As per the Securities and Exchange Board of India (SEBI) (Mutual Funds) Regulations, 1996 (MF regulations), every Asset Management Company (AMC) is required to keep and maintain proper books of account, records and documents for each scheme of a mutual fund. Such books of account, records and documents should explain the transactions and disclose the financial position of the mutual fund scheme at any point in time.
On 25 January 2022, SEBI issued the SEBI (Mutual Funds) (Amendment) Regulations, 2022 that mandate the AMCs to prepare the financial statements and accounts of the Mutual Fund schemes in accordance with Ind AS with effect from 1 April 2023.
Additionally, on 4 February 2022, SEBI issued certain accounting guidelines (including formats) for the preparation of financial statements under Ind AS by AMCs. Following are important points of the circular:
- Opening balance sheet : Mutual Fund Schemes should prepare an opening balance sheet as on date of transition (1 April 2022) and the comparatives as per the requirements of Ind AS (FY 2022-23).
- Historical per unit statistics: Mutual Fund schemes are required to disclose scheme wise perspective historical per unit statistics for the past three years1.
Mutual Fund schemes may not be mandatorily required to restate the previous years published perspective historical per unit statistics, in accordance with the provisions of Ind AS for the first two years from first time adoption of Ind AS. However, mutual fund schemes would need to provide the following additional information in the perspective historical per unit statistics:
- State the previous Generally Accepted Accounting Principles (GAAP) information prominently as not being prepared in accordance with Ind AS and
- Disclose the nature of adjustments that are required to be made for compliance with Ind AS (quantification of adjustments is not required).
- MF regulations to prevail over Ind AS: Proviso to clause 50(1A) of the MF regulations states that in case there is any conflict between the requirements of Ind AS and the MF Regulations and guidelines issued thereunder, the mutual funds shall follow the requirements specified under the MF Regulations
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Brokerage and transaction costs: Currently, under the MF regulations, brokerage and transaction costs incurred for the purpose of execution of trade, up to a prescribed threshold are required to be capitalised to the cost of investment. As per the amendments, these brokerage and transaction costs incurred for the purpose of execution of trade will now be charged to the mutual fund scheme as provided under Regulation 52 (6A) of the MF regulations:
- Up to 12 bps and 5 bps for cash market transactions and derivatives transactions respectively
- Any payment towards brokerage and transaction costs, over and above the limits specified in (a) may be charged to the mutual fund scheme within the maximum limit of Total Expense Ratio (TER) prescribed in MF regulations.
- Other disclosures: The circular also prescribes other disclosures such as accounting policies on recognition of revenue, accounting policies on valuation of investments, contingent liabilities, and other disclosures as part of Ind AS to be provided in the notes to account.
- As per clause 6 of the Eleventh Schedule of MF regulations
To access the text of the SEBI (Mutual Funds) (Amendments) Regulations, 2022, please click here
To access the text of SEBI circular dated 4 February 2022, please click here
Action points for auditors
- Transition to Ind AS is a significant exercise both, for the management and for the auditors. As MF regulations are not fully aligned with the principles of Ind AS, auditors should highlight the areas of differences to their clients. Broadly areas of that would require assessment are valuation of investments, disclosures under Ind AS, first-time adoption requirements and equity-liability classification of the unit capital. Given that the transition date is 1 April 2022, auditors should start liaising with their clients on priority.
- Auditors should take note of the various formats specified for preparing the financial statements of the Mutual Fund schemes.
