On Friday, the Investment Company Institute released a letter to the Financial Accounting Standards Board entitled, "ICI Comments on FASB Accounting for Financial Instruments Proposal. The letter says, "The Investment Company Institute appreciates the opportunity to comment on the proposed accounting standards update Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities (ASU or Proposal). Among other things, the ASU would: 1) require investment companies to recognize transaction costs on the purchase and sale of portfolio securities as an expense in the statement of operations and expense ratio; 2) require money market funds that comply with Rule 2a-7 under the Investment Company Act of 1940 to measure their investments at fair value (rather than amortized cost) when reporting holdings in their financial statements; and 3) require investment companies to measure financial liabilities at fair value, and recognize changes in fair value of financial liabilities in earnings."
Under the section on "Money Market Funds" on page 8 of the letter, ICI says, "The ASU would require money market funds that comply with rule 2a-7 under the Investment Company Act of 1940 to measure their investments at fair value, rather than amortized cost. The Proposal, at Question 6, asks whether reporting those investments at fair value, rather than amortized cost, would provide financial statement users with decision-useful information. Rule 2a-7 permits SEC-registered money market funds to calculate their net asset value per share for purposes of issuing and redeeming fund shares using amortized cost (in lieu of fair value), provided they meet certain risk-limiting conditions. The risk-limiting conditions are intended to provide assurance that any deviation between the fair value of the portfolio and its amortized cost is minimal, and results in calculation of a share price that represents fairly the current net asset value per share of the fund. The risk-limiting conditions minimize a money market fund's exposure to credit, currency, interest rate, and liquidity risks."
It continues, "Rule 2a-7 also requires money market funds to calculate, on a periodic basis, the current net asset value per share using available market quotations for their portfolio securities. This 'shadow pricing' is intended to illustrate, for the fund's board and management, any deviation between the current net asset value per share based on amortized cost and net asset value per share based on available market quotations. If the deviation results in material dilution or other unfair results to existing shareholders, under the rule, the fund's board must cause the fund to take action to eliminate or reduce such dilution or unfair results."
ICI explains, "The SEC recently adopted Rule 30b1-7, which requires money market funds to report portfolio information on new Form N-MFP to the SEC within five business days after the end of each month. Form N-MFP requires money market funds to disclose, for each portfolio security held by the fund, 1) the total principal amount to the nearest cent, 2) the total current amortized cost to the nearest cent, and 3) the value of the security, calculated using available market quotations (or an appropriate substitute that reflects current market conditions). In addition, Form N-MFP requires money market funds to disclose the most recently calculated net asset value per share using available market quotations (or an appropriate substitute that reflects current market conditions) to the nearest hundredth of a cent. Money market funds must first file Form N-MFP beginning with the filing covering the month ended November 30, 2010. The SEC has indicated that it will make funds' filings on Form N-MFP publicly available 60 days after the month end to which the filing relates. Accordingly, beginning on or about February 1, 2011, current fair values for money market fund holdings, as well as the net asset value per share based on those fair values, will be publicly available through the SEC. Such information will be updated on a monthly basis."
The letter states, "We see no practical benefit associated with requiring money market funds to measure their holdings at fair value (in lieu of amortized cost) when reporting their investments in their financial statements. Accordingly, we urge the Board to clarify that money market funds that comply with rule 2a-7 may continue to measure their investments at amortized cost for financial reporting purposes. First, due to rule 2a-7's risk limiting conditions, under normal circumstances, any deviation between the amortized cost value and the fair value of the fund's holdings will be insignificant. We note that money market funds have, for many years, measured their holdings at amortized cost for financial reporting purposes, and that auditors, notwithstanding GAAP's requirement for investment companies to measure their holdings at fair value, have not objected to this presentation. We believe auditors have concluded appropriately that amortized cost does not differ materially from fair value. Further, we believe the fund's periodic shadow pricing process, in which the fund calculates net asset value per share based on available market quotations, confirms there is no significant deviation."
It adds, "In those rare circumstances where the fair value of a particular holding differs materially from amortized cost (i.e., due to an issuer default), industry practice is to measure the holding at its fair value in the fund's financial statements. In addition, the fund would separately disclose any credit support arrangement from the fund sponsor measured at fair value. Such presentation would be supplemented with note disclosure detailing the terms of any credit support arrangement. Second, as described above, fair value information for each money market fund holding will be publicly available in SEC Form N-MFP beginning on or about February 1, 2011. This information will be updated on a monthly basis. Accordingly, the fair value information that the Board would require under the Proposal will be available through the SEC to investors and others, and it will be updated more frequently (monthly vs. quarterly)."
Finally, the letter concludes, "For the reasons described above we believe there is no practical benefit associated with measuring the money market fund's investments at fair value in the fund's financial statements and urge the Board to clarify that such funds may continue to measure their investments at amortized cost. Recommendation - In lieu of requiring money market funds to measure their investments at fair value, we recommend the Board consider requiring these funds to disclose the fair value of the investment portfolio at the reporting date in the notes to the financial statements. Such disclosure would enable financial statement users to assess any difference between the amortized cost and fair value of the fund's portfolio." (For more comment letters on the FASB site, click here.)
