Investment Company Notebook

Practical insight and analysis on the accounting, audit and tax issues impacting investment companies.

Treatment of Organization and Offering Costs For New Open-End Funds

Through our interaction with various clients, it has become clear there is much uncertainty with respect to the identification and treatment of organization and offering costs as they relate to a newly established open-ended mutual fund. In hopes of providing clarification on this matter, we have illustrated the accounting treatment of both types of costs in several different scenarios through which they may apply.

Before the determination can be made as to the appropriate accounting treatment of these costs, the advisor (or sponsor) must first state its intentions regarding whether or not they would like to incur the costs on behalf of the new mutual fund. The fund’s expense reimbursement agreement should be considered during this process. If the advisor intends to incur the organization and/or offering costs of the new fund, without the ability to recover them, the expenses would have no impact on the financial statements.

If, however, the advisor does not wish to absorb these costs, the accounting treatment should be as follows:

Organization Costs – charge to expense as incurred.

  • In the process of establishing a new investment company, and sometimes even a new series of a previously established investment company, organization costs will be borne so that the entity is legally able to operate. Such costs can consist of audit fees in connection with the seed financial statements and the initial registration statement as well as billings for services rendered by counsel (including fees to incorporate and organize the entity, drafting the bylaws, drafting agreements with third party service providers and ad-hoc research deemed necessary).

Offering Costs – amortize to expense over 12 months on a straight line basis. If a portion of the expense remains to be amortized at the end of the period, the balance is commonly reflected as an asset account labeled “deferred offering costs.”

  • Offering costs can include legal fees for the preparation of the initial registration statement, registration fees (SEC, Blue Sky, etc.), underwriters’ fees and printing costs.

In the event that the fund is reimbursed by the advisor as a condition of the expense limitation agreement, the accounting treatment should follow the parameters presented above, with a few additional requirements. Any reimbursement received by the fund should be reflected on the statement of operations as a separate line item and netted with the fund’s total expenses. If the advisor has the ability to recapture any of the amounts that were waived and reimbursed to the fund, a disclosure is necessary within the notes of the financials detailing the expiration of the recapture period and the corresponding amount that the fund may have to pay back to the advisor.