Fund accounting NAV package end to to end process with Accounting entries . (2024)

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A) CAPSTOCK ( Activity on Capital Invested by the Investors )

Capstock activity is one of the key task in the Fund accounting NAV production process , as we know that Funds has created a Pool where Investor invest into it and take the exist from the Pool Investment also so , simply if you are Investing in the fund then that activity called the Subscription units of Funds and if you are taking an exit from the same fund then that activity called the Redemptions units of the fund or withdrawals. The Capstock activity work will be taken care by Transfer Agents . as Fund accounting they verify the Transfer agents reports for booked subscriptions and redemptions and ensure that all the subscriptions and redemptions on the Capital activity are booked correctly with the fair NAV Value of Funds . If Subscriptions and redemptions booked incorrectly that means there will have impact on NAV also so, make sure Capstock activity has been recorded in the system accurately. see the below to have better understanding about the Capstock activity.

Goal

Ensure all capital activity is reflected for NAV calculation; and is reconciled to Transfer Agency’s record.

General Process

➢ Receive capstock report (Dealing Date Report, Supersheet) from Transfer Agency

➢ Post capstock via Applications or centralize Platform.

➢ Check ending outstanding shares with Transfer Agency report for unitized funds

➢ Answer all alerts on NAVAlert

Control/Procedure

Transfer Agency Report:

➢ Ensure the capstock activity is processed with correct NAV

[Why? To check for dilution impact]

# units transacted = Transaction Amount / Trade Date NAV

➢ Check for any backdated capstock activity

➢ Check to ensure that ending outstanding shares with Transfer Agency report tie to that in APPLICATION for unitized funds

[Why? To check for any missing capstock]

APPLICATION Trial Balance:

Check pending subscription receivable and redemption payable balances.

Accounting Knowledge

Information Flows

➢ Transfer Agency Report: Transfer Agency is responsible of tracking and processing the fund’s investor activities. The Transfer Agency report provides the capital activity on the fund and the ending capital balance.

➢ NAV Reporting: ABC Fund provides the fund’s NAV or investor r’s capital balance Transfer Agency for reporting or capital activity processing.

B) EXPENSES ( To record the fees correctly)

This is one of the Important head comes under the Fund Accounting NAV Package . the Funds Managers team book the fees in system for let say for ABC Funds and send the Notice to NAV Production team to validate , check , report and record accurately . Two ways Funds record the fees i) Accrued Fees - Fees has been earned but that yet to received/Paid

ii) Pre-Paid Fees - fee has been paid / received from the Investors in advance . these are two ways where we record the fees on daily basis .

Note:- You may expect the questions on Prep-paid and Accrued fees accounting entries, so make sure you are preparing the same.

Fund wise fees structure , please note that the below fees structure vary from fund to funds so, refer the scheme docs like PPM & others to check the exact fees details for that fund.

See the below steps to apply accounting treatment for fees part.

GoalEnsure expense is accrued correctly and captured in fund valuationGeneral ProcessDAILY EXPENSE ACCRUAL:➢ Input prior day Total Net Accruals into expense spreadsheet➢ Update FX rate in the expense spreadsheet if applies ➢ Check number of days (forward/backward accrual, fund holiday) on the expense spreadsheet and NAVAlert accrual calendar.➢ Post expenses via your Applications➢ Scrape accruals and input expenses paid on expense spreadsheet➢ Tie out expense spreadsheet to trial via Application scrape➢ Verify via Report Recon➢ Answer all NAV Alerts

Control/ProcedureEXPENSE SPREADSHEET:[Why? The expense spreadsheet is set up as a backup calculation of the expense accruals; and used to ensure the accrual calculated in APPLICATION is accurate]➢ Ensure the daily accrual that APPLICATION calculates equals the expense spreadsheetcalculation➢ Ensure all expenses are posted by tying out subledger (i.e. expense spreadsheet) and general ledger➢ Ensure all payable and expense balances are reconciled between expense spreadsheet andAPPLICATION general ledger➢ Identify negative payables on expense spreadsheetsNAVALERT AND REPORT RECON:➢ Ensure impacts are reviewed on NAV Alert• Any fixed expense accruals change? Any variable expense accruals change significantly or different from change in fund’s Total Net Accruals?➢ Ensure differences are reviewed on Report ReconExpense Payment:➢ Ensure there is client authorization for expense payment

➢ Ensure the expense payment is paid from the correct expense account

Accounting Knowledge

Information Flows

➢ Sources of Expense Accruals

• Expense budget provided by client (e.g. audit, legal, miscellaneous etc)

• Fee Schedule (e.g. ABC Fund fees)

• Prospectus (e.g. management fee, expense caps)

➢ Quarterly Expense Analysis

General Knowledge

➢ Types of Expenses

• Fixed: The expense budget is usually fixed and therefore daily accrual is fixed

• Variable: The expense accrual is dependent on other factor, e.g. a % of the fund prior day’s TNA

• Tiered: Similar to variable, the % rate varies depending on the fund’s asset level

➢ Expense Caps

• The investment manager might set up annual expense cap to limit the fund operating expenses. If the operating expense is above the expense cap, the investment manager will reimburse the fund for the expense overage.

➢ Prepaid Expenses

• Fund might pay certain expenses in advance to cover expenses over a future time period. In such case, the fund will set up prepaid expense and amortize it over this time period.

➢ Organizational Expenses

• Fund might incur certain expense upfront in setup. Instead of taking the organization expense at once, certain accounting standards allow the fund to amortize the organizational expense over certain time period.

➢ Multi-Class expenses

• Composite level: Expense is incurred or accrued at composite level and allocated proportionately to all classes.

• Class level: Expense rate might be different among classes or certain expenses are incurred for specific classes only. These expenses are allocated at class level and will be aggregated at composite level.

➢ Forward/backward accrual

• Forward Accrual: Accrue income and expense over weekend on Fridays

• Backward Accrual: Accrued income and expense for weekend on Mondays

c) INCOME

To Income Process mean to do the accounting for Dividend that funds received from the Equity and Interest from the Debts instruments like Bonds and debentures.

This is one important head of NAV package , if you are working as Fund accountant then you should know that if there is having any announcement of dividend or Interest payment on securities then accordingly you can apply the accounting treatment for the same.

Dividend - Once the Ex date announced then funds consider Dividend as accrued dividend from the Ex-date of that security ( few funds consider Dividend from the record date of Dividends)

Interest Payment- On interest payment you can carry as accrued income through-out the duration and once you get the payment then convert all the accruable into the Cash.

Note:- You may expect the questions on Accounting entries of Accrued Interest payment and Divined announcement.

Goal

To ensure income from equity and fixed income securities is correctly accrued in the fund for valuation.

General Process

Income from Equity – Dividend Income

➢ Run the Dividend Scraper/tracker

➢ Check the results in the Dividend Scraper/tracker

➢ Tie out dividend income/expense to trial balance

➢ Answer all dividend related alerts on NAVAlert

Income from Fixed Income – Interest Income and Amortization

➢ Run Income Book

➢ Tie out interest income/expense to trial balance

➢ Answer all income related alerts on NAVAlert

Control/Procedure

Income from Equity – Dividend Income

➢ Check to ensure all dividend setups are with the appropriate Application records (confirmed and second-sourced by valid sources). If not, ensure appropriate research is completed and necessary backup is included.

Income from Fixed Income – Interest Income and Amortization

➢ Check to ensure all fixed income securities are set up with the correct accrual and amortization parameters in APPLICATION

➢ Check to ensure all variable rates are up-to-date

➢ Check to ensure all daily changes and income hits are reconciled

Accounting Knowledge

Information Flows

➢ Amortization Policy: Instruction schedule from client in regards to the amortization method for various fixed income investment types.

d) TRADES & Settlement( To record the Buy and sell Trades)

Trades Recording :-

As you know that Trading in securities its main business activity of a Funds. on a daily basis fund Managers they do the Trading on fund portfolio accounts and send the data to the trade entry accounting teams .Trade entry team record all trades Buy/sell for all the securities on T+1 day under that portfolio , so after booking Fund Accounting / NAV team start to work NAV productions part.

If you book the trades incorrectly in the system it means there will have impact on the NAV . once the all trades booked then Fund accounting teams start to work on final accounting.

Trades settlement:-

All booked trades in the system should be settled as per the trade life cycle if not then it will have an impact on the Funds Financial statements, so make sure you are settling the trades accurately in the system.

Note :- You may expect Questions on Trade date and settlement date accounting entries, so please refer the another blog for the same.

Goal

Trades are processed accurately as per trade instructions and in timely manner Check NAV impact from trading activity

General Process

➢ Ensure all trades and local currency settlements are processed before trade cutoff time

➢ Run APPLICATION trade summary via Respective reporting Applications

➢ Run APPLICATION “Insert Fund ID and run the report for – PORTFOLIO POSITION – ALL HOLDINGS” report via Reporting Application Platform

➢ Review trade summary

➢ Answer all alerts on NAVAlert

➢ Provide confirmation to Valuation team

➢ Check receiving Valuation’s notification on PreNAV, run macro to download PreNAV report so you can check easily check the impact of Trade activity on NAV

Control/Procedure

Trade Summary:

➢ Review price change percentage (i.e. difference between trade price and previous market price)

[Why? To check NAV impact from trades. Possible issues: trades are booked incorrectly, trade instructions are incorrect, previous market price is incorrect?]

Every Fund carry such threshold limit while calculating NAV , Limits vary from fund to funds.

e) Corporate actions ( Review all CA and record it correctly)

As we know that Corporate actions is one of the important process comes under the Fund Accounting NAV Package. as fund accountant need to check the all corporate actions and review the impact of CA on fund holding and record it correctly so , you can calculate the NAV accurately.

Most of people think that due to corporate actions there will have impact on NAV for per unit , but my dear fellow aspirants if you see only few corporate actions make a impact on NAV of per units like Dividends, DRIP, CSO , stock dividend, Bonus shares, Liquidation , worthless Redemptions , Bankruptcy etc.

events like stock split , merger spin off etc. there is no impact on NAV of per units .

Every corporate action create impact on NAV of per shares , but not on NAV of Per units of Funds , so NAV per shares and NAV of Per units both are the Different.

Note :- You may expect the questions on stock split and impact on NAV , Dividends , Breaks of Corporate actions , If you booked the CA incorrectly then what will have impact on NAV etc.

Follow below steps for the CA.

➢ Corporate actions, review corporate action reasonability test

Ensure all trades are captured in trade summaryCheck for Impact and % Movement[Why? Corporate Action Reasonability Test is used to compare the market value prior and post corporate actions and check the NAV impact from corporate action. In most cases, the corporate action should not have any impact on NAV as the information should have been reflected in the security price. ]

PreNAV:

➢ Ensure all information is (portfolio shares) ties to PreNAV report from Valuations [Why? To ensure Valuations team has the correct portfolio in system for accurate portfolio valuation]

➢ Ensure PreNAV (i.e. Current day’s portfolio at prior day’s base price) ties to Adjusted Prior Market Value on NAVAlert

Accounting Knowledge

Information Flows

➢ Client Trade Instructions

o Swi† messages= Messages information can be retrieved in APPLICATION via specified sources.

o Manual trade tickets also projected correctly .

General Knowledge

➢ Local currency settlements: local currencies are included as part of security portfolio.

➢ Costing Method

• Identified Cost: security lot level information is maintained

• Average Cost: When security is sold, the cost is relieved from the average of all current lots of that security, as opposed to cost related to specific lot

➢ Inventory Method

• Closest to Average; First in first out; Last in first out; Highest cost first out; Lowest cost first out; Identified lot basis

MARK TO MARKET

MTM means Mark is the Investment Price or Purchase Price or acquisitions Value of Investment. Market is the Current value of Investment so , simply you should know the MTM of each securities to consider the fair value of Investment , Why the MTM is important ? you should know the realistic value of your Investment , see below from the Fund accounting front.

Note:- You may expect question on what is the important of MTM? so do prepare .

Goal

Mark to Market report calculates the unrealized currency gain/loss on any open local receivable/payable balances due to FX rate changes

It also shows the details of the subledger of receivable/payable balances

General Process

➢ Once all trades and settlements are processed, daily income accrual is completed, and the fund’s FX rates are available, run MTM reports (Request value = B, i.e. report and calc)

➢ Review MTM reports

➢ Run and verify Report Recon

➢ Answer alerts on NAVAlert

Control/Procedure

Mark To Market reports:

➢ Ensure all pending receivable/payable balances on MTM reports tie to trial balance

➢ Ensure correct FX rate is used on MTM reports to calculate MTM

➢ Ensure all overdue receivable/payable balances (settle date < current date= to compare the price of trade with settlement date and current date and accordingly consider for the valuations) are followed up.

Accounting Knowledge

Unrealized MTM Gain/Loss on Pending Receivables

Accounting for Realized and Unrealized Gains and Losses on Equity Securities

Unrealized Gain or Loss

As the fair value of the equity security changes during its holding period, the unrealized gain or loss is reported on the income statement as an unrealized holding gain or loss.

In the case of an increase in the fair value, the journal entry will be:

Dr Fair value adjustment (valuation account)........................................... X

Cr Unrealized holding gain (on income statement)........................... X

For a decrease in fair value, the entry will be as follows:

Dr Unrealized holding loss (on income statement)................................. X

Cr Fair value adjustment (valuation account)..................................... X

Equity securities are accounted for as a portfolio, and only one journal entry is made each reporting period that recognizes the net unrealized gain or loss on the whole portfolio for the period. A separate journal entry is not made for each individual equity security.

Realized Gain or Loss

When an equity security is sold, the realized gain or loss on the sale is recorded as follows on the sale date (assuming the security increased in value while being held):

Dr Cash (including costs of the transaction)................... sales price

Cr Gain................................................................................ balance

Cr Investment account................................ original acquisition price

f) Pricing( To update accurate price of securities in the books of account)

Pricing means after the Market close the Pricing teams update the Price for all the securities in the books of accounts.

For Listed securities - Funds update the Prices of securities as per the closing price of that securities .

Listed Derivatives :- Exchanges provide the report to the pricing team for Derivatives options so, accordingly they update the data in the accounting system.

Unlisted securities :- They follow the True Faith or fair value method to record it .

*FINAL ( To prepare the final accounting report and publish the NAV)

Final shaping to the NAV Production process.

Goal

Ensure APPLICATIONs trial balance reflects portfolio valuation provided by Valuations team and the NAV impact is reviewed.

General Process

➢ Once Valuation team notifies that the final valuation is available, run macro to download NAVs final reports

➢ Ensure final trials are saved in APPLICATION

➢ Run Price Verification Macro

➢ Run and verify Final Report Recon

➢ Answer alerts on NAVAlert

Control/Procedure

NAV Reports:

➢ Ensure market value on applications report ties to trial balance.

➢ Ensure market value change on NAV, Check report ties to Market Value Change on NAVAlert [Why? This represents the impact resulted from security price change on the portfolio, excluding futures, write options.]

➢ Ensure current margin variation on Futures ties to Unrealized on Futures on trial balance(if applicable)

[Why? This represents the impact resulted from futures price change on the future positions.]

➢ Ensure current applications recorded short options ties to Unrealized on Short Options on trial balance (if applicable)

➢ Ensure market value change on NAV Check for Short Option report ties to alert on NAVAlert[Why? This represents the impact resulted from price change on the write options.]

Price Verification Macro Procedure:

➢ Ensure all significant price movers are verified and reconfirmed by Valuations and Accounting.

here you can assume if you have followed the same process then you can prepare the financial statements and publish the NAV to the Client .To produce NAV it means what I believe we have recorded the All Journal entries , classified to the respective accounts and summaries in the Financial statements like Trail balance , Trading account , PNL and balance sheet and other statement like Income statements, fund flow statements etc .. On a daily basis fund accountant they do the record and summaries the daily Fund Investment activities that's it .

Kudos, we have Produced the NAV

General Information's:-

International Holdings by Client Account

Holdings Report with total portfolio shares and total base market value, including long, short fixed incomes, equities, swaps, currency holdings; long options. It does not include written options or futures holdings.

Nav Check by ASSETT

It shows base market value change, which is the total market value change on the current portfolio (excluding written options or futures contracts) resulted from base market price change from prior day to today.

Base Nav Check For Futures Contracts

It shows the current margin variation on futures contracts

Note:- You may see the different structure in your organization , but the basic process structure would be remained same with every organization. so please avoid such an argument able comments and notes .

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Corporate actions.

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