Combined Financial Statement Presentation for Investment Funds
The SEC’s Division of Investment Management’s Chief Accountant’s Office regularly issues “Dear CFO Letters” to assist registrants and their public accountants in addressing certain accounting, auditing, and financial reporting matters. In October 2020, one such letter was issued that addressed the acceptability of issuing combined audited financial statements to comply with Rule 206(4)-2(b)(4) under the Investment Advisers Act of 1940 (SEC Custody Rule), which states that a fund must distribute financial statements annually that are audited by an independent public accountant that is registered with the PCAOB. According to the letter, limited partnerships, limited liability companies, or other types of pooled investment vehicles may satisfy the SEC Custody Rule with combined financial statements if certain criteria are met. Per the FASB codification (Accounting Standards Codification (ASC) 810-10-45), combined financial statements may be presented for a group of commonly controlled or commonly managed entities. A good example of this would be parallel funds that are invested in a common pool of assets. The SEC has determined this presentation provides meaningful protections to a limited partner/member as long as the limited partner/member can still ascertain the value of its ownership interests based on the combined audited financial statements.
There are several potential advantages to combined financial statement presentation for a group of funds. Perhaps the most significant is that it reduces the burden on management of preparing entirely separate financial statements for all related entities. A large amount of time and effort goes into year-end financial statement preparation, so combining entities into a single set of financial statements can free up significant time and resources. This presentation method also can promote transparency as it allows investors to see the big picture across the full group of investment vehicles rather than just the one in which they are invested. This advantage will vary between funds, and asset managers will need to consider all facts and circumstances before electing combined financial statement treatment.
It is important to note that the fund-specific reporting requirements under ASC 946 are still in place regardless of whether combined financial statement presentation is used. For instance, the combined schedule of investments must clearly indicate how much of each asset is owned by each entity. Further, disclosures such as the financial statement highlights are required to be presented for each class of ownership, and separate legal entities are typically deemed to be separate classes of ownership. In such instances, the required disclosures can be presented side by side within the footnote disclosures of the combined financial statements. Similar to consolidated financial statements, any intercompany transactions will need to be eliminated if they are between entities within the combined group. Fund managers with significant intercompany transactions will need to consider eliminations and their effect on the financial statements before implementing a combined presentation.
This is a high-level summary of a financial reporting methodology that may be beneficial to many asset managers and registered investment advisors. Although the CFO Letter was issued to registrants, BKD believes the guidance may be applied to nonregistered investment funds as well.
If you have questions or would like to learn more about combined financial statement presentation for funds, reach out to your BKD Trusted Advisor™ or use the Contact Us form below. To learn about our services for fund managers, visit our Asset Management webpage.