Fund Accounting Simplified – All you need to know

Private equity investments offer lucrative opportunities for investors seeking higher returns, but their complex financial landscape demands a thorough understanding of private equity fund accounting. In this comprehensive guide, we will delve into the intricacies of private equity fund accounting, exploring its core principles, common challenges, and best practices. Whether you’re an aspiring accountant or a fund administrator, this article will equip you with the knowledge needed to navigate this dynamic field effectively.

In this blog, we will cover the following key areas relevant to effective fund accounting:

  1. Understanding Private Equity Fund Accounting
  2. Principles of Private Equity Fund Accounting
  3. Key Components of Private Equity Fund Accounting
  4. Challenges in Private Equity Fund Accounting
Fund accounting - Project Accountants

1.Understanding Private Equity Fund Accounting

(i) Definition and Scope

Private equity fund accounting involves the comprehensive management and recording of financial transactions related to privately held investments within a fund. Private equity funds are investment vehicles that pool capital from various investors to make direct investments in private companies or assets.

The scope includes not only tracking investments but also accurately recording capital contributions, distributions, and various fees.

(ii) Key Players in Private Equity Fund Accounting

General Partners (GPs): Responsible for fund management, investment decisions, and performance optimization.

Limited Partners (LPs): Investors who contribute capital to the fund and rely on GPs for management. Typically include institutional investors, i.e. pension funds, endowments and high-net-worth individuals.

Fund Administrators, Accountants, Auditors, and Regulators: These entities play critical roles in overseeing and maintaining the integrity of fund accounting.

Valuation Specialists: They are responsible for determining fair value of the fund’s investments. Using various methods they assess the value of private equity holdings, considering factors such as market conditions and financial performance.

(iii) Objectives and Importance of Fund Accounting

  • Transparency: Ensures investors are informed about their investments’ performance, risks, and liquidity.
  • Compliance: Adherence to Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS).
  • Informed Decision-Making: Provides GPs with timely, accurate financial data for informed investment decisions.
  • Investor Confidence: Accurate and timely financial reporting instils confidence in investors.

2. Principles of Private Equity Fund Accounting

(i) Fair Value Accounting

  • Importance of Fair Value: Assets are valued at their current market prices, ensuring transparency and accuracy.
  • Fair Value Hierarchy: Categorizing assets into Levels 1, 2, or 3 based on data availability.
  • Mark-to-Market Accounting: Regular adjustments reflect market changes.

(ii) Cash Flow Accounting

  • Understanding Cash Flows: Detailed tracking of capital flows, including capital calls, investments, and distributions.
  • Cash Waterfall Distribution Mechanisms: The order in which profits are distributed among stakeholders.

(iii) Fund Structure and Organization

  • Master-Feeder Structure: Streamlining operations by pooling capital from multiple feeder funds into a master fund. Allows for centralised management of the fund’s assets.
  • Parallel Fund Structures: Managing multiple funds with different objectives, requiring distinct accounting practices.

(iv) Valuation Methods

  • Market Approach, Income Approach, and Cost Approach: Methods for valuing assets based on market data, projected cash flows, or replacement cost.
    • Market Approach:
      • Comparable Company Analysis (CCA): Compares the financial metrics of the target company with those of similar publicly traded companies.
      • Precedent Transactions Analysis (PTA): Examines the financial metrics of similar companies that have recently been involved in mergers or acquisitions.
    • Income Approach:
      • Discounted Cash Flow (DCF): Projects the future cash flows of an investment and discounts them back to present value using a discount rate. This is widely used but it does involve making assumptions about future cash flows, growth rates and discount rates.
      • Earnings or Revenue Multiples: This is involved applying a multiple to the target company’s earnings or revenue to determine its valuation.
    • Cost Approach: This method assessed the value of an investment based on its historical cost or net book value. Risks of this approach are that it may not reflect the current market value.
 The International Private Equity and Venture Capital Valuation (IPEV) Guidelines (‘Valuation Guidelines’) set out recommendations, intended to represent current best practice, on the valuation of Private Capital Investments. Click here to learn more about IPEV guidelines.

3. Key Components of Private Equity Fund Accounting

(i) Management Fees

  • Structure and Calculation: The fee paid by LPs to GPs for fund management.
  • Calculation Methods: Typically a percentage of assets under management (AUM) or committed capital.

(ii) Carried Interest (Performance Fees)

  • Definition: A share of profits earned by GPs when investment returns exceed a specified threshold.
  • Typical Structure: GPs receive a percentage of profits above a “hurdle rate.”

(iii) Capital Calls

  • Purpose and Timing: The fund’s request for additional capital from LPs for new investments or operational expenses.
  • Notification and Payment: LPs are notified of capital calls and must contribute their committed capital accordingly.

(iv) Distributions

  • Profit Sharing: Returns on investments distributed to LPs.
  • Methods: Distributions can include cash, securities, or other assets.

(v) Investor Contributions

  • Capital Commitments: LPs’ financial obligations to contribute capital as needed.
  • Drawdown Notices: Notices issued to LPs specifying the amount and timing of capital contributions.

(vi) Net Asset Value (NAV) Calculations

  • Calculated regularly usually quarterly.
  • NAV is determined by subtracting liabilities from the fair value of the fund’s assets, providing a measure of the fund’s overall value.

4. Challenges in Private Equity Fund Accounting

(i) illiquid Investments

  • Valuing Illiquid Assets: Difficulty in assigning fair values to privately-held investments with no active market.
  • Use of Models and Assumptions: Fund accountants rely on models and assumptions to estimate fair values.

(ii) Valuation Complexity

  • Factors Affecting Valuation: Considerations like limited financial data, industry-specific metrics, and economic conditions.
  • Third-Party Valuations: Engaging valuation experts to provide objective valuations.

(iii) Diverse Investment Strategies

  • Venture Capital vs. Buyout Funds: Distinct investment strategies with varying accounting approaches.
  • Specialized Funds: Focus on specific sectors (e.g., real estate, technology) with unique challenges.

(iv) Investor Reporting

  • Timely and Transparent Reports: Essential for maintaining investor trust and confidence.
  • Content of Reports: Reports should offer insights into fund performance, fees, and potential risks. Investors can have different preferences or needs.

(v) Taxation and Regulatory Changes

  • Changing Tax Landscape: Understanding the tax implications of fund structures and strategies.
  • Adapting to Regulatory Changes: Staying informed about evolving regulatory requirements to ensure compliance.

(vi) Complex Fee Structures

Multiple layers of calculations: Calculating and allocating the different fee structures (management fees, performance fees, and hurdle rates) can be complex.

In conclusion, private equity fund accounting is a multifaceted discipline that requires a solid grasp of its principles, an awareness of common challenges, and the application of best practices. Whether you’re an investor or a fund manager, mastering private equity fund accounting is essential for optimizing returns, ensuring compliance, and building trust with stakeholders. 

Project Accountants specialise in helping fund managers and fund administrators in all aspects of Fund accounting. Contact us to learn more about how we can help you.


IPEV guidelines
IPEV guidelines

The International Private Equity and Venture Capital Valuation (IPEV) Guidelines (‘Valuation Guidelines’) set out recommendations, intended to represent current best practice, on the valuation of Private Capital Investments. The Valuation Guidelines 2022 should be regarded as superseding the previous 2018 Valuation Guidelines issued by the IPEV Board and are considered in effect for reporting periods beginning on or after 1 January 2023.


The Valuation Guidelines are intended to be applicable across the whole range of alternative funds (seed and start-up venture capital, buyouts, growth/development capital, infrastructure, credit, etc.; collectively referred to as Private Capital Funds) and financial instruments commonly held by such funds.


Where there is a conflict between the content of IPEV Guidelines and the requirements of any applicable laws or regulations, accounting standards or generally accepted accounting principles, the latter requirements should take precedence.


IPEV guidelines

The key purpose of the revised edition of the IPEV guidelines is to not to re-invent the wheel but to provide a framework for consistently determining the fair value of investments held by private capital funds.

Therefore, the enhancements in the 2022 edition are meant to continue to support the existing concepts to assist investors in private capital funds in making better economic decisions in relation to the fair value of the investments.


Five key points to note in the lasts IPEV guidelines changes (effective as of 15 December 2022)
are outlined below:


This relates to conditions that existed at the date of measurement. Known or Knowable information pertains to facts, conditions, or observable information which exists as of the measurement date and is available to the valuer or would be available to valuer through routine inquiry or due diligence. For example, the value of a traded share is known or knowable at the measurement date as it can be obtained from the relevant exchange or reporting service. For example, changing markets, new players in the industry, new products, rise in interest rates. These should be considered when deriving an investment’s fair value at a specific date.


Investors’ needs are evolving and there is an ever-increasing focus on ESG bringing a growing need to integrate ESG into valuation models. ESG factors are becoming an important focus of investors, regulators, and governments. These factors may impact fair value from both a qualitative and quantitative perspective.


While there are different ways to value a company in its early stage, it is very subjective to put a value on early-stage entities which are in the pre-revenue stage. Valuation methods and key performance indicators (KPIs) will differ, depending on where the business is. Attention should be paid to how the capital is structured and whether the company is achieving the set milestones, accordingly this would impact the valuation favourably or unfavourably.


Relates to volatility and uncertainty, in relation to potential future development i.e. increasing interest rates, Covid-19 pandemic, Russian-Ukraine war amongst others. In these circumstances professional judgment must be applied as it may not be appropriate to use transaction multiples or recent price if the market is changing very rapidly especially those negotiated before a market dislocation to receive significant, if any, weight in determining fair value. In such conditions fair value remains the amount that a market participant would pay in an orderly transaction reflecting current market conditions.


There is a renewed emphasis on entities to ensure information gathered during the valuation process is of high-quality ensuring reliability of the data used in each valuation technique.


Project accountants specialise in private equity fund accounting and fund administration support services. If you have a query regarding the application of IPEV guidelines, please feel free to reach out to a member of our team or visit

IAS 21 – New pocket guide

IAS 21 – The Effects of Changes in Foreign Exchange Rates outlines how to account for foreign currency transactions and operations in financial statements, and how to translate financial statements into a presentation currency. An entity is required to determine a functional currency (for each of its operations if necessary) based on the primary economic environment in which it operates and records foreign currency transactions using the spot conversion rate to that functional currency on the date of the transaction.

Functional currency is the currency of the primary economic environment in which it operates.

When determining the appropriate functional currency, management should give priority to the following primary factors:

  • Currency influencing sales prices for goods and services.
  • The currency of the country whose competitive forces and regulations determine sale prices.
  • Currency influencing input costs.

The primary indicators may be determinative. However, the following two indicators serve as supporting evidence.

  • Currency in which funds/receipts:
  • from financing activities are generated
  • from operating activities are retained.



Spot exchange rate is applied to the foreign currency amount at the date of transaction. For practical reasons, an average rate over a period may be used if it approximates the actual rate at the date of transaction.  


Units of currency held and assets/ liabilities to be received/paid in a fixed or determinable amount of money. Translated at closing rate at reporting date.Gain or loss is recognised in profit or loss.

-Rate at transaction date (if item at historical cost)
-Rate at revaluation date (if item carried at revalued amount).

Impairment test

Non-monetary assets are measured at the lower of:
-Carrying amount (at historical rate)
-Net realizable value/recoverable amount (at closing rate at the end of the period).

Exchange gains or losses on asset/liability recognised where gain/loss on non-monetary item is recognized i.e profit or loss, or other comprehensive income.

All foreign exchange gains or losses are charged to profit or loss. However, there is one exception where a gain or loss on a non-monetary item is recognised in equity, the foreign exchange gain or loss is also recognised in equity.


Translation method

– Assets & liabilities at closing rate.
-Income and expenses – Exchange rate at transaction date or average rate (for practical purposes a monthly or quarterly rate might approximate the transaction date rates)

The resulting exchange differences are recognised in other comprehensive income (foreign currency translation reserve).

Disposal of a foreign operation

The cumulative amount of exchange differences that was recognised in equity is reclassified to profit and loss.

Loan forming part of net investment in foreign operation

Exchange gains and losses to equity on consolidation only. Recorded in profit or loss in the separate (entity only) financial statements.


An entity is required to disclose:

  • The amount of exchange differences recognised in profit or loss (except for those on financial instruments measured at fair value through profit or loss in accordance with IFRS 9).
  • The net exchange differences recognised in other comprehensive income and accumulated in a separate component of equity, and a reconciliation of the amount of exchange differences at the beginning and end of the period.
  • The fact and reason for a change in functional currency of either the reporting entity or significant foreign operation.
  • The fact for a difference in the presentation and functional currency of the financial statements. In this situation, an entity can only confirm that the financial statements comply with IFRS if they comply with the requirements of IFRS, including the translation method covered above.

Where an entity presents its financial statements or other financial information in a currency that is not it functional currency without meeting the requirements of IAS 21. For example, an entity may convert into another currency only selected items from its financial statements. Or an entity whose functional currency is not the currency of a hyperinflationary economy may convert the financial statements into another currency by translating all items at the most recent closing rate. Such conversions are not in accordance with IFRSs, and the entity shall:

  • clearly identify the information that does not comply as supplementary.
  • disclose the currency in which the supplementary information is displayed; and
  • disclose the entity’s functional currency and the method of translation used to determine the supplementary information.


If you have a specific question about the application of IAS 21, please reach out to or visit For more recent updates, follow us on Linkedin.