AICPA Changes the Accounting Treatment of Start-up Costs For Hedge Funds 

July 27, 1998

Overview of AICPA Statement of Procedure 98-5

The AICPA has issued a Statement of Procedure (“SOP”) 98-5 that will change the accounting treatment of start-up costs for most businesses from the traditional capitalization and amortization of these costs over a period of time (which was typically five years) to treat the full amount of these costs as an expense item in the period in which they are incurred. SOP 98-5 defines start-up costs as the costs related to one time activities associated with the opening of a new facility, introducing new products and services, conducting new business with a new class of customers or in a new area, or starting a new operation or a new process in an existing facility. Costs associated with organizing the new entity (e.g., preparation of certificates of formation or partnership agreements) are also considered start-up costs. For most nongovernmental business entities SOP 98-95 is effective for fiscal years beginning after December 15, 1998 with pre-existing costs written off as a cumulative effect of a change in accounting principle.

Special Relief for Hedge Funds

Special relief on the implementation of SOP 98-5 is given for open-end investment companies (which, for this purpose, include most hedge funds). These entities have the option of continuing to capitalize and amortize start-up costs incurred prior to June 30, 1998 and continuing to amortize these costs over the originally selected period. Thus a hedge fund would not have to report a large expense due to the cumulative effect of a change in accounting principle in a single fiscal year.

To discuss other issues relating to hedge funds and their investment managers, contact Howard A. Neuman or Steven B. Katz at (212) 818-9200 .