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. …