[15560]
January 16, 2003
TO: ACCOUNTING/TREASURERS COMMITTEE No. 4-03
RE: AICPA PROPOSAL CLARIFYING SCOPE OF AUDIT GUIDE
The AICPA’s Accounting Standards Executive Committee recently issued a proposal
clarifying the scope of the Investment Company Audit Guide.1 The proposal provides specific
conditions for determining whether entities such as investment partnerships, private equity
funds and venture capital companies are subject to the Guide. For those entities that are
investment companies under the proposal, the SOP also addresses the retention of specialized
industry accounting by a parent company in consolidation, or by an investor that has the ability
to exercise significant influence over the investment company and applies the equity method of
accounting to its investment in the entity.
Comments on the proposal are due to the AICPA by March 31, 2003. If you have any
comments on the proposal that you would like to be considered in a possible comment letter,
please contact the undersigned at 202/326-5851 or smith@ici.org by February 28.
The proposed SOP recognizes three categories of investment companies. Entities that
fall within these three categories must apply the Guide in preparing their financial statements.
Entities that do not qualify as an investment company within these three categories are
prohibited from applying the provisions of the Guide. These three categories are:
1. Investment companies regulated under the Investment Company Act of 1940 or the
Small Business Investment Company Act of 1958, common (collective) trust funds, the
separate accounts of insurance companies, and entities in foreign jurisdictions that are
subject to regulations similar to the Investment Company Act;
2. Entities that pool funds from multiple investors where no one investor owns twenty
percent or more of the outstanding shares. The primary business activity of these
entities must be investing for current income, capital appreciation, or both. Such entities
must meet the following conditions:
1 The proposed Statement of Position, Clarification of the Scope of the Audit and Accounting Guide, Audits of Investment
Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies is
available from the AICPA website: http://www.aicpa.org/download/acctstd/021217_sop_invest.pdf.
2
a. The entity’s expressed business purpose is to be an investment company that
holds investments for current income, capital appreciation, or both;
b. The entity holds multiple substantive investments;
c. The entity’s activities, assets, and liabilities are limited to investment activities,
assets, and liabilities;
d. The entity or its affiliates are not involved in the day-to-day management of
investees, affiliates of investees, or other investment assets; and
e. The entity has an exit strategy for equity investments.
3. Entities not owned by multiple investors whose primary business activity is investing
for current income, capital appreciation, or both (i.e., they meet conditions a–e above).
In addition, these entities must invest in “separate autonomous businesses.” Factors
that lead to the conclusion that an investee is not a separate autonomous business
include:
a. The entity obtains benefits from the investee that are unavailable to unrelated
noninvestor entities;
b. The entity or its affiliates provide significant administrative or support services
to investees or affiliates of investees;
c. Investees or affiliates of investees provide financing guarantees or collateral for
borrowing arrangements of the entity or the entity’s affiliates;
d. Compensation of management or employees of investees or affiliates of investees
is dependent on the financial results of the entity or the entity’s related parties; or
e. The entity or its affiliates direct the integration of operations of investees or
affiliates of investees, or the establishment of business relationships between
investees or affiliates of investees.
The proposed SOP is scheduled to be effective for fiscal years beginning after December
15, 2003. Earlier application is encouraged.
Gregory M. Smith
Director - Operations/Compliance & Fund
Accounting