Liquidating a fund dating parenthood

As investment funds continue to face challenges in meeting performance benchmarks and as investors become less tolerant of paying management fees for underperformance, many fund managers are determining that liquidating their funds is the best course of action.

As a result, questions concerning the implementation of the Financial Accounting Standards Board (FASB)accounting and financial reporting guidance on adopting the liquidation basis of accounting are becoming more frequent.

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An investment fund should adopt the liquidation basis of accounting when liquidation is imminent or when the likelihood of returning from wind down mode is remote.

The likelihood of returning from wind down mode is considered remote when a plan of liquidation is approved by the persons with the authority to make a plan of liquidation effective, and the plan is unable to be blocked by other parties; or when liquidation is imposed by outside parties, for example involuntary bankruptcy.

Once the liquidation basis of accounting is adopted, the assets and liabilities of an investment fund should be measured at estimated collection or settlement amounts (net realizable value).

The following financial statements, at a minimum are required to be presented upon adoption of the liquidation basis of accounting: Financial statements should disclose the investment fund’s plan of liquidation and its effect on the fund’s financial statements.

A condensed schedule of investments, the statement of cash flows and financial highlights of the fund should continue to be presented as long as they remain relevant.

When an investment fund determines that it is appropriate to apply the liquidation basis of accounting, the estimated costs to dispose of assets and the estimated costs and income expected to be incurred or earned during the liquidation period should be accrued if and when the investment fund has a reasonable basis for estimation.Such costs might include legal fees, management and incentive fees and administrative costs.In recognizing income earned during the liquidation period, expected earnings on assets would not be recognized when those earnings are already reflected in the net realizable values of the assets of the investment fund.Accruals for income earned and costs incurred during the liquidation period should not be discounted and estimates of income earned and costs incurred should be reevaluated at each subsequent reporting date.Determining the costs incurred during the liquidation period could present challenges because certain costs are dependent on how long the entity will exist under the liquidation basis of accounting.An investment fund should undertake efforts to evaluate how long it will take to liquidate and develop an estimate of future expenses to be incurred during the estimated liquidation period.

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