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.

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.

IAS 34 ‘Interim Financial Reporting’ – New Pocket guide

IAS 34 ‘Interim Financial Reporting’ is applicable when an entity chooses to prepare an interim financial report. It doesn’t mandate which entities should be required to publish interim financial reports, how frequently, or how soon after the end of an interim period.

This standard allows for a reduced level of information to be presented compared to annual financial statements.

The standard establishes guidelines for recognizing, measuring, and disclosing financial data in interim reports. Reports can include either a complete or condensed set of financial statements covering a period shorter than a financial year.


Entities reporting in accordance with IAS 34 are required to include in their interim financial reports, at a minimum, the following components:

  • A condensed statement of comprehensive income,
  • A condensed statement of financial position,
  • A condensed statement of cash flows,
  • A condensed statement of changes in equity, and
  • selected explanatory notes.  

Full compliance with IFRSs is required if a complete set of financial statements are being included in the interim report.


IAS 34 requires interim reports to include interim financial statements for the periods listed in the following table:

Statement of financial positionEnd of current interim periodEnd of immediately preceding financial year
Statement of profit and loss and other comprehensive incomeCurrent interim period and cumulatively for the current financial year-to-dateComparable interim period of immediately preceding financial year
Statement of changes in equityCumulatively for the current financial year-to-dateComparable year-to-date period of the immediately preceding financial year
Statement of cash flowsCumulatively for the current financial year-to-dateComparable year-to-date period of the immediately preceding financial year


The same accounting policies should be applied for interim reporting as are applied in the entity’s annual financial statements. The exception to this is accounting policy changes made after the date of the most recent annual financial statements that are to be reflected in the next annual financial statements.

Entities are required by IAS 34 to disclose in their interim financial reports that this requirement has been met.

A key provision of IAS 34 is that an entity should use the same accounting policy throughout a single financial year. If a decision is made to change a policy mid-year, the change is implemented retrospectively, and previously reported interim data is restated.


In preparing their interim financial reports, entities are required to apply the same accounting policies as applicable for next annual financial statements.

The Standard states that the frequency of an entity’s reporting (annual, half-yearly or quarterly) should not affect the measurement of its annual results. To achieve that objective, measurements for interim reporting purposes are made on a year-to-date basis.

Several important measurement points to consider are as follows:


Costs that are incurred unevenly during an entity’s financial year shall be anticipated or deferred for interim reporting purposes if, and only if, it is also appropriate to anticipate or defer that type of cost at the end of the financial year.


Revenues that are received seasonally, cyclically or occasionally within a financial year should not be anticipated or deferred as of an interim date, if anticipation or deferral would not be appropriate at the end of the financial year.


Measurement procedures used in interim financial reports should produce information that is reliable, with disclosure of all material relevant financial information.

The standard acknowledges that interim reports generally will require a greater use of estimation methods than annual financial reports.


Materiality is defined in IAS 1.

In deciding how to recognise, measure, classify, or disclose an item for interim financial reporting purposes, materiality should be assessed in relation to the interim period financial data.

In making assessments of materiality, it should be recognised that interim measurements may rely on estimates to a greater extent than measurements of annual financial data. (IAS 34:23)


The disclosure requirements of IAS 34 are designed with the understanding that readers of the interim financial report will already have access to the latest annual financial statements. Therefore, supplementary notes found in the annual financial statements need not be duplicated in the interim reports. Instead, the explanatory notes accompanying the interim report aim to offer insights into significant events and transactions since the last annual reporting period.

IAS 34:16 sets out a list of the minimum explanatory notes required to be included in the interim financial statements.


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