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Fund accounting specifics - Coggle Diagram
Fund accounting specifics
Mutual funds
Tend to have a significant number of transactions daily on the investor's side and the investment side
All of the expenses running the fund are deducted from the total assets of the fund
Individual investors of the fund are entitled to their share of the net assets of the fund depending on what percentage of total capital they have contributed through their investment
The investors can receive regular returns through dividends paid out of any excess distributable profits or opt to reinvest any proposed dividends back into the fund
From a taxation perspective, the fund accountant is only concerned with calculating any applicable corporation tax, individual tax liabilities on returns paid out to investors are the responsibility of the investors
The accountant will calculate NAV per share of the fund, often on a daily basis
The NAV per share is relied upon by directors and shareholders to assess how the fund has been performing, comparing this figure over time
Potential investors will this as an indicator of how one fund is performing against another, which is key when making the decision over which fund offers the best value
We would expect to see in the balance sheet
investments (recorded at purchase cost initially and then valuation); cash;
debtors;
dividends receivable;
accrued management and advisory fees due;
other payables;
dividends and distributions due;
investor deposits (under capital contributions).
In the P&L, we would expect to see
dividend income;
realised gain or loss on investments; unrealised gain or loss on investments; management and advisory fees;
administration fees.
Hedge funds
Due to the riskier and more complex nature of the investments found in hedge funds, it is often recommended that outsourced accounting should not just be recommended but compulsory in order to provide third party controls check and remove any bias
Where the accounting is carried out by an external admin/accountant they are deemed to be indpendent
Alongside NAVs, which are generally produced one a year, investors also receive other accounting reports which give detailed info on the performance of the fund
Potential investors use NAV history as well as additional reports to make investment decisions
In the balance sheet we would expect to see
investments (recorded at purchase cost initially and then valuation); cash;
debtors;
dividends receivable;
due from broker;
investments sold short;
due to broker;
management fee payable;
other payables;
dividends and distributions due;
investor deposits (under capital contributions).
In the P&L we would expect to see
dividend income;
realised gain or loss on investments;
unrealised gain or loss om investments;
management and advisory fees;
administration fees;
transaction costs;
borrowing fees;
carried interest.
PE funds
Accounting for PE funds is unique due to the nature of the investments within the fund which can be varied and tend to be illqiuid
Widespread, often complex, valuation techniques
All investments should be accounted for at fair value in accordance with all current accounting standards (fair value is the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date)
Define fair value for the investments within the portfolio of a PE fund due to the nature would be carried out by valuation specialists rather than the fund accountant
The strcture of Pe funds typically involves GPs who are typically the partners of the PE firm
The GPs are responsible for making the investment decisions on behalf of the fund and managing the fund, each fund generally has one GP
LPs are the providers of capital contributions into the fund
The investments made are referred to as capital commitments
One fund can have as many as a few hundred different LPs
The terms of a LPs investment, including the duration of the fund, extension options, management fees and how any profits of the fund will be divided are out in the LPA
Accounting for PE funds with regards to expenses and distributions is dependent solely on the terms as agreed in the LPA
The LPA determines how these expenses are spread across the GP and LP, the terms can often be complex, having a number of specific conditions overall as well as per investment deal
Accounting standards define how the accounting of PE funds should be carried out, eg how much control and equity stake the fund has over each business investment in their portfolio will impact what method of accounting should be applied
The accounting standard applied also impacts how the capital commitments are treated
Under IFRS partner capital commitments are treated as debt which have a finite life
Under US GAAP partner capital commitments are treated as equity with an infinite life, unless the LPA states that they can redeem their investment at a specific point in time
The presentation of financial statements and the accounting treatment of certain financial items for PE funds are also influenced by the standards encouraged the Institutional Limited Partners Association, eg the ILPA standards set out how the account of a LPs contributions and payments (drawdowns/dists) along with the value of their investment should be presented, it also influences the format of drawdown and distribution notices to LPs
A further complication with regards to accounting for PE funds is that some funds investment in businesses by way of a mixture of both debt and equity, these will need to be separated for accounting purposes with the interest and dividends due being accounted for accordingly
In the balance sheet we would expect to see
investments (recorded at purchase cost initially and then valuation); cash;
other receivables;
carried interest;
other payables; and
borrowings.
In the P&L we would expect to see
interest income;
dividend income;
unrealised gain or loss on investments;
carried interest;
administration fees;
transaction costs; and
interest expense.
Real estate funds
Accounting for real estate funds is similar to PE funds in that as underlying investments are illqiuid, valuations can be more complex to ascertain especially where the portfolio includes development properties
Valuations are usually carried out by property valuation experts rather than the fund accountant
On the balance sheet we would expect to see
investment property (recorded at purchase cost initially and then valuation);
rental revenue receivable;
cash;
debtors;
borrowings;
creditors; and
taxation payable.
On the P&L we would expect to see
rental income;
property expenses;
profit or loss on sales of investment property;
management and advisory fees;
administration fees;
transaction costs; and
taxation.