Accounting evolution for investment companies

Read our article in the Cayman Financial Review Magazine, eversion 

Although there has been progress since the Memorandum of Understanding (MoU) was developed between the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) in 2002, today there continues to be differences between International Financial Reporting Standards and US Generally Accepted Accounting Principles (US GAAP) [Accounting Standards Codifications (ASC)]. 

What will be the impact of the “written but not yet effective” and “proposed” standards IFRS 9 IAS 39 sets out the requirements for recognizing and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items.

Many users of financial statements and other interested parties told the IASB that the requirements in IAS 39 were difficult to understand, apply and interpret. They urged the IASB to develop a new standard for the financial reporting of financial instruments that was principle-based and less complex.

Although the IASB amended IAS 39 several times to clarify requirements, add guidance and eliminate internal inconsistencies, it had not previously undertaken a fundamental reconsideration of reporting for financial instruments.

IFRS 9 contains guidance on recognition and derecognition, classification and measurement of financial instruments. The IASB intends that IFRS 9 will ultimately replace IAS 39 in its entirety.

However, in response to requests from interested parties that the accounting for financial instruments should be improved quickly, the IASB divided its project to replace IAS 39 into three main phases. As the IASB completes each phase, it will delete the relevant portions of IAS 39 and create chapters in IFRS 9 that replace the requirements in IAS 39.

The IASB has agreed to change the mandatory effective date of IFRS 9 to annual periods beginning on or after 1 January 2015 rather than being required to apply them for annual periods beginning on or after 1 January 2013.

It appears that IFRS 9 will not have a significant impact on the differences noted below.

IFRS 13 and ASU 2011-04
Inconsistencies in the requirements for measuring fair value and for disclosing information about fair value measurements have contributed to diversity in practice and have reduced the comparability of information reported in financial statements.

IFRS 13 remedies that situation by creating one standard that defines fair value, sets out in a single IFRS a framework for measuring fair value and requires disclosures about fair value measurements. An entity shall apply this IFRS for annual periods beginning on or after 1 January 2013.


Investment company standards
Investment company accounting is mainly governed by the following standards:

 Currently in effect  Written but not yet effective   Proposed   
International Accounting Standard 32
– Financial Instruments: Presentation
 International Financial Reporting Standard 9
– Financial Instruments
Exposure Draft
2011/04 Investment Entities
International Accounting Standard 39
– Financial Instruments: Recognition and Measurement
 International Financial Reporting Standard 13
– Fair Value Measurement
International Financial Reporting Standard 7
– Financial Instruments: Disclosures


Currently in effect Written but not yet effective  Proposed 
Topic 946 Financial Services
– Investment Companies
  Proposed Accounting Standards
Update 2011-200
– Financial Services – Investment Companies
(Topic 946).
Amendments to the Scope, Measurement,
and Disclosure Requirements.
Proposed Accounting Standards
Update 2011-210
– Real Estate – Investment Property Entities
(Topic 973).
Topic 820 Fair Value MeasurementAccounting Standards Update No. 2011-04
– Fair Value Measurement (Topic 820).
Amendments to Achieve
Common Fair Value Measurement and
Disclosure Requirements in

The amendments in ASU 2011-04 change the wording used to describe the requirements in US GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments include the following:

  • Those that clarify the FASB’s intent about the application of existing fair value measurement and disclosure requirements
  • Those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements.
  • The amendments in this ASU are effective for annual periods beginning after 15 December, 2011.

Once IFRS 13 and the amendments from ASU 2011-04 are implemented, the definition, measurement criteria and disclosure requirements for Fair Value Measurements will be almost identical under IFRS and US GAAP, with only minor differences. This will therefore eliminate the difference on fair value of investments noted below.

Exposure Draft 2011/04 (IASB) and Proposed Accounting Standards Update (PASU) 2011-200 (FASB)

ED 2011/04 proposes criteria for an entity to qualify as an investment entity. The proposals would require an investment entity to measure its investments in controlled entities at fair value through profit or loss in accordance with IFRS 9 and to provide additional disclosures to enable users of its financial statements to evaluate the nature and financial effects of its investment activities.

This exposure draft also proposes that in its consolidated financial statements, a parent of an investment entity should not retain the fair value accounting that is applied by its investment entity subsidiary to controlled entities, unless the parent qualifies as an investment entity itself. As a consequence, a parent of an investment entity should consolidate all entities it controls, including those that are controlled by an investment entity subsidiary, unless the parent is an investment entity itself. Comments on this ED were due by 5 January 2012.

Current Standards
The following are the main differences when comparing a set of financial statements prepared under IFRS and one under US GAAP:

Disposal of
IFRS does not prescribe
how to calculate
the cost of disposed
Topic 946 requires an investment
company to determine the cost
of disposed securities using the
average cost of the securities or
specifically identifying the cost of
each security sold.
The amount of realised gain
(or loss) on the disposal of
a security could be different
under US GAAP and IFRS
depending on the method
used to determine the cost
of the security disposed.
An investment company is
required to present comparative
financial statements and
the related footnotes.
Topic 946 does not require
comparative financial statements
for nonregistered investment entities.
Under IFRS a feeder fund will
consolidate a master fund
which it has control over.
Under US GAAP the master
financial statements are attached
to the feeder’s
financial statements.
ConsolidationIAS 27 requires
an entity to consolidate
other entities which it
has control over.
Topic 946 allows entities to
show investments at fair value
(consolidation is required
only in certain situations).
IFRS discloses “Net assets
attributable to holders of
redeemable shares” as a liability.
US GAAP discloses “Net Assets”
as equity.
 IAS 32 requires a financial
instrument that gives the holder
the right to put the instrument
back to the issuer for cash or
another financial asset
(a ‘puttable instrument’) is a
financial liability of the issuer, unless
certain conditions are met.
Transactions with owners of
the investment entity are
generally accounted for as equity.
Schedule of
No specific requirement, however general
disclosure requirements under IFRS 7
Specific requirements on the format
and content of this statement.
Realised and
and Losses
IFRS does not require disaggregation of
these balances.
Required to be disclosed separately
in the statement of operations
and statement of changes in equity.
Cash flow
Required in all instancesIf certain conditions are met,
an investment entity can be exempt
from disclosing a cash flow statement.
DisclosuresIFRS 7: Qualitative and quantitative
disclosures on the nature and extent
of risks arising from financial instruments.
 Required risk disclosures not as
extensive compared to IFRS 7,
however ASC 815 does contain
specific derivative disclosures.
No specific requirement, however
general disclosure requirements
under IFRS 7
Specific requirement on the
format and contents of
financial highlights.
Fair value
of investee funds
No such practical expedient in
the standards
Use of the NAV/share as a
practical expedient for fair
value is allowed
Although the guidance is silent
under IFRS, NAV/share is
commonly used
as an indication of fair value.
Fair value
of investments
Bid prices for long positions and ask
prices for short positions
Last quoted sales price.
Bid and ask prices used,
if a last quoted price is
not available.
This difference may result
in the net assets of an identical
fund being different

The main elements of PASU 2011-200 are:

  • Amend the investment company (IC) definition in Topic 946.
  • Require an IC to consolidate another IC or an investment property entity (IPE) if it holds a controlling financial interest in the entity in a fund-of-funds structure. The IC parent would retain the specialized guidance when consolidating another IC or an IPE.
  • Amend the financial statements and financial highlights presentation requirements for situations in which an IC consolidates a less-than-wholly-owned IC or a less-than-wholly-owned IPE.
  • Prohibit an IC that is able to exercise significant influence over another IC or an IPE from accounting for its interest using the equity method of accounting. Rather, those investments would be measured at fair value.
  • Require additional disclosures including changes in an entity’s status as an IC, whether the IC has provided support to any of its investees, and any significant restrictions on an investee’s ability to transfer funds to the IC.

There are two significant differences in the proposed scope of entities that would be an IC under US GAAP compared with IFRS. Under PASU 2011-200, an entity that is regulated as an IC under the Investment Company Act of 1940 would be an IC. The IASB decided not to base its definition of an investment entity under any local regulations.

The other significant difference under PASU 2011-200 is that if an IC meets the criteria to be an IPE in the FASB’s proposed update on IPEs, it would apply the requirements in that proposed update. The IASB has not proposed specific guidance to define an IPE. Therefore the entity would account for its investment properties in accordance with IAS 40, Investment Property.

Comments on PASU 2011-200 were due by 5 January 2012.


The above shows that the IASB and the FASB are making progress in addressing the main differences between IFRS and US GAAP for investment companies regarding financial instruments and fair value.

However while Topic 946 remains in effect there will be differences in the format of a set of financial statements prepared under IFRS compared to one prepared under US GAAP as Topic 946 provides specific guidance for investment entities.

The IASB has made a start on specific guidance for investment entities (with the publication of ED 2011/04), however it may be some time before all the differences noted above are eliminated.

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Ben Leung

Ben has more than 15 years of accounting and auditing experience. He has specialised in the audits of Cayman based mutual funds and captive insurance companies. He is a member of the Institute of Chartered Accountants in England and Wales, and a member of the Cayman Islands Society of Professional Accountants.

Ben Leung
Managing Partner
PKF (Cayman) Ltd
P.O. Box 1782
Grand Cayman, KY1-1109

T: +1 (345) 945 5889      

Rennie Khan
Rennie has fourteen years of accounting experience, including ten years in the Cayman Islands. Prior to joining PKF (Cayman) Ltd, he served with another major accounting firm in Trinidad and Tobago and the Cayman Islands. He gained his experience working on audits of investment funds, private banks, insurance captives and trust companies.

Rennie Khan
Technical Director
PKF (Cayman) Ltd
P.O. Box 1782
Grand Cayman
Cayman Islands KY1-1109

T: +1 (345) 945 5889