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Fund units are accounted for in the same way as shares when they are purchased or sold. However, funds may involve specific transactions such as:
- Subscriptions
- Redemptions
- Reinvested distributions
- Accumulation units
- Switches between unit classes.
These transactions should be recorded according to their economic substance: increasing or decreasing the number of units, recording any income, and recognizing realized gains or losses when applicable.
For funds, the price per unit is often referred to as the Net Asset Value (NAV). The NAV represents the value of one fund unit and is generally used to calculate how many units are purchased, redeemed, or received through a reinvestment. For ordinary shares, the equivalent concept is usually not called NAV, but rather market price, share price, or execution price, meaning the price at which the share is traded or booked.
Subscriptions / Redemptions
Subscriptions and redemptions of fund units are recorded in the same way as purchases and sales of shares.
A subscription increases the number of units held and the book value of the investment, while the bank account decreases. A redemption decreases the number of units held and increases the bank account. Any difference between the redemption value and the book value of the units sold is recorded as a realized gain or loss.
Distribution / income units
Income or distribution units pay income to the investor. The payment is recorded as investment income and increases the bank account.
Accumulation units
Accumulation units do not normally pay income in cash. The income is retained and reinvested within the fund, increasing the value of the units. If required for tax or reporting purposes, the reinvested income may be recorded as notional income and added to the investment’s book value.
Reinvestment
If a distribution is reinvested, the income is first recorded as investment income and then used to purchase additional units. The number of units increases, even if there is no net bank movement.
The quantity of additional units is calculated by dividing the reinvested amount by the fund price per unit, usually the NAV applicable on the reinvestment date. For example, if USD 100 is reinvested and the NAV is USD 50 per unit, the reinvestment results in 2 additional units. If the NAV is USD 37.50, the result is 2.6667 units. Therefore, especially for funds, it is normal for the quantity of units to include decimals.
Switch / conversion
A switch or conversion between fund classes may be recorded either as a sale and purchase, or as an internal transfer of book value, depending on the tax treatment and on how the transaction is reported by the bank.
If the switch is not treated as a sale and purchase, it can be recorded as an internal transfer. The old Item is decreased and the new Item is increased, normally within the same investment account. The book value is transferred from the old Item to the new Item and no realized gain or loss is recorded.
If the two Items are in different currencies, the transferred book value must be converted into the currency of the new Item. If the conversion changes the value in the accounting currency, an exchange difference may need to be recorded, unless the book value is transferred without recognizing a gain or loss.
Split / consolidation
A split or consolidation changes the number of units held without changing the total value of the investment. In a split, the number of units increases and the unit price decreases proportionally. In a consolidation, the number of units decreases and the unit price increases proportionally. No cash movement and no realized gain or loss are normally recorded.
