Fund Accounting Gets Overhaul

Terry Flanagan

Investment accounting, an arcane yet critical component of asset management, presents complexities as companies launch new investment products across different geographies, each with their own tax and accounting regimes.

“The growth of cross-border trading places onerous burdens on asset managers and servicers responsible for tracking daily portfolio valuations,” said Tony Warren, vice president of product management at SunGard InvestOne. “This invariably leads to a requirement for multiple sets of records, which are often housed on separate platforms.”

Investment portfolios such as mutual funds, hedge funds, separate, and institutional accounts require investment accounting to help manage risk and produce financial statements to prove to investors that their portfolios are accurately represented.

“The industry is moving towards implementing one accounting system, whether in-house or outsourced, to help streamline processes and reduce systems cost,” said Jeremy Skaling, head of product management at BNY Mellon’s Eagle Investment Systems subsidiary.

An Investment Book of Record (IBOR) is a set of investment data that is maintained with the primary purpose of supplying timely and accurate data to the front office of an investment manager to support the investment decision process.
Equally important to servicing front office needs, a well-constructed IBOR supports middle- office business functions such as calculation of daily security level performance measurement and portfolio attribution, oversight of the back office or custodian, management reporting, client billing, and client statements.
The IBOR is typically processed on a trade date basis, meaning any trades are recognized as part of the investment book on their market trade date.

The Accounting Book of Record (ABOR) is the investment book that supports the back-office operations. In most cases, the ABOR is maintained by an out-source provider and is typically the official book of record which will be the basis for financial statements and audited annually.

“The ABOR supports back-office business functions such as daily NAVs and other unit valuations, regulatory reporting, fund administration, transfer agency, and custodial services,” said Skaling. “It is processed on a trade date +1 basis for US 40 Act funds, meaning trades are recognized as part of the fund and NAV one business day after the trade is executed.”

Fund companies and fund service providers have begun to implement investment accounting systems that support both the IBOR and ABOR on a single transaction set.
“To accomplish this and recognize the cost savings, firms must implement an investment accounting platform which allows for a single transaction set to be used for both T+1 NAV calculation, and T+0 IBOR,” Skaling said.

Equipping investment managers and service providers with a combined IBOR/ABOR capability gives them the potential to extend their services beyond traditional back office functions.

The next step in the evolution is Multiple Books of Record (MBOR), which enables companies to set up multiple views within an account structure.

“By leveraging MBOR, InvestOne users have the facility to create up to 10 additional views within an account structure,” said SunGard’s Warren. “Each view is available online in real time and can be set either to effective date or trade date accounting (supporting post execution replay and recalculation for tax assessment), and be restated into multiple base accounting currencies.”

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