Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies–SOP 07-1

Effective for fiscal years beginning on or after December 15, 2007, this Statement of Position (SOP) provides guidance for determining whether the specialized industry accounting principles of the Guide (referred to as investment company accounting) should be retained in the financial statements of a parent company of an investment company or an equity method investor in an investment company, and includes certain disclosure requirements. The appendices cover practical details such as:

• Background information and basis for conclusions
• Illustrations of how this SOP applies to specific fact patterns
• How to apply this SOP to entities that hold investments in real estate
• Effect of this SOP on other pronouncements

Introduction and Background

.01

The purpose of this Statement of Position (SOP) is to clarify the scope of the AICPA Audit and Accounting Guide Investment Companies (the Guide) to assist preparers and auditors in determining whether the provisions of the Guide should be applied. This SOP clarifies the scope of the Guide by amending the Guide to provide specific guidance for determining whether an entity is within its scope. In addition, this SOP provides guidance for determining whether the specialized industry accounting principles of the Guide (referred to as investment company accounting) should be retained in the financial statements of a parent company of an investment company or an equity method investor in an investment company, and includes certain disclosure requirements.

Conclusions

.02

Paragraphs 1.01 to 1.06 in Chapter 1 of the Guide, including related footnotes, are deleted and replaced with the following paragraphs .03–.29 and paragraph .48 of this SOP. Other paragraph numbers in Chapter 1 of the Guide, starting with paragraph 1.07, are renumbered accordingly. fn 2 Paragraphs .30 to .47 and paragraph .49 of this SOP, including related footnotes, will be inserted as a separate chapter of the Guide. The disclosure requirements included in paragraphs .50, .51, and .53 of this SOP will be included in that new chapter. The disclosure requirements included in paragraph .52 of this SOP will be inserted before paragraph 7.79 in Chapter 7 of the Guide. The illustrations in Appendix B [paragraph .60], "Illustrations," of this SOP will be included as an appendix of the Guide. Appendix C [paragraph .61], "Applying the Provisions of This SOP to Entities That Hold Investments in Real Estate," of this SOP will be included as an appendix of the Guide. Appendix E [paragraph .63], "Schedule of Paragraph Numbers in This SOP and How They Will Be Reflected in the Revised Guide," of this SOP provides a schedule of paragraph numbers in this SOP and how they will be reflected in the Guide, as amended by this SOP.

Background

.03

(Replaces paragraph 1.01 of the Guide) The business activity of an investment company, fn 3 as defined in paragraph .05 of this SOP, is investing for current income, capital appreciation, or both. Those investments typically consist of securities of other entities, but may also include commodities, securities based on indices, derivatives, real estate, and other forms of investments. An investment company sells its capital shares to an investor(s), invests the proceeds to achieve its investment objectives, and distributes to its investor(s), in the form of cash or distributions of ownership interests in investees, income earned on investments, and proceeds realized on the disposition of investments, net of expenses of the investment company. Investment companies, other than certain separate accounts of insurance companies, which are discussed in paragraph .09 of this SOP, are organized as separate legal entities, such 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 referred to as business trusts), limited partnerships, limited liability investment partnerships and companies, and other specialized entities.

.04

(Replaces paragraph 1.02 of the Guide) The investment company industry is highly specialized and certain entities may be subject to specific governmental regulation and special tax treatment. Accordingly, before starting an engagement to audit an investment company’s financial statements, an auditor should become familiar with the entity’s business, organization, and operating characteristics; the industry’s terminology; and pertinent legislation, as well as any applicable securities and income tax rules and regulations.