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Audit and Accounting Guide: Investment Companies

by AICPA

November 2018

Intermediate to advanced

752 pages

25h

English

Wiley

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IntroductionGuide ApplicationInvestment Companies Defined—Scope of FASB ASC 946 Types of Investment CompaniesHistoryDefinition and ClassificationOrganizations Providing Services to Investment CompaniesThe Investment AdviserThe DistributorThe CustodianThe Transfer AgentThe AdministratorRegulationSummary of Relevant SEC Registration and Reporting FormsFinancial Reporting to ShareholdersAccounting Rules and PoliciesEffective Date of TransactionsOther Rules and RegulationsMoney Market ReformOther RequirementsJumpstart Our Business Startups Act (JOBS Act)Regulatory Changes for Investment Companies That Invest in Commodities
Investment Objectives and PoliciesOperations and ControlsRecordkeeping RequirementsCustody of SecuritiesAccounting for Segregated AccountsRoutine Investment ProceduresAccountingNet Asset Value Per ShareBasis of Recording Securities TransactionsValuing InvestmentsFair Value Determination When the Volume or Level of Activity Has Significantly DecreasedValuation TechniquesPresent Value TechniquesThe Fair Value HierarchyApplication of Fair Value MeasurementsOffsetting Positions in Market Risks or Counterparty Credit RiskInvestments in Entities That Calculate Net Asset Value Per ShareMoney Market FundsDetermining Costs and Realized Gains and LossesAccounting for Investment IncomeDefaulted Debt SecuritiesAccounting for Expenditures in Support of Defaulted Debt SecuritiesLending of Portfolio Securities and Secured BorrowingsAccounting for DerivativesAccounting for Foreign Investments
Money Market InvestmentsRepurchase AgreementsReverse Repurchase AgreementsU.S. Government Securities (Treasury Bills, Notes, and Bonds)Municipal Notes and BondsInsured PortfoliosTo Be Announced SecuritiesWhen-Issued SecuritiesSynthetic Floaters and Inverse FloatersMortgage-Backed SecuritiesAdjustable Rate MortgagesCollateralized Mortgage ObligationsReal Estate Mortgage Investment ConduitsHigh-Yield SecuritiesPayment-in-Kind BondsStep BondsPut and Call OptionsWarrantsLoan CommitmentsStandby CommitmentsCommodity and Financial Futures ContractsForward ContractsForward Exchange ContractsInterest Rate, Currency, Credit, and Equity Swaps and SwaptionsCentrally Cleared SwapsStructured Notes or Indexed SecuritiesShort PositionsMortgage Dollar Rolls
Operations and ControlsDistributorsOrders to Purchase or RedeemCancellation of OrdersShareholder TransactionsAccounting for Capital Share Transactions and DistributionsEqualizationAuditing ProceduresPrincipal Audit ObjectivesObtaining an Understanding of the Entity and Its Environment, Including Internal ControlExamination of Transactions and Detail RecordsOther Auditing Matters
Operational and Accounting IssuesMultiple-Class FundsMaster-Feeder FundsFunds of FundsOther Considerations for Investments in Nonpublicly Traded InvesteesFinancial Statement PresentationMultiple-Class FundsMaster-Feeder FundsFunds of FundsAudit ConsiderationsPlanningControl EnvironmentInvestment in Master Fund and Income-Gain AllocationsOther TransactionsProspectus Restrictions and ComplianceTax Qualifications and ComplianceFinancial StatementsFunds of FundsControl Environment
OverviewFinancial Statements and Other MattersIncome Tax ExpenseFederal Income Tax Provisions Affecting Investment AccountsForeign Withholding TaxesFinancial Statement PresentationDiversification of AssetsRICsGeneral Discussion of the Taxation of RICsTaxation of a RIC’s Taxable Income and Net Capital GainsTaxation of Shareholder DistributionsExcess Reported AmountsQualification TestsVariable ContractsDistribution TestExcise Tax on Undistributed IncomeComputation of Taxable Income and GainsOffshore FundsSmall Business Investment Companies
Comparative Financial StatementsConsolidationOther Consolidation ConsiderationsReporting Financial PositionReporting of Fully Benefit-Responsive Investment ContractsSchedule of InvestmentsAssetsLiabilitiesDisclosures Related to Transfers of Financial Assets, Including Repurchase AgreementsFair Value DisclosuresFair Value OptionNet AssetsStatement of OperationsInvestment IncomeExpensesNet Investment IncomeNet Realized Gain or Loss From Investments and Foreign Currency TransactionsNet Increase (Decrease) in Unrealized Appreciation or Depreciation on Investments and Translation of Assets and Liabilities in Foreign CurrenciesNet Increase From Payments by Affiliates and Net Gains (Losses) Realized on the Disposal of Investments in Violation of RestrictionsNet Realized and Unrealized Gain or Loss From Investments and Foreign CurrencyNet Increase or Decrease in Net Assets From OperationsReporting of Fully Benefit-Responsive Investment ContractsStatement of Changes in Net AssetsSubsequent EventsStatement of Cash FlowsFinancial HighlightsOther Disclosure RequirementsFully Benefit-Responsive Investment Contract DisclosuresOffsetting Assets and LiabilitiesInterim Financial StatementsAuditing ConsiderationsIllustrative Financial Statements of Investment CompaniesIllustrations of Calculations and Disclosures When Reporting Expense and Net Investment Income RatiosIllustration of Calculation and Disclosure When Reporting the Internal Rate of ReturnIllustration of Calculation and Disclosure When Reporting the Total Return RatioIllustration of a Condensed Schedule of InvestmentsIllustrations of Nonregistered Investment Partnerships Schedule of InvestmentsPresentation of Fully Benefit-Responsive Investment ContractsIllustration of Deferred FeesIllustration of Reporting Financial Highlights, Net Asset Value Per Share, Shares Outstanding, and Share Transactions When Investors in Unitized Nonregistered Funds Are Issued Individual Classes or Series of Shares Illustrative Statement of Changes in Net Assets (Changes in Partners’ Capital) of a Nonregistered Investment Partnership That Includes a General Partner and One or More Limited Partners Illustrative Disclosure for a Registered Fund Issuing Consolidated Financial Statements and Relying on CFTC Letter No. 13-51
Investment Advisory (Management) Fee ExpenseExpensesDistribution ExpensesOrganization and Offering CostsUnusual Income ItemsBusiness CombinationsDiversification of AssetsLiquidation Basis of AccountingWhen to Apply the Liquidation Basis of AccountingRecognition and Measurement ProvisionsPresentation and Disclosure
Fixed-Income and Equity UITsTaxesIllustrative Financial Statements
Separate AccountsHistoryProduct DesignContracts in the Payout (Annuitization) PeriodSEC RegistrationAuditing ConsiderationsTaxation of Variable ContractsIllustrative Financial Statements

Chapter OverviewGeneral Audit Planning ConsiderationsAudit RiskRisk Assessment ProceduresRisk Assessment and the Design of Further Audit ProceduresOther General Considerations for Audits of Investment CompaniesInternal Control ConsiderationsGoing ConcernRisk Assessment Procedures and Related ActivitiesAuditor ConclusionsImplications for the Auditor’s ReportDocumentationAuditing Procedures for the Investment Portfolio AccountsPrincipal Audit ObjectivesExamination of Transactions and Detail RecordsAppendix A—Auditor’s Responsibility for Other Information in Documents Containing Audited Financial StatementsAppendix B—Reports on Controls at Outside Service OrganizationsAppendix C—Consideration of Fraud in a Financial Statement Audit
IntroductionForming an Opinion on the Financial StatementsReports on Financial Statements of Nonregistered Investment CompaniesUnmodified OpinionModified OpinionsReview Report on Interim Financial InformationReports on Financial Statements of Registered Investment CompaniesReport for a Registered Investment Company That Includes a Summary Schedule of Investments in the Financial Statements Provided to ShareholdersReport on Internal Control Required by the SEC Under Form N-CENReport on Examinations of Securities Pursuant to Rules 17f-1 and 17f-2 Under the 1940 ActReport on Examinations of Securities Pursuant to Rule 206(4)-2 Under the Investment Advisers Act of 1940Reports on Processing of Transactions by a Transfer AgentReporting Pursuant to the Global Investment Performance Standards Illustrative Representation Letter—XYZ Investment CompanyNonregistered Investment Company Written RepresentationRegistered Investment Company Written Representation

Content preview from Audit and Accounting Guide: Investment Companies

Chapter 5 Complex Capital Structures

5.01 Many investment companies adopt complex capital structures to increase flexibility in pricing and access to alternative distribution channels for their shares. Such structures are principally of two kinds: multiple-class funds and master-feeder funds. In addition, many organizations are offering funds of funds. Funds of funds either permit a fund complex to provide asset allocation products using funds in the complex or allow an investment adviser to allocate assets among many unaffiliated investment advisers. Master-feeder and multiple-class structures permit a common investment vehicle to be distributed through different channels or with different distribution charges to the shareholder, or both.

Operational and Accounting Issues

Multiple-Class Funds

5.02 As stated in FASB Accounting Standards Codification (ASC) 946-20-05-1D, multiple-class funds issue more than one class of shares. Each class of shares may have different types of sales charges, such as a front-end load, contingent deferred sales load, 12b-1 fee, 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.

5.03 An example of a (commonly used) multiple-class structure for registered investment companies includes (but is not limited to) the following classes of shares:

• Class A. Class A shares are primarily charged a front-end ...