Accounting for private equity funds should be adjusted to accommodate privately held companies. A great way to distinguish this structure from general accounting is noting that private equity funds are not traded publicly, and investments are usually made directly from high net-worth sources. Thus, accounting and tax planning follow the same tone.

A private equity CPA should work within the standards issued by the FASB and the IASP. Some accounting standards were not formed with private equity entities in mind, so private equity tax planning and private equity fund accounting must be adjusted to clearly outline the financial situation and operation of the private equity fund.

Private equity bookkeeping, especially the preparation of financial statements, should clearly reflect the terms that the equity fund has with the different businesses or individuals that have invested. The private equity fund's activities and investors should also be outlined in financial statements.

Private equity funds under the US GAAP follow this framework laid out by the American Institute of Certified Public Accountants that includes an Audit and Accounting Guide. According to the guide, private equity bookkeeping should consist of:

  • Cash flow statements
  • Schedule of investments
  • Statement of assets and liabilities
  • Statement of operations
  • Separate listings of financial highlights
  • Notes on the financial statements

Valuation may be the heart of private equity accounting. For this reason, private equity financial advisers are able to help their clients choose the right accounting standard. The wrong choice may negatively impact the investment value.

Still, regardless of the accounting standard used, investments should be listed at fair value. However, the meaning of fair value changes depending on the accounting standard used. For example, in some situations, your private equity fund could discount the value of investments if you make the claim that there is a regulatory or contractual restriction that impacts the market price of the investment.

Generally, investments should be listed as the price the fund paid for them, subtracting any provisions or, at the price of the investment when it was first put on the market.

Private equity funds are likely to be structured as limited partnership agreements. They generally have multiple classes of partners consisting of a founder partner class, general partner class, and a limited partner class. Expenses and funds should then be allocated across different partner classes. It may also be helpful to note that a limited partnership agreement sets the rules for the allocation of expenses and distributions.

As the tax laws evolve, equity fund structures may need to be adjusted to provide the best tax protection for all involved. You may have come to understand that private equity funds can create complicated investment and accounting structures. However, the previously mentioned information only scratches the surface of private equity accounting.

There are additional tax rules and regulations in place that vary based on the jurisdiction, county, or state. These elements may add another layer of complexity to the accounting process. Our private equity accountants here at Fusion CPA recommend partnering with an expert to assist with understanding the full scope of private equity accounting and placing controls to minimize tax risk.

Fusion CPA offers private equity CFO business advisory to small and medium-size private equity funds. As private equity financial advisers, we aim to help you manage client relationships, coordinate quarterly investor reporting, review and prepare management fee calculations, and prepare quarterly management fee calculations.

Our team of experienced accountants is here to provide leadership and guidance. We are well-versed in the principles behind accounting for private equity funds and offer assistance that is coupled with the use of specialized accounting software. You can learn more about our services if you contact us to schedule a complimentary discovery call today!

This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.