Investment Management — Accounting and Financial Reporting Update (2017) | Deloitte US | Financial Services Industry has been added to your bookmarks.
Accounting and Financial Reporting Update (2017)
The 2017 edition of our annual update highlights selected accounting and reporting developments that may be of interest to investment management entities. Among other topics, the publication discusses (1) the issuance of targeted improvements to hedge accounting and (2) continued work by the various standard setters on issues related to implementation of the new revenue recognition and leasing standards.
The 2017 editions of our annual updates highlight selected accounting and reporting developments applicable to entities in each of the following financial services industry sectors:
- Banking and securities.
- Investment management.
- Real estate.
Among other topics, the publications discuss the issuance of new guidance on (1) classification and measurement of financial instruments, (2) impairment of financial instruments, and (3) the accounting for leases. Also discussed is the issuance of refinements to the new guidance on recognition of revenue from contracts with customers. The publications include tables that summarize accounting pronouncements that became effective for calendar year 2017 and the current status of FASB projects.
The year 2017 has seen continued economic improvement, as shown by increasing consumer confidence, strong market performance, and the Federal Reserve’s elevation of the federal funds rate. However, continued volatility in Europe and the volatility of global markets as a result of the new U.S. administration are creating uncertainty.
Technology in the investment management industry is driving disruption, as is the belief that there are tremendous opportunities, and associated risks, within the industry. Opportunities in technology may bring down the cost of active portfolio management for firms that embrace it, and blockchain is a potentially game-changing technology and a possible threat to established players. But while opportunities exist, barriers such as the cost of implementation, ever-changing technology, and competition remain.
The industry faces increased regulatory compliance requirements as a result of Investment Company Report Modernization and Liquidity Risk Management Program Rules. Consequently, investment managers should expect greater compliance costs as well as pressure to produce higher returns for lower management fees. To retain existing investors and attract new prospects, investment managers will need to differentiate themselves.
Investment Company Report Modernization
On October 13, 2016, the SEC finalized its Investment Company Report Modernization rules, making sweeping changes to registered investment company reporting. The new and amended rules are intended to keep up with changes in the industry and technology as well as to provide more timely transparency to the SEC and investors. The new rules will create forms such as N-PORT and N-CEN, replace existing forms such as N-Q and N-SAR, and considerably reduce the filing requirements for other forms. In addition to the new forms, the amendments to Regulation S-X, which became effective in 2017, enhance and standardize derivatives disclosures in financial statements to allow for more comparability among funds. Forms N-PORT and N-CEN, which will become effective in 2018, will significantly affect the industry and should be reviewed by investment companies and investment advisers.
Investment Company Liquidity Risk Management
The liquidity risk management rules are intended to reduce the risk that registered open-end management investment companies, including open-end exchange-traded funds (ETFs), will not be able to meet shareholder redemptions or mitigate potential ownership dilution of the residual shareholders. Under the new rules, which will become effective in 2018, mutual funds and ETFs will be required to establish programs under which the assessment, management, and periodic review of a fund’s liquidity risk would be performed and the oversight of boards would be enhanced.
Core Principles for Regulating the U.S. Financial System
In October 2017, the U.S. Department of the Treasury issued A Financial System That Creates Economic Opportunities — Asset Management and Insurance Industries, a report on a presidential executive order. The report outlines recommendations for Congress and financial service regulators, supporting an approach based on principles rather than prescriptive rules. The report’s recommendations include:
- Postponing the December 2018 implementation of the SEC’s Liquidity Risk Management Rule 22e-4 bucketing requirement.
- Having the SEC consider requiring funds to have a derivatives risk management program.
- A proposal that the SEC examine derivatives data based on the new filing requirements.
- Creating a “plain-vanilla” ETF rule to allow easier entrance into the market.
- Reducing the burden of the Volcker Rule.
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