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Investment company accounting; rescission of APB statements.

INVESTMENT COMPANY ACCOUNTING; RESCISSION OF APB STATEMENTS

Statement on Auditing Standards no. 69, The Meaning of "Present Fairly in Conformity With Generally Accepted Accounting Principles" in the Independent Auditor's Report, identifies American Institute of CPAs statements of position as sources of established GAAP.

This month's column summarizes three SOPs on investment company accounting for high-yield debt securities; income, capital gain and return of capital distributions; and foreign currency and another SOP that rescinds Accounting Principles Board statements.

SOPs no. 93-1 (product no. 014876JA), no. 93-2 (product no. 014877JA) and no. 93-3 (product no. 014878JA) are available as pamphlets. An SOP entitled Foreign Currency Accounting and Financial Statement Presentation for Investment Companies will be published later this year. The SOPs will be included in AICPA Technical Practice Aids. SOPs no. 93-1 and no. 934 and Foreign Currency Accounting and Financial Statement Presentation for Investment Companies also will be available in the 1993 edition of the AICPA audit and accounting guide Audits of Investment Companies and the audit and accounting guide loose-leaf service. To obtain pricing and ordering information for any of these publications, contact the AICPA order department, JA1092, P.O. Box 1003, New York, New York 10108-1003. Phone: 1-800-TO-AICPA.

SOPs no. 93-1 and no. 93-2 are effective for financial statements for fiscal years ending after December 15, 1993, and interim periods within such years. They need not be applied to financial statements for fiscal years ending before the effective date that, for comparative purposes, are provided with financial statements for fiscal years ending after the effective date. The SOPs' effects should be disclosed in the period in which they are first applied. Early application of these SOPs is encouraged.

SOP NO. 93-1

SOP no. 93-1, Financial Accounting and Reporting for High-Yield Debt Securities by Investment Companies, provides guidance on interest income recognition for certain types of these securities and two accounting issues relating to defaulted debt securities (capital infusions and workout expenses paid by bondholders). Although this SOP focuses on high-yield debt securities (junk bonds), certain guidance also applies to other debt securities held as investments by investment companies.

It recommends the following:

* The use of the effective-interest method to report interest income on payment-in-kind bonds (for which interest payments are made in the form of the issuer's additional debt securities bearing similar terms) and step bonds (for which periodic interest payments do not begin until a specific date in the securities' life cycle).

* The writeoff of the interest receivable on defaulted high-yield debt securities in accordance with Financial Accounting Standards Board Statement no. 5, Accounting for Contingencies, and the allocation of the writeoff between income (for the portion that had been recognized as income) and the cost of the related investment for the portion purchased.

* The reporting of capital infusions supporting high-yield debt securities as additions to cost, the reporting of workout expenditures as realized losses only to the extent they are incurred when negotiating the terms and requirements of capital infusions or are expected to result in a reorganization plan and the treatment of on-going expenditures to protect or enhance an investment or of expenditures that are incurred to pursue other claims or legal actions as operating expenses.

* Auditors' procedures for reviewing the high-yield debt security valuations to be reported in financial statements.

SOP NO. 93-2

SOP no. 93-2, Determination, Disclosure, and Financial Statement Presentation of Income, Capital Gain, and Return of Capital Distributions by Investment Companies, provides guidance on financial reporting by investment companies for shareholder distributions, including returns of capital. An investment company qualifying under the Internal Revenue Code generally can avoid incurring federal income tax liabilities by distributing all its annual taxable income to shareholders. Because of differences between income reported for tax and financial purposes, shareholder distributions may be more or less than income reported in the financial statements. When distributions exceed financial statement income (which often is due to differences in book and tax timing), the excess has been reported in the financial statements as a return of capital. This has led to confusion because the annual form 1099 reporting the shareholder distributions does not characterize any of the dividends paid out as a return of capital. In addition, the financial statements might lead shareholders to conclude their capital was returned to them instead of invested as expected. Therefore, while the SOP recognizes that investment companies' financial statements are prepared in accordance with GAAP, it recommends that, to avoid shareholder confusion, the term return of capital only be used to report portions of shareholder distributions that exceed taxbasis current and accumulated earnings and profits (that is, distributions that are a return of capital for tax purposes).

FOREIGN CURRENCY ACCOUNTING FOR INVESTMENT COMPANIES

An SOP entitled Foreign Currency Accounting and Financial Statement Presentation for Investment Companies has been approved for final issuance. It requires the reporting of foreign currency gains and losses other than those related to investments and provides guidance on the calculation and reporting of foreign currency gains and losses in the financial statements and notes. To be consistent with the current audit and accounting guide Audits of Investment Companies, the SOP does not require separate reporting of the portion of the realized gains and losses on investments and the change in market value of investments that result from changes in foreign currency rates. It does, however, provide guidance on how such unrealized and realized gains should be measured and reported, if separate reporting is adopted by the reporting entity. The SOP is effective for financial statements for fiscal years beginning after December 15, 1993, and interim periods within such years.

SOP NO. 93-3

SOP no. 93-3, Rescission of Accounting Principles Board Statements, rescinds APB Statements nos. 1-4, which do not have standing as rules or standards required to be observed by AICPA members under Rule 203 of the Code of Professional Conduct and have been substantially superseded by subsequent FASB pronouncements. It is effective upon issuance. This SOP does not affect APB opinions, which are distinct from APB statements.

By ALBERT F. GOLL, CPA, technical manager of the AICPA accounting standards division. Edited by LINDA A. VOLKERT, CPA, technical manager of the AICPA technical information division.

EXECUTIVE SUMMARY

* SAS no. 69 identifies SOPs as sources of established GAAP. Four new SOPs have been issued.

* SOP no. 93-1, Financial Accounting and Reporting for High-Yield Debt Securities by Investment Companies, provides guidance on financial reporting by investment companies for high-yield debt securities that are held as investments.

* SOP no. 93-2, Determination, Disclosure, and Financial Statement Presentation of Income, Capital Gain, and Return of Capital Distributions by Investment Companies, provides guidance on financial reporting by investment companies for shareholder distributions, including returns of capital.

* An SOP entitled Foreign Currency Accounting and Financial Statement Presentation for Investment Companies, which will be published later this year, requires the reporting of all foreign currency gains and losses other than those related to investments.

* SOP no. 93-3, Rescission of Accounting Principles Board Statements, rescinds Accounting Principles Board Statements nos. 1-4.
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Title Annotation:Accounting Principles Board
Author:Volkert, Linda A.
Publication:Journal of Accountancy
Date:Apr 1, 1993
Words:1162
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