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The proposals recognise the views of many investors that fair value measurement is most relevant for investments held by entities that are in the business of pooling funds and providing professional investment management services.
The concept of an investment company is not a new concept in the United States. Under long-standing US GAAP, an investment company measures all of its investments at fair value, even if the entity holds a controlling financial interest in an investee. The investment company proposal would improve the criteria to be an investment company to reflect more appropriately the characteristics of an investment company. These improvements to the criteria would capture the appropriate population of entities for which fair value is the most appropriate measurement attribute for their investments.
The investment company’s project is a joint effort between the FASB and the IASB to converge financial reporting by investment companies by developing consistent criteria for determining whether an entity is an investment company. The concept of an investment company would be new to IFRS. Therefore, the proposal would improve comparability between entities that meet the criteria to be investment companies under US GAAP and those that meet the criteria to be investment entities under IFRS.
Currently, an entity that invests in real estate properties but is not an investment company is required to measure its real estate properties at cost. However, some of those entities measure their real estate properties at fair value because they are controlled by pension plans that are required to measure their investments at fair value or the development of industry accounting practices allows them to measure real estate investments at fair value. The proposal would require all entities that meet the criteria to be investment property entities to follow the proposed accounting guidance resulting in consistent application of US GAAP across all real estate entities that have similar business operations.
As part of the FASB and IASB’s joint project on accounting for leases, the IASB decided that a lessor of an investment property would not be required to apply the proposed lessor accounting requirements if the lessor elects the fair value model for its investment properties under IFRS. This proposal is a result of the FASB’s efforts to align the scope of entities that would apply the proposed lessor accounting model under US GAAP and IFRS. In response to consistent investor input, the FASB decided to prescribe the circumstances when fair value would be required, rather than introduce an optional accounting practice into US GAAP.
The criteria to be an investment company and investment property entity are similar. An entity that is regulated under the SEC's Investment Company Act of 1940 would be required to follow investment company accounting guidance. All other entities would first determine whether they are investment property entities. An entity that is not an investment property entity would then determine whether it is an investment company. Entities that do not meet either definition would follow other applicable US GAAP.