The Association of Mutual Funds in India (Amfi) recently completed three rounds of workshops for accounting personnel in 30 mutual funds, updating and enhancing their knowledge and awareness of accounting policy principles unique to mutual funds.

The workshops were conducted under the aegis of project FIRE by Price Waterhouse consultant Rajesh Dadoo. According to him, it became apparent during the course of the workshop that the concept of value was not very clear among the valuers of mutual fund holdings. This is rather unhealthy for unitholders, because unless the securities are valued correctly, they may even stand to lose. ``There was a lack of awareness as to what a NAV actually means,'' he said.

Participants in the workshop were told therefore that a misstatement of NAV may cause a total or partial reprocessing of the capital stock transactions. If an NAV is overstated, the person buying into an open-end fund received fewer units and those redeeming receives less than what is due to him. If the NAV is understated, the shareholder buying into the fund is issued more units, while the person redeeming receives too little money.

Value was defined for them as `the quoted market price for securities for which market quotations are readily available or an estimate of value as determined in good faith by the board of trustees for other securities.' Sebi has laid out rather elaborate norms for accounting standards in its mutual fund regulations 1996, but some confusion prevails when it comes to implementation.

The biggest problem faced by the valuers is valuation of illiquid or unquoted securities. It was explained to the participants that a fair value is `the estimate of the amount the owner of the security expects to receive in a current sale, though the owner may not intend to sell them.' The workshop also focussed on accounting for stamp duty. The generally accepted accounting principle requires that stamp duty be accounted as a part of acquisition cost of the security. It was explained to the participants that stamp duty is an integral part of the acquisition of the security and everyone has to pay for it as opposed to other transaction expenses. The general practice is to adjust the cost upon actual payment of the duty for the difference between the accrued amount and amount actually paid.

On the issue of accounting for primary market transactions, participants were told that just application money paid as deposit cannot be treated as an investment. It becomes an investment when it can be marked to market only upon allotment of shares. The workshop also touched upon the concept of load. Dadoo said that there seemed to be some confusion between the concept of organisation costs, initial issue expenses and distribution costs. In India, the load is treated as cost incurred in the initial issue. So a no-load scheme can have a back-end load.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.