{"schema_version":2,"canonical_url":"https://asc.understandingaccounting.org/asc/946/","source":"FASB Accounting Standards Codification, Basic View","usage":"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.","number":"946","title":"Financial Services—Investment Companies","area":"Industry","group":"9XX Financial Services","subtopics":[{"number":"946-10","topic":"946","title":"Overall","area":"Industry","paragraphs":74,"summary":"ASC 946-10 sets the scope of the Financial Services—Investment Companies Topic by defining which entities qualify as investment companies and therefore apply the Topic's specialized (fair value) accounting and reporting. Any entity regulated under the Investment Company Act of 1940 is automatically an investment company (946-10-15-4); all others must possess the two fundamental characteristics in 946-10-15-6 and are assessed against five typical characteristics in 946-10-15-7, applying judgment when a typical characteristic is absent. Status is determined at formation and reassessed only upon a change in purpose and design (or loss of 1940 Act regulation), with prescribed prospective or cumulative-effect accounting and disclosure for a change in status.","concepts":["investment company assessment","fundamental characteristics","typical characteristics","exit strategy","fair value basis management","master-feeder structure","change in investment company status","investment company act of 1940"],"categories":["Industry-specific","Recognition","Disclosure","Fair value"],"level":"intermediate","topic_title":"Financial Services—Investment Companies","sections":[{"number":"00","label":"00 Status","anchor":"00-status","is_sec":false,"groups":[{"block":null,"heading":null,"paragraphs":[{"citation":"946-10-00-1","para":"00-1","html":"The following table identifies the changes made to this Subtopic.
The Financial Services—Investment Companies Topic includes the following Subtopics:
- a
Overall
- b
Investment Company Activities
- c
Presentation of Financial Statements
- d
Balance Sheet
- e
Income Statement
- f
Statement of Cash Flows
- g
Notes to Financial Statements
- h
Cash and Cash Equivalents
- i
Receivables
- j
Investments—Debt and Equity Securities
- k
Investments—Equity Method and Joint Ventures
- kk
Investments—Other
- l
Liabilities
- m
Equity
- n
Revenue Recognition
- o
Income Taxes
- p
Consolidation
- q
Foreign Currency Matters.
The Financial Services—Investment Companies Topic only provides incremental industry-specific guidance for the entities that meet the assessment of investment company status described in this Scope Section, with the exception of Subtopic
946-605, which has its own discrete scope. Entities within the scope of this Topic also shall comply with the applicable guidance not included in this Topic. The Scope Section of the Overall Subtopic establishes the pervasive scope for all Subtopics of the Financial Services—Investment Companies Topic. Unless explicitly addressed within specific Subtopics, the following scope guidance applies to all Subtopics of the Financial Services—Investment Companies Topic, with the exception of Subtopic
946-605.
The accounting principles discussed in this Topic apply to all investment companies. An investment company as discussed in this Topic is an entity that meets the assessment described in paragraphs . - a
- b
- c
- d
The guidance in this Topic does not apply to real estate investment trusts.
An entity regulated under the Investment Company Act of 1940 is an investment company under this Topic.
An entity that is not regulated under the Investment Company Act of 1940 shall assess all the characteristics of an investment company in paragraphs to determine whether it is an investment company. The entity shall consider its purpose and design when making that assessment. An investment company has the following fundamental characteristics: - a
It is an entity that does both of the following:
- 1
Obtains funds from one or more investors and provides the investor(s) with investment management services
- 2
Commits to its investor(s) that its business purpose and only substantive activities are investing the funds solely for returns from capital appreciation, investment income, or both.
- b
The entity or its affiliates do not obtain or have the objective of obtaining returns or benefits from an investee or its affiliates that are not normally attributable to ownership interests or that are other than capital appreciation or investment income.
An investment company also has the following typical characteristics: - a
It has more than one investment.
- b
It has more than one investor.
- c
It has investors that are not related parties of the parent (if there is a parent) or the investment manager. - d
It has ownership interests in the form of equity or partnership interests.
- e
It manages substantially all of its investments on a fair value basis.
To be an investment company, an entity shall possess the fundamental characteristics in paragraph 946-10-15-6. Typically, an investment company also has all of the characteristics in paragraph 946-10-15-7. However, the absence of one or more of those typical characteristics does not necessarily preclude an entity from being an investment company. If an entity does not possess one or more of the typical characteristics, it shall apply judgment and determine, considering all facts and circumstances, how its activities continue to be consistent (or are not consistent) with those of an investment company. The implementation guidance in Section 946-10-55 is an integral part of assessing investment company status and provides additional guidance for that assessment. The initial determination of whether an entity is an investment company within the scope of this Topic shall be made upon formation of the entity. An entity shall reassess whether it meets (or does not meet) the assessment of investment company status in paragraphs only if there is a subsequent change in the purpose and design of the entity or if the entity is no longer regulated under the Investment Company Act of 1940. An entity that is no longer an investment company under this Topic as a result of the reassessment of status shall discontinue applying the guidance in this Topic and shall account for the change in its status prospectively by accounting for its investments in accordance with other Topics as of the date of the change in status. The fair value of an investment at the date of the change in status shall be the investment's initial carrying amount. An entity that subsequently is an investment company under this Topic as result of the reassessment of status shall account for the effect of the change in status from the date of the change in status. The effect of applying this Topic shall be recognized as a cumulative-effect adjustment to net assets at the date of the change in status. The cumulative-effect adjustment shall be included in the net asset value at the beginning of the period in the per-share information included in the financial highlights. The adjustment to net assets represents both of the following: - a
The difference between the fair value and the carrying amount of the entity's investees (or parent's portion of the assets minus liabilities for consolidated investments) at the date of the change in status - b
Any amounts previously recognized in accumulated other comprehensive income.
An investment company under this Topic shall disclose that it is an investment company following accounting and reporting guidance in this Topic.
An entity with a change in status (as described in paragraphs ) shall disclose that a change in status occurred and the reasons for that change. An entity that previously was not an investment company under this Topic and becomes an investment company under this Topic shall disclose the effect of the change in status on the reported amounts of investments as of the date of the change in status.
This Section provides additional guidance for the assessment in paragraphs to determine whether an entity that is not regulated under the Investment Company Act of 1940 is an investment company under this Topic. This Section is organized as follows: - a
Fundamental characteristics of an investment company
- b
Typical characteristics of an investment company
- c
Illustrative examples.
To be an investment company, an entity shall possess the fundamental characteristics in paragraph 946-10-15-6. Paragraphs provide additional guidance for determining whether an entity has the fundamental characteristics of an investment company. An investment company should have no substantive activities other than its investing activities and should not have significant assets or liabilities other than those relating to its investing activities, subject to the exception in the following paragraph.
An investment company may provide investing-related services (for example, investment advisory or transfer agent services) to other entities, directly or indirectly through an investment in an entity that provides those services, as long as those services are not substantive. However, an investment company may provide substantive investing-related services, directly or indirectly through an investment in an entity that provides those services, if the substantive services are provided to the investment company only.
Evidence of the entity's business purpose and substantive activities may be included in the entity's offering memorandum, publications distributed by the entity, and other corporate or partnership documents that indicate the investment objectives of the entity. Evidence of the entity's business purpose and substantive activities also may include the manner in which the entity presents itself to other parties (such as potential investors or potential investees). For example, an entity that presents its business to its investors as having the objective of investing for capital appreciation has characteristics that are consistent with the business purpose and substantive activities of an investment company. Alternatively, an entity that presents itself as an investor whose objective is jointly developing, producing, or marketing products with its investees has characteristics that are inconsistent with the business purpose and substantive activities of an investment company.
An entity's investment plans also provide evidence of its business purpose and substantive activities. Accordingly, an investment company whose business purpose and substantive activities include realizing capital appreciation should have an exit strategy for how it plans to realize the capital appreciation of its investments. Although the entity may not yet have determined the specific method or timing of disposing of an investment, the fact that it has identified potential exit strategies through which it can realize capital appreciation provides evidence that its business purpose and substantive activities are consistent with those of an investment company. The entity need not document specific exit strategies for each individual investment held for the purpose of realizing capital appreciation but should identify potential exit strategies for different types or portfolios of investments held with the purpose of realizing capital appreciation. Disposal of investments only during liquidation or to satisfy investor redemptions are not exit strategies. Therefore, an entity should have a plan to dispose of its investments before liquidation when its business purpose and substantive activities include realizing capital appreciation. An investment company whose business purpose and substantive activities are to invest for returns only from investment income does not require an exit strategy for its investments.
An entity would not be an investment company if the entity or its affiliates obtain or have the objective of obtaining returns or benefits from an investee or its affiliates that are not normally attributable to ownership interests or that are other than capital appreciation or investment income. Examples of relationships and activities that would be inconsistent with the characteristics of an investment company include any of the following: - a
The entity or its affiliates acquire, use, exchange, or exploit the processes, assets, or technology of an investee or its affiliates. This includes the entity or its affiliates having disproportionate or exclusive rights to acquire assets, technology, products, or services of an investee or its affiliates (for example, by holding an option to purchase an asset from an investee if the asset's development is deemed successful).
- b
There are other arrangements between the entity or its affiliates and an investee or its affiliates to jointly develop, produce, market, or provide products or services.
- c
An investee or its affiliates provide financing guarantees or assets to serve as collateral for borrowing arrangements of the entity or its affiliates to provide returns or with the objective of providing returns other than capital appreciation or investment income. The guidance in this paragraph does not prohibit an investment company from using its investments in its investees as collateral for any of its borrowings.
- d
An affiliate of the entity holds an option to purchase from the entity ownership interests in an investee at an amount other than fair value. - e
There are transactions between the entity or its affiliates and an investee or its affiliates that meet any of the following:
- 1
They are on terms that are unavailable to entities that are not affiliates of the investee.
- 2
They are not at fair value or are not conducted at arm's length.
- 3
They represent a substantive portion of the investee's or the entity's business activities, including business activities of affiliates of the entity or affiliates of the investee.
An investment company may have a strategy to invest in more than one investee in the same industry, market, or geographical area to benefit from synergies that increase the returns from capital appreciation and investment income from those investments. Transactions between an entity's investees should not affect the entity's assessment of whether it is an investment company unless those transactions result in the entity obtaining returns or benefits other than capital appreciation or investment income.
An investment company may provide both of the following services to an investee, either directly or through an investment in an entity that provides those services, only if those services are provided for the purpose of maximizing returns from capital appreciation, investment income, or both (rather than other benefits) and do not represent a separate substantial business activity or separate substantial source of income for the investment company: - a
Assistance with day-to-day management of the operations of an investee
- b
Financial support, such as a loan, capital commitment, or guarantee.
As required by paragraph 946-10-15-5, an entity shall assess all the typical characteristics in paragraph 946-10-15-7 to determine whether it is an investment company. If an entity does not possess one or more of the typical characteristics, it should apply judgment and determine, considering all facts and circumstances, how its activities continue to be consistent (or are not consistent) with those of an investment company. Paragraphs provide additional guidance for determining whether an entity has a certain typical characteristic of an investment company. An investment company typically holds multiple investments at the same time to diversify its risk and maximize its returns from capital appreciation, investment income, or both. Investments typically consist of securities of other entities, but also may include commodities, securities based on indexes, securities sold short, derivative instruments, real estate properties, and other forms of investments.
An investment company may hold investments directly or indirectly through another investment company. For example, in a master-feeder structure, a feeder fund holds multiple investments indirectly through its investment in a master fund that holds multiple investments or, in a fund-of-funds structure, an investment company holds multiple investments indirectly through its investment in an underlying fund that holds multiple investments.
Holding a single investment does not necessarily preclude an entity from being an investment company. There may be times when an investment company holds a single investment, such as in any of the following examples: - a
It is in its start-up period and has not yet identified suitable investments and, therefore, has not yet executed its investment plan to acquire multiple investments.
- b
It has not yet made other investments to replace those it has disposed of.
- c
It is in the process of liquidation.
- d
It is established to pool investors' funds to invest in a single investment when that investment is unobtainable by individual investors (for example, when the required minimum investment is too high for an individual investor).
An investment company with a single investment also may be formed (for legal, regulatory, tax, or other business reasons) in conjunction with another investment company that holds multiple investments (for example, a master-feeder structure or blocker fund). Investment companies formed in conjunction with each other are not required to be formed at the same time. Holding a single investment for that reason does not necessarily preclude an entity from being an investment company.
An investment company typically pools funds from multiple investors and provides them with investment management services, including access to investment opportunities unobtainable by individual investors. Having multiple investors makes it less likely that the entity or its affiliates obtain or have the objective of obtaining returns or benefits from an investee or its affiliates that are not normally attributable to ownership interests or that are other than capital appreciation or investment income.
Having a single investor does not necessarily preclude an entity from being an investment company. There may be times when an investment company has a single investor, such as in any of the following examples: - a
It is in its initial offering period, which has not expired, and it is actively identifying suitable investors.
- b
It is actively identifying investors but has not yet identified suitable investors to replace those that have redeemed their ownership interests.
- c
It is in the process of liquidation.
An investment company may be formed by, or for, a single investor that represents or supports the interests of a wider group of investors (for example, a pension fund, government investment fund, or endowment fund). An investment company with a single investor also may be formed (for legal, regulatory, tax, or other business reasons) in conjunction with another investment company that has multiple investors (for example, a master-feeder structure or a blocker fund). Investment companies formed in conjunction with each other are not required to be formed at the same time. Having a single investor for those reasons does not necessarily preclude an entity from being an investment company.
An investment company typically has investors that are not related parties of the parent (if there is a parent) or the investment manager. Those unrelated investors, in aggregate, hold a significant interest in the investment company. Having investors that are not related parties of the parent or the investment manager makes it less likely that the entity or its affiliates obtain or have the objective of obtaining returns or benefits from an investee or its affiliates that are not normally attributable to ownership interests or that are other than capital appreciation or investment income. Investors that are related parties of the parent or investment manager should be combined and treated as a single investor, along with the parent or investment manager, for the purposes of evaluating the more-than-one-investor characteristic of an investment company in paragraph 946-10-15-7. Having investors that are related parties of the parent or the investment manager does not necessarily preclude an entity from being an investment company. For example, an investment manager may form an investment company for its employees in conjunction with another investment company. Although the employees may be related parties of the investment manager, the investment company formed for its employees mirrors the business purpose and activities of the main investment company.
If the parent or its related parties have an implicit or explicit arrangement that would require them to acquire another investor's ownership interest in the investment company at an amount other than fair value, those interests should be combined and treated as if they were owned by the parent for the purposes of evaluating the typical characteristics of an investment company. Examples of when interests would be combined and treated as if they were owned by the parent include any of the following: - a
The parent or its related parties have a written option to acquire another investor's ownership interests in the entity at an amount other than fair value.
- b
The parent finances another investor's ownership interests, and the ownership interests are collateral for the debt.
Ownership interests in an investment company are typically in the form of equity or partnership interests. Each ownership interest represents a specifically identifiable portion of the net assets of the investment company. An investor in an investment company contributes funds to acquire ownership interests, and the value of those interests is dependent on the changes in the fair value of the underlying investments of the investment company.
Having multiple classes of equity instruments, such as shares with distinct rights or rights that do not represent a proportionate interest in all of the underlying investments of the investment company, does not preclude an entity from meeting this characteristic of an investment company.
An investment company can be but is not required to be a separate legal entity. For example, separate accounts of life insurance companies may not be separate legal entities. However, investors in the separate accounts base their investment decisions on the changes in the fair value of the underlying investments held in those separate accounts.
In addition, having significant ownership interests that are not considered equity interests in accordance with other Topics (for example, ownership interests in the form of debt) does not necessarily preclude an entity from being an investment company provided that the holders are exposed to variable returns from changes in the fair value of the underlying investments of the entity. The economic substance of the entity, rather than its legal form, should be evaluated to determine whether the entity has that characteristic of an investment company.
An investment company typically manages substantially all of its investments on a fair value basis. Determining whether an entity manages its investments on a fair value basis does not depend on the nature of its investments but, rather, includes an evaluation of whether fair value is a key component of any of the following: - a
How the entity evaluates the performance of its investments
- b
How the entity transacts with its investors
- c
How asset-based fees are calculated.
An investment company's activities typically demonstrate that fair value is the primary measurement attribute used to evaluate the financial performance of and to make investment decisions for substantially all of its investments. Also, an investment company typically transacts with investors on the basis of net asset value per share and incurs asset-based fees, both of which are based on the fair value of its investments. Assets held by an investment company that are used to service the investment company's own investments are not required to be managed on a fair value basis (see paragraph 946-10-55-5). Managing investments on another basis, such as a yield basis or an income basis, does not necessarily preclude an entity from being an investment company. For example, although a short-term investment fund may evaluate the performance of its investments on a yield (amortized cost) basis, fair value is the primary measurement attribute used to evaluate the financial performance of investments and to make investment decisions because the fund monitors the fair value of its investments to minimize the differences between the carrying value and the fair value.
The following Examples illustrate the assessment to determine whether an entity that is not regulated under the Investment Company Act of 1940 is an investment company under this Topic: - a
Example 1: Limited partnership
- b
Example 2: Technology fund
- c
Example 3: Master-feeder structure.
Entity A, a limited partnership, is formed in 20X1 with a 10-year life. The offering memorandum provides that Entity A's purpose is to invest in operating entities with rapid growth potential, with the only objective of realizing capital appreciation from investments in those entities over the life of Entity A. One percent of Entity A's capital was contributed by the general partner (the investment manager), who has the responsibility of identifying suitable investments for Entity A. The remaining 99 percent of Entity A's capital was contributed by 75 limited partners, who are not related parties of the general partner.
Entity A begins its investment activities in 20X1. However, no suitable investments are identified during that year. In 20X2, Entity A acquires a controlling financial interest in Entity B, a corporation. Entity A is unable to identify suitable investments and complete any other investment purchases until 20X3, at which time it acquires equity interests in five additional operating companies. Other than acquiring those equity interests, Entity A conducts no other activities. Entity A manages and evaluates the performance of its investments on a fair value basis. Information about Entity A's financial results, including changes in the fair value of its investments, are provided by the general partner to the limited partners periodically.
Entity A has plans to dispose of its interests in each of its investees during the 10-year stated life of the partnership to realize returns from the capital appreciation of its investees. Those disposals include the sale of the interests for cash or the distribution of marketable equity securities to investors following a successful public offering of an investee's securities.
From formation in 20X1 to December 31, 20X3, Entity A has the fundamental characteristics of an investment company because all of the following conditions exist: - a
Entity A obtained funds from investors (the general partner and the limited partners) and is providing those investors with investment management services.
- b
Entity A's business purpose and only substantive activity is acquiring interests in operating companies with the objective of realizing returns over its life from the capital appreciation of the investments. Entity A has identified exit strategies for its investments to realize the capital appreciation.
- c
Entity A does not have an objective of obtaining returns or benefits other than capital appreciation from its investments.
Entity A also has all of the following typical characteristics of an investment company: - a
Entity A is funded by multiple investors.
- b
The limited partners of Entity A hold a significant interest in the partnership and are not related to the investment manager (the general partner).
- c
Ownership in Entity A is represented by partnership interests acquired through capital contributions.
- d
Investments are managed, and their performance is evaluated on a fair value basis.
Entity A does not hold more than one investment until 20X3. However, that is because during each of the years 20X1, 20X2, and part of 20X3, it is in its start-up period and has not yet fully executed its investment plan to acquire multiple investments because it could not identify suitable investment opportunities.
Entity A is an investment company from formation in 20X1 to December 31, 20X3. It has all the fundamental characteristics of an investment company. In addition, although Entity A does not possess all of the typical characteristics of an investment company, its activities are consistent with those of an investment company.
Entity C, an investment fund, is formed in 20X1 by six corporations in the technology industry to invest in multiple technology start-up companies for capital appreciation. Entity D, one of the corporations, holds a 70 percent controlling financial interest in Entity C. The remaining 30 percent of the fund is owned by the other 5 corporations, which are not related to each other or Entity D. Entity D holds options at amounts other than fair value to acquire controlling financial interests in the investees of the technology fund and options to purchase assets produced by the investees, if the technology developed by the investee is successful and would benefit the operations of Entity D. No plans for exiting the investments have been identified by Entity C. Entity C is managed by an investment manager that is not related to the investors. The investors in Entity C also provide significant advice to the investment manager about potential investments.
Even though Entity C's business purpose and substantive activities include investing for returns from capital appreciation and it has many of the typical characteristics of an investment company, Entity C is not an investment company because of both of the following conditions: - a
Entity D, the parent of Entity C, holds options at amounts other than fair value to acquire investees of the fund and assets of the investees if the technology developed by the investee is successful and would benefit Entity D's operations. That provides Entity D with a benefit that is other than returns from capital appreciation or investment income.
- b
The investment plans of Entity C do not include exit strategies for its investments to realize returns from the capital appreciation of investees.
Entity E, a master fund, is formed in 20X1 with a 10-year life. The equity of Entity E is held by Entity F and Entity G, two affiliated feeder funds. Entity F and Entity G are established in conjunction with Entity E to meet legal, regulatory, tax, or other requirements. Entity F, the domestic feeder partnership, is capitalized with a 1 percent investment from the general partner and 99 percent from unaffiliated investors (with no party holding a controlling financial interest). Entity G, the offshore feeder fund, is capitalized with a 1 percent equity investment from the sponsor and 99 percent equity investments from unaffiliated investors (with no party holding a controlling financial interest). Entity H is the investment manager for the master-feeder structure and is the general partner of Entity F and the sponsor of Entity G.
This figure illustrates the master-feeder structure. The purpose of Entity E is to invest in multiple investments to generate returns solely from capital appreciation and investment income. Entity F and Entity G have communicated to investors that the sole purpose of the master-feeder structure is to provide investment opportunities for investors in separate market niches to invest in a large pool of assets. Entity E has identified exit strategies for the investments that it holds for returns from capital appreciation. In addition, Entity E manages, and evaluates the performance of, its investments on a fair value basis. Entity F and Entity G provide their investors with periodic information about the financial results of the master-feeder structure.
Entity E, Entity F, and Entity G each possess the fundamental characteristics of an investment company because all of the following conditions exist: - a
Entity E, Entity F, and Entity G obtained funds from investors and are providing those investors with investment management services.
- b
The master-feeder structure's business purpose and only substantive activities, which were communicated to investors of Entity F and Entity G, are investing solely for returns from capital appreciation and investment income.
- c
Entity E has identified exit strategies for the investments it holds for returns from capital appreciation. Although Entity F and Entity G do not have an exit strategy for their interests in Entity E, they are considered to have an exit strategy for their investments because Entity E was formed in conjunction with Entity F and Entity G and holds investments on behalf of them.
- d
Entity E, Entity F, and Entity G do not have an objective of obtaining returns or benefits other than capital appreciation and investment income from their investments.
Entity E, Entity F, and Entity G each also possess all of the following typical characteristics of an investment company: - a
Entity E holds more than one investment. Both Entity F and Entity G also are considered to hold more than one investment because they were formed in conjunction with Entity E.
- b
Both Entity F and Entity G are funded by multiple investors. Entity E also is considered to be funded by multiple investors because it was formed in conjunction with Entity F and Entity G.
- c
Both Entity F and Entity G have investors that hold a significant interest in the partnership and are not related to the investment manager (Entity H). Although Entity F and Entity G are related to Entity E, Entity E is considered to have unrelated investors because it was formed in conjunction with Entity F and Entity G, which have unrelated investors.
- d
Ownership in Entity E and Entity G are represented by equity interests acquired through capital contributions. Ownership in Entity F is represented by partnership interests acquired through capital contributions.
- e
Entity E manages and evaluates the performance of investments on a fair value basis. Additionally, investors of Entity F and Entity G are provided with periodic financial information about the investing activities of Entity E, which includes information about the change in fair value of investments held.
Entity E, Entity F, and Entity G are investment companies. They possess all the fundamental characteristics of an investment company and all the typical characteristics of an investment company, either directly or indirectly as a result of the master-feeder structure.
Paragraph superseded on 06/26/2015 after the end of the transition period stated in Accounting Standards Update No. 2013-08, Financial Services—Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements.
Paragraph superseded on 06/26/2015 after the end of the transition period stated in Accounting Standards Update No. 2013-08, Financial Services—Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements.
The following table identifies the changes made to this Subtopic.
See paragraph 946-10-S99-1, Regulation S-X Rule 6-01, for entities required to comply with the SEC materials in this Subtopic. See paragraph 946-10-S99-4, SAB Topic 5.D, for SEC Staff views on the recognition of organization and offering expenses and selling commissions. The following is the text of Regulation S-X Rule 6-01, Application of Rules 6-01 through 6-11 (17 CFR 210.6-01).
[81 FR 82010, Nov. 18, 2016, as amended at 85 FR 54064, Aug. 31, 2020]The following is the text of Regulation S-X Rule 6-02, Definition of Certain Terms (17 CFR 210.6-02).
[47 FR 56838, Dec. 21, 1982, as amended at 81 FR 82137, Nov. 18, 2016; 85 FR 54064, Aug. 31, 2020]The following is the text of Regulation S-X Rule 6-03, Special Rules of General Application to Registered Investment Companies and Business Development Companies (17 CFR 210.6-03).
The financial statements filed for persons to which §§ 210.6-01 through 210.6-11 are applicable shall be prepared in accordance with the following special rules in addition to the general rules in §§ 210.1-01 to 210.4-10 (Articles 1, 2, 3, and 4). Where the requirements of a special rule differ from those prescribed in a general rule, the requirements of the special rule shall be met.
(a) Content of financial statements. The financial statements shall be prepared in accordance with the requirements of this part (Regulation S-X) notwithstanding any provision of the articles of incorporation, trust indenture or other governing legal instruments specifying certain accounting procedures inconsistent with those required in §§ 210.6-01 through 210.6-11.
(b) Audited financial statements. Where, under Article 3 of this part, financial statements are required to be audited, the independent accountant shall have been selected and ratified in accordance with section 32 of the Investment Company Act of 1940 (15 U.S.C. 80a-31).
(c) Consolidated and combined statements.
(1) Consolidated and combined statements filed for registered investment companies and business development companies shall be prepared in accordance with §§ 210.3A-02 and 210.3A-03 (Article 3A) except that:
(i) [Reserved]
(ii) A consolidated statement of the registrant and any of its investment company subsidiaries shall not be filed unless accompanied by a consolidating statement which sets forth the individual statements of each significant subsidiary included in the consolidated statement: Provided, however, That a consolidating statement need not be filed if all included subsidiaries are totally held; and
(iii) Consolidated or combined statements filed for subsidiaries not consolidated with the registrant shall not include any investment companies unless accompanied by consolidating or combining statements which set forth the individual statements of each included investment company which is a significant subsidiary.
(2) If consolidating or combining statements are filed, the amounts included under each caption in which financial data pertaining to affiliates is required to be furnished shall be subdivided to show separately the amounts:
(d) Valuation of investments. The balance sheets of registered investment companies, other than issuers of face-amount certificates, and business development companies, shall reflect all investments at value, with the aggregate cost of each category of investment reported under §§ 210.6-04.1, 6-04.2, 6-04.3, and 6.04.9 or the aggregate cost of each category of investment reported under § 210.6-05.1 shown parenthetically.
State in a note the methods used in determining value of investments.
As required by section 28(b) of the Investment Company Act of 1940 (15 U.S.C. 80a-28(b)), qualified assets of face-amount certificate companies shall be valued in accordance with certain provisions of the Code of the District of Columbia.
(e) Qualified assets. State in a note the nature of any investments and other assets maintained or required to be maintained, by applicable legal instruments, in respect of outstanding face-amount certificates. If the nature of the qualifying assets and amount thereof are not subject to the provisions of section 28 of the Investment Company Act of 1940 (15 U.S.C. 80a-28), a statement to that effect shall be made.
(f) Restricted securities. State in a note unless disclosed elsewhere the following information as to investment securities which cannot be offered for public sale without first being registered under the Securities Act of 1933 (15 U.S.C. 77a et seq) (restricted securities):
(1) The policy of the person with regard to acquisition of restricted securities.
(2) The policy of the person with regard to valuation of restricted securities. Specific comments shall be given as to the valuation of an investment in one or more issues of securities of a company or group of affiliated companies if any part of such investment is restricted and the aggregate value of the investment in all issues of such company or affiliated group exceeds five percent of the value of total assets. (As used in this paragraph, the term affiliated shall have the meaning given in § 210.6-02(a).)
(3) A description of the person's rights with regard to demanding registration of any restricted securities held at the date of the latest balance sheet.
(g) Income recognition. Dividends shall be included in income on the ex-dividend date; interest shall be accrued on a daily basis. Dividends declared on short positions existing on the record date shall be recorded on the ex-dividend date and included as an expense of the period.
(h) Federal income taxes.
(1) The company's status as a regulated investment company as defined in subtitle A, chapter 1, subchapter M of the Internal Revenue Code, as amended, shall be stated in a note referred to in the appropriate statements. Such note shall also indicate briefly the principal assumptions on which the company relied in making or not making provisions for income taxes. However, a company which retains realized capital gains and designates such gains as a distribution to shareholders in accordance with section 852(b)(3)(D) of the Internal Revenue Code shall, on the last day of its taxable year (and not earlier), make provision for taxes on such undistributed capital gains realized during such year.
(2) State the following amounts based on cost for Federal income tax purposes:
(i) Aggregate gross unrealized appreciation for all investments in which there is an excess of value over tax cost;
(ii) The aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value;
(iii) The net unrealized appreciation or depreciation; and
(iv) The aggregate cost of investments for Federal income tax purposes.
(i) Issuance and repurchase by a registered investment company or business development company of its own securities. Disclose for each class of the company's securities:
(1) The number of shares, units, or principal amount of bonds sold during the period of report, the amount received therefor, and, in the case of shares sold by closed-end management investment companies, the difference, if any, between the amount received and the net asset value or preference in involuntary liquidation (whichever is appropriate) of securities of the same class prior to such sale; and
(2) The number of shares, units, or principal amount of bonds repurchased during the period of report and the cost thereof. Closed-end management investment companies shall furnish the following additional information as to securities repurchased during the period of report:
(i) As to bonds and preferred shares, the aggregate difference between cost and the face amount or preference in involuntary liquidation and, if applicable net assets taken at value as of the date of repurchase were less than such face amount or preference, the aggregate difference between cost and such net asset value;
(ii) As to common shares, the weighted average discount per share, expressed as a percentage, between cost of repurchase and the net asset value applicable to such shares at the date of repurchases.
Note to paragraphs (h)(2)(i) and (ii): The information required by paragraphs (h)(2)(i) and (ii) of this section may be based on reasonable estimates if it is impracticable to determine the exact amounts involved.
(j) Series companies.
(1) The information required by this part shall, in the case of a person which in essence is comprised of more than one separate investment company, be given as if each class or series of such investment company were a separate investment company; this shall not prevent the inclusion, at the option of such person, of information applicable to other classes or series of such person on a comparative basis, except as to footnotes which need not be comparative.
(2) If the particular class or series for which information is provided may be affected by other classes or series of such investment company, such as by the offset of realized gains in one series with realized losses in another, or through contingent liabilities, such situation shall be disclosed.
(k) Certificate reserves.
(1) For companies issuing face-amount certificates subsequent to December 31, 1940 under the provisions of section 28 of the Investment Company Act of 1940 (15 U.S.C. 80a-28), balance sheets shall reflect reserves for outstanding certificates computed in accordance with the provisions of section 28(a) of the Act.
(2) For other companies, balance sheets shall reflect reserves for outstanding certificates determined as follows:
(i) For certificates of the installment type, such amount which, together with the lesser of future payments by certificate holders as and when accumulated at a rate not to exceed 3 1/2 per centum per annum (or such other rate as may be appropriate under the circumstances of a particular case) compounded annually, shall provide the minimum maturity or face amount of the certificate when due.
(ii) For certificates of the fully-paid type, such amount which, as and when accumulated at a rate not to exceed 3 1/2 per centum per annum (or such other rate as may be appropriate under the circumstances of a particular case) compounded annually, shall provide the amount or amounts payable when due.
(iii) Such amount or accrual therefor, as shall have been credited to the account of any certificate holder in the form of any credit, or any dividend, or any interest in addition to the minimum maturity or face amount specified in the certificate, plus any accumulations on any amount so credited or accrued at rates required under the terms of the certificate.
(iv) An amount equal to all advance payments made by certificate holders, plus any accumulations thereon at rates required under the terms of the certificate.
(v) Amounts for other appropriate contingency reserves, for death and disability benefits or for reinstatement rights on any certificate providing for such benefits or rights.
(l) Inapplicable captions. Attention is directed to the provisions of §§ 210.4-02 and 210.4-03 which permit the omission of separate captions in financial statements as to which the items and conditions are not present, or the amounts involved not significant. However, amounts involving directors, officers, and affiliates shall nevertheless be separately set forth except as otherwise specifically permitted under a particular caption.
(m) Swing pricing. For a registered investment company that has adopted swing pricing policies and procedures, state in a note to the company's financial statements:
(1) The general methods used in determining whether the company's net asset value per share will swing;
(2) Whether the company's net asset value per share has swung during the year; and
(3) A general description of the effects of swing pricing.
[81 FR 82010, Nov. 18, 2016, as amended at 81 FR 82137, Nov. 18, 2016; 83 FR 50202, Oct. 4, 2018; 85 FR 54064, Aug. 31, 2020]The following is the text of Regulation S-X Rule 6-11, Financial Statements of Funds Acquired or to Be Acquired (17 CFR 210.6-11).
(a) Financial statements required.
(1) Financial statements described in §§210.3-01 and 210.3-02, or §210.3-18, as applicable, including the schedules specified in §§210.12-01 through 210.12-29 (Article 12), prepared and audited in accordance with Regulation S-X (including the independence standards in §210.2-01 or, alternatively if the fund is not a registrant, the applicable independence standards) for the periods specified in paragraph (b) of this section and the supplemental information specified in paragraph (d) of this section must be filed if any of the following conditions exist:
(i) During the most recent fiscal year or subsequent interim period for which a balance sheet is required by §210.3-01 or §210.3-18, a fund acquisition has occurred; or
(ii) After the date of the most recent balance sheet filed pursuant to §210.3-01 or §210.3-18 or, if no relevant balance sheet has been filed in connection with a post-effective amendment for a new series submitted pursuant to §230.485(a)(2) of this chapter (Rule 485(a)(2) under the Securities Act), the filing of such amendment, consummation of a fund acquisition has occurred or is probable.
(2) For purposes of this section:
(i) The term fund includes any investment company as defined in section 3(a) of the Investment Company Act of 1940, including a business development company, or any company that would be an investment company but for the exclusions provided by sections 3(c)(1) or 3(c)(7) of that Act, or any private account managed by an investment adviser.
(ii) The determination of whether a fund has been acquired or will be acquired should be evaluated in light of the facts and circumstances involved. Among the facts and circumstances which should be considered in evaluating whether a fund acquisition has occurred or will occur are whether it will result in the acquisition by the registrant of all or substantially all of the portfolio investments held by another fund.
(3) Acquisitions of a group of related funds that are probable or that have occurred subsequent to the latest fiscal year-end for which audited financial statements of the registrant have been filed will be treated under this section as if they are a single acquisition. For purposes of this section, funds will be deemed to be related if:
(i) They are under common control or management;
(ii) The acquisition of one fund is conditional on the acquisition of each other fund; or
(iii) Each acquisition is conditioned on a single common event.
(4) This section does not apply to a fund which is totally held by the registrant prior to consummation of the transaction.
(b) Periods to be presented.
(1) If securities are being registered to be offered to the security holders of the fund to be acquired, the financial statements specified in §§210.3-01 and 210.3-02 or §210.3-18 for the fund to be acquired and the supplemental information specified in paragraph (d) of this section must be filed, except as provided otherwise for filings on Form N-14 (§239.23 of this chapter). The financial statements covering the fiscal year must be audited except as provided in Item 14 of Schedule 14A (§240.14a-101 of this chapter) with respect to certain proxy statements or in registration statements filed on Form N-14 (§239.23 of this chapter ).
(2) In all cases not specified in paragraph (b)(1) of this section, financial statements of the fund acquired or to be acquired for the periods specified in this paragraph (b)(2) or such shorter period as the fund has been in existence and the supplemental information specified in paragraph (d) of this section must be filed. Whether such financial statements and supplemental information are to be filed must be determined using the conditions specified in the definition of significant subsidiary in §210.1-02(w)(2)(i) and (w)(2)(ii)(B) as follows:
(i) If none of the conditions set forth in §210.1-02(w)(2)(i) and (w)(2)(ii)(B), substituting 20 percent for 10 percent each place it appears therein, are satisfied, the financial statements and supplemental financial information in paragraph (d) of this section are not required.
(ii) If any of the conditions set forth in §210.1-02(w)(2)(i) and (w)(2)(ii)(B), substituting 20 percent for 10 percent each place it appears therein, are satisfied, the financial statements of the acquired fund must be filed. If the acquired fund is subject to §210.3-18, then the financial statements for the periods described therein must be filed. For all other acquired funds, the financial statements for the most recent fiscal year and the most recent interim period must be filed. The registrant must also provide the supplemental financial information in paragraph (d) of this section.
(iii) If the aggregate impact of funds acquired or to be acquired since the date of the most recent audited balance sheet filed for the registrant, for which financial statements are not required by paragraph (b)(2)(i) of this section, satisfies any of the conditions set forth in §210.1-02(w)(2)(i) and (w)(2)(ii)(B), substituting 50 percent for 10 percent each place it appears therein, the registrant must provide financial statements for any fund acquired or to be acquired for which financial statements are not yet required by paragraph (b)(2)(i) of this section. If any of the acquired funds are subject to §210.3-18, then the financial statements for the periods described therein must be filed. For any other acquired funds, the financial statements for the most recent fiscal year and the most recent interim period must be filed. The registrant must also provide the supplemental financial information in paragraph (d) of this section for such funds.
(3) The determination must be made by comparing the most recent annual financial statement of each such fund, or for acquisitions each group of related funds on a combined basis, to the registrant's most recent annual financial statements filed at or prior to the date of acquisition. However, the determination may be made by using pro forma amounts as calculated by the registrant for the periods specified in §210.1-02(w)(2) that only give effect to an acquisition consummated after the latest fiscal year-end for which the registrant's financial statements are required to be filed when the registrant has filed audited financial statements of such acquired fund and provided the supplemental financial information for the periods required by this section.
(4) Separate financial statements of the acquired fund and the supplemental information specified in paragraph (d) of this section need only to be filed once and not included in any subsequent filing or shareholder report.
(c) Acquisitions involving private funds or private accounts. If the fund acquired or to be acquired would be an investment company under the Investment Company Act but for the exclusion provided from that definition by either sections 3(c)(1) or 3(c)(7) of that Act, then the required financial statements may comply with U.S. Generally Accepted Accounting Principles and only Article 12. In situations of any private account managed by an investment adviser provide the schedules specified in Article 12 for the assets acquired or to be acquired.
(d) Supplemental financial information.
(1) Supplemental financial information must consist of:
(i) A table showing the current fees for the registrant and the acquired fund and pro forma fees, if different, for the registrant after giving effect to the acquisition using the format prescribed in the appropriate registration statement under the Investment Company Act;
(ii) If the transaction will result in a material change in the acquired fund's investment portfolio due to investment restrictions, a schedule of investments of the acquired fund modified to reflect such change and accompanied by narrative disclosure describing the change; and
(iii) Narrative disclosure about material differences in accounting policies of the acquired fund when compared to the registrant.
(2) With respect to any fund acquisition, registered investment companies and business development companies must provide the supplemental financial information required in this section in lieu of any pro forma financial information required by §§210.11-01 through 210.11-03 .
[85 FR 54064, Aug. 31, 2020]The following is the text of SAB Topic 5.D, Organization and Offering Expenses and Selling Commissions—Limited Partnerships Trading in Commodity Futures.
Facts: Partnerships formed for the purpose of engaging in speculative trading in commodity futures contracts sell limited partnership interests to the public and frequently have a general partner who is an affiliate of the partnership's commodity broker or the principal underwriter selling the limited partnership interests. The commodity broker or a subsidiary typically assumes the liability for all or part of the organization and offering expenses and selling commissions in connection with the sale of limited partnership interests. Funds raised from the sale of partnership interests are deposited in a margin account with the commodity broker and are invested in Treasury Bills or similar securities. The arrangement further provides that interest earned on the investments for an initial period is to be retained by the broker until it has been reimbursed for all or a specified portion of the aforementioned expenses and commissions and that thereafter interest earned accrues to the partnership.
In some instances, there may be no reference to reimbursement of the broker for expenses and commissions to be assumed. The arrangements may provide that all interest earned on investments accrues to the partnership but that commissions on commodity transactions paid to the broker are at higher rates for a specified initial period and at lower rates subsequently.
Question 1: Should the partnership recognize a commitment to reimburse the commodity broker for the organization and offering expenses and selling commissions?
Interpretive Response: Yes. A commitment should be recognized by reducing partnership capital and establishing a liability for the estimated amount of expenses and commissions for which the broker is to be reimbursed.
Question 2: Should the interest income retained by the broker for reimbursement of expenses be recognized as income by the partnership?
Interpretive Response: Yes. All the interest income on the margin account investments should be recognized as accruing to the partnership as earned. The portion of income retained by the broker and not actually realized by the partnership in cash should be applied to reduce the liability for the estimated amount of reimbursable expenses and commissions.
Question 3: If the broker retains all of the interest income for a specified period and thereafter it accrues to the partnership, should an equivalent amount of interest income be reflected on the partnership's financial statements during the specified period?
Interpretive Response: Yes. If it appears from the terms of the arrangement that it was the intent of the parties to provide for full or partial reimbursement for the expenses and commissions paid by the broker, then a commitment to reimbursement should be recognized by the partnership and an equivalent amount of interest income should be recognized on the partnership's financial statements as earned.
Question 4: Under the arrangements where commissions on commodity transactions are at a lower rate after a specified period and there is no reference to reimbursement of the broker for expenses and commissions, should recognition be given on the partnership's financial statements to a commitment to reimburse the broker for all or part of the expenses and commissions?
Interpretive Response: If it appears from the terms of the arrangement that the intent of the parties was to provide for full or partial reimbursement of the broker's expenses and commissions, then the estimated commitment should be recognized on the partnership's financial statements. During the specified initial period commissions on commodity transactions should be charged to operations at the lower commission rate with the difference applied to reduce the aforementioned commitment.
The following table identifies the changes made to this Subtopic.
This Subtopic addresses accounting for certain activities engaged in by investment companies.
- a
- b
- c
- d
- e
- f
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.
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, 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. 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.
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, contingent-deferred sales load, 12b-1 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. 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.
Affiliates may make payments to a fund related to investment losses for either of the following reasons: - 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. - 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.
Payments by affiliates may take several forms, such as any of the following: - a
A direct cash contribution to the fund to offset the effect of a realized loss on a portfolio investment
- b
Purchase of securities from the fund at prices in excess of the securities' current fair value
- c
Provision of a credit enhancement to maintain the investment's value.
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 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, a fund's distributor may be compensated or reimbursed for its distribution costs or efforts through any of the following methods: - a
A 12b-1 fee, payable by the fund, based on an annual percentage of the fund's average net assets (a compensation plan) or based on an annual percentage of the fund's average net assets limited to actual costs incurred, after deducting contingent-deferred sales loads received by the distributor (a reimbursement plan). 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. - b
A front-end load, which is assessed on purchasing shareholders at the time fund shares are sold.
- 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.
Rule 12b-1 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. 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 are fully recovered, after which the contingent-deferred sales load payments usually are remitted to the fund instead of the distributor. With an enhanced 12b-1 plan, 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. The following table summarizes the 12b-1 plan attributes. -
![\"](\"/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)\t\"Excludes front-end and contingent deferred sales load payments, which are made by shareholders and not the fund.\"
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.
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).
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.
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.
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.
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section
946-10-15.
A credit enhancement provided by an affiliate to maintain an investment's value shall be recognized when the enhancement becomes available to the fund.
The guidance in this paragraph applies to annual and interim financial statements of investment companies that adopt plans that comply with Rule 12b-1. A liability, with a corresponding charge to expense, shall be recognized by a fund with an enhanced 12b-1 plan for excess costs. A liability for excess costs, computed in the same way as for an enhanced 12b-1 plan, shall be recorded by a fund with a board-contingent plan when the fund's board commits to pay such costs. Example 1 (see paragraph 946-20-55-1) illustrates this guidance. A liability for excess expenses shall be recognized if, and to the extent that, the expense limitation agreement's established terms for repayment of the excess expenses to the adviser by the fund and the attendant circumstances meet the criteria in paragraphs 36(a), 36(b), and 36(c) of FASB Concepts Statement No. 6, Elements of Financial Statements, and the criteria in paragraph 450-20-25-2. In most instances, a liability will not be recorded because it is not likely that excess expenses under such plans will meet those criteria before amounts are actually due to the adviser under the reimbursement agreement. If an assessment of the specific circumstances (such as an agreement to reimburse for either an unlimited period or a period substantially greater than that necessary for the fund to demonstrate its economic viability or an obligation to reimburse the servicer remains even after the cancellation of the fund's contract with the servicer) indicates that those criteria are met, a liability shall be recorded. (P) December 16, 2024; (N) December 16, 2025
105-10-65-9A liability for excess expenses shall be recognized if, and to the extent that, the expense limitation agreement's established terms for repayment of the excess expenses to the adviser by the fund and the attendant circumstances meet all of the following criteria: - a
The excess expense or expenses embody a present duty or responsibility to one or more other entities that entails settlement by probable future transfer or use of assets at a specified or determinable date, on occurrence of a specified event, or on demand.
- b
The duty or responsibility obligates a particular entity, leaving it little or no discretion to avoid the future sacrifice.
- c
The transaction or other event obligating the entity has already happened.
- d
In most instances, a liability will not be recorded because it is not likely that excess expenses under such plans will meet those criteria before amounts are actually due to the adviser under the reimbursement agreement. If an assessment of the specific circumstances (such as an agreement to reimburse for either an unlimited period or a period substantially greater than that necessary for the fund to demonstrate its economic viability or an obligation to reimburse the servicer remains even after the cancellation of the fund's contract with the servicer) indicates that those criteria are met, a liability shall be recorded. Offering costs of closed-end funds and investment partnerships shall be charged to paid-in capital upon sale of the shares or units. Offering costs of open-end investment companies and of closed-end funds with a continuous offering period shall be recognized as a deferred charge.
Accounting for shareholder transactions of open-end funds differs from the accounting followed by commercial entities in several key aspects. Sales of fund shares are recorded daily by crediting capital stock for the par value of the stock to be issued and additional paid-in capital for the amount paid over the par value; redemptions are recorded daily by debiting those accounts. The offsetting debit (credit), however, is made to an asset (liability) account, typically captioned as receivable for fund shares sold (payable for fund shares redeemed). These entries are made on or as of the date the order to purchase or sell fund shares is received (trade date), not on the day the payment is due (settlement date) as is typical practice for the recording of issuance of equity shares by commercial entities.
Investment partnerships shall record capital subscription and redemption commitments as of the date required by the partnership agreement. Cash received before this date shall be recorded as an advance capital contribution liability.
Both closed-end and open-end investment companies record distribution liabilities on the ex-dividend date rather than the declaration date. For closed-end investment companies, a purchaser typically is not entitled to a dividend for shares purchased on the ex-dividend date. Open-end investment companies record the liability on the ex-dividend date to properly state the net asset value at which sales and redemptions are made. When large (in excess of 15 percent of a closed-end fund's net asset value) dividends or distributions are declared, it is the policy of some exchanges to postpone the ex-dividend date until the dividend has been paid. In such circumstances, the liability for the dividend distribution would be recorded on the books of the fund on the payment date.
Performance fees by an investment adviser under an investment advisory agreement shall be accrued at interim dates based on actual performance through the accrual date.
If insurance applies only to the fund's portfolio, it does not have a measurable fair value in the absence of default of the underlying securities or of indications of the probability of default and, accordingly, the cost of the policy should be treated as an operating expense. The amount of the payment from a credit enhancement to maintain the investment's value shall be measured initially by the cost of obtaining a similar enhancement in an arm's-length transaction.
The guidance in paragraphs applies to annual and interim financial statements of investment companies that adopt plans that comply with Rule 12b-1. The liability and expense recognized under paragraph 946-20-25-3 shall be measured initially in an amount equal to the cumulative distribution costs incurred by the distributor less the sum of all of the following: - a
Cumulative 12b-1 fees paid
- b
- c
Future cumulative contingent-deferred sales load payments by current shareholders, if reasonably estimable.
The liability and expense recognized under paragraph 946-20-25-3 shall be measured at its present value, calculated using an appropriate current interest rate, if both of the following criteria are met: - a
The amount and timing of cash flows are reliably determinable.
- b
The distribution costs are not subject to a reasonable interest charge.
If these conditions are not met, the liability recognized under paragraph 946-20-25-3 shall be calculated without discounting to present value. Any subsequent change in the value of a credit enhancement to maintain the investment's value shall be accounted for as unrealized appreciation or depreciation.
The guidance in the following paragraph and paragraph 946-20-35-4 applies to annual and interim financial statements of investment companies that adopt plans that comply with Rule 12b-1. The liability recognized under paragraph 946-20-25-3 shall be subsequently measured using the guidance in paragraphs . Changes in the liability shall be recognized in the statement of operations as an expense or reduction in expense. Any future cumulative contingent-deferred sales load payments shall be based on all of the following: - a
- b
The number of shares currently outstanding and the number of years that they have been outstanding
- c
Estimated shareholder persistency based on historical fund data or, if historical fund data are not available, group or industry data for a similar class of shares.
Offering costs recognized as a deferred charge under paragraph 946-20-25-6 shall be amortized to expense over 12 months on a straight-line basis when operations begin. Offering costs of unit investment trusts shall be charged to paid-in capital on a pro rata basis as the units or shares are issued or sold by the trust (when the units are purchased by the underwriters). Units sold to underwriters on a firm basis are considered sold by the trust, and the offering costs associated with those units shall be charged to paid-in capital when the units are purchased by the underwriters. Offering costs that remain unamortized at the end of the year shall be reviewed for impairment. (For guidance concerning organization and offering costs, see Subtopic
720-15.)
Offering costs of unit investment trusts that have not yet been charged to paid-in capital shall be written off when it is no longer probable that the shares to which the offering costs relate will be issued in the future. It is presumed that those costs will not have a future benefit one year from the initial offering. Payments made by affiliates for the two reasons in paragraph 946-20-05-2 shall be combined and reported as a separate line item entitled net increase from payments by affiliates and net gains (losses) realized on the disposal of investments in violation of restrictions in the statement of operations as part of net realized and unrealized gains (losses) from investments and foreign currency. That separate line item would comprise amounts related to all of the following: - a
Voluntary reimbursements by the affiliate for investment transaction losses
- b
Realized and unrealized losses on investments not meeting the investment guidelines of the fund
- c
Reimbursements from the affiliate for losses on investments not meeting the investment guidelines of the fund
- d
Realized and unrealized gains on investments not meeting the investment guidelines of the fund.
The guidance in this paragraph applies to annual and interim financial statements of investment companies that adopt plans that comply with Rule 12b-1. An excess of cumulative 12b-1 fees and contingent-deferred sales load payments to date and future contingent-deferred sales load payments by current shareholders over the cumulative costs incurred by the distributor shall not be reported as an asset. The relevant expense caption on the statement of operations and the expense ratio in the financial highlights shall include the amount that would have been incurred by the investment company for brokerage services had it paid for the services directly in an arm's-length transaction. Such amounts shall also be shown as a corresponding reduction in total expenses, captioned as fees paid indirectly.
The amounts of any payments or allocations for advisory services from the general partner shall be presented in either the statement of operations or the statement of changes in partners' capital.
Expense offset arrangements, under which a third party explicitly reduces its fees by a specified or readily ascertainable amount for services provided to the investment company in exchange for use of the investment company's assets, shall be presented in the statement of operations, the expense ratio in the financial highlights, and notes to financial statements in the same manner as brokerage service arrangements.
The unique features (primarily the existence of significant debt) of small business investment companies often make it desirable that their financial statements be presented in a conventional balance sheet format.
Though all venture capital investment companies shall prepare their financial statements in conformity with generally accepted accounting principles (GAAP), the statement presentation of some venture capital investment companies may need to be tailored to present the information in a manner most meaningful to their particular group of investors. For example, if debt is a significant item, a balance sheet might be more appropriate than a statement of net assets.
The amounts and circumstances of payments by affiliates to reimburse the fund for losses on investment transactions shall be described in the notes to financial statements. The gains and losses on investments not meeting investment guidelines of the fund shall also be disclosed in the notes to financial statements. In addition, the effect on total return of the payments, as well as any gains or losses on investments not meeting investment guidelines of the fund, shall be quantified and disclosed in the financial highlights in a manner similar to disclosure of the effect of voluntary waivers of fees and expenses on expense ratios. (See Subtopic 850-10.) Total return shall be presented in the financial highlights. The guidance in this paragraph applies to annual and interim financial statements of investment companies that adopt plans that comply with Rule 12b-1. For both board-contingent plans and enhanced 12b-1 plans, funds shall disclose in their financial statements the principal terms of such plans and any plan provisions permitting or requiring payments of excess costs after plan termination. For board-contingent and enhanced plans, the aggregate amount of distribution costs subject to recovery through future payments by the fund pursuant to the plan and through future contingent-deferred sales load payments by current shareholders shall be disclosed. For enhanced plans, funds shall disclose the methodology used to estimate future contingent-deferred sales load payments by current shareholders. If a 12b-1 distribution reimbursement plan provides for the carryover of unreimbursed costs to subsequent periods, the terms of reimbursement and the unreimbursed amount shall be disclosed. The method of computing payments or allocations for advisory services from the general partner shall be described in the notes to financial statements.
The existence of reimbursement agreements and the carryover of excess expenses potentially reimbursable to the adviser but not recorded as a liability shall be disclosed in the notes to financial statements.
All voluntary and involuntary fee waivers shall be disclosed on the face of the statement of operations as a reduction of total expenses. The expense ratio in the financial highlights shall be shown net of voluntary and involuntary waivers. The effect of only voluntary waivers on the expense ratio shall be disclosed (either as the basis point effect on the ratio or as the gross expense ratio) in a note to, or as part of, the financial highlights. In addition, the terms of all voluntary and involuntary waivers shall be disclosed in the notes to financial statements.
Dividends paid to investors shall be disclosed as a single line item in the statement of changes in net assets, except tax return of capital distributions, which shall be disclosed separately. The notes shall disclose the tax basis components of the dividends paid (that is, either from ordinary income, capital gains, or tax return of capital). Disclosing dividends on a tax basis is consistent with how dividends are reported to shareholders during and at the end of the calendar year. The financial highlights table would disclose per-share information that is consistent with the statement of changes in net assets. Dividends from affiliates and controlled companies shall be disclosed.
If management of a fund determines that a tax return of capital is likely to occur for the fund's fiscal year, although the exact amount may not be estimable, that fact shall be disclosed in a note to the interim financial statements.
This guidance requires all investment companies to disclose only two components of capital on the balance sheet: shareholder capital and distributable earnings. The components of distributable earnings, on a tax basis, shall be disclosed in a note to financial statements. This information enables investors to determine the amount of accumulated and undistributed earnings they potentially could receive in the future and on which they could be taxed.
(P) June 30, 2027; (N) June 30, 2027
105-10-65-7 This guidance requires all investment companies to disclose two components of capital on the balance sheet: shareholder capital and distributable earnings. The components of distributable earnings, on a tax basis, shall be disclosed in a note to financial statements. This information enables investors to determine the amount of accumulated and undistributed earnings they potentially could receive in the future and on which they could be taxed. The notes shall disclose all of the following tax-basis components of distributable earnings as of the most recent tax year end: - a
Undistributed ordinary income
- b
Undistributed long-term capital gains
- c
Capital loss carryforwards
- d
Unrealized appreciation (depreciation).
Paragraphs 946-740-35-1 and 946-740-50-1 require that, if a provision for deferred income taxes on unrealized appreciation exists, it be charged against the unrealized gains account and disclosed as such in the statement of operations. Explanations shall be provided for the differences between the total of these amounts and distributable earnings (accumulated losses). Investment partnerships and other pass-through entities shall aggregate all elements of equity into partners' capital, because the results from operations are deemed distributed to each partner.
If, during the periods presented, an investment company provides financial support to an investee, it shall disclose information about both of the following items, disaggregated by financial support that it was contractually required to provide and financial support that it was not previously contractually required to provide: - a
The type and amount of financial support provided, including situations in which the investment company assisted the investee in obtaining financial support
- b
The primary reasons for providing the financial support.
An investment company also shall separately disclose both of the following items about financial support that it is contractually required to provide to any of its investees but has not yet provided: - a
The type and amount of financial support to be provided, including situations in which the investment company must assist the investee in obtaining financial support
- b
The primary reasons for the contractual requirement to provide the financial support.
This Example illustrates application of the guidance in paragraph
946-20-50-2. An entity might disclose the following.
In 20XX, a.aa% of the fund's total return consists of a voluntary reimbursement by the adviser for a realized investment loss, and another b.bb% consists of a gain on an investment not meeting the fund's investment restrictions. Excluding these items, total return would have been c.cc%. Additionally, the adviser fully reimbursed the fund for a loss on a transaction not meeting the fund's investment guidelines, which otherwise would have reduced total return by d.dd%.
![\"](\"/asc-img/GUID-E24AE302-B7CE-4B39-9E2C-EA036116AA3F-low.gif\")