Mutual Funds: It's Time for Better Reporting

By Nave, Vincent | Journal of Accountancy, July 1993 | Go to article overview

Mutual Funds: It's Time for Better Reporting


Nave, Vincent, Journal of Accountancy


Financial accounting deals with extraordinarily complex issues, but its purpose is quite simple: to communicate economic reality. The accounting profession's body of knowledge generally accepted accounting principles--permits dissimilar organizations to apply the same standards in presenting financial results. The performance of businesses as dissimilar as banks, factories and hospitals can be compared consistently from one period to the next.

Because GAAP financial statements have significant predictive value, interested parties can track trends in sales or revenues, dividends, retained earnings and book values. In one area, however, GAAP is ineffective for the principal end users of financial information. These accounting principles, developed for companies with financial statements based on historical cost accounting, should not be applied to mutual funds. GAAP statements do not depict economic reality for mutual funds; funds operate primarily on a market value and tax basis and shareholders would be better served by a different financial reporting approach. In the square peg in a round hole analogy, mutual funds are the square peg and GAAP is the round hole.

There is a square hole mutual funds fit into naturally: tax-basis accounting. It's time to modify GAAP significantly for mutual funds and account for their income exclusively on a tax basis. A substantial majority of mutual fund financial executives say preparing tax-basis financial statements for mutual funds would provide many advantages over GAAP. Almost three-quarters of the financial executives in the mutual fund industry surveyed in 1992 by the Investment Company Institute said switching to tax-basiS reporting would provide shareholders with more meaningful financial statements.

Furthermore, the American Institute of CPAs, the Securities and Exchange Commission and the Financial Accounting Standards Board already have recognized the importance of applying elements of tax-basis accounting to mutual funds. The AICPA and the FASB recently endorsed basing mutual funds' return-of-capital distributions reporting solely on tax rules. SEC rules regulate long-term capital gain distributions, exclusively a tax concept. However, these bodies have stopped well short of endorsing a complete change to tax-basis reporting.

Tax-basis reporting would give shareholders the information they want and need in a clear, understandable format. A wide array of book-tax differences would be eliminated. There would be a single, consistent basis for mutual fund accounting instead of two often contradictory and misleading bases.

THE SPECIAL CASE OF MUTUAL FUNDS

Open-end investment companies--or mutual funds--hardly resemble companies that produce goods or services. Depending on their investment objectives, funds can be made up of listed or unlisted common stocks; money market instruments; foreign securities; government, corporate or municipal bonds; or other securities. Most funds are organized as corporations but also may be limited partnerships or business trusts.

Mutual funds are pools of securities that provide investors with diversification, professional management and convenience. They have existed in the United States since 1924. Most of the current accounting rules date to the Investment Company Act of 1940, which mandated SEC registration and recognized the public expected mutual funds to be exempt from federal income tax at the corporate level.

Mutual funds are creations of the tax law; without special tax treatment, few if any could exist. When funds meet certain requirements, federal income taxes on earnings are paid by shareholders only on distributions received from such earnings. Mutual funds thus are tax conduits not subject to the double taxation of companies producing goods or services. Conduit status makes funds attractive investments for individual investors, large and small.

Until the 1980s, mutual funds were fairly simple. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • A full archive of books and articles related to this one
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Mutual Funds: It's Time for Better Reporting
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

    Already a member? Log in now.