Recording, valuing and accounting for MMFs is likely to change under new EU rules, as David Passarinho explains
The European Regulation on Money Market Funds (MMFs) came into force on 21 July 2018, applicable to any new MMFs in the EU from that date. Existing MMFs will have to comply with the regulation by 21 January 2019.
One of the main changes introduced by the regulation is that most constant net asset value (CNAV) funds will have to convert to either low volatility net asset funds (LVNAV) or variable net asset value funds (VNAV).
The exception is public debt CNAV MMFs, which may continue to be CNAV funds.
The recharacterisation of funds may not only impact investment decisions, but is also likely to impact the accounting treatment and the process required to record, value and account for MMFs.
Most MMFs in the UK are currently accounted for at historical cost, since the NAV is constant. LVNAV MMFs will continue to be accounted for in this way, as long as the ‘real’ NAV fluctuation remains within pre-established limits.
However, VNAV MMFs will have to be accounted for at fair value through profit or loss. (This is because VNAV MMFs are classified as non-SPPI financial assets – SPPI stands for solely payments of principal and interest).
Some accounting issues that corporate treasurers should consider during the conversion period include:
- MMFs currently classified as cash and cash equivalents (C&CEs) are expected to continue being classified as such, provided the converted funds have similar investment strategies, policies and portfolio structures. Nevertheless, for those entities that have MMFs classified as C&CEs, this is a good opportunity to revisit the internal investment, risk management and accounting policies to ensure that: (1) Investments are only allowed in funds with a high level of credit quality and liquidity; (2) Investments in MMFs have the objective of meeting short-term cash commitments rather than having a pure investment purpose; and (3) There are internal controls in place to verify the funds’ liquidity buffers and to verify that the NAV variability is within levels considered insignificant for that corporate (some entities may consider defining strict thresholds for a fund’s allowed NAV variability or at least prepare guidance to assist with analysis to support that conclusion).
- Entities that currently classify MMFs as C&CEs should reconfirm the classification of their funds upon conversion with their auditors, especially for those that will convert their CNAV into VNAV funds.
Treasury management systems
Next, it is important that the treasury management system (TMS) can accommodate MMFs, as the products become more complex.
Most TMSs have modules to manage equity investments, and this may generally be the most appropriate solution to accommodate the new products. Some of the more specific considerations when looking to record MMFs in a TMS will include:
- The TMS should be able to handle VNAV funds. Specifically, the system should record the changes in the fair value of the funds and calculate the gains and losses upon redemption based on whichever inventory cost method is used (for example, first in, first out or last in, last out);
- MMFs’ units of participation (UP) are often a non-integral number, whereas some systems might only accept integral numbers to record UP information;
- As a result of the current market conditions, some EUR MMFs have been paying ‘negative dividends’ due to the EUR negative yields. Many systems may not be able to record this information in their equity modules, and workarounds will be necessary; and
- A robust process should be in place to feed the funds’ NAVs into the system and to verify the funds’ valuation.
In summary
There is a lot of work to be done between now and the end of the year in order to be ready for the reclassified MMFs. We would recommend starting sooner rather than later.
About the author
David Passarinho is treasury accounting expert at Huawei Global Finance UK