Audit and Accounting Guide: Investment Companies

Chapter 2 Investment Accounts

2.01 As stated by FASB Accounting Standards Codification (ASC) 946-320-05-2, an investment company’s securities portfolio typically comprises substantially all its net assets. Portfolio securities produce income from dividends and interest, and changes in fair values of securities while they are owned by the fund.

Investment Objectives and Policies

2.02 The composition of an investment company’s portfolio is primarily a function of the company’s investment objectives and strategies to achieve them. An investment company discloses the investment objectives adopted by its management and the strategies adopted to achieve them in its charter or partnership agreement and documents such as registration statements, prospectuses, or offering circulars. Restrictions, statutory or otherwise, are also disclosed. Those restrictions may include specific limitations or outright prohibitions of transactions in real estate, commodities or commodity contracts, and property other than securities. Other restrictions may include limitations on investing in unregistered securities; making short sales of securities; underwriting securities of other issuers; acquiring securities of other investment companies; or using leveraging techniques, such as margin accounts, bank borrowing, reverse repurchase agreements, and transactions in options, futures, and swaps.

2.03 An investment company may also specify the kinds of investments, such as bonds, preferred stocks, convertible ...