The Financial Accounting Standards Board has released two proposed accounting standards updates to clarify the criteria for investment company accounting and develop guidance for investment property accounting.

The proposed update for investment company accounting stems from the efforts of FASB and the International Accounting Standards Board to develop consistent criteria for determining whether an entity is an investment company. Under U.S. GAAP, investment companies carry all of their investments at fair value, even if they hold a controlling interest in another company. The primary changes proposed by FASB relate to which entities would be considered investment companies, along with certain disclosure and presentation requirements.

The changes are being proposed for the first time under International Financial Reporting Standards, and the proposed standards update would thus improve comparability between entities that meet the criteria to be investment companies under U.S. GAAP and the proposed amendments to IFRS.

In addition to the changes to the criteria for determining whether an entity is an investment company, FASB is also proposing that an investment company consolidate another investment company if it holds a controlling financial interest in the entity.

The IASB issued its proposal, Investment Entities, on Aug. 25, 2011. Comments on the IASB’s exposure draft are due Jan. 5, 2012.

In the other proposed standards update, for investment property accounting, an entity that meets certain criteria would be required to measure its investment properties at fair value, rather than to apply lease accounting to each individual lease. The proposed amendments would also introduce new presentation and disclosure requirements for an investment property entity.

The proposed update is a result of FASB’s efforts to align the scope of entities that would apply the proposed lessor accounting model under U.S. GAAP and IFRS and to address the diversity in practice about the accounting by real estate entities.

As part of FASB and the 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 in the IASB’s August 2010 Exposure Draft, Leases, if the lessor measures its investment properties at fair value by electing the fair value model under IAS 40, Investment Property.

Unlike IFRS, U.S. GAAP does not contain specific accounting requirements for investment properties. As a result, an entity that invests in real estate properties but is not an investment company is required to measure its real estate properties at cost under Topic 360, Property, Plant, and Equipment, and account for the leases separately.

In response to consistent investor input, FASB decided to prescribe the circumstances when fair value would be required, rather than introduce an optional accounting practice into U.S. GAAP.

Comments on the proposed update are also due Jan. 5. For more information, visit

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