How to record the gain from a company investing my assets?

[Frida_The_Dog]

Hello,

I am a little confused about how to perform the accounting for the following scenario and would appreciate any guidance. This should be under IFRS.

Scenario Description:

Firm "The_Client" (client) and "The_Fund" (invests the assets of the client)

1. The_Client has $100,000 USD that were transferred over to The_Fund
2. The_Fund perform investment activities that increase the value to $105,000

Additional details (if relevant):

• The_Client has no access to the accounts used by The_Fund to perform the investments (i.e. their brokers)
• Both parties have a legal contract that states that The_Fund invests for the benefit of The_Client - "For the Benefits of xxx" ("FBO")

The Accounting:

My understanding is that the journals would be:

Cash............. $100,000 (credit)
Accounts Receivable..........$100,000 (debit)

Accounts Receivable............. $5,000 (debit)
??? unrealized gain ??? ..........$5,000 Which account should be used here?

Any other things that I may be missing? Thanks!

 

[DrStrangeLove]

Whose journal entries are these supposed to be, the investor-client or the investment firm? If it's the investor-client's journal entries, It wouldn't debit Accounts Receivable. It would debit Investments - The_Fund (or something similar), an asset account used to identify the investor-client's investment in The_Fund. So the entries would look more like:

DR Investment - The_Fund.....$100,000
CR Cash ....................................$100,000

DR Investment - The_Fund ......................................$5,000
CR Unrealized Gain on Investment - The_Fund ......$5,000

 

[Frida_The_Dog]

Whose journal entries are these supposed to be, the investor-client or the investment firm? If it's the investor-client's journal entries, It wouldn't debit Accounts Receivable. It would debit Investments - The_Fund (or something similar), an asset account used to identify the investor-client's investment in The_Fund. So the entries would look more like:

DR Investment - The_Fund.....$100,000
CR Cash ....................................$100,000

DR Investment - The_Fund ......................................$5,000
CR Unrealized Gain on Investment - The_Fund ......$5,000

Thanks. Would this account " Unrealized Gain on Investment" be part of Other Comprehensive Income?

 

[DrStrangeLove]

Thanks. Would this account " Unrealized Gain on Investment" be part of Other Comprehensive Income?

Yes, I believe so. Since you're using IFRS, you should double-check to make sure. I'm more familiar with US GAAP, but I think on this particular point, the two sets of standards agree.

 

[Frida_The_Dog]

Yes, I believe so. Since you're using IFRS, you should double-check to make sure. I'm more familiar with US GAAP, but I think on this particular point, the two sets of standards agree.

Thanks. I would like to get your point of view on the following please:

Suppose that every month The_Fund charges a management fee for investing The_Client's assets. But this fee is to be paid annually.

I would like to confirm my understanding of the fee's accounting for both entities. Let's suppose $100 management fee for a given month as example.

The_Fund
Accounts receivable......100 (Assets)
Management fees ...................100 (I/S) --> would this be I/S or some sort of unrealized gains account?

The_Client
Unrealized gains from investment......100 (Other Comprehensive Income_Equity)
Accounts payable......100 (Liabilities)

 

[DrStrangeLove]

The entry for The_Fund looks correct. They would book a receivable for the fees the client owes them and revenue for the management fees earned. (The account would be a revenue account, and would appear in the top of the income statement.)

The entry for The_Client would book a payable for the fees owed, but not against unrealized gains. The entry would book a payable against an expense account:

DR Investment Expenses - The_Fund.....100 <---This in an expense account above Net Income on the Income Statement
CR Account Payable..................................100