A.28 ASC 946, Financial Services — Investment Companies

45-14 Under Rule 2a-4 of the Investment Company Act of 1940, current net asset value is computed using the fair value of the investment company’s portfolio securities.

45-15 The following line items shall be separately reported on the statement of assets and liabilities with a parenthetical reference that such amounts are being reported at fair value:

1. Investments (including traditional guaranteed investment contracts)
2. Wrapper contracts.

45-16 The statement of assets and liabilities of the fund shall present amounts for all of the following:

1. Total assets
2. Total liabilities
3. Net assets reflecting all investments at fair value
4. Net assets.

Amount (d) represents the amount at which participants can transact with the fund. That amount shall be used also for purposes of preparing the per-share disclosures required by Section 946-205-50 and as the beginning and ending balance in the statement of changes in net assets of the fund. The amount representing the difference between (c) and (d) shall be presented on the face of the statement of assets and liabilities as a single amount, calculated as the sum of the amounts necessary to adjust the portion of net assets attributable to each fully benefit-responsive investment contract from fair value to contract value.

45-18 The following information shall be disclosed in the financial statements as part of the schedule of investments, to the extent that schedule is already required under paragraph 946-210-50-1, and shall reconcile to corresponding line items on the statement of assets and liabilities:

1. The fair value of each investment contract, including separate disclosure of both of the following:
   1. The fair value of the wrapper contract
   2. The fair value of each of the corresponding underlying investments, if held by the fund, included in that investment contract.
2. Adjustment from fair value to contract value for each investment contract (if the investment contract is fully benefit-responsive)
3. Major credit ratings of the issuer or wrapper provider for each investment contract.

50-1 In the absence of regulatory requirements, investment companies other than nonregistered investment partnerships shall do all of the following:

1. Disclose the name, number of shares, or principal amount of all of the following:
   1. Each investment (including short sales, written options, futures contracts, forward contracts, and other investment-related liabilities) whose fair value constitutes more than 1 percent of net assets. In applying the 1-percent test, total long and total short positions in any one issuer should be considered separately.
   2. All investments in any one issuer whose fair values aggregate more than 1 percent of net assets. In applying the 1-percent test, total long and total short positions in any one issuer should be considered separately.
   3. At a minimum, the 50 largest investments.
2. Categorize investments by both of the following characteristics:
   1. The type of investment (such as common stocks, preferred stocks, convertible securities, fixed income securities, government securities, options purchased, options written, warrants, futures contracts, loan participations and assignments, short-term securities, repurchase agreements, short sales, forward contracts, other investment companies, and so forth)
   2. The related industry, country, or geographic region of the investment. . . .

50-6 The financial statements of an investment partnership meeting the condition in paragraph 946-210-50-4 shall, at a minimum, include a condensed schedule of investments in securities owned by the partnership at the close of the most recent period. Such a schedule shall do all of the following:

1. Categorize investments by all of the following:
   1. Type (such as common stocks, preferred stocks, convertible securities, fixed-income securities, government securities, options purchased, options written, warrants, futures, loan participations, short sales, other investment companies, and so forth)
   2. Country or geographic region, except for derivative instruments for which the underlying is not a security (see (a)(4))
   3. Industry, except for derivative instruments for which the underlying is not a security (see (a)(4))
   4. For derivative instruments for which the underlying is not a security, by broad category of underlying (for example, grains and feeds, fibers and textiles, foreign currency, or equity indexes) in place of the categories in (a)(2) and (a)(3).
2. Report the percent of net assets that each such category represents and the total fair value and cost for each category in (a)(1) and (a)(2).
3. Disclose the name, number of shares or principal amount, fair value, and type of both of the following:
   1. Each investment (including short sales) constituting more than 5 percent of net assets, except for derivative instruments (see (e) and (f)). In applying the 5-percent test, total long and total short positions in any one issuer should be considered separately.
   2. All investments in any one issuer aggregating more than 5 percent of net assets, except for derivative instruments (see (e) and (f)). In applying the 5-percent test, total long and total short positions in any one issuer shall be considered separately.
4. Aggregate other investments (each of which is 5 percent or less of net assets) without specifically identifying the issuers of such investments, and categorize them in accordance with the guidance in (a). In applying the 5-percent test, total long and total short positions in any one issuer shall be considered separately.
5. Disclose the number of contracts, range of expiration dates, and cumulative appreciation (depreciation) for open futures contracts of a particular underlying (such as wheat, cotton, specified equity index, or U.S. Treasury Bonds), regardless of exchange, delivery location, or delivery date, if cumulative appreciation (depreciation) on the open contracts exceeds 5 percent of net assets. In applying the 5-percent test, total long and total short positions in any one issuer shall be considered separately.
6. Disclose the range of expiration dates and fair value for all other derivative instruments of a particular underlying (such as foreign currency, wheat, specified equity index, or U.S. Treasury Bonds) regardless of counterparty, exchange, or delivery date, if fair value exceeds 5 percent of net assets. In applying the 5-percent test, total long and total short positions in any one issuer shall be considered separately.
7. Provide both of the following additional qualitative descriptions for each investment in another nonregistered investment partnership whose fair value constitutes more than 5 percent of net assets:
   1. The investment objective
   2. Restrictions on redemption (that is, liquidity provisions).

50-14 Investment companies identified in paragraph 946-210-45-11 shall disclose all of the following in connection with fully benefit-responsive investment contracts, in the aggregate: . . .

45-4 The practice of not separately disclosing the portion of the changes in fair values of investments and realized gains and losses thereon that result from foreign currency rate changes is permitted. However, separate reporting of such gains and losses is allowable and, if adopted by the reporting entity, shall conform to the guidance in this Subtopic.

45-15 A fund investing in foreign securities generally invests in such securities to reap the potential benefits offered by the local capital market. It may also invest in such securities as a means of investing in the foreign currency market or of benefiting from the foreign currency rate fluctuation. The extent to which separate information regarding foreign currency gains or losses will be meaningful will vary depending on the circumstances, and separate information may not measure with precision foreign exchange gains or losses associated with the economic risks of foreign currency exposures. A foreign currency rate fluctuation, however, may be an important consideration in the case of foreign investments, and a reporting entity may choose to identify and separately report any resulting foreign currency gains or losses as a component of unrealized fair value gains or losses on investments.

45-16 The fair value of securities shall initially be determined in the foreign currency and translated at the spot rate on the purchase trade date. The unrealized gain or loss between the original cost (translated on the trade date) and the fair value (translated on the valuation date) comprises both of the following elements:

1. Changes in the fair value of securities before translation
2. Movement in foreign currency rate.

45-17 Such movements may be combined as permitted by paragraph 946-830-45-4. If separate disclosure of the foreign currency gains and losses is chosen, the changes in the fair value of securities before translation should be measured as the difference between the fair value in foreign currency and the original cost in foreign currency translated at the spot rate on the valuation date. The effect of the movement in the foreign exchange rate shall be measured as the difference between the original cost in foreign currency translated at the current spot rate and the historical functional currency cost. These values can be computed as follows:

1. (Fair value in foreign currency – original cost in foreign currency) × valuation date spot rate = unrealized fair value appreciation or depreciation.
2. (Cost in foreign currency times valuation date spot rate) – cost in functional currency = the unrealized foreign currency gain or loss.

45-20 If separate reporting of foreign currency gains and losses on sales of securities is chosen by the reporting entity, the computation of the effects of the changes in fair value and the foreign currency rate is similar to that described in paragraphs 946-830-45-17 through 45-18. Fair value in the formula given in those paragraphs should be replaced with sale proceeds and valuation date shall be replaced with sale trade date. Accordingly, the values shall be computed as follows:

1. (Sale proceeds in foreign currency – original cost in foreign currency) × sale trade date spot rate = realized fair value gain or loss on sale of security.
2. (Cost in foreign currency × sale trade date spot rate) – cost in functional currency = realized foreign currency gain or loss.

50-2 Foreign currency risk associated with investing in foreign securities shall be assessed continuously by management and considered for financial statement disclosure, including disclosures about all of the following:

1. Liquidity. Because certain foreign markets are illiquid, market prices may not necessarily represent fair value.
2. Size. If market capitalization is low, a fund’s share in the entire market (particularly if single-country funds are involved) or in specific securities may be proportionately very large, and the fair value, consistent with Topic 820, may not be representative of the price that would be received if the fund sold its large proportion of the specific security (“block”) at the measurement date.
3. Valuation. Because of liquidity problems as well as other factors, such as securities that are unlisted or securities that are traded in inactive markets, funds are required to develop procedures consistent with Topic 820 for measuring the fair values of such securities. Doing so may be difficult in a foreign environment; while others may perform the research and provide supporting documentation for fair values, the ultimate responsibility for determining the fair values of securities rests with the management.