November 1998 Issue

New Audit Guides Proposed for Insurance Entities and Investment Companies

Comments Due in December

By Anthony J. Mancuso, CPA

The AICPA seeks feedback on exposure drafts for two proposed audit and accounting guides. The deadline for comments on Life and Health Insurance Entities is December 4, and the deadline for Audits of Investment Companies is December 22.

Life and Health Insurance Entities

The guide, which supersedes Audits of Stock Life Insurance Companies, applies to all life and health insurance entities including stock, mutual, fraternal, and assessment entities. It establishes expanded or new audit rules in certain areas, including requiring the use of an outside qualified actuary in connection with auditing reserves, deferred acquisition costs, and other actuarially determined amounts in all audit engagements to which the guide applies. This requirement is the same as the standard established for property and liability insurance companies by SOP 92-4, Auditing Insurance Entities' Loss Reserves.

The guide does not establish any new accounting standards or interpret any existing accounting standards, except for a SEC staff announcement with guidance on adopting FASB No. 115 and FASB Interpretation No. 40.

The provisions are effective for financial statements for fiscal years beginning after December 15, 1999, with earlier application permitted.

Audits of Investment Companies

The guide describes operating conditions and auditing procedures that are unique or particularly significant to investment companies. It also illustrates the form and content of financial statements and related disclosures.

Among the proposals are new accounting standards which state:

* Premiums and discounts on debt securities should be amortized using the interest method;

* Paydown gains and losses on mortgage- and asset-backed securities should be recorded as adjustments to interest income, not as realized gains or losses;

* Fund contributions from the fund's advisor, relative to a realized loss on a fund portfolio investment selected by the advisor in violation of the fund's investment restrictions, should be reported as a separate line item in the statement of operations. Gains realized on such transactions should be disclosed; and

* A liability for "excess expense" plans that meet certain provisions should be recorded when, and to the extent that, amounts become payable under the excess expense plan agreement; that is, on a daily basis as the amounts actually become due under the reimbursement agreement.

The guide also discusses accounting for organization and offering costs, and SOP 98-5, Reporting on the Costs of Start-Up Activities, to expense organization costs. The proposal states that offering costs for closed-end funds and investment partnerships should be charged to paid-in capital upon sale of the shares or units. Offering costs for open-end funds and close-end funds with a continuous offering period should be accounted for as a deferred charge until operations begin, and thereafter, amortized to expense over 12 months on a straight-line basis. Offering costs for investment trusts should be charged to paid-in capital on a pro-rata basis as the units or shares are issued or sold by the trust.

In addition, the guide includes provisions for accounting, reporting, and auditing of multiple-class funds, master-feeder funds, and funds of funds.

With some exceptions, the proposed guide applies to annual financial statements issued for fiscal years beginning after December 15, 1999, and for interim financial statements issued after initial application, with earlier application encouraged but restatement of previously issued financial statements not permitted.

The new guide supersedes Audits of Investment Companies (With Conforming Changes as of May 1, 1998) and Statement of Position 93-2, Determination, Disclosure, and Financial Statement Presentation of Income, Capital Gain, and Return of Capital Distributions by Investment Companies. *

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