Investment Accounting

What is investment accounting?

Investment accounting, within the accounting industry, is defined as a process of managing investments—tracking and monitoring the investment activity of customers. 

It is important to note that a company or business makes an investment in a tangible (real estate, land, commodities) or intangible (securities, derivatives, equity) manner.

Fund managers, professionals, and investment accounting firms use investment accounting software to maintain accurate records of investment, track investment activity, create portfolio insights, and perform profitability analysis.

This software handles various types of accounting methods in line with the requirements of the user and accounting standards and guidelines. 

Every firm must have an investment accounting process to help decision making as it provides clarity on the financial position and value of the investments. This leads to businesses creating action items by forecasting future returns and carrying out risk analysis and management. 

Investment accounting software is often integrated with investment portfolio management, accounting, financial analytics, and financial risk management software.

Types of investment accounting

Based on the type of business and investments of the business, one of the four different types of investment accounting methods (as categorized by GAAP) will be utilized:

• Cost method: When an investor has a small ownership stake (less than 20%) in the investee, a cost method is used. This is generally in an intercorporate investment where the investment on the balance sheet is termed as a cost. This results in dividends received from the investee company to reduce the carrying cost of the investment. 
• Consolidation method: When an investment results in a controlling stake or financial interest (more than 50% ownership) in the investee company, a consolidation method is used.
  As a parent company, the investor has deemed control over its subsidiary, the investee. Hence, the financial statements of the investor and investee are combined and consolidated into one.
• Equity method: When the investor has a significant stake but not a controlling stake in the investee (between 20-50%), the initial investment is recorded as cost, where over a period of time, the cost is adjusted to recognize the investor’s share to calculate the income and losses of the investment. 
• Mark-to-market method: Also called the fair value method, it deals with short-term investments (such as securities trading) instead of the three long-term investments mentioned above. It is a practice of measuring the assets and liabilities at the current market value.
  In this method, the fair value price is determined depending on the party's interests, asset objectives, and risk factors against the market value price, which is the observed and actual value of the asset or liability.

Benefits of using investment accounting software

Investment accounting software combines investment tracking, reporting, compliance, and automation for an efficient workflow and investment management.

• Investment activity tracking: An investment accountant tracks and monitors a company’s investment activity and advises clients in their best interest to carry out business efficiently using investment accounting methods.  
• Report making and compliance: Tax reports, annual reports, and investment summaries are created via investment accounting for tax compliance and shareholder briefing. 
• Automation: Investment accounting can be automated to get an in-depth ROI analysis, track and monitor investments, execute conditional orders, and provide real-time access, improving efficiency and accuracy.

Impacts of using investment accounting software

Deploying investment accounting software into a company’s investment process and management has its considerations. Some of them are:

• Decision making and performance indicators: With clarity on investment decisions through accurate data analysis, investors can make enhanced investment choices. Important performance indicators are derived as insights through accounting analysis, which is instrumental in strategic planning.
• Financial reporting and tax compliance: Maintaining records and accounts paves the way for enhanced risk management and prediction on returns. Investors can paint an accurate picture of the investments and their returns to shareholders, regulators, and creditors.
• Increased dependency on software: Any technical or software difficulties may lead to potential threats, inaccuracies, and delays. Therefore, a financial analyst must check and balance the process, which may result in compliance and accounting issues.

As positives outweigh negatives, any potential challenges can be mitigated and managed with planned costs, well-trained accountants, and clarity on the accounting methodology. 

Basic elements of investment accounting

Investment accounting generally includes the following basic elements: 

• Investment portfolio management: With a seamless and user-friendly dashboard, the investor can identify types of investments, monitor investments, execute orders, and gain insights from portfolio analysis of historical data to make strategic decisions.
• Transaction tracking and reporting capabilities: With the ability to calculate accruals, cashflows, and profit and loss data, the investor can regularly track positions and generate reports. This results in the recording of income from an investment (dividends, losses, and interests), which is calculated, recorded, and recognized in the financial statements.
• Real-time recording of data: Change in the market value of an investment is tracked over time and is recorded based on the accounting method in the financial statements. Finally, the appropriate value and the changes in statements are reported with respect to GAAP or other standard regulations.

Investment accounting best practices

• Periodically update the financial statements: Continuously monitor and analyze the financial statements, regularly log financials, and audit the accounting records to maintain financial health and report accuracy.
• Use reliable software and trained staff: As a rule of thumb, always use reliable software for investment accounting and continuously train professionals to handle investment accounting. This increases efficiency and security and avoids any vulnerabilities that can threaten the investor.
• Stay updated on regulation and compliance changes: Always be up-to-date with tax rules, investment regulations, and compliance requirements. Periodically review and compare investment records with external statements to maintain accuracy.

Investment accounting vs. financial accounting vs. management accounting

Investment accounting focuses only on recording, reporting, and analyzing an investor or company's investment in tangible and intangible assets. Transactions and decisions around capital allocation to maximize returns in the form of shares, equity, subsidiaries, real estate, and other forms of investments are dealt with via investment accounting.

Financial accounting encompasses summarizing and reporting all the company's financial transactions, including costs and returns on the company operations, investments, and other contractual obligations, which is the overall value of the company’s assets and liabilities. 

Management accounting only relates to the accounting of management decisions concerning the company's operations—internal reporting, strategies, and business success.

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