07 April 2010
How should the adjustment be made in the books of accounts for change in NAV of mutual funds? Can we do it once in a year in march in case of unlisted companies? What would be the effect of such adustment, once in march only, on profit or loss on sale of units if the method of valuation is Weighted average? Please quote the references if related to AS 30, 31 or 32.
14 July 2024
Adjustments for changes in the Net Asset Value (NAV) of mutual funds in the books of accounts typically depend on the accounting standards applicable to the entity, especially if it involves unlisted companies. Here’s how such adjustments are generally handled, with reference to relevant Accounting Standards (AS):
1. **Adjustment for Change in NAV of Mutual Funds:** - According to AS 13 - Accounting for Investments, the value of investments in mutual funds should be recognized at cost or fair value, depending on the classification of the investment. - For mutual funds, which are typically valued at NAV, changes in NAV affect the fair value of the investment.
2. **Frequency of Adjustments:** - AS 13 and related standards do not specify a specific frequency for adjusting the value of investments such as mutual funds. However, it is generally accepted that investments should be stated at fair value, and changes in fair value should be recognized in the financial statements of each reporting period.
3. **Impact on Profit or Loss on Sale of Units:** - If the method of valuation used is Weighted Average, adjustments in NAV would impact the carrying value of the investment. - When units are sold, the profit or loss on sale is typically calculated as the difference between the sale proceeds and the carrying amount of the investment at the time of sale. - A once-a-year adjustment in March (end of financial year) would mean that the carrying amount of the mutual fund investment reflects the NAV as at that date. Any subsequent changes in NAV during the year would not be reflected until the next adjustment date.
4. **AS 30, 31, and 32:** - **AS 13 (Accounting for Investments):** This standard deals with accounting for investments in financial statements. It requires investments to be initially recognized at cost and subsequently measured at cost or fair value, depending on the classification of the investment. - **AS 31 (Financial Instruments: Presentation):** This standard provides guidance on the presentation of financial instruments in the financial statements. - **AS 32 (Financial Instruments: Disclosures):** This standard deals with the disclosure requirements for financial instruments in the financial statements.
5. **Effect of Once-a-Year Adjustment:** - Making adjustments once a year in March for mutual fund investments would mean that the fair value of the investments is updated annually. - This approach aligns with the principle of reporting investments at fair value, ensuring that the financial statements reflect the current value of the investments at the end of each reporting period (year-end).
In conclusion, while AS 13 and related standards do not mandate a specific timing for adjustments, it is essential to ensure that investments, including mutual funds, are valued at fair value in accordance with generally accepted accounting principles. Adjustments should reflect changes in NAV promptly to ensure the accuracy of financial statements and to properly account for profit or loss on sale of units based on the weighted average valuation method.
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