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Money Market Fund Accounting: A Brief Primer

by Susan Dargan, IMMFA Operations Committee Chair

While most mutual funds are managed with the objective of increasing their value and providing shareholders with a return, money market funds are somewhat different. The primary objectives for money market funds are ensuring the security of capital and providing shareholders with access to that capital at all times. A return, or yield, is a secondary consideration.

Although money market funds invest in assets whose value can change over time, the funds’ net asset value (NAV) may remain constant at 1.00. How can fund managers square this circle? The answer lies in the use of amortised accounting.  

Amortised value

Amortisation is an accounting technique which diminishes the value of an asset in a gradual manner over time. If this is applied to money market instruments, any discount / surplus initially paid over par (face value) is gradually added to / taken off the value of the instrument over time. Amortisation of money market instruments is conducted on a straight line basis (i.e., in a regular fashion) over the life of the asset, helping to provide continuity in asset values.

The use of amortisation is permitted by fund regulation (Undertakings for Collective Investment in Transferable Securities, or UCITS) as well as international accounting standards (International Financial Reporting Standards, or IFRS). Under IFRS, assets should be booked at fair value. Where assets are ‘held to maturity investments’, fair value should be measured using amortised cost under IFRS standards. As money market funds emphasise security and liquidity, the fund manager does not actively look to sell assets in the secondary market to generate profit (or realise a loss). This is because liquidity in secondary markets can rapidly disappear, as we recently witnessed.