Accrual

Under accrual accounting, a fund recognizes interest income as it is earned day by day, dividends on the ex-date, and expenses such as management fees, performance fees, administration, audit and legal fees over the period they cover. Each accrual creates a receivable or payable in the balance sheet that reverses when cash moves.

Accruals are essential for a correct NAV. Because investors subscribe and redeem at NAV, an unaccrued expense shifts cost from departing investors to remaining ones, and an unaccrued income item does the reverse. Funds therefore accrue daily or at each valuation point using budgets, fee schedules, rate contracts and security terms.

Controls include an expense budget reviewed at least annually, true-ups when invoices arrive, analytical review of accrual balances against prior periods, and checks that accruals stop when positions are sold or loans default. Common errors are missed accruals for new service providers, accrued income on defaulted assets, and accruals that are never reversed after payment.

Example

A fund with an annual audit fee of USD 60,000 accrues USD 5,000 per month. When the USD 62,000 invoice is paid, the USD 2,000 difference is recorded as a true-up in that period.