The Financial Accounting Standards Board (FASB) has developed a new guideline for determining whether a public or private company is an investment company.
As part of the reform, funds that meet the definition of an investment company will need to disclose more information about any financial support (such as a loan or guarantee) provided to portfolio companies.
Funds regulated under the Investment Company Act of 1940 will be deemed an investment company for accounting purposes. Most private equity funds rely on certain exemptions from the act. To meet the definition of an investment company a private equity fund will have to exhibit certain characteristics, three of which are mandatory:
1. The company obtains funds from investor(s) and provides the investor(s) with investment management services;
2. The company commits to its investor(s) that its business purpose and only substantive activities are investing the funds for returns solely from capital appreciation, investment income, or both;
3. The company or its affiliates do not obtain or have the objective of obtaining returns or benefits from an investee or its affiliates that are not normally attributable to ownership interests or that are other than capital appreciation or investment income
Most private equity funds exhibit these characteristics, meaning the industry will continue to report their investments at fair value, defined as the exit price of a company in an orderly transaction.
The rule changes are effective for an entity’s interim and annual reporting periods in fiscal years that begin after December 15, 2013.