GAAP Reporting Requirements for Mutual Funds

Mandatory GAAP disclosures give you better insight into a mutual fund’s performance.

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The Securities and Exchange Commission requires that mutual funds use generally accepted accounting principles, or GAAP, when preparing their financial documents. This lets you compare one mutual fund’s performance against another over the same period. The SEC reviews the documents filed by mutual funds to verify they are complying with GAAP accounting procedures. GAAP gives you more transparency about the financial transactions and material events affecting the mutual fund.

Transaction Reporting

Mutual funds must disclose their transactions during the accounting cycle. Under GAAP, income and expense transactions that occur within the same accounting cycle must be matched together. To satisfy this requirement, mutual funds use the accrual accounting method. With the accrual method, income is reported when it is earned and not when it is received. Likewise, expenses are recognized when they are incurred and not when they are paid. This lets you weigh the amount of income the mutual fund earns against the expenses for the same accounting period.

Annual Report to Stockholders

Mutual funds must file an annual report with the SEC and provide a copy of it to their stockholders of record. To comply with SEC regulations, the annual report must be prepared according to GAAP. The annual report must include a balance sheet spanning the current and prior year and an income statement and a statement of cash flow for the current year and prior two years. An independent auditing firm must certify that the financial statements were prepared in accordance with GAAP.

Net Asset Value Reporting

An open-end mutual fund must calculate its net asset value, or NAV, daily using GAAP. The NAV is the value of all the mutual fund’s assets, which are the securities it owns, divided by the number of shares outstanding. To determine the NAV, the mutual fund calculates the value of each asset at the end of the trading day. The mutual fund must calculate the GAAP-qualified expenses it incurred as well. The mutual fund then subtracts the expenses for that trading day from the ending value of all the assets to arrive at the NAV.

Expense Reporting

The SEC requires that open-end mutual funds disclose the management expenses they pass on to shareholders. The report must conform to GAAP requirements that the expenses are based on an investment of $1,000 for the accounting period. The disclosure must also include the mutual fund’s actual expense ratio assuming that the fund earns a 5 percent return. This enhanced expense reporting requirement is in addition to the other disclosures required by the SEC and GAAP.