[Federal Register Volume 60, Number 25 (Tuesday, February 7, 1995)]
[Rules and Regulations]
[Pages 7392-7402]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-2937]




[[Page 7391]]

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Part VIII





Small Business Administration





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13 CFR Part 107



Small Business Investment Companies; Accounting and Financial Reporting 
Standards; Interim Final Rule

  Federal Register / Vol. 60, No. 25 / Tuesday, February 7, 1995 / 
Rules and Regulations   
[[Page 7392]] 

SMALL BUSINESS ADMINISTRATION

13 CFR Part 107


Small Business Investment Companies; Accounting and Financial 
Reporting Standards

AGENCY: Small Business Administration.

ACTION: Interim final rule.

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SUMMARY: The Small Business Administration (SBA) currently provides 
accounting guidance for Small Business Investment Companies (SBICs) in 
two appendices to SBA regulations. These appendices have not been 
significantly revised since 1986. Subsequent changes in generally 
accepted accounting principles and in the SBIC program have caused the 
accounting standards to become outdated and incomplete. This rule 
updates the standards for accounting and financial reporting by SBICs, 
as well as the guidelines for Independent Public Accountants (IPAs) 
performing audits of SBIC financial statements.
    The current appendix I includes SBA Form 468, on which SBICs 
prepare the required Annual Financial Report to SBA. The current 
appendix II includes the standard chart of accounts for SBICs. This 
rule deletes both the Form 468 and the chart of accounts from the 
regulations and consolidates the remaining material in appendices I and 
II into one appendix.

DATES: This interim final rule is effective February 7, 1995. Written 
comments on this rule must be received no later than March 9, 1995.

ADDRESSES: Written comments should be sent to Robert D. Stillman, 
Associate Administrator for Investment, Small Business Administration, 
Suite 6300, 409 3rd Street SW., Washington, DC 20416.

FOR FURTHER INFORMATION CONTACT:
Carol Fendler, Office of Program Support; telephone no. (202) 205-7559.

SUPPLEMENTARY INFORMATION: The accounting standards published by SBA on 
August 28, 1986 (51 FR 30752) have since undergone only minor 
revisions. As a result, these standards do not reflect subsequent 
changes in the SBIC program mandated by the Small Business Investment 
Act of 1958, as amended (Act), as well as changes in generally accepted 
accounting principles (GAAP).
    This rule updates the accounting standards for the SBIC program, 
while also reorganizing the material to make information on specific 
topics easier to find. The accounting, financial reporting and auditing 
requirements included in the current appendices I and II to Part 107 of 
SBA regulations are consolidated into a revised appendix I.
    Two items currently included in the appendices are deleted: (1) The 
schedules which constitute SBA Form 468, on which SBICs prepare their 
Annual Financial Report to SBA, and (2) the standard SBIC chart of 
accounts. SBA is deleting Form 468 in the interest of consistency, 
since none of the other standard forms used in the SBIC program is 
included in Part 107 of the regulations or its appendices. The SBIC 
chart of accounts represents the type of explanatory material that SBA 
considers more appropriate for inclusion in a Policy and Procedural 
Release rather than in Agency regulations. SBA plans to provide updated 
versions of both the Form 468 and the SBIC chart of accounts after this 
rule is published. Until then, Licensees should continue to use the 
existing versions.
    While many of the topics covered in this rule should be familiar to 
users of the current appendices, some are either new or significantly 
revised, including the following:
    1. Independent Auditors' Report--Includes a sample report which 
satisfies current requirements of the American Institute of Certified 
Public Accountants.
    2. Access to Accountants' Working Papers--States explicitly that 
SBA, in its discretion, may assign its examiners or other personnel to 
review accountants' working papers prepared in connection with audits 
of SBICs. Although this statement does not appear in the existing 
appendices, it is consistent with SBA's current position that working 
papers are subject to the requirements concerning records and reports 
set forth in Sec. 107.1002 of the regulations.
    3. Accounting for Income Taxes--Revised in accordance with FASB 
Statement No. 109, issued in February 1992, which sets forth current 
GAAP in this area.
    4. Interest Income--Provides more specific guidance than before 
concerning the accounting treatment of delinquent interest. This 
section sets forth conditions which are deemed to create a presumption 
that the collection of interest is doubtful; SBICs would have the 
opportunity to rebut such a presumption. This approach is consistent 
with the valuation guidelines for interest-bearing securities published 
in the Federal Register on June 2, 1994 (59 FR 28471) and is intended 
to achieve greater consistency in financial reporting by SBICs.
    5. Undistributed Realized Earnings--Provides more detailed 
definitions of Undistributed Net Realized Earnings and Noncash Gains/
Income, the two components of Undistributed Realized Earnings. These 
definitions are consistent with the interpretations currently used by 
SBA in practice.
    6. Retained Earnings Available for Distribution--Corrects 
contradictory statements in the current appendices and provides 
additional detail concerning the computation of this amount, consistent 
with the definition of Retained Earnings Available for Distribution 
which was published in the Federal Register on April 8, 1994 (59 FR 
16898).
    7. Preferred Securities Leverage for Section 301(d) Licensees--
Provides guidance on accounting for 4% redeemable preferred securities, 
a topic which is not addressed in the current appendices.
    8. Participating Securities--Provides general guidance on financial 
statement presentation of these new equity-type securities, which may 
be issued by Licensees pursuant to the final rule published in the 
Federal Register on April 8, 1994. Additional guidance and computer 
software to perform the various profit and distribution computations 
associated with Participating Securities will be provided to issuers of 
such securities.

Compliance With Executive Orders 12866, 12612 and 12778, and the 
Regulatory Flexibility and Paperwork Reduction Acts

Executive Order 12866 and Regulatory Flexibility Act

    This rule will not constitute a significant regulatory action for 
purposes of Executive Order 12866 because it is not likely to have an 
annual impact on the national economy of $100 million or more, and, for 
purposes of the Regulatory Flexibility Act, 5 U.S.C. 601 et seq., it 
will not have a substantial impact on a significant number of small 
entities.
    1. The legal basis for this regulation is section 308(c) of the 
Small Business Investment Act, 15 U.S.C. 687(c).
    2. The potential benefits of this regulation have been set forth in 
the discussion above, under Supplementary Information.
    3. The potential cost of this regulation cannot be quantified or 
estimated.
    4. There are no Federal rules which duplicate, overlap, or conflict 
with this rule.
    5. SBA is not aware of regulatory alternatives that could achieve 
the same objectives at lower cost.
    This rule was not reviewed under Executive Order 12866.
    [[Page 7393]]
    
Executive Order 12612

    SBA certifies that this regulation has no federalism implications 
warranting the preparation of a Federal Assessment in accordance with 
Executive Order 12612.

Paperwork Reduction Act

    For purposes of the Paperwork Reduction Act, 44 U.S.C., ch. 35, SBA 
hereby certifies that this rule, in and of itself, will impose no new 
reporting or recordkeeping requirements. This rule prescribes the 
accounting treatment for certain types of financial transactions which 
are new to the SBIC program; such treatment, however, is dictated by 
the substance of these transactions, which has already been established 
by statute (primarily section 403 of Pub. L. 102-366).

Executive Order 12778

    SBA certifies that this rule is drafted, to the extent practicable, 
in accordance with the standards set forth in Section 2 of Executive 
Order 12778.
    SBA certifies pursuant to 5 U.S.C. 553(b)(B) that notice and 
comment in the promulgation of this regulation is impracticable. In 
this regard, the rule provides necessary accounting guidance to 
Licensees on recently implemented aspects of the SBIC program (such as 
Participating Securities and commitments from Institutional Investors). 
It also revises the guidelines to reflect recent regulatory changes in 
such areas as valuations, Retained Earnings Available for Distribution, 
and electronic reporting requirements. Licensees need to have access to 
this information in order to prepare their year end financial 
statements in a manner acceptable to SBA.
    Other changes to the accounting guidelines are intended to bring 
them into compliance with generally accepted accounting principles. 
Some areas of the present guidelines (such as accounting for income 
taxes and preparation of the Independent Accountant's Report) are so 
out of date that they have become sources of significant confusion to 
Licensees.
    Finally, this rule provides for the deletion of the present SBA 
Form 468 from the appendix to Part 107. This will allow SBA to 
implement a revised 468 (subject to OMB approval) for companies with 
fiscal years ending on or after December 31, 1994. The revised Form 468 
is needed to accommodate reporting related to statutorily mandated 
programs, and also to provide Licensees with a format in which to show 
information such as economic impact data, investments in Smaller 
Concerns, and computations of Regulatory and Leverageable Capital. 
Without the new Form 468, Licensees will find it difficult to report 
required financial information to SBA, and SBA will find it difficult 
to monitor key aspects of their financial condition and regulatory 
compliance.
    Therefore, this rule is being promulgated as an interim final rule, 
and the public is offered an opportunity to comment on it subsequent to 
its publication. Comments will be taken into consideration in the 
ultimate finalization of the rule.

List of Subjects in 13 CFR Part 107

    Investment companies, Loan programs--business, Small businesses.

    For the reasons set forth above, Title 13, Part 107 of the Code of 
Federal Regulations is amended as follows:

PART 107--SMALL BUSINESS INVESTMENT COMPANIES

    1. The authority citation for Part 107 continues to read as 
follows:

    Authority: Title III of the Small Business Investment Act, 15 
U.S.C. 681 et seq.; 15 U.S.C. 687c; 15 U.S.C. 683; 15 U.S.C. 687d; 
15 U.S.C. 687g; 15 U.S.C. 687b; 15 U.S.C. 687m, as amended by Pub. 
L. 102-366.

    2. Appendix I is revised to read as follows:

Appendix I to Part 107--Accounting Standards and Financial Reporting 
Requirements for Small Business Investment Companies

Table of Contents

I. Introduction
II. Recordkeeping and Financial Reporting
    A. Records and Reports
    B. Account Classification
    C. Annual Financial Report (SBA Form 468)
    D. Filing of Annual Financial Report
    E. Portfolio Financial Report (SBA Form 1031)
    F. Interim Reports
III. Selection and Qualification of the Auditor
    A. Selection of the Auditor
    B. Qualification of the Auditor
    C. Independence
IV. Annual Report
    A. Generally Accepted Auditing Standards
    B. Independent Auditors' Report
    C. Access to Accountants' Working Papers
    D. Accountants' Reponsibility for Valuations
    E. Audit Adjustments
    F. Reporting Irregularities
    G. Detecting Noncompliance With Laws and Regulations
V. Accounting Policies and Procedures
    A. Generally Accepted Accounting Principles
    B. Accrual Basis of Accounting
    C. Reporting Entity
    D. Fair Value of Loans and Investments
    E. Interest Income
    F. Dividend Income
    G. Profit Participation in Small Concerns
    H. Fees Charged to Small Concerns
    I. Accounting for Investments in Flow-Through Entities
    J. Equity Method of Accounting
    K. Accounting for Income Taxes
    L. Realized Gain (Loss) on Investments
    M. Nonmonetary Transactions
    N. Interest, Notes and Accounts Receivable
    O. Compensating Balances
    P. Organization Costs
    Q. Contingent Liabilities
    R. Transactions with Related Parties
    S. Leverage--Debentures Guaranteed or Purchased by SBA
    T. Leverage--Participating Securities Guaranteed by SBA
    U. Preferred Securities Leverage for Section 301(d) Licensees
    V. Contributed Capital and Committed Capital
    W. Unrealized Gain (Loss) on Securities Held
    X. Undistributed Realized Earnings
    Y. Retained Earnings Available for Distribution
    Z. Partnership Capital Accounts

VI. Availability of Publications and Forms

I. Introduction

    i. This appendix provides guidance to Small Business Investment 
Companies (SBICs) on accounting policies and procedures, financial 
reporting to SBA, and selection of an auditor. In addition, this 
appendix contains guidelines for Independent Public Accountants 
(IPAs) engaged to conduct annual audits of SBICs. This appendix is 
not intended to be a comprehensive treatment of all accounting and 
auditing issues which may arise in an SBIC; instead, its purpose is 
to cover those topics that are particularly relevant to the SBIC 
program and which may involve the application of specialized 
industry practices. Therefore, Licensees and their IPAs should 
consult other appropriate sources of information as needed. 
Furthermore, as in any audit, the independent auditor of an SBIC 
must exercise professional judgment as to the work required to 
satisfy generally accepted auditing standards.
    ii. This appendix contains references to Securities and Exchange 
Commission (SEC) Rules and Regulations, pronouncements of the 
Financial Accounting Standards Board (FASB) and its predecessors, 
publications of the American Institute of Certified Public 
Accountants (AICPA), and the Internal Revenue Code. Such references 
are subject to change. It is the responsibility of the Licensee and 
its advisors to be aware of any regulatory, accounting, or tax code 
changes that could have an effect on the Licensee.

II. Recordkeeping and Financial Reporting

A. Records and Reports

    All books, records, ledgers, and other supporting documents 
shall be maintained in the English language. See Sec. 107.1002 for 
specific requirements relating to the retention of records and the 
filing of reports with SBA.

B. Account Classification

    i. Licensees shall maintain their books of account in accordance 
with the system of [[Page 7394]] account classification prescribed 
by SBA. The system has been prescribed to insure that standard books 
of account are maintained by Licensees and that uniform accounting 
policies are followed.
    ii. Books of account for a management consulting or other 
subsidiary shall be maintained using accounts compatible with those 
used by the Licensee.

C. Annual Financial Report (SBA Form 468)

    i. The Small Business Administration, under authority granted by 
the Small Business Investment Act of 1958, as amended (the Act), 
requires each Licensee to submit an Annual Financial Report as of 
the close of its fiscal year (see Sec. 107.1002(e)). The Annual 
Financial Report consists of audited financial statements and 
supplementary schedules prepared on SBA Form 468, the Independent 
Public Accountant's report, the notes accompanying the financial 
statements, and the required certifications.
    ii. Preparation of the Annual Financial Report is the 
responsibility of the Licensee. The Independent Public Accountant's 
responsibility is to perform an audit and to express an opinion on 
the financial statements and supplementary schedules based on the 
audit.

D. Filing of Annual Financial Report

    i. The Annual Financial Report on SBA Form 468 shall be 
submitted to SBA by the Licensee no later than the last day of the 
third month following the end of the Licensee's fiscal year.
    The Licensee shall include in its filing a copy of any 
transmittal letter, special report, or other communication furnished 
by its auditor.
    ii. For all fiscal years ending on or after June 30, 1994, SBA 
Form 468 shall be submitted electronically, in accordance with 
Sec. 107.101(h). All Licensees must use the electronic reporting 
software provided by SBA for this purpose. A complete filing of Form 
468 consists of the following:
    (1) The electronic reporting data diskette;
    (2) Two printed copies of the financial statements and 
supplementary schedules;
    (3) The signed management certifications which appear on the 
last page of Form 468 (two copies, one with original signatures);
    (4) The IPA's report (two copies, one with original signature); 
and
    (5) The notes to the financial statements (two copies).

E. Portfolio Financing Report (SBA Form 1031)

    For each financing of a small concern, Licensees shall submit a 
Portfolio Financing Report on SBA Form 1031 within 30 days of the 
closing date of the financing. Such reports shall be prepared using 
software provided by SBA. Licensees may submit a printout of the 
form to SBA or transmit it electronically. The report, which is used 
for program evaluation purposes, provides summary information 
concerning the amount and terms of the financing, the financial 
condition of the small concern and the intended use of proceeds, as 
well as information which will be used to assess the economic impact 
of the financing.

F. Interim Reports

    SBA may require Licensees to submit interim reports containing 
unaudited financial and/or management information, pursuant to 
Sec. 107.1002(g). The form and content of such reports may be 
standardized or determined by SBA on a case-by-case basis. Interim 
reports shall be submitted in such manner and at such time as SBA 
shall direct.

III. Selection and Qualification of the Auditor

A. Selection of the Auditor

    i. The Licensee's Board of Directors or General Partner is 
responsible for selecting the Independent Public Accountant (IPA). 
Within 30 days of its engagement by the Licensee, the Independent 
Public Accountant shall file with the SBA a completed IPA 
Certification (CO Form 112) certifying as to its qualifications and 
independence. The IPA shall be deemed approved unless the Licensee 
is notified to the contrary by SBA within 90 days after receipt of 
the IPA Certification.
    ii. Submittal of the IPA Certification is required only upon the 
initial engagement of the IPA. An IPA engaged to audit an SBIC on a 
recurring basis does not need to submit a new Certification each 
year.
    iii. The Licensee shall notify the SBA in writing of a change in 
accountants and shall explain the reason for the change.

B. Qualification of the Auditor

    Any Certified Public Accountant or Public Accountant, licensed 
by a regulatory authority of a State or other political subdivision 
of the United States, may be considered qualified to render an 
opinion on behalf of a Licensee, provided the following conditions 
are met: (1) The accountant is independent with respect to the 
Licensee, and (2) the accountant is duly authorized to practice and 
is in good standing under the laws of the State or other comparable 
authority in which so authorized.

C. Independence

    i. Independent Public Accountants approved by SBA are to follow 
the Code of Professional Conduct adopted by the AICPA. In 
considering questions which may arise concerning the independence of 
an accountant with respect to a Licensee, the SBA will give 
appropriate consideration to all relevant circumstances, including 
evidence bearing on relationships between the accountant and such 
Licensee or any of its affiliates.
    ii. Independence will be considered to be impaired by 
circumstances including, but not limited to, the following:
    1. During the professional engagement, or at the time of 
expressing an opinion, the accountant or his/her firm:
    a. Had or was committed to acquire any direct or indirect 
financial interest in the Licensee; or
    b. Had any joint closely held business investment with the 
Licensee or any of its officers, directors or principal 
stockholders, or any general or limited partner, which was material 
in relation to the net worth of the accountant or his/her firm; or
    c. Had any loan to or from the Licensee or any of its officers, 
directors or principal stockholders, or any general or limited 
partner.
    2. During the period covered by the financial statements during 
the professional engagement, or at the time of expressing an 
opinion, the accountant or his/her firm:
    a. Was connected with the Licensee as a promoter, underwriter, 
or voting trustee, a director of officer or in any capacity 
equivalent to that of a member of management or of an employee; or
    b. Was a trustee of any trust or executor or administrator of 
any estate is such trust or estate had a direct or material indirect 
financial interest in the Licensee; or was a trustee for any pension 
or profit-sharing trust of the Licensee; or
    c. Rendered bookkeeping services to the Licensee; Provided 
however, that SBA may approve the rendering of bookkeeping services 
by independent accountants on a case by case basis.
    iii. Independent public accountants who audit Licensees which 
elect to qualify as Regulated Investment Companies should become 
familiar with Section 600 (``Matters Relating to Independent 
Accountants'') of the SEC's ``Codification of Financial Reporting 
Policies.''

IV. Annual Audit

A. Generally Accepted Auditing Standards

    The IPA shall perform an audit of the Licensee's financial 
statements in accordance with generally accepted auditing standards 
(GAAS) of the AICPA. It is the responsibility of accountants to be 
informed of any changes in GAAS as they occur. AICPA recommendations 
for the application of GAAS to audits of the financial statements of 
investment companies are presented in the publication, ``Audits of 
Investment Companies'', which is updated periodically. Although this 
publication deals primarily with companies investing in marketable 
securities, many of its recommended audit procedures are applicable 
to SBICs.

B. Independent Auditor.s Report

    i. The Independent Auditor's Report shall conform to current 
AICPA recommendations regarding the application of generally 
accepted auditing standards to reports on audited financial 
statements of investment companies. As of the publication date of 
these regulations, such recommendations are presented in chapter 9 
of the AICPA publication, ``Audits of Investment Companies.'' It is 
the responsibility of accountants to be aware of any changes in 
generally accepted auditing standards which may affect reporting 
requirements.
    ii. The opinion expressed in the Independent Auditors' Report 
must refer specifically to the financial statements as they appear 
in SBA Form 468. An opinion expressed on financial statements 
prepared for general purposes, or for any specific purpose other 
than inclusion in SBA Form 468, is not acceptable. The financial 
statements may be listed by name in the auditor's report, or listed 
separately and referred to in the report (for example, the report 
could refer to the financial statements [[Page 7395]] ``as listed on 
the following page'' or ``as listed in the accompanying index'').
    iii. In addition to expressing an opinion on the basic financial 
statements (the statement of financial position, statement of 
operations realized and statement of cash flows), the accountant 
must express an opinion on the supplementary financial information. 
The supplementary information should be addressed in a separate 
paragraph of the Independent Auditors' Report. As with the basic 
financial statements, the supplementary statements and schedules may 
be listed in the report itself or listed separately and referred to 
in the report.
    iv. Almost all SBICs have Loans and Investments, the value of 
which must be estimated by the Board of Directors or General 
Partner(s) in the absence of readily ascertainable market values. 
The auditor's reports for such SBICs must include an explanatory 
paragraph addressing portfolio valuations, in which the auditor 
states whether the valuation procedures are reasonable and the 
underlying documentation is appropriate. It is no longer acceptable 
to state that valuations involve subjective judgment which is not 
susceptible to substantiation by auditing procedures. The paragraph 
should follow the AICPA's reporting recommendations presented in 
chapter 9 of ``Audits of Investment Companies''.
    V. Sample Report. Following is a sample Independent Auditors' 
Report which is acceptable to SBA, based on generally accepted 
auditing standards in effect as of the publication date of these 
regulations. Any subsequent changes in generally accepted auditing 
standards which affect reporting requirements must be reflected in 
the Independent Auditors' Report included in a Licensee's filing of 
SBA Form 468, regardless of whether or not SBA has published an 
updated sample report.

Independent Auditors' Report

    The Board of Directors of [Licensee]

      or

    The General Partner(s) and Limited Partners of [Licensee]
    We have audited the statement of financial position of 
[Licensee] as of [closing date of fiscal year] and the related 
statements of operations realized and cash flows for the year then 
ended included in SBA Form 468. These financial statements are the 
responsibility of the Company's management. Our responsibility is to 
express an opinion on these financial statements based on our audit.
    We conducted our audit in accordance with generally accepted 
auditing standards. Those standards require that we plan and perform 
the audit to obtain reasonable assurance about whether the financial 
statements are free of material misstatement. An audit includes 
examining, on a test basis, evidence supporting the amounts and 
disclosures in the financial statements. An audit also includes 
assessing the accounting principles used and significant estimates 
made by management, as well as evaluating the overall financial 
statement presentation. We believe that our audit provides a 
reasonable basis for our opinion.
    In our opinion, the financial statements referred to above 
present fairly, in all material respects, the financial position of 
[Licensee] as of [closing date of fiscal year], and the results of 
its operations and cash flows for the year then ended in conformity 
with generally accepted accounting principles.
    As explained in Note ____, the financial statements include 
investments valued at $________ as of [closing date of fiscal year], 
whose values have been estimated by the [Board of Directors] 
[General Partner(s)], in the absence of readily ascertainable market 
values. We have reviewed the procedures used by the [Board of 
Directors] [General Partner(s)] in arriving at its estimates of 
value of such investments and have inspected underlying 
documentation, and, in the circumstances, we believe the procedures 
are reasonable and the documentation appropriate. However, because 
of the inherent uncertainty of valuation, those estimated values may 
differ significantly from the values that would have been used had a 
ready market for the investments existed, and the differences could 
be material.
    Our audit was made for the purpose of forming an opinion on the 
basic financial statements taken as a whole. The supplementary 
information contained in the [analysis of stockholders' equity] 
[analysis of partners' capital], computations of retained earnings 
available for distribution and of regulatory and leverageable 
capital, schedules of commitments and guarantees, and schedules 1 
through 7 is presented for purposes of additional analysis and is 
not a required part of the basic financial statements. Such 
information has been subjected to the auditing procedures applied in 
the audit of the basic financial statements and, in our opinion, is 
fairly stated in all material respects in relation to the basic 
financial statements taken as a whole.

C. Access to Accountants' Working Papers

    At its discretion, SBA may assign its examiners or other 
personnel to review the accountant's working papers. The audit 
engagement agreement between the Licensee and the IPA shall provide 
that the accountant's working papers will be made available for 
review upon request of the SBA.

D. Accountants' Responsibility for Valuations

    i. The investment portfolios of virtually all SBICs contain 
nonmarketable securities, the values of which must be estimated in 
the absence of readily ascertainable market values. It is the 
responsibility of the Board of Directors or the General Partner(s) 
to estimate the value of such securities in good faith.
    ii. The IPA does not act as an appraiser for security values 
estimated by the Board of Directors or General Partner(s), and is 
not expected to perform an audit of the portfolio concerns. The 
IPA's review of a Licensee's portfolio valuations shall address the 
following questions:
    (1) Does the Licensee have a written valuation policy which has 
been approved by SBA?
    (2) Do the Licensee's valuations of its portfolio concerns 
reflect consistent adherence to its valuation policy?
    (3) Has the Licensee documented the basis for its valuations, 
and does such documentation indicate that a reasonable analysis of 
available information has been performed?
    iii. Based upon the auditing procedures performed, the IPA shall 
express an opinion as to whether the Licensee's valuation procedures 
are reasonable and the documentation is appropriate.
    iv. SBA requirements concerning portfolio valuations are set 
forth in Appendix II to Part 107. Appendix II contains recommended 
valuation techniques for securities of various types, as well as 
requirements concerning written valuation policy, frequency of 
valuation, and documentation. A Licensee has the option of adopting 
the model valuation policy included in Appendix II or obtaining SBA 
approval of an alternative valuation policy.
    v. In addition to the SBA valuation requirements, IPAs may also 
wish to review SEC Accounting Series Release No. 118 (section 
404.03, ``Codification of Financial Reporting Policies'').
    vi. The IPA shall test a sufficient number of valuations to 
support an opinion. Testing of valuations representing less than 50 
percent of the value of the entire portfolio shall be presumed to be 
insufficient to support an opinion.
    vii. If the audit discloses that the valuation procedures are 
inadequate, unreasonable or inconsistent with the Licensee's 
valuation policy, or that the underlying documentation does not 
adequately support the valuations, the IPA's opinion shall be 
modified to indicate a lack of conformity with generally accepted 
accounting principles. The opinion may be qualified (using the 
phrase ``except for'') or, depending upon the possibility of a 
material misstatement, the accountant may determine that an adverse 
opinion is appropriate.

E. Audit Adjustments

    All audit adjustments shall be entered in the Licensee's records 
before issuance of the Independent Auditors' Report. As a result, 
the financial statements accompanying the report will agree with the 
books as adjusted as of the statement date, giving consideration to 
reclassification of account balances for report purposes. If the 
adjustments are not so recorded on the Licensee's books, a statement 
shall be made by the IPA to this effect.

F. Reporting Irregularities

    i. Reporting Irregularities and Illegal Acts to SBA. An 
independent public accountant that detects irregularities or illegal 
acts individually or collectively material to the financial 
statements, or irregularities or illegal acts relative to SBA 
programs whether or not material, shall advise management in 
writing. Management, in turn, shall immediately advise, in writing, 
the Associate Administrator for Investment, Investment Division, 409 
Third Street, SW, Washington, DC 20416. Management, in advising SBA, 
shall, to the extent practicable, describe the irregularities or 
illegal acts and their effects on the financial statements and SBA 
programs. Auditors shall determine whether management reported the 
irregularities or [[Page 7396]] illegal acts and, if management 
fails to report, the auditor shall report to SBA at the address 
listed above.
    ii. Reporting Internal Control Structure Reportable Conditions. 
Reportable conditions in an SBIC's internal control structure shall 
be reported to SBIC management in writing and SBIC management shall 
immediately transmit this auditor's report to SBA. Reportable 
conditions and the manner of reporting such conditions are addressed 
in AU Section 325, Codification of Statements on Auditing Standards, 
issued by the American Institute of Certified Public Accountants.

G. Detecting Noncompliance With Laws and Regulations

    i. Audits of SBICs are performed in accordance with generally 
accepted auditing standards. These standards require IPAs to design 
audit procedures which will provide reasonable assurance of 
detecting instances of noncompliance with applicable laws and 
regulations that could have a material effect on Licensees' 
financial statements.
    ii. A GAAS audit is neither a substitute for nor a duplication 
of the examination of an SBIC performed by SBA's examiners. The 
purpose of such examinations is to provide a comprehensive 
evaluation of the Licensee's compliance with laws and regulations 
governing the SBIC program. In contrast, IPAs perform audits in 
which compliance issues are viewed in the context of the possible 
effects of noncompliance on the financial statements.
    iii. As part of the audit planning process, all IPAs shall be 
responsible for reviewing and becoming familiar with the laws and 
regulations applicable to SBICs. Auditors must have sufficient 
knowledge of such laws and regulations to be able to design 
appropriate audit procedures for an SBIC, and to recognize instances 
of noncompliance which may become evident in the course of 
performing such procedures. The laws and regulations governing the 
SBIC program include the following:
    1. Small Business Investment Act of 1958, as amended (Act). The 
Act (15 U.S.C. 681 et seq.) provides a statement of the public 
purpose of the SBIC program and establishes the legislative 
framework upon which the regulations are based. Licensees are 
permitted to engage in activities contemplated by the Act, and in no 
other activities. Provisions of the Act governing SBICs are found 
primarily in Title III.
    2. Code of Federal Regulations, title 13, parts 107 and 121 (13 
CFR 107 and 121). Part 107 contains the regulations governing the 
SBIC program, and auditors should become familiar with this part in 
its entirety. Part 121 contains small business size regulations 
which apply to various SBA programs; particular attention should be 
given to the definition of ``Affiliation'' (Sec. 121.401) and the 
SBIC size standard (Sec. 121.802).
    iv. In addition to the Act and regulations themselves, SBA has 
various materials available which may assist auditors in developing 
an overall understanding of the SBIC program. These include basic 
informational brochures about the program; the preambles to final 
rules published in the Federal Register, which provide rationales 
for and interpretations of new regulations; and a regulatory 
compliance checklist for small business financings.
    v. Preparation for an SBIC audit should include a review of 
AICPA Statement on Auditing Standards No. 54 (SAS 54). This 
statement discusses the consideration an auditor should give to the 
possibility of illegal acts by a client in a financial statement 
audit performed in accordance with GAAS. As defined in the 
statement, ``illegal acts'' include violations of laws or government 
regulations.
    vi. In addition to any specific audit procedures deemed 
necessary which may relate to compliance issues, the IPA shall 
obtain representation from the Licensee regarding its lawful 
operation as contemplated by the Act.

V. Accounting Policies and Procedures

A. Generally Accepted Accounting Principles

    i. As a general rule, Licensees shall follow generally accepted 
accounting principles (GAAP) as promulgated by the Financial 
Accounting Standards Board, its predecessors (such as the Accounting 
Principles Board), and the AICPA. Sources of information concerning 
specialized accounting and reporting principles for investment 
companies include the AICPA publication, ``Audits of Investment 
Companies'', as well as this accounting guide. In the event of any 
conflict between this appendix and other sources, this appendix 
shall govern for purposes of financial reporting to SBA.
    ii. Licensees and their IPAs should be aware that some of the 
specialized GAAP promulgated for investment companies is oriented 
towards companies which do not share many of the characteristics of 
SBICs. Appendix A of ``Audits of Investment Companies'' discusses 
some of the distinctive characteristics of venture capital companies 
in general, and of SBICs in particular, relative to other types of 
investment companies. These characteristics may include active 
rather than passive investment, illiquid portfolios with no public 
market, relatively long holding periods for investments, and the 
existence of significant debt in the case of SBICs.
    iii. Appendix A includes the following statement: ``Though all 
venture capital investment companies should prepare their financial 
statements in conformity with generally accepted accounting 
principles and are subject to audit as are other investment 
companies, the statement presentation of some companies may need to 
be tailored to present the information in a manner most meaningful 
to their particular group of investors.'' SBA, as the regulator and 
major creditor of the SBIC industry, has tailored Form 468 to 
provide financial information in a format which will satisfy SBA's 
analytical and regulatory requirements. An IPA should exercise 
professional judgment in determining whether reporting on Form 468 
requires a material departure from GAAP for a particular SBIC. If 
such a departure exists, the Independent Auditors' Report should be 
modified accordingly.

B. Accrual Basis of Accounting

    Books of account shall be maintained on an accrual basis. All 
accruals are to be entered in the records and posted at the end of 
the fiscal year, and as of the closing dates of any other fiscal 
periods to be covered by interim or special financial report to SBA.

C. Reporting Entity

    i. For most SBICs, the reporting entity is the Licensee only. 
Application of this general rule and certain exceptions to it are 
discussed in this paragraph C.
    ii. Investment in Management Services Company. The provisions of 
Sec. 107.501(c) permit a Licensee to organize a wholly-owned 
corporation solely to provide management services. The regulation 
states that reports submitted to SBA shall reflect the consolidated 
results of the Licensee and its subsidiary.
    iii. Investment in Section 301(d) Licensee. Under Sec. 107.712, 
a Section 301(d) Licensee may be licensed to operate as the 
subsidiary of one or more Licensee companies (``Participant 
Licensees''), with or without non-Licensee participation. Each 
Participant Licensee shall own at least twenty percent of the voting 
securities of the Section 301(d) Licensee. Such an investment should 
be reported on the equity method, under the caption ``Investment in 
301(d) Licensee'' on the Statement of Financial Position. SBA 
recognizes that this accounting treatment may constitute a departure 
from GAAP if the Participant Licensee is the majority owner of the 
Section 301(d) Licensee. The independent public accountant may wish 
to express a qualified opinion if the departure is considered 
material.
    iv. Temporary Control. Under certain circumstances, as described 
in Sec. 107.801, a Licensee may temporarily own more than a 50 
percent interest in a small business concern. These investments 
shall be classified in the appropriate category of Loans and 
Investments on the Statement of Financial Position (generally, this 
will be ``Operating Concerns Acquired''), and shall be reported at 
their fair value. This treatment is consistent with FASB Statement 
No. 94, which provides an exception to the general rule of 
consolidating majority-owned subsidiaries when control is likely to 
be temporary.

D. Fair Value of Loans and Investments

    i. In accordance with generally accepted accounting principles 
for investment companies, SBICs shall report Loans and Investments 
(presented on lines 1 through 10 of the Statement of Financial 
Position, page 2 of SBA Form 468) at fair value. To the extent 
possible, fair value shall be represented by quoted market prices 
(appropriately discounted for such factors as restrictions on 
marketability or large holdings relative to daily trading volume). 
In the absence of quoted market prices, fair value shall be an 
estimate determined in good faith by the Board of Directors or 
General Partner(s), based on the application of valuation policies 
which are consistent with SBA guidelines.
    ii. In response to new statutory requirements concerning 
valuations, SBA [[Page 7397]] published regulations which included 
new Sec. 107.101(g) as well as a new Appendix II to Part 107, 
``Valuation Guidelines for SBICs''. These new valuation regulations 
supersede the guidelines previously published in SBA Policy and 
Procedural Release #2006. Licensees may adopt the model valuation 
policy included in Appendix II or submit an alternate policy to SBA 
for approval. In addition to valuation policy, Sec. 107.101(g) and 
Appendix II also set forth requirements concerning frequency of 
valuation, documentation, and responsibility for valuations.
    iii. The following statement is included in Sec. 107.101(g): 
``The boards of directors of corporations and the general partners 
of partnerships shall have sole responsibility for adopting the 
Licensee's valuation policy and, pursuant thereto, for valuing Loans 
and Investments of such Licensee.'' This statement establishes 
responsibility for all valuations assigned to portfolio securities 
by the Licensee. SBA, in its capacity as a regulator, retains the 
same oversight responsibilities over valuations as it does over all 
other issues affecting regulatory compliance.
    iv. Accounting considerations. Licensees shall maintain separate 
general ledger accounts for the original cost of Loans and 
Investments and any valuation adjustments thereto. Valuation 
adjustments shall be in the form of unrealized appreciation or 
depreciation, respectively representing valuations above or below 
cost. The sum of cost and unrealized appreciation or depreciation 
represents fair value.
    v. Unrealized appreciation may be recognized on equity 
investments and debt investments which contain equity features, such 
as options or warrants. Recognition of unrealized appreciation on 
loans is not permitted under SBA's valuation guidelines.
    vi. A general allowance for losses on Loans and Investments is 
not utilized in fair value accounting. Rather, the Licensee's Board 
of Directors or General Partner(s) shall value Loans and Investments 
individually as of the financial statement date. This requirement 
applies equally to Licensees engaged in equity investing and in 
lending. A Licensee which is primarily engaged in lending, however, 
may also identify additional anticipated losses on the basis of its 
portfolio history, industry experience, or other relevant factors; 
such amounts may be reported in the Statement of Financial Position 
of SBA Form 468 as additional unrealized depreciation not associated 
with specific portfolio assets.
    vii. An appropriate tax provision shall be established for net 
unrealized appreciation on securities held by taxable corporate 
Licensees. There may also be circumstances in which a tax benefit 
for net unrealized depreciation should be recognized, depending on 
the likelihood of realization. Such a provision or benefit shall be 
determined in accordance with FASB Statement No. 109, ``Accounting 
for Income Taxes''.

E. Interest Income

    i. Interest income shall be accrued according to the terms of 
interest bearing loans and investments. Premiums or discounts 
associated with debt instruments represent adjustments to interest 
income which shall be amortized over the stated life of the debt 
instrument.
    ii. Collection in Doubt. Interest income shall not be recognized 
if collection is doubtful. Licensees may choose to handle doubtful 
interest receivable in either of two ways: (1) Make no entry to 
accrue interest in the regular general ledger accounts and track 
interest due in a memorandum account; or (2) accrue the interest and 
provide a 100% reserve (debit provision for loss on receivables, 
credit allowance for uncollectible interest receivable). The method 
used by the Licensee must be disclosed in the footnote to the 
financial statements summarizing significant accounting policies.
    iii. Collection of interest is presumed to be in doubt when 
either or both of the following conditions occur: (1) The small 
concern is in bankruptcy, insolvent, or there is substantial doubt 
about its ability to continue as a going concern; or (2) the small 
concern is in default more than 120 days to the Licensee. Licensees 
may rebut this presumption by providing evidence of collectibility 
satisfactory to SBA. Such evidence may include the existence of 
collateral, the value of which has been verified through an 
appraisal by an independent professional appraiser acceptable to 
SBA. Such an appraisal shall be at liquidation value (net of 
liquidation costs) and shall have been performed within the 12 
months immediately preceding the valuation date. In considering 
whether collateral provides an appropriate basis for valuations, SBA 
will consider the nature of a Licensee's claim on the collateral 
(for example, whether other parties have security interests senior 
to the Licensee's, or whether the Licensee's security interest in an 
asset is perfected). SBA will also review the Licensee's operating 
history for evidence concerning its willingness and ability to 
pursue available remedies (including foreclosure) in default 
situations.
    iv. The two conditions cited in the preceding paragraph are not 
the only possible indicators of a collection problem. Even if 
neither condition is present, other circumstances may cause the 
Board of Directors or General Partner(s) to conclude that collection 
is in doubt.
    v. When interest income is not being recorded on a loan or debt 
security, the Licensee shall so note in its Annual Financial Report 
on Form 468. The note should include the date at which interest 
accrual was discontinued. In addition, the total amount of interest 
not accrued because collection is in doubt shall be disclosed in a 
footnote to the financial statements.
    vi. When the accrual of interest is discontinued, the full 
amount of any interest receivable recorded in prior periods must be 
either reversed or fully reserved.

F. Dividend Income

    i. Dividend income from investments in common or preferred stock 
is normally recognized as of the date of record (the date at which 
official ownership of shares is determined for the purpose of paying 
the dividend). Dividend income shall not be accrued in the absence 
of a dividend declaration by the small concern's board of directors. 
This treatment shall apply to all dividends, including dividends on 
redeemable preferred stock or similar securities with some debt-like 
characteristics.
    ii. Any cash distribution which is identified as a return of 
capital shall not be recognized as income. Such distributions are a 
reduction in the cost basis of an investment.
    iii. Stock splits and stock dividends (in stock of the same 
class as that owned) are not income because the Licensee's 
proportional interest in the small business concern does not change 
as a result of such events. The cost of the shares previously held 
should be allocated, on a rational basis, to the number of shares 
held after the split or dividend. Similarly, when stock rights are 
received, a portion of the cost basis of the related investment may 
be allocated to the rights.
    iv. Dividends in kind are recorded as income at the fair value 
of the property received. Such income should be classified as Non-
Cash Gains/Income in the Statement of Financial Position of SBA Form 
468. If the Licensee has a choice between a dividend in cash or in 
kind, and chooses to receive an in-kind dividend, the fair value is 
deemed to be the amount of cash that could have been received.

G. Profit Participation in Small Concerns

    Participation in the profits of a loan- or debt-financed small 
business concern represents additional interest income to the 
Licensee. For regulatory purposes, any profits received must be 
included in the calculation of the Cost of Money.

H. Fees Charged to Small Concerns

    i. Income from nonrefundable fees charged by SBICs in connection 
with the origination of loans shall be deferred and amortized over 
the term of the financing, regardless of whether or not such fees 
are included in the Cost of Money. Licensees should be aware of the 
provisions set forth in Sec. 107.402 (d) through (g) concerning 
permissible fees, prepayment penalties, obligations of SBICs to 
provide certain fee-related information in writing to small 
concerns, and circumstances in which SBICs may be required to refund 
fees paid by small concerns.
    ii. If a Licensee has made a commitment for a financing which 
does not take place, any processing fees which the Licensee is 
permitted to retain pursuant to Sec. 107.402(d) shall be recognized 
as income upon expiration of the commitment.

I. Accounting for Investments in Flow-Through Entities

    i. On SBA Form 468, in the Statement of Operations Realized, 
Licensees are asked to report income (loss) from investments in 
partnerships or other types of flow-through entities. This category 
of investments is intended to include any entity which allocates its 
income and losses to its equity holders and is not taxed at the 
entity level. Any such investments made by SBICs would most commonly 
be in limited partnerships.
    ii. For investments of this type, original cost is adjusted at 
the end of each accounting [[Page 7398]] period to recognize the 
investor's share of earnings or losses of the investee. The amount 
of the adjustment is included in the net income of the investor. 
Distributions received from an investee reduce the carrying amount 
of the investment.
    iii. It should be noted that the steps in the preceding 
paragraph determine only the cost basis of investments. Any 
investment included in an SBIC's portfolio of Loans and Investments 
still must be valued by the Board of Directors or General Partner(s) 
and presented at fair value in the Licensee's financial statements.
    iv. Any income from investment in flow-through entities must be 
included initially in Non-cash Gains/Income, as discussed in 
paragraph X of this section V. When a Licensee actually receives a 
distribution from the investee, the amount received should be 
reclassified from Non-cash Gains/Income to Undistributed Net 
Realized Earnings.

J. Equity Method of Accounting

    i. The only type of investment which shall be accounted for 
under the equity method is an investment in the common stock of a 
Section 301(d) Licensee, as permitted under Sec. 107.712. Since a 
Licensee investing in a Section 301(d) Licensee is required to have 
an ownership interest of at least 20 percent, use of the equity 
method will normally be appropriate. Under the equity method, 
original cost is adjusted at the end of each accounting period to 
recognize the investor's share of earnings or losses of the 
investee. The amount of the adjustment is included in the net income 
of the investor. Dividends or distributions received from an 
investee reduce the carrying amount of the investment.
    ii. Licensee should not use the equity method to account for 
investments in the common stock of small business concerns, even if 
a Licensee's ownership interest exceeds 20 percent. SBICs, whether 
or not registered under the Investment Company Act of 1940, are 
exempt from the usual requirements concerning use of the equity 
method because they account for investments at fair value (see APB 
Opinion No. 18, ``The Equity Method of Accounting for Investments in 
Common Stock'', paragraph 2).

K. Accounting for Income Taxes

    i. In February 1992, the FASB issued Statement No. 109, 
``Accounting for Income Taxes''. The Statement is effective for 
fiscal years beginning after December 15, 1992. Statement No. 109 
supersedes FASB Statement No. 96, as well as APB Opinion No. 11, 
which many companies continued to follow during the period when 
adoption of Statement No. 96 was optional.
    ii. Statement No. 109 establishes the following basic principles 
to be applied in accounting for income taxes at the date of 
financial statements:
    (1) A current tax liability or asset is recognized for the 
estimated taxes payable or refundable on tax returns for the current 
period.
    (2) A deferred tax liability is recognized for the estimated 
future tax effects of ``taxable temporary differences'' (events 
which will result in future taxes payable).
    (3) A deferred tax asset is recognized for the estimated future 
tax effects of ``deductible temporary differences'' (events which 
will result in future tax savings), operating loss carryforwards, 
and tax credit carryforwards.
    (4) A valuation allowance is recognized to reduce the deferred 
tax asset to the extent that the tax benefits are not expected to be 
realized.
    (5) Both current and deferred tax liabilities and assets are 
based on provisions of the enacted tax law; the effects of future 
changes in tax laws or rates are not anticipated.
    iii. The ability to recognize deferred tax assets under certain 
circumstances represents a significant change from earlier 
pronouncements. Licensees which recognize deferred tax assets should 
take careful note of the requirements of Statement No. 109 in 
determining whether it is ``more likely than not'' that such assets 
will be realized. Generally, application of the ``more likely than 
not'' standard means that when ``negative evidence'' exists which 
suggests that benefits will not be realized, there must be 
sufficient ``positive evidence'' to outweigh it; otherwise, a 
valuation allowance is required.
    iv. Because SBICs must report their Loans and Investments at 
value, many Licensees will find it necessary to apply the criteria 
of Statement No. 109 in determining whether to recognize deferred 
tax liabilities or assets reflecting the estimated future tax 
effects of unrealized gains or losses. Both unrealized gains and 
unrealized losses are temporary differences as defined in the 
statement. Previously, SBA required Licensees with net unrealized 
appreciation to record a provision for estimated future taxes, but 
did not permit Licensees with net unrealized depreciation to record 
a corresponding benefit. In accordance with current GAAP, such a 
benefit may now be recorded.
    v. The reporting of unrealized gains and losses and the related 
tax effects must be consistent. Since SBIC program accounting 
guidelines require that changes in unrealized appreciation or 
depreciation be excluded from net income (that is, they do not 
appear in the statement of operations realized), it follows that the 
related tax effects must be similarly excluded. Both elements, 
however, are included in ``comprehensive income'' (that is, they 
affect the equity of Licensees). This is reflected in the 
presentation of net unrealized appreciation or depreciation, net of 
estimated future tax effects, as Unrealized Gain (Loss) on 
Securities Held in the Capital section of the Statement of Financial 
Position.

L. Realized Gain (Loss) on Investments

    i. Realized gain or loss on investment shall be recorded by 
Licensees in accordance with generally accepted accounting 
principles.
    ii. Capital gains realized on the sale of securities shall be 
recognized provided that collection of proceeds is reasonably 
assured and the earnings process is complete. For the earnings 
process to be considered complete, the Licensee must have no further 
obligation related to the transaction. Any transaction with recourse 
upon the Licensee or involving any understanding, agreement, option, 
privilege, or other rights to repurchase by and/or resell to the 
Licensee shall not be considered as a final transaction. 
Transactions which do not meet the criteria in this paragraph L for 
current recognition of gains shall be accounted for using an 
appropriate alternate method, such as the installment method or the 
cost recovery method. Under the installment method, a portion of the 
gain is recognized with each installment payment received; under the 
cost recovery method, no gain is recognized until the full amount of 
the seller's cost has been collected.
    iii. Capital losses may arise not only from sales, but also from 
write-offs or charge-offs of securities held (the two terms are 
generally used synonymously in this appendix; in contrast, the term 
``write-down'' refers to the recording of unrealized depreciation). 
Write-offs may be either full or partial. Writing off an investment, 
in comparison with recording unrealized depreciation, represents a 
stronger judgment concerning loss of value. However, it is not 
necessary to have a definitive event (such as bankruptcy of the 
small business concern) in order to write off an investment. 
Generally accepted accounting principles call for the recognition of 
loss when it becomes evident that previously recognized future 
economic benefits of an asset have been reduced or eliminated.
    iv. A Licensee may also realize capital gains or losses in 
connection with the exchange or non-reciprocal transfer of 
securities. The treatment of such transactions is governed by APB 
Opinion No. 29, ``Accounting for Nonmonetary Transactions'', and is 
discussed in paragraph M of this section V.
    v. If a Licensee acquires shares of an investee's stock (of the 
same class) at different times and prices, SBA requires that the 
average cost method be used to determine the cost of such securities 
when sold.
    vi. When a gain or loss is realized, whether as a result of the 
sale, other disposal or write-off of an asset, any previously 
recorded unrealized appreciation or depreciation associated with the 
asset shall be reversed.
    vii. Non-cash Gains. When a Licensee realizes capital gains, but 
does not receive cash at the time of the transaction, SBA requires 
Licensees to segregate such ``Non-cash Gains'' from other components 
of Undistributed Realized Earnings, until such time as any non-cash 
assets received are converted to cash. Non-cash Gains are realized 
earnings which have been recognized in the Licensee's Statement of 
Operations. They are segregated in the Statement of Financial 
Position only because they are subject to certain restrictions under 
SBA regulations, primarily concerning distributions. In effect, Non-
cash Gains can be considered a type of restricted retained earnings. 
For further information on Non-cash Gains, see ``Undistributed 
Realized Earnings'' in paragraph X of this section V.

M. Nonmonetary Transactions

    i. Licensees should follow APB Opinion No. 29 to the extent 
applicable when accounting for nonmonetary transactions. Such 
transactions include both reciprocal and non-reciprocal transfers of 
nonmonetary assets or liabilities between the Licensee and 
[[Page 7399]] another entity or person, or between the Licensee and 
its stockholders or partners. The cost of an asset acquired in a 
nonmonetary transaction is the fair value of the asset relinquished 
to obtain it, and a gain or loss should be recognized on the 
exchange. Any gain recognized shall be reported on SBA Form 468 as a 
Non-cash Gain.
    ii. Nonmonetary transactions in which the Licensee exchanges 
certain securities or assets for other securities or assets will 
result in the realization of gain or loss for financial reporting 
purposes, regardless of whether such transactions are taxable or 
non-taxable exchanges.
    iii. Fair value of a nonmonetary asset transferred to or from a 
Licensee should be determined by referring to estimated realizable 
values in cash transactions of the same or similar quoted market 
prices, independent appraisals, estimated fair values of assets, or 
other available evidence.
    iv. In cases where the values are not clearly determinable, 
assets received will have the same accounting basis as the assets 
transferred.
    v. Dividends In Kind and Spin-offs. Dividends or other 
distributions in kind, consisting of shares of a small business 
concern or other securities, are nonreciprocal transfers of non-
monetary assets from a Licensee to its owners. Such transfers shall 
be reported at the fair value of the assets distributed.

N. Interest, Notes and Accounts Receivable

    i. Interest Receivable. In reporting interest receivable, 
Licensees should make certain that amounts are properly classified 
between current and noncurrent assets. Current assets are those 
providing benefits which are expected to be realized within the next 
fiscal year.
    ii. Interest receivable is reported net of an allowance for 
uncollectible amounts, which represents a conservative estimate of 
probable losses. The allowance shall be adjusted, at a minimum, as 
of the end of the fiscal year. Interim adjustment to reflect changes 
in the status of receivables is strongly encouraged. See paragraph E 
(``Interest Income'') of this section V for guidelines to be used by 
SBICs in evaluating the collectibility of interest income.
    iii. Expense is recognized whenever the allowance for 
uncollectible amounts is adjusted to reflect a change in the 
valuation of interest receivable. An actual write-off of interest 
receivable is normally recorded as a reduction of the receivable and 
a corresponding reduction of the allowance, and does not result in 
the recognition of expense.
    iv. The total expense recognized during a fiscal year with 
respect to uncollectible interest receivable appears on Form 468 in 
the Statement of Operations Realized, under the caption, ``Provision 
for Losses on Accounts Receivable.''
    v. Requirements concerning the recording of interest receivable 
and the related interest income appear in this appendix under the 
heading, ``Interest Income.''
    vi. Notes and Accounts Receivable. The accounting treatment of 
notes receivable and accounts receivable shall be governed by the 
same rules which apply to interest receivable, as previously 
described in this paragraph N.
    vii. Notes Receivable represents the unpaid balance of 
miscellaneous notes which do not fit into any category of Loans and 
Investments. It does not include notes representing amounts due from 
purchasers of assets acquired in liquidation of portfolio 
securities, which are presented separately in the Loans and 
Investments section of the Statement of Financial Position on Form 
468.
    viii. Accounts Receivable represents amounts due on account, 
such as for management consulting, appraisal, or other services 
rendered. Accounts Receivable also includes accrued fees for 
services rendered in connection with participations or joint 
financings and accrued fees receivable from small concerns.

O. Compensating Balances

    i. In those instances where idle funds are encumbered or are 
required to be maintained at a financial institution as compensating 
balances in connection with debt of the SBIC, the nature of the 
encumbrance and the terms of any applicable agreements shall be 
disclosed in a footnote to the financial statements.
    ii. Depending upon the specific terms, it may be necessary to 
classify idle funds subject to a compensating balance agreement as 
non-current assets.

P. Organization Costs

    i. Organization costs are incurred in the formation of an SBIC 
and may include such items as legal fees, incorporation and various 
other fees imposed by states, and promotional expenditures. SBICs 
should amortize organization costs over a term of not more than five 
years.
    ii. If an SBIC incurs organization costs which are deemed by SBA 
to be unreasonable or excessive, such costs must be excluded from 
Regulatory Capital as long as they are carried as an asset by the 
SBIC. Once such costs have been amortized to expense, the regulatory 
deduction is no longer required. No deduction is ever required for 
organization costs accepted by SBA as reasonable.
    iii. Operating losses incurred by a company prior to licensing 
as an SBIC are not considered organization costs and shall not be 
capitalized.

Q. Contingent Liabilities

    i. Licensees shall accrue or disclose contingent liabilities, as 
appropriate, in accordance with the requirements of FASB Statement 
No. 5. Such requirements vary depending upon whether the likelihood 
of realizing a loss is evaluated as ``probable'', ``reasonably 
possible'', or ``remote''. Contingent liabilities may arise from 
such transactions or events as the issuance of guarantees, pending 
litigation, and the sale of portfolio interests with recourse.
    ii. In addition to the reporting requirements of FASB Statement 
No. 5, Licensees and their IPAs should be familiar with SBA's 
requirements for reporting of certain contingencies. These 
additional requirements include the completion of the Schedule of 
Guarantees (include in SBA Form 468) by Licensees which have 
guaranteed the obligations of small concerns and the filing of a 
litigation report by Licensees which become a party to litigation 
(see Sec. 107.1002(f)).
    iii. A Licensee which has sold portfolio securities (or any 
interest therein) on a recourse basis should be aware that any 
amounts for which it may be contingently liable must be treated as 
investments in small concerns for overline purposes (see 
Secs. 107.707(b) and 107.303).

R. Transactions with Related Parties

    i. Licensees shall disclose material transactions with related 
parties in accordance with FASB Statement No. 57. In applying the 
requirements of this pronouncement to SBIC financial statements, a 
Licensee shall consider the term ``related party'' to encompass any 
person or entity which is an Associate as defined in Sec. 107.3. 
Footnote disclosures of related party transactions shall include the 
name of the related party as well as the nature of the relationship.
    ii. Licensees and their IPAs should be aware that certain 
transactions involving Associates are either prohibited by SBA 
regulations or permitted only with SBA's prior written approval. See 
Sec. 107.903 (``Conflicts of Interest'').

S. Leverage--Debentures Guaranteed or Purchased by SBA

    i. SBICs which qualify on the basis of financial soundness and 
regulatory compliance are eligible to receive long-term leverage in 
the form of five-year or ten-year debentures guaranteed (or, in some 
cases, purchased directly) by SBA. Debentures with an interest rate 
subsidy of three percentage points for the first five years of their 
term are available to Section 301(d) Licensees only.
    ii. Debentures, net of current maturities, shall be classified 
in the financial statements as long-term debt, and shall be shown at 
face value in the Statement of Financial Position of Form 468.
    iii. Licensees issuing debentures pay a user fee (currently 2 
percent of the amount borrowed) and an underwriter's fee (currently 
.625 percent). These fees shall be capitalized and amortized over 
the life of the debenture. Generally accepted accounting principles 
normally require that debt be reported net of the unamortized 
portion of related fees; Licensees, however, should report the 
unamortized fees as an asset and the debentures at their gross 
amount. SBA does not believe that this treatment will constitute a 
material departure from GAAP for most Licensees.
    iv. Debentures are subject to the terms and conditions set forth 
in SBA regulations. In most respects, debentures incorporate by 
reference the regulations as amended from time to time. With respect 
to events of default, however, debentures incorporate those events 
and associated remedies in existence at the date of issue. Thus, 
debentures issued at different times may be subject to different 
default provisions. Events of default include both financial and 
regulatory conditions, which may result in [[Page 7400]] the entire 
indebtedness of the Licensee being declared due and payable.
    v. If SBA decides to demand payment in accordance with the 
acceleration provisions of the debentures, such demand ordinarily 
will be presented in a letter specifying the violations that have 
occurred.

T. Leverage--Participating Securities Guaranteed by SBA

    i. Participating Securities are redeemable preferred equity-type 
securities. Issuers are required to make equity investments in an 
amount at least equal to the amount of Participating Securities 
issued (see the defined term ``Equity Capital Investments'' in 
Sec. 107.3 for the specific categories of investments permitted). 
The structure, terms and conditions of the Participating Security 
are set forth in detail in Secs. 107.240 through 107.247.
    ii. The Act authorizes SBA to guarantee Participating Securities 
issued in the form of limited partnership interests, preferred 
stock, or debentures with interest payable only to the extent of 
earnings. Currently, the only form of Participating Security for 
which documentation has been created is a limited partnership 
interest to be held by SBA. Other forms will be made available in 
the future as required to meet the needs of Licensees.
    iii. The Participating Security has the following significant 
features:
    (1) Licensees issue Participating Securities to SBA, which in 
turn assigns certain of its interests in such securities to a pool. 
Investors (known as ``certificate holders'') then purchase interests 
in the pool through a public offering. Each Licensee issuing 
Participating Securities pays a cumulative preferred return 
(``Prioritized Payments'') which is passed through to the 
certificate holders, but such payments are contingent upon the 
profitability of the issuer. Any Prioritized Payments which exceed 
the cumulative earnings of a Licensee will be paid to the 
certificate holders by SBA as guarantor. The Licensee, however, will 
be ineligible to make any other profit distributions until it has 
paid all of its Prioritized Payments (including reimbursement of 
amounts previously advanced on its behalf by SBA).
    (2) In consideration for SBA's guarantee, profitable Licensees 
must pay a percentage of earnings to SBA as ``Profit 
Participation''. SBA's profit percentage (the ``Profit Participation 
Rate'') depends upon the Licensee's ratio of Participating 
Securities issued to Leverageable Capital, as well as the interest 
rate on 10-year Treasury securities at the time each Participating 
Security was issued.
    (3) Except for Prioritized Payments, SBA (the ``Preferred 
Limited Partner'') and the Licensee's private limited partners 
receive distributions at the same time, allocated in accordance with 
legislative formulas.
    (4) The securities have a 10-year term, at the end of which 
redemption is mandatory. It is expected, however, that most 
Participating Securities will be redeemed, at least in part, before 
the mandatory redemption date.
    iv. Participating Securities will be reported in a ``Redeemable 
Securities'' section of the Statement of Financial Position on SBA 
Form 468. The amount of Participating Securities issued represents 
the capital contribution of SBA, the Preferred Limited Partner. 
SBA's capital account will increase by the amount of any Prioritized 
Payments or Profit Participation which the License becomes obligated 
to pay on the basis of profits earned, and will decrease as 
distributions are actually received. Distributions to SBA will be 
applied as Prioritized Payments, Profit Participation, or 
redemptions of outstanding leverage in accordance with Secs. 107.243 
through 107.245.
    v. In a footnote to the financial statements, the Licensee shall 
provide a description of the terms of the Participating Securities 
issued, including disclosure of the mandatory redemption date. If 
there are any ``accumulated'' Prioritized Payments (representing a 
contingency for amounts paid to certificate holders by SBA on the 
Licensee's behalf, which the Licensee must repay as profits are 
realized), a footnote shall provide the dollar amount of the 
accumulation for the current fiscal year period and the aggregate 
amount accumulated.
    vi. For companies licensed after March 31, 1993, the obligation 
to pay Prioritized Payments and Profit Participation is conditioned 
upon the profitability of the Licensee as a whole. Those licensed 
earlier, however, may be permitted to exclude profits attributable 
to portfolio assets in existence as of March 31, 1993.
    vii. Because of the complexity of the required profit and 
distribution computations, all Licensees issuing Participating 
Securities shall use SBA-provided software to perform such 
computations.

U. Preferred Securities Leverage for Section 301(d) Licensees

    i. Four Percent Preferred Securities. Section 301(d) Licensees 
which qualify on the basis of financial soundness and regulatory 
compliance are eligible to receive long-term leverage by selling 4% 
redeemable preferred securities (either preferred stock or a 
preferred limited partnership interest) directly to SBA. Such 
securities must be redeemed not later than 15 years from the date of 
issuance, at which time any unpaid portion of the preferred and 
cumulative 4% return due to SBA must also be paid. No distributions 
may be made to any investor other than SBA unless the Licensee is 
current on all amounts due SBA.
    ii. Like Participating Securities, 4% preferred securities will 
be reported in the ``Redeemable Securities'' section of the 
Statement of Financial Position on SBA Form 468. Unlike 
Participating Securities, however, which specifically provide for 
the extinguishment of any obligation to pay Prioritized Payments in 
excess of the issuer's profits, the legislation which authorized 4% 
preferred securities does not set forth any circumstances in which 
the 4% return would be extinguished.
    iii. The initial carrying amount of 4% preferred securities 
shall be the purchase price paid by SBA at the date of issue (for 4% 
preferred stock issued by corporate Licensees, this amount must be 
equal to the par value). At the end of each accounting period, the 
carrying amount shall be increased by the amount of any 4% returns 
not currently paid or declared. A breakdown of the total carrying 
amount, showing separately the purchase price of 4% preferred 
securities and the accrued 4% returns in arrears, is reported on the 
Statement of Financial Position.
    iv. Cumulative 4% returns in arrears must be recorded as a 
charge against Undistributed Net Realized Earnings. For some Section 
301(d) Licensees, these amounts may exceed Undistributed Net 
Realized Earnings. Ordinarily, a company in these circumstances 
would reduce paid-in capital or partners' contributed capital by the 
amount of the excess. Because such treatment would reduce Regulatory 
Capital, however, it could result in certain unintended regulatory 
compliance problems for Licensees (such as overline violations). 
Therefore, on SBA Form 468, Licensees shall report all 4% returns in 
arrears as a reduction of Undistributed Net Realized Earnings, even 
though this treatment may result in a deficit, and shall not reduce 
paid-in capital or partners' contributed capital.
    v. Because Section 301(d) Licensees must charge the 4% return to 
Undistributed Net Realized Earnings whether it is paid or not, any 
unpaid amounts must be added back in order to determine a Licensee's 
Retained Earnings Available for Distribution. Unpaid 4% returns must 
be paid in full from Retained Earnings Available for Distribution 
before any other distributions can be made.
    vi. In a footnote to the financial statements, the Licensee must 
provide a description of the terms of the preferred securities 
issue, including disclosure of the mandatory redemption date. If 
there are 4% returns in arrears, a footnote shall provide the dollar 
amount of the arrearage for the current fiscal period, the aggregate 
amount in arrears, and the number of periods in arrears.
    vii. Three Percent Preferred Stock. Before November 21, 1989, 
corporate Section 301(d) Licensees were eligible to receive long-
term leverage by issuing 3% cumulative preferred stock to SBA at par 
value. Three percent preferred stock has no mandatory redemption 
date and is classified as equity for financial reporting purposes. 
However, it shall not be treated as Regulatory or Leverageable 
Capital for any purpose.
    viii. No dividends may be paid to any investor other than SBA 
unless the Licensee is current on all 3% preferred dividends due 
SBA.
    ix. Three Percent Preferred Stock Repurchase Program. SBA 
published in the Federal Register a notice announcing the 
implementation of a program under which Section 301(d) Licensees may 
apply to repurchase their outstanding 3% preferred stock from SBA at 
a set price of 35 percent of par value. Specific guidelines 
governing repurchase transactions are set forth in SBA Policy and 
Procedural Release #2021, issued June 14, 1994. Licensees will have 
three years from the date of the Policy and Procedural Release 
during which to apply for and complete the Repurchase Program.
    x. Participants in the Repurchase Program will receive detailed 
accounting guidance [[Page 7401]] from SBA at the time their 
repurchases are completed. In general, when a company repurchases 
its own stock at a discount (that is, for less than the original 
issue price), it records an increase in paid-in surplus equal to the 
discount. Section 301(d) Licensees will follow this general rule, 
but the increase in surplus attributable to the repurchase must be 
separately identified (as ``Restricted Contributed Capital 
Surplus'') on SBA Form 468 because it is subject to certain 
restrictions for regulatory purposes.

V. Contributed Capital and Committed Capital

    i. In general, ``contributed capital'' refers to funds 
contributed to a Licensee by private investors (although such funds 
may also include ``qualified nonprivate funds'' from State and local 
government sources, in accordance with the definition of Private 
Capital in Sec. 107.3). Although some Licensees may obtain financial 
assistance through the issuance of equity-type securities purchased 
or guaranteed by SBA, such securities are reported on Form 468 as 
SBA leverage rather than as contributed capital. The contributed 
capital of a corporate Licensee consists of the par value of its 
capital stock (which may consist of one or more classes or stock) 
and its aggregate paid-in surplus, excluding Restricted Contributed 
Capital Surplus obtained through the repurchase of 3 percent 
preferred stock from SBA. For a partnership Licensee, contributed 
capital consists of proceeds from the sale of partnership interests 
to the general partners and the limited partners (other than SBA). 
For all Licensees, contributed capital shall be recorded net of 
expenses incurred to obtain the capital.
    ii. Capital contributed to a Licensee in the form of non-cash 
assets requires the prior approval of SBA, unless such assets are 
physical assets to be currently employed by the Licensee in its 
operations (see Sec. 107.705). Equity securities issued in exchange 
for approved non-cash assets will be excluded from a Licensee's 
Regulatory Capital until the assets received are converted to cash.
    iii. Commitments from Investors. In addition to its contributed 
capital, a Licensee may have outstanding commitments from 
individuals or entities to invest additional funds in the Licensee 
at a future date. Binding commitments from Institutional Investors 
(as defined in Sec. 107.3) may be included in the Licensee's 
Regulatory Capital; the principal effects of such inclusion are to 
increase the Licensee's overline limitation (See Sec. 107.303) and 
to increase the capital base used in the computation of Capital 
Impairment (see Sec. 107.210(h)).
    iv. Unfunded commitments from investors shall not be reported as 
part of the contributed capital of the Licensee on SBA Form 468. The 
amount of such commitments shall be disclosed in a footnote to the 
financial statements, which shall separately identify commitments 
included in Regulatory Capital and any other commitments 
outstanding. Any significant terms and conditions associated with 
investor commitments, including the timing of anticipated drawdowns 
if known, shall also be disclosed.

W. Unrealized Gain (Loss) on Securities Held

    i. Unrealized Gain (Loss) on Securities Held results from the 
valuation of Loans and Investments by the Board of Directors or 
General Partner(s). Unrealized appreciation is recognized for 
valuations above cost and unrealized depreciation is recognized for 
valuations below cost. Unrealized gain or loss is the aggregate 
amount obtained by summing the unrealized appreciation or 
depreciation of all Loans and Investments, net of any estimated 
future income tax effects.
    ii. Unlike some other types of investment companies, such as 
mutual funds, SBICs do not report changes in net unrealized 
appreciation or depreciation in the Statement of Operations. 
Instead, such changes are recorded directly in the capital account, 
Unrealized Gain (Loss) on Securities Held. SBA requires this 
treatment for two reasons: (1) because most securities held by SBICs 
have no readily ascertainable market values and valuation of such 
securities is highly subjective, SBA prefers that reported net 
income not be influenced by changes in valuation; and (2) 
segregation of unrealized gains and losses on the Statement of 
Financial Position makes it easier to perform certain computations 
required by SBA regulations.

X. Undistributed Realized Earnings

    i. Undistributed Realized Earnings is the defined term used in 
SBA regulations to represent the earned capital of a Licensee. In 
general, Undistributed Realized Earnings are the cumulative balance 
of periodic net investment income (loss) and realized gain (loss) on 
investments, less dividends or distributions (at times, an SBIC may 
need to make an adjustment which is not reflected in this general 
formula). To accommodate regulatory requirements, two components of 
Undistributed Realized Earnings are presented separately in the 
financial statements:
    ii. Non-cash Gains/Income consists of (1) gains on the 
disposition of securities realized in the form of notes, securities 
or any other non-cash assets; (2) income from investments in pass-
through entities (such as limited partnerships) which has not been 
distributed to the Licensee; (3) dividends received in kind; (4) 
interest income accrued on deferred interest notes, zero coupon 
bonds or similar instruments; and (5) delinquent accrued interest 
converted into a new note or added to the principal of an existing 
note (the amount of such interest which is included in Undistributed 
Net Realized Earnings must be reclassified to Non-cash Gains/
Income).
    iii. Non-cash Gains/Income represents realized earnings of an 
SBIC which have been recognized in the Statement of Operations. Such 
earnings are segregated in the Statement of Financial Position only 
because they are subject to certain restrictions under SBA 
regulations, primarily concerning distributions. In effect, Non-cash 
Gains/Income can be considered a type of restricted retained 
earnings.
    iv. Classification of capital gains or other income as non-cash 
items is intended to be temporary. As a Licensee receives payments 
on a note, receives distributions from a partnership in which it has 
invested, sells shares of stock received as a dividend or otherwise 
converts non-cash assets to cash, amounts initially reported as Non-
cash Gains/Income shall be transferred to Undistributed Net Realized 
Earnings.
    v. Undistributed Net Realized Earnings is a residual, computed 
by subtracting the balance in Non-cash Gains/Income from 
Undistributed Realized Earnings. If an SBIC holds treasury stock, 
Undistributed Net Realized Earnings are restricted (i.e., not 
available for distribution) to the extent of the cost of such 
treasury stock.

Y. Retained Earnings Available for Distribution

    i. Retained Earnings Available for Distribution represents, in 
most cases, the maximum amount that an SBIC may distribute to 
investors. For SBICs which have received financial assistance from 
SBA in a form other than debentures, the term ``investors'' 
encompasses SBA as well as private investors.
    ii. In some instances, SBA is entitled to receive payments from 
Retained Earnings Available for Distribution on a priority basis, 
and must receive these payments before any amounts may be 
distributed to investors or transferred to private capital. 
Dividends (or equivalent distributions) on 4% preferred securities 
issued by Section 301(d) Licensees are examples of such payments. In 
other cases, SBA may be entitled to receive payments from Retained 
Earnings Available for Distribution in proportion to any 
distributions received by private investors. Profit participations 
on Participating Securities are an example of this type of payment.
    iii. For most Licensees, Retained Earnings Available for 
Distribution is computed by subtracting unrealized depreciation on 
Loans and Investments from Undistributed Net Realized Earnings 
(excluding any restricted amounts). Unrealized depreciation and 
unrealized appreciation are not netted in this computation.
    iv. For Section 301(d) Licensees which have issued 4% preferred 
securities, there is one additional element in the computation. 
Because 4% distributions in arrears are accrued and charged against 
Undistributed Net Realized Earnings, they must be added back to 
determine Retained Earnings Available for Distribution.
    v. Although partnerships do not ordinarily report retained 
earnings as such, partnership SBICs must compute Retained Earnings 
Available for Distribution in the same manner as corporate SBICs. 
Further discussion of the equity classifications used by partnership 
SBICs in financial reporting to SBA appears in paragraph Z 
(``Partnership Capital Accounts'') of this section V.
    vi. If a Licensee has negative Retained Earnings Available for 
Distribution as of the end of a fiscal period, and has made or 
declared a distribution during such period, the distribution may 
have violated SBA regulations. It is the Licensee's responsibility 
to show, to the satisfaction of SBA, that it had sufficient Retained 
Earnings Available for Distribution at the time the distribution was 
made. In particular, a Licensee should [[Page 7402]] consider the 
adequacy of its unrealized depreciation before making a 
distribution.
    vii. Capitalization of Retained Earnings Available for 
Distribution. Ordinarily, contributed capital and earned capital are 
maintained and reported separately. In the SBIC program, however, a 
Licensee which has attained positive Retained Earnings Available for 
Distribution has the option of ``capitalizing'' such earnings by 
permanently reclassifying them as contributed capital. As a result 
of the reclassification, Undistributed Net Realized Earnings are 
reduced, while paid-in capital is increased; the net effect is the 
same as if the Licensee had made a distribution to its owners, who 
then reinvested the same amount in the Licensee. From a regulatory 
perspective, this action results in an increase in the Licensee's 
Leverageable Capital, thus increasing its eligibility for SBA 
leverage. Capitalization of Retained Earnings Available for 
Distribution reflects the intent of a Licensee to pursue long-term 
growth by reinvesting its earnings in small businesses.
    viii. 1940 Act Companies. A Licensee which has registered under 
the Investment Company Act of 1940 may elect to be taxed as a 
regulated investment company under the Internal Revenue Code 
(Secs. 851 through 855). In general, such a company can avoid 
taxation at the corporate level if it distributes at least 90 
percent of its investment company taxable income for a given year.
    ix. Licensees which are (or contemplate becoming) 1940 Act 
companies should be aware that the distribution requirements imposed 
on such companies by the Internal Revenue Code may, under certain 
circumstances, conflict with SBA regulations concerning 
distributions to shareholders. SBA regulations allow profit 
distributions to be made only from Retained Earnings Available for 
Distribution. Any distribution which would exceed Retained Earnings 
Available for Distribution requires the prior written approval of 
SBA.

Z. Partnership Capital Accounts

    i. To provide the information necessary to determine compliance 
with various SBA regulations, Licensees which organize as limited 
partnerships must divide partners' capital into specified 
categories. The categories are (1) Partners' Contributed Capital, 
(2) Unrealized Gain (Loss) on Securities Held, (3) Non-Cash Gains/
Income, and (4) Undistributed Net Realized Earnings (Partners' 
Earned Capital). The sum of these four accounts is the equivalent of 
the total partners' capital of a non-SBIC partnership. The Licensee 
must also record the general and limited partners' shares of each 
capital account, which results in eight separate control accounts 
for partners' capital.
    ii. Partners' Permanent Capital Contribution. This balance 
represents proceeds from the sale of partnership units and any other 
partners' contributions of cash or other consideration to the 
partnership, less any returns of capital or other deductions.
    iii. Undistributed Net Realized Earnings and Non-Cash Gains/
Income. The sum of these two accounts represents the total 
undistributed earned capital of the Licensee. Separate totals must 
be maintained because SBA rules and regulations do not permit Non-
cash Gains/Income to be distributed until they have been converted 
to cash. Both of these terms are explained in detail in paragraph X 
of this section V.
    iv. Unrealized Gain (Loss) on Securities Held. This component of 
partnership capital results from the valuation of Loans and 
Investments by the Board of Directors or General Partner(s). 
Unrealized appreciation is recognized for valuations above cost and 
unrealized depreciation is recognized for valuations below cost. 
Unrealized gain or loss is the sum of the unrealized appreciation or 
depreciation of all Loans and Investments. Estimated future tax 
effects associated with unrealized appreciation or depreciation are 
not taken into account because partnerships are not taxed at the 
entity level. For further information, see paragraph W of this 
section V.

VI. Availability of Publications and Forms

    i. This section contains information about where to obtain 
various publications and forms cited in this appendix I.
    ii. The following forms may be obtained from the Investment 
Division of SBA, 409 Third Street, SW., suite 6300, Washington, DC 
20416: Form 468 (Annual Financial Report), Form 1031 (Portfolio 
Financing Report), and CO Form 112 (IPA Certification). Forms 468 
and 1031 are provided to all Licensees in the form of electronic 
reporting software. SBA Policy and Procedural Releases #2001 through 
2021 may also be obtained from the Investment Division.
    iii. Pronouncements of the Financial Accounting Standards Board 
(FASB) and its predecessor, the Accounting Principles Board (APB) 
may be purchased from the Order Department, FASB, 401 Merritt 7, 
P.O. Box 5116, Norwalk, CT 06856-5116.
    iv. Publications of the American Institute of Certified Public 
Accountants (AICPA) may be purchased from the Order Department, 
AICPA, Harborside Financial Center, 201 Plaza III, Jersey City, NJ 
07311-3881.

    3. Appendix II, Chart of accounts for SBICs, is removed and 
Appendix III, Valuation Guidelines for SBICs, is redesignated as 
Appendix II.

    Dated: December 7, 1994.
Philip Lader,
Administrator.
[FR Doc. 95-2937 Filed 2-6-95; 8:45 am]
BILLING CODE 8025-01-M