2013-08/). 4. d [Subparagraph superseded by Accounting Standards Update No. 2013-08](https://asc.understandingaccounting.org/updates/asu-2013-08/). 5. e [Subparagraph superseded by Accounting Standards Update No. 2013-08](https://asc.understandingaccounting.org/updates/asu-2013-08/). 6. f [Subparagraph superseded by Accounting Standards Update No. 2013-08](https://asc.understandingaccounting.org/updates/asu-2013-08/). #### Background Information about Investment Company Activities ##### [946-20-05-1A](https://asc.understandingaccounting.org/asc/946/20/#946-20-05-1A) Pending content: no Source downloaded (UTC): 2026-09-10T02:19:31.828Z to 2026-09-10T02:19:31.828Z Record version: sha256:362822ee1307fd5375f4fdd40c2c11f1075e51784d4b19f1d6d257e4f8f297f8 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Typically, an investment company sells its ownership interests, invests the proceeds to achieve its investment objectives, and provides returns to its investors from the net income earned on its investments and net gains realized on the disposal of its investments. ##### [946-20-05-1B](https://asc.understandingaccounting.org/asc/946/20/#946-20-05-1B) Pending content: no Source downloaded (UTC): 2026-09-10T02:19:31.828Z to 2026-09-10T02:19:31.828Z Record version: sha256:e8ab3aea5e529cc3a43df9069033c98d83c1fa3f43e051bddfdf1c7d65b2ee6c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Several kinds of investment companies exist: management investment companies, unit investment trusts, common (collective) trust funds, exchange-traded funds, investment partnerships, certain separate accounts of life insurance companies, and offshore funds. Management investment companies may be open-end funds (commonly known as mutual funds), [closed-end funds](https://asc.understandingaccounting.org/glossary/c/#closed-end-funds "Closed-end funds are investment companies that issue a fixed number of shares (that generally trade on an open market) to raise capital, similar to the way in which an entity sells stock in an initial public offering."), special purpose funds, venture capital investment companies, small business investment companies, and business development companies. Investment companies are organized as corporations (in the case of mutual funds, under the laws of certain states that authorize the issuance of common shares redeemable on demand of individual shareholders), common law trusts (sometimes called business trusts), limited partnerships, limited liability investment partnerships and companies, and other more specialized entities, such as separate accounts of insurance companies that are not in themselves legal entities. ##### [946-20-05-1C](https://asc.understandingaccounting.org/asc/946/20/#946-20-05-1C) Pending content: no Source downloaded (UTC): 2026-09-10T02:19:31.828Z to 2026-09-10T02:19:31.828Z Record version: sha256:aba4d11ec20150a8d10e87982f5b809ff9ad4ca7d5c97804465f92de0febede0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Once an investment company has been organized to do business, it usually engages immediately in its planned principal operations, that is, the sale of capital stock and investment of funds. Employee training, development of markets for the sale of capital stock, and similar activities are usually performed by the investment adviser or other agent, and the costs of these activities are not borne directly by the investment company. However, an investment company, particularly one not engaging an agent to manage its portfolio and to perform other essential functions, may engage in such activities and may bear those costs directly during its development stage. ##### [946-20-05-1D](https://asc.understandingaccounting.org/asc/946/20/#946-20-05-1D) Pending content: no Source downloaded (UTC): 2026-09-10T02:19:31.828Z to 2026-09-10T02:19:31.828Z Record version: sha256:c9f15cbfed2d3c79b1d03ab6eab29fe67487a4136cd9d8ab1cfcbd386518e3c0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Multiple-class funds issue more than one class of shares. Each class of shares typically has a different kind of sales charge, such as a [front-end load](https://asc.understandingaccounting.org/glossary/f/#front-end-load "A sales commission or charge payable at the time of purchase of mutual fund shares."), [contingent-deferred sales load](https://asc.understandingaccounting.org/glossary/c/#contingent-deferred-sales-load "A sales charge imposed directly on redeeming shareholders based on a percentage of the lesser of the redemption proceeds or original cost. The percentage may decrease or be eliminated based on the duration of share ownership (frequently decreases by 1 percent a year). Also referred to as back-end load."), [12b-1](https://asc.understandingaccounting.org/glossary/b/#12b-1 "Rule 12b-1 in Chapter 17 of the Code of Federal Regulations is one of the regulations implementing the Investment Company Act of 1940.") fee (referring to Rule 12b-1 in Chapter 17 of the Code of Federal Regulations, which implements the Investment Company Act of 1940), or combinations thereof. Multiple-class funds may charge different classes of shares for specific or incremental expenses, such as transfer-agent, registration, and printing expenses related to each class. ##### [946-20-05-1E](https://asc.understandingaccounting.org/asc/946/20/#946-20-05-1E) Pending content: no Source downloaded (UTC): 2026-09-10T02:19:31.828Z to 2026-09-10T02:19:31.828Z Record version: sha256:11fa509bb0a9bde9021c5855e63f3fd40a1276552203191d54379b814c916214 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Venture capital investment companies, including most small business investment companies and private equity investment companies, differ from other types of investment companies. The typical open-end or closed-end investment company is a more passive investor, whereas a venture capital investment company is more actively involved with its investees. In addition to providing funds, whether in the form of loans or equity, a venture capital investment company often provides technical and management assistance to its investees as needed and requested. That assistance is provided for maximizing the overall value of the investment rather than for other benefits. The portfolio of a venture capital investment company may be illiquid by the very nature of the investments, which are usually securities with no public market. Often, gains on those investments are realized over a relatively long holding period. The nature of the investments therefore requires valuation procedures that may differ from those used by the typical investment company primarily addressed by this Subtopic. Venture capital investment companies also may incur liabilities not generally found in other investment companies. #### Payments by Affiliates ##### [946-20-05-2](https://asc.understandingaccounting.org/asc/946/20/#946-20-05-2) Pending content: no Source downloaded (UTC): 2026-09-10T02:19:31.828Z to 2026-09-10T02:19:31.828Z Record version: sha256:6f9fca653c0363ff2298cd17e3dbbcc37fa3f7bd6b093ee613581d80c060df7e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Affiliates may make payments to a fund related to investment losses for either of the following reasons: 1. a Payments by affiliates. To reimburse the effect of a loss (realized or unrealized) on a portfolio investment, often caused by a situation outside the fund's, or its affiliates', direct control, such as an issuer default or a decline in [fair value](https://asc.understandingaccounting.org/glossary/f/#fair-value "The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date."). 2. b Investment restriction violations (investments not meeting investment guidelines). Occasionally, a fund adviser may purchase an investment for a fund that clearly violates the fund's investment restrictions (investment restrictions are described in the prospectus or statement of additional information for registered funds and in partnership agreements or offering memorandums for nonregistered funds). The investment held in violation of the fund's investment restrictions may appreciate or depreciate in value. In the case where the investment has depreciated in value and the fund has consequently incurred a loss, the fund adviser may make a payment to the fund in lieu of settlement of a potential claim resulting from the violation of the fund's investment restrictions. This payment, in effect, makes the fund whole relative to the loss that it has incurred. This type of transaction is in essence a payment to put the fund's shareholders in the position they would have been in had the violation not occurred. ##### [946-20-05-3](https://asc.understandingaccounting.org/asc/946/20/#946-20-05-3) Pending content: no Source downloaded (UTC): 2026-09-10T02:19:31.828Z to 2026-09-10T02:19:31.828Z Record version: sha256:640e71da5b7bca95ba725e6dc9dd1f0264346462fe7737439bd1c8bbb76d9c15 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Payments by affiliates may take several forms, such as any of the following: 1. a A direct cash contribution to the fund to offset the effect of a realized loss on a portfolio investment 2. b Purchase of securities from the fund at prices in excess of the securities' current fair value 3. c Provision of a credit enhancement to maintain the investment's value. #### Certain Distribution Costs ##### [946-20-05-4](https://asc.understandingaccounting.org/asc/946/20/#946-20-05-4) Pending content: no Source downloaded (UTC): 2026-09-10T02:19:31.828Z to 2026-09-10T02:19:31.828Z Record version: sha256:7002813a6df2ff1e985400d73a2e50b8ae2a8658078c23589a10a04158003dc5 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Open-end investment companies, also known as funds, are permitted to finance the distribution of their shares under a plan pursuant to Rule [12b-1](https://asc.understandingaccounting.org/glossary/b/#12b-1 "Rule 12b-1 in Chapter 17 of the Code of Federal Regulations is one of the regulations implementing the Investment Company Act of 1940.") in Chapter 17 of the Code of Federal Regulations. (Rule 12b-1 is one of the regulations implementing the Investment Company Act of 1940.) Under Rule 12b-1, a fund's board of directors is required to perform an annual review of the plan and determine whether to continue or terminate it. Under a [traditional 12b-1 plan](https://asc.understandingaccounting.org/glossary/t/#traditional-12b-1-plan "A compensation or reimbursement plan pursuant to Rule 12b-1 that permits the use of a fund's assets to pay distribution-related expenses under certain conditions. The 12b-1 fees under traditional 12b-1 plans are normally discontinued upon plan termination, but may continue to be paid after plan termination under a board-contingent plan."), a fund's [distributor](https://asc.understandingaccounting.org/glossary/d/#distributor "Usually the principal underwriter that sells the fund's capital shares by acting as an agent (intermediary between the fund and an independent dealer or the public) or as a principal, buying capital shares from the fund at net asset value and selling shares through dealers or to the public (see definition of underwriter in section 2(a)(40) of the Investment Company Act of 1940).") may be compensated or reimbursed for its [distribution costs](https://asc.understandingaccounting.org/glossary/d/#distribution-costs "Costs, as defined in a distribution agreement between a distributor and a fund, incurred by a distributor in distributing a fund's shares. Such costs may include commission payments to sales representatives, promotional materials, overhead allocations, and interest.") or efforts through any of the following methods: 1. a A 12b-1 fee, payable by the fund, based on an annual percentage of the fund's average net assets (a [compensation plan](https://asc.understandingaccounting.org/glossary/c/#compensation-plan "A plan that provides for a 12b-1 fee, payable by the fund, based on a percentage of the fund's average net assets. The 12b-1 fee may be more or less than the costs incurred by the distributor.")) or based on an annual percentage of the fund's average net assets limited to actual costs incurred, after deducting [contingent-deferred sales loads](https://asc.understandingaccounting.org/glossary/c/#contingent-deferred-sales-load "A sales charge imposed directly on redeeming shareholders based on a percentage of the lesser of the redemption proceeds or original cost. The percentage may decrease or be eliminated based on the duration of share ownership (frequently decreases by 1 percent a year). Also referred to as back-end load.") received by the distributor (a [reimbursement plan](https://asc.understandingaccounting.org/glossary/r/#reimbursement-plan "A plan that provides for a 12b-1 fee, payable by the fund, that may not exceed the lesser of an annual percentage of the fund's average net assets or actual costs incurred by the distributor net of contingent-deferred sales load received by the distributor.")). Therefore, a compensation plan differs from a reimbursement plan only in that the latter provides for annual or cumulative limits, or both, on fees paid. Fees for both kinds of plans are treated as expenses in a fund's statement of operations. 2. b A front-end load, which is assessed on purchasing shareholders at the time fund shares are sold. 3. c A contingent-deferred sales load imposed directly on redeeming shareholders. The contingent-deferred sales load usually is expressed as a percentage, which declines with the passage of time, of the lesser of redemption proceeds or original cost. The contingent-deferred sales load normally ranges from 4 percent to 6 percent and typically is reduced by 1 percent (for example, from 6 percent to 5 percent) a year until the sales charge reaches 0 percent. ##### [946-20-05-5](https://asc.understandingaccounting.org/asc/946/20/#946-20-05-5) Pending content: no Source downloaded (UTC): 2026-09-10T02:19:31.828Z to 2026-09-10T02:19:31.828Z Record version: sha256:a0024d31bee009d1ee554b2a21b5db1a1398fbb8a3581fdc651cf14f380908e6 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Rule [12b-1](https://asc.understandingaccounting.org/glossary/b/#12b-1 "Rule 12b-1 in Chapter 17 of the Code of Federal Regulations is one of the regulations implementing the Investment Company Act of 1940.") plans historically have provided that a fund's board of directors may terminate the plan with no penalty to the fund. (Termination of the plan does not necessitate termination of the fund.) Redeeming shareholders still would be subject to the contingent-deferred sales load, which would be paid to the distributor that sold the shares to those shareholders. However, with a traditional 12b-1 plan, the 12b-1 fees normally would be discontinued on plan termination. Some traditional reimbursement 12b-1 plans provide that, when the plan is terminated, the fund's board of directors has the option, but not the requirement, to pay the distributor for any costs incurred by the distributor in excess of the cumulative contingent-deferred sales load and 12b-1 fees the distributor has received. Such a plan is referred to as a [board-contingent plan](https://asc.understandingaccounting.org/glossary/b/#board-contingent-plan "A reimbursement 12b-1 plan that provides that, on the plan's termination, a fund's board of directors has the option, but not the requirement, to pay the distributor for any excess costs incurred by the distributor."). Under traditional reimbursement 12b-1 plans, including board-contingent plans, contingent-deferred sales load payments by shareholders continue to be remitted to the distributor until [excess costs](https://asc.understandingaccounting.org/glossary/e/#excess-costs "The cumulative distribution costs incurred by the distributor less the sum of cumulative 12b-1 fees paid, cumulative contingent-deferred sales load payments, and future cumulative contingent-deferred sales load payments by current shareholders, if reasonably estimable.") are fully recovered, after which the contingent-deferred sales load payments usually are remitted to the fund instead of the distributor. ##### [946-20-05-6](https://asc.understandingaccounting.org/asc/946/20/#946-20-05-6) Pending content: no Source downloaded (UTC): 2026-09-10T02:19:31.828Z to 2026-09-10T02:19:31.828Z Record version: sha256:922899d13c7aa1f053805bad9b2effd226690b9a0b8742f5c4fedcd189f5fed1 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. With an [enhanced 12b-1 plan](https://asc.understandingaccounting.org/glossary/e/#enhanced-12b-1-plan "A reimbursement 12b-1 plan that provides that, on termination of the plan, the fund is required to continue paying the 12b-1 fee to the extent the distributor has excess costs."), the fund is required to continue paying the 12b-1 fee after termination of the plan to the extent the distributor has excess costs. Contingent-deferred sales load payments by shareholders would continue to be remitted to the distributor to further offset excess costs. Thus, the major distinction between traditional and enhanced 12b-1 plans is the requirement for the fund to continue such payments upon plan termination. ##### [946-20-05-7](https://asc.understandingaccounting.org/asc/946/20/#946-20-05-7) Pending content: no Source downloaded (UTC): 2026-09-10T02:19:31.828Z to 2026-09-10T02:19:31.828Z Record version: sha256:8c1020853d7d4ade83dfbb6135dbbb6eacc79e996a17991a6e677aac99a45c29 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following table summarizes the 12b-1 plan attributes. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-F8E707FC-AD76-412C-A2AA-147B9B7456DA-low.gif) Traditional Enhanced Compensation Reimbursement Nonboard Contingent Board Contingent "Annual review and approval of plan by board, with ability to terminate plan" X X X X Fund Payment Terms (a) Payment based on average net assets X X X X "Annual or cumulative limitation, or both, based on actual distribution costs" X X X "Upon termination of 12b-1 plan, board has option, but not obligation, to pay excess costs" X "Upon termination of 12b-1 plan, fund is required to continue paying 12b-1 fee to the extent the distributor has excess costs" X (a) "Excludes front-end and contingent deferred sales load payments, which are made by shareholders and not the fund." #### Expense Limitation Agreements ##### [946-20-05-8](https://asc.understandingaccounting.org/asc/946/20/#946-20-05-8) Pending content: no Source downloaded (UTC): 2026-09-10T02:19:31.828Z to 2026-09-10T02:19:31.828Z Record version: sha256:482e37f9629ee91d811532d9cf1dbfc368e2dbc977e3e6bd36a1543d82b52b6e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Some expense limitation agreements may provide that reimbursements by the fund adviser of expenses incurred by the fund in excess of the maximum permitted by the prospectus or offering document will be carried over to a future period and reimbursed to the fund adviser when, and to the extent that, the total expense ratio falls below the permitted maximum. Such agreements may provide that reimbursement of excess expenses to the fund adviser is not required after a specified date or upon conclusion of a specified period from the time the fund initially incurred, or the adviser initially reimbursed, the expenses, such as three years. Under most excess expense plans, a fund is obligated to repay a servicer for expenses incurred previously only if, during a defined period, the fund retains the service provider and can reduce its expense ratio to a low enough level to permit payment, and maintain that ratio at a sufficiently low level thereafter. Many substantive conditions could cause the fund to have no obligation to the servicer, including failure to attract assets, significant redemptions of shares by investors, market depreciation, and significant increases in other expenses, all of which could drive expenses up to or beyond the maximum under which payment would otherwise be made. #### Brokerage Service Arrangements ##### [946-20-05-9](https://asc.understandingaccounting.org/asc/946/20/#946-20-05-9) Pending content: no Source downloaded (UTC): 2026-09-10T02:19:31.828Z to 2026-09-10T02:19:31.828Z Record version: sha256:76e5579f65e471e4ad5f52f1ca948ab322d35ab46bd996fa27b2728ff86e1883 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An investment company may have a brokerage service arrangement with a broker-dealer or an affiliate of a broker-dealer under which the broker-dealer (or its affiliate), in connection with the investment company's brokerage transactions directed to the broker-dealer, provides or pays for services to the investment company (other than brokerage and research services as those terms are used in section 28(e) of the Securities Exchange Act of 1934). #### General Partner Advisory Services ##### [946-20-05-10](https://asc.understandingaccounting.org/asc/946/20/#946-20-05-10) Pending content: no Source downloaded (UTC): 2026-09-10T02:19:31.828Z to 2026-09-10T02:19:31.828Z Record version: sha256:54abb0129672634b30d8ba946ef465ada1df752268b5203de86a5b12a118b605 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Investment companies organized as limited partnerships typically receive advisory services from the general partner. For such services, a number of partnerships pay fees chargeable as expenses to the partnership, whereas others allocate net income from the limited partners' capital accounts to the general partner's capital account, and still others employ a combination of the two methods. #### Fee Waivers ##### [946-20-05-11](https://asc.understandingaccounting.org/asc/946/20/#946-20-05-11) Pending content: no Source downloaded (UTC): 2026-09-10T02:19:31.828Z to 2026-09-10T02:19:31.828Z Record version: sha256:51526c401fc6fb949bd06c0f5c2c3bd38c10a27ef5c0a2cf5f3950657a5af6bc Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An adviser or a third party may voluntarily or involuntarily waive its fee and reimburse expenses (waivers). An example of an involuntary waiver is when the advisory agreement (or other regulation or agreements that are either outside the adviser's control or require shareholder approval) provides that the adviser should reimburse the investment company for expenses in excess of a specified percentage of average net assets. #### Portfolio Insurance ##### [946-20-05-12](https://asc.understandingaccounting.org/asc/946/20/#946-20-05-12) Pending content: no Source downloaded (UTC): 2026-09-10T02:19:31.828Z to 2026-09-10T02:19:31.828Z Record version: sha256:bb600134870eb5bd3514baa4ed2c5e973b8cf074bd601e42cd59d1b83adce66d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Many municipal bond funds, primarily those organized as unit investment trusts with fixed portfolios, arrange for insurance for the payment of principal and interest when due. The insurance applies to portfolio securities only while they are owned by the fund, and its coverage is not transferable to buyers of the securities. That arrangement differs from those in which the issuer of the securities acquires the insurance, making the insurance feature an element of the securities and transferable on changes in ownership.