The Financial Accounting Standards Board (FASB) recently issued two Proposed Accounting Standards Updates (ASUs), one intended to improve and converge financial reporting by providing consistent criteria for determining whether an entity is an investment company and a second that would require an entity that meets certain criteria to measure its investment properties at fair value.
The first proposed ASU, Financial Services—Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements, is a result of joint efforts with the International Accounting Standards Board (IASB) to develop consistent criteria for determining whether an entity is an investment company. Under U.S. GAAP, investment companies carry all of their investments at fair value, even if they hold a controlling interest in another company. The proposal would amend the guidance in Topic 946 for determining whether an entity is an investment company.
The proposal clarifies that an entity that invests in real estate properties and meets the criteria to be an investment property entity under the simultaneously released Proposed ASU, Real Estate—Investment Property Entities (Topic 973), would not be an investment company.
The primary changes in the Investment Companies ED relate to which entities would be considered investment companies as well as certain disclosure and presentation requirements. The ED says the proposed amendments would improve the comparability between entities that meet the criteria to be investment companies under U.S. GAAP and those that meet the criteria to be investment entities under the IASB’s proposed amendments to IFRS.
In addition to the changes to the criteria for determining whether an entity is an investment company, FASB also proposed that an investment company consolidate another investment company if it holds a controlling financial interest in the entity.
The second Proposed ASU, Real Estate—Investment Property Entities (Topic 973), would require an entity that meets certain criteria to measure its investment properties at fair value, rather than to apply lease accounting to each individual lease. The proposed amendments also would introduce additional presentation and disclosure requirements for an investment property entity.
FASB said this ED is a result of its efforts to align the scope of entities that would apply the proposed lessor accounting model under U.S. GAAP and IFRS and to address the diversity in practice about the accounting by real estate entities.
FASB said that, as part of the FASB and IASB joint project on accounting for leases, the IASB decided that a lessor of an investment property would not be required to apply the proposed lessor accounting requirements in the IASB’s August 2010 ED, Leases, if the lessor measures its investment properties at fair value by electing the fair value model under IAS (International Accounting Standard) 40, Investment Property. Unlike IFRS, U.S. GAAP does not contain specific accounting requirements for investment properties. As a result, an entity that invests in real estate properties but is not an investment company is required to measure its real estate properties at cost under Topic 360, Property, Plant, and Equipment, and account for the leases separately. FASB said it decided to prescribe the circumstances when fair value would be required, rather than introduce an optional accounting practice into U.S. GAAP.
FASB said the effective date for each proposal will be determined after the board considers feedback. The proposed amendments would be effective for interim and annual reporting periods in fiscal years that begin on or after the effective date. Early adoption would be prohibited.
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