Understanding Investment Fluctuation Funds: Managing Market Volatility

An investment fluctuation fund is a reserve of profits created to meet changes in the market value of an investment. It is designed to adjust the difference between the book value and the market value of an investment. The fund is used to meet a fall in the market value of investments, and any excess is credited to old partners in their old profit-sharing ratio. At the time of dissolution, the investment fluctuation reserve is transferred to the credit side of the revaluation account.

Investment Fluctuation Fund and the Balance Sheet

An investment fluctuation fund is a reserve of profits set aside to meet changes in the market value of an investment. It is used to adjust the difference between the book value and the market value of an investment.

During a change in the profit-sharing ratio or reconstitution of a firm, the investment fluctuation fund will appear on the balance sheet and is distributed among partners in the old profit-sharing ratio. This is the case when there is a change in the profit-sharing ratio among existing partners, or when there is an admission, retirement, or death of a partner, or the dissolution of the partnership.

When the book value and market value of the investment are the same, the amount of the investment fluctuation fund is transferred to the old partner's capital or current accounts in their old profit-sharing ratio.

When the market value of the investment is less than the book value, the treatment of the investment fluctuation fund depends on the quantum of the decrease. If the fall in value is less than the investment fluctuation fund, the fund is adjusted to the extent of the fall in value, and the balance is distributed among the old partners in their old profit-sharing ratio. If the fall in value is equal to the investment fluctuation fund, the amount of the fund is transferred to the investment account, and no amount is distributed among the old partners. If the fall in value is more than the investment fluctuation fund, the amount of the fund, along with the balance amount of the fall in value, is transferred to the investment account. The amount in excess of the investment fluctuation fund is debited to the revaluation account, and the loss on the revaluation is transferred to the old partners' capital accounts in their old profit-sharing ratio.

When the market value of the investment is more than the book value, the entire investment fluctuation fund is distributed to the old partners in their old profit-sharing ratio, and the increase in value is credited to the revaluation account. The gain on the revaluation is transferred to the old partners' capital accounts in their old profit-sharing ratio.

When the Market Value of an Investment Equals the Book Value

An investment fluctuation fund (or reserve) is a reserve created out of a company's profits to meet changes in the market value of investments. In other words, it is a sum of money set aside to account for fluctuations in the value of an investment. This fund is used to adjust the difference between the book value and the market value of an investment.

When the market value of an investment is equal to the book value, the investment fluctuation reserve is treated as a free reserve and is distributed among the existing partners in the old profit-sharing ratio. In this case, there is no loss or gain on the valuation of the investment, and no adjustment is needed.

For example, consider a scenario where partners Amit and Sumi share profits and losses in a 4:3 ratio. They decide to admit a new partner, Rita, who will share future profits and losses in a 3:2:2 ratio with Amit and Sumi. On the date of Rita's admission, the balance sheet shows an Investment Fluctuation Fund of ₹12,600 on the liability side and an Investment of ₹15,000 (at cost). In this case, the entire amount of the Investment Fluctuation Fund would be distributed among the partners in their old profit-sharing ratio.

Another example involves partners J and K, who share profits and losses in a 6:4 ratio. They decide to admit a new partner, L, who will receive a 1/4th share in the firm. On the date of L's admission, the balance sheet shows an Investment Fluctuation Fund of ₹7,900 on the liability side and an Investment of ₹10,500 (at cost). Again, the Investment Fluctuation Fund is distributed among the partners in their old profit-sharing ratio.

In summary, when the market value of an investment equals the book value, the investment fluctuation fund or reserve is distributed among the existing partners according to their previous profit-sharing ratio, and no adjustments are made to the investment value.

When the Market Value of an Investment is Less Than the Book Value

An investment fluctuation fund is a reserve created from profits to meet changes in the market value of an investment. It is designed to adjust the difference between the book value and market value of an investment. When the market value of an investment is less than the book value, it means that the market does not believe the investment is worth the value stated on its books. This could be due to a loss of confidence in the investment, business problems, poor economic conditions, or investors undervaluing the investment.

• Fall in value is less than the investment fluctuation fund: In this case, the investment fluctuation fund, to the extent of the fall in value, is transferred to the investment account, and any remaining balance is distributed among the old partners in their old profit-sharing ratio.
• Fall in value is equal to the investment fluctuation fund: Here, the entire amount of the investment fluctuation fund is transferred to the investment account, and no amount is distributed among the old partners.
• Fall in value is more than the investment fluctuation fund: In this situation, the investment fluctuation fund and the remaining amount of the fall in value are transferred to the investment account. Any excess amount above the investment fluctuation fund is debited to the revaluation account, and the loss on the revaluation is charged to the old partners' capital accounts in their old profit-sharing ratio.

These scenarios can be illustrated through examples. Suppose partners N and P share profits in a 5:3 ratio and decide to admit R as a new partner, sharing future profits in a 4:3:1 ratio. On the date of admission, the balance sheet showed an investment fluctuation fund of ₹19,400 on the liability side and an investment of ₹40,000 at cost. The market value of the investment on the date of the balance sheet was ₹21,400. In this case, the fall in value is less than the investment fluctuation fund, and the appropriate journal entries would need to be made.

Another example involves partners G and H, who share profits in a 1:2 ratio and decide to admit F as a new partner with a 1/3 share. On the date of admission, the balance sheet showed an investment fluctuation fund of ₹27,300 on the liability side and an investment of ₹50,000 at cost. The market value of the investment on the date of the balance sheet was ₹22,700. Here, the fall in value is equal to the investment fluctuation fund, and the amount of the fund is transferred to the investment account without any distribution to the old partners.

A final example involves partners Amit and Ajay, who share profits in a 2:1 ratio and decide to admit Arjun as a new partner with a 1/3 share. On the date of admission, the balance sheet showed an investment fluctuation fund of ₹12,300 on the liability side and an investment of ₹25,000 at cost. The market value of the investment on the date of the balance sheet was ₹11,200. In this scenario, the fall in value is more than the investment fluctuation fund. Therefore, the investment fluctuation fund and the remaining amount of the fall in value are transferred to the investment account, and the excess amount above the fund is debited to the revaluation account. The loss on revaluation is then charged to the old partners' capital accounts.

When the Market Value of an Investment is More Than the Book Value

An investment fluctuation fund is a reserve created from profits to meet changes in the market value of an investment. It is used to adjust the difference between the book value and the market value of an investment.

When the market value of an investment is greater than the book value, the stock market is assigning a higher value to the company due to the earnings power of the company's assets. Consistently profitable companies typically have market values greater than their book values because investors have confidence in their abilities to generate revenue and earnings growth.

In this scenario, the entire investment fluctuation reserve is distributed among the old partners in their old profit-sharing ratio, and the increase in value is credited to the Revaluation Account. The gain on such revaluation is then transferred to the old partners' capital accounts in the old profit-sharing ratio.

• Investment Fluctuation Reserve A/c Dr.
• To Old Partner’s Capital A/cs
• Investment A/c Dr.
• To Revaluation A/c
• Revaluation A/c Dr.
• To Old Partner’s Capital/ Current A/cs

Other Scenarios

When the market value of an investment is less than the book value, the treatment of the investment fluctuation fund depends on the quantum of the decrease. There are three possibilities: the fall in value is less than the investment fluctuation fund, equal to the investment fluctuation fund, or more than the investment fluctuation fund.

When the book value and market value of the investment are the same, the amount of the investment fluctuation fund is transferred to the old partners' capital or current accounts in their old profit-sharing ratio.

Investment Fluctuation Fund and the Realisation Account

An investment fluctuation fund (or reserve) is a sum of money set aside from profits to meet any changes in the market value of an investment. It is used to adjust the difference between the book value and the market value of an investment. The fund can be used to make changes in value against the reserve, or not.

At the time of dissolution, the investment fluctuation fund is transferred to the credit side of the Realisation Account. This is used to record the dissolution of a partnership and the distribution of assets and liabilities. As the fund is a reserve, it will have a credit balance. Transferring it to the Realisation Account reduces the total assets of the partnership and increases the equity available for distribution to the partners.

The accounting treatment of the investment fluctuation fund differs depending on the situation. For example, when a new partner is admitted, the fund appears on the balance sheet and is distributed among the old partners in the old profit-sharing ratio.

>A, B and C are sharing profits in the ratio of 4:3:2 and decide to admit D as a new partner with effect from 1st April 2018. An extract of their Balance Sheet shows the Investment Fluctuation Reserve at ₹18,000 and the Investment (at cost) is ₹2,00,000.

Journal entries will need to be made in the following cases:

• If there is no other information
• If the market value of the investment is 2,00,000
• If the market value of the investment is ₹1,91,000
• If the market value of the investment is ₹1,73,000
• If the market value of the investment is ₹2,18,000

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