Distribution Proceeds from Investment in a Fund

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Keibri
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Distribution Proceeds from Investment in a Fund

Post by Keibri »

Dear all,

I am writing to ask whether someone could provide some insight with a question I have on Fund Investment from an IFRS stand-point.

For ease of reference below a simplified example:

An investment company reporting under IFRS which keeps its investments at FVTPL (therefore all fair value and foreign exchanges goes are recorded in the P/L) committed and paid-in full capital-called of EUR 1,000,000 into a private equity fund. At the time of acquisition the entry which was recorded was:

DR: Investment in Fund
CR: Bank

After 1 years, there was a distribution from the fund to the investor (i.e. the investment company) of EUR 50,000, i.e.: distribution proceeds. The distribution’s calculation to the investor is made-up of:
- EUR 25,000 from dividend of the underlying investments within the fund; and
- EUR 25,000 as return of capital.

From an IFRS stand-point –

1) should the full distribution amount be credited to the P/L or against the Investment in the B/S, i.e.:

Option 1:

DR: Bank
CR: Income from Investment- Distribution (P/L)


Option 2:

DR: Bank
CR: Investment in Fund (B/S)




2) Should the treatment be the same for the full amount of the distribution proceeds? Or since the calculation of the distribution proceeds is made up of 50% as return of capital and 50% as dividend from underlying investment, these should be recorded differently?

Much appreciated

Keibri
JRSB
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Re: Distribution Proceeds from Investment in a Fund

Post by JRSB »

I think it's the same as your other question, return of capital as answered but dividend as P&L
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Marek Muc
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Re: Distribution Proceeds from Investment in a Fund

Post by Marek Muc »

Agreed, but the distribution of dividends will have an impact on FV of the equity instrument. So you should see a drop in FV after the dividend income is recognised and the amount of that drop depends on when you last measured FV (i.e. how much of that accumulated income was factored in the valuation)
Keibri
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Re: Distribution Proceeds from Investment in a Fund

Post by Keibri »

Thanks a lot both, I am in line with your understanding ! This is truly appreciated :)
Tacs
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Re: Distribution Proceeds from Investment in a Fund

Post by Tacs »

Continuing on the topic of distributions...

PE funds also disclose other elements in the distribution (realized gains, interest income, dividends, ROC etc.). When these funds are being held at fair value, I have seen diversity in practice over recording and disclosure of these distributions:
- Have seen these distributions broken out in income and gains on the P&L (and ROC obviously reducing the value of the investment)
- Have seen the gain / income elements just being aggregated under investment income
- Have seen the entire distribution (ROC + income + gains) just reducing the carrying value of the investment so that everything just flows into the P&L as unrealized gains on update of fair values based on NAV statements.

Wondering what most people see here / what is the recommended approach?

Thanks!
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Marek Muc
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Re: Distribution Proceeds from Investment in a Fund

Post by Marek Muc »

How do PE typically classify their investments under IFRS 9?
Tacs
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Re: Distribution Proceeds from Investment in a Fund

Post by Tacs »

The funds themselves fair value all their investments since they qualify as investment entities under IFRS 10.
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Marek Muc
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Re: Distribution Proceeds from Investment in a Fund

Post by Marek Muc »

It would seem from IAS 1.35 that a gross presentation is preferred, i.e. fair value gains and losses arising on different material investments should not be offset.
Tacs
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Re: Distribution Proceeds from Investment in a Fund

Post by Tacs »

It's one investment from the fund investor's perspective (investment in the fund).

Question is whether, due to the nature of the limited partnership which is how funds are structured, distributions received should be accounted using a lookthrough approach.
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Marek Muc
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Re: Distribution Proceeds from Investment in a Fund

Post by Marek Muc »

It wasn't clear to me that you were thinking from the investor's perspective. There are two cases where you'd utilise the 'look-through approach':
- if you control the fund https://ifrscommunity.com/knowledge-bas ... tatements/, or
- if the fund is a joint operation https://ifrscommunity.com/knowledge-bas ... statements
Tacs
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Re: Distribution Proceeds from Investment in a Fund

Post by Tacs »

Thanks Marek,

So in essence:
When a distribution is received from a fund:
Dr. Cash
Cr. Investment in fund

All the value created under the fund would get recorded as part of fair value gains and losses which are recorded each quarter when updated nav is received.
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Marek Muc
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Re: Distribution Proceeds from Investment in a Fund

Post by Marek Muc »

Well, it depends on the type of distributions - dividends are taken directly to P/L under IFRS 9.5.7.1A. Do PE funds specify whether a distribution represents a recovery of part of the cost of the investment, or accumulated profits?
Tacs
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Re: Distribution Proceeds from Investment in a Fund

Post by Tacs »

PE funds do not themselves pay out dividends. Similar to mutual funds, they pay out distributions. Most PE funds do specify what was the source of the cash being distributed: was it gains from the underlying portfolio of investments, income from those investments, return of capital etc. However, if we start looking at what the underlying source is, we would have started to look through.
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Marek Muc
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Re: Distribution Proceeds from Investment in a Fund

Post by Marek Muc »

It appears that our understanding of 'looking through' differs slightly :) To me, look-through accounting would be effected if you ignored the existence of the PE fund, directly recognising the fair value movements and capital flows to and from the investees.

'Dividends' refer to 'Distributions of profits to holders of equity instruments' (Appendix A to IFRS 9)- it seems that those should be easily identifiable from what you've written.
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