Investment Company Notebook

Practical insight and analysis on the accounting, audit and tax issues impacting investment companies.

SEC Disclosure Update and Simplification Release

On August 17, 2018, the SEC adopted what effectively amounts to “housekeeping items” for a variety of public issuers. These updates are effective November 5, 2018. 

Specific to registered investment companies, this release focuses on Regulation S-X and the presentation requirements of distributable earnings. The changes eliminate past SEC requirements to present the specific components of distributable earnings on a book basis in the financialSEC Disclosure statements. The release makes the SEC’s rules consistent with GAAP requirements and recognizes the fact that the tax components of distributable earnings are really what is most relevant to the reader. Specifically, the release updates the following:

  • Rule 6-04.17 of Regulation S-X has been amended to require presentation of the total, rather than the components, of distributable earnings on the balance sheet.
BBD’s interpretation – The equity section of the Statement of Assets and Liabilities will now generally present two line items
  • Paid in Capital
  • Distributable Earnings
  • Rule 6-09.7 of Regulation S-X has been amended to delete the requirement for parenthetical disclosure of undistributed net investment income on the statement of changes in net assets on a book basis.
  • Rule 6-09.3 of Regulation S-X has been amended to require presentation of distributions to shareholders in total, except for tax return of capital distributions, which should be disclosed separately.

BBD’s interpretation - As these presentation changes are not to be implemented retroactively, more detail will be presented for the prior year than the current with respect to distributions in the Statements of Changes in Net Assets. AICPA Expert Panel Minutes have noted that the SEC has indicated that they will not take issue if the presentation of the prior year amounts conform to the current year presentation so long as that detail and the reasoning for the change are disclosed in a footnote.

Further clarification in the way of “Non-Changes”

  • The presentation requirements for the Financial Highlights remain unchanged

BBD’s interpretation – For the most part, one would expect the Financial Highlights to encapsulate the performance presented in detail in the Statement of Changes in Net Assets. In this scenario, the Financial Highlights will actually provide more detail than the Statement of Changes in Net Assets relating specifically to the book character of distributions.

  • GAAP basis tax disclosure requirements also remain unchanged

BBD’s interpretation – The central thought process behind the aggregation of distributable earnings on a book basis is that the tax basis is more relevant to the reader and is presented in the notes in a disaggregated fashion.