Financial Highlights under US GAAP – Total Return Vs Internal Rate of Return

Author: DM Technical Team : June 2026

Investment funds and investment companies preparing financial statements reporting under US GAAP are required to present performance based financial highlights to investors and other users of the financial statements. These metrics are disclosed in order to measure performance of the Investment funds and investment companies for investors in a transparent and consistent way over the reporting period.

There are two relevant measures that can be utilized by preparers of financial statements under US GAAP, Total Return or Internal Rate of Return. Determining which measure is mandated to prepare the financial highlights depends on whether the investment funds or investment companies meet the criteria for when Internal Rate of Return is applicable (which we detail later in the article). If the investment funds or investment companies do not meet this criteria Total Return is then utilized.

US GAAP guidance 

FASB ASC 946, Financial Services – Investment Companies establishes the accounting and reporting standards for financial highlights under US GAAP.

ASC 946-205-45-1 states that the overall objective of financial statements, including financial highlights, of investment companies, is to present net assets, results of operations, changes in net assets and financial highlights resulting from investment activities, and if applicable, from capital share transactions.

ASC 946-205-50-1 states that financial highlights should be presented either as a separate schedule or within the notes to the financial statements.

ASC 946-205-50-18 outlines the requirements for Total Return presentation “Total return shall be presented for all investment companies (for interim periods, the disclosure shall include whether or not total return is annualized)”.

Based on the above guidance, Total Return is the required presentation metric under ASC 946 used for investment companies unless the specific criteria for Internal Rate of Return presentation are met as per ASC 946-205-50-23. Where funds meet these criteria (which we will discuss in the next section), Internal Rate of Return is presented instead of Total Return.

Criteria for when Internal Rate of Return is applicable

ASC 946-205-50-23 states that an investment company is required to disclose the internal rate of return since inception of the investment company’s cash flows and ending net assets at the end of the period (i.e. the residual values) as presented in the financial statements, net of all performance allocations or fees, for each investor class, as of the beginning and end of the period, if they meet all of the following criteria as per their offering documents:

 

    • They have limited lives;
    • They do not continuously raise capital and are not required to redeem their interests upon investor request. Situations where initial capital commitments are obtained from investors at the time of organization of the fund and subsequently drawing down those commitments to make investments is not considered continuous for this purpose;
    • They have as a prominent operating strategy, the return of proceeds from disposition of investments to investors;
    • They have limited opportunities, if any, for investors to withdraw before termination of the entity; and
    • They do not routinely acquire, either directly or indirectly, market-traded securities and derivative instruments as part of their investment strategy.

Financial statement calculation and disclosure requirements for Internal Rate of Return

When Internal Rate of Return is the applicable performance metric being used for the financial highlights the internal rate of return since inception should be based on a consistent assumption, no less than quarterly, as to the timing of cash inflows and outflows (for example on actual cashflow dates or cash inflows at the beginning of each month or quarter and cash outflows at the end of each month or quarter).

In relation to disclosure:

    • The resulting information can be disclosed in the financial statements in either a table or narrative format.
    • All significant assumptions with respect to the internal rate of return must be included in the footnotes to the financial highlights.
    • ASC 946-205-50-24 states that a footnote to the financial highlights must also be included to disclose that the internal rate of return since inception of the investment is net of all incentives.

The DM Technical Team are available to provide template examples for Internal Rate of Return disclosures or specific worked examples for Internal Rate of Return disclosures, as required.

Criteria for when Total Return is applicable

Total Return is the required presentation metric under ASC 946 used for investment companies unless the specific criteria for Internal Rate of Return presentation are met as per ASC 946-205-50-23.

Financial statement calculation and disclosure requirements for Total Return

Under Total Return presentation the calculation and disclosure requirements differ for unitized funds and non-unitized funds.

Unitized funds

    • ASC 946-205-50-19 states that for investment companies using unitized net asset value, total return is calculated based on the change in the net asset value per share during the period under the assumption that all dividends are reinvested.
    • Per share information is only required to be disclosed for unitized funds. ASC 946-205-50-7 states that per-share amounts presented are based on a share outstanding throughout each period presented. The caption descriptions in the per-share data in the financial highlights note should match the captions used in the statement of operations and statement of changes in net assets to allow the reader of the financial statements to determine which components of operations are included in or excluded from various per-share data. The extensive list of the per-share information that may be presented is detailed in points (a) to (h) in ASC 946-205-50-7. The per share information is disclosed in table format in the first section of the wider financial highlights disclosure table.
    • ASC 946-205-50-12 states that average net assets are used as the denominator when determining expense ratios for both unitized and non-unitized funds. The average net assets are calculated using the investment company’s weighted average net assets as measured at each accounting period or periodic valuation (for example, daily, weekly, monthly, quarterly), adjusting for capital contributions or withdrawals from the investment company occurring between accounting periods or valuations. ASC 946-205-50-14 states that the determination of expenses for computing those ratios should follow the presentation of expenses in the investment company’s statement of operations and the ratios should be presented in the financial highlights note before and after performance fees. The expense ratio section forms the final section of the wider financial highlights disclosure table for unitized funds.

The DM Technical Team are available to provide template examples for unitized Total Return disclosures or specific worked examples for unitized Total Return disclosures, as required.

Non-unitized funds

    • 946-205-50-20 states that for investment companies not using unitized net asset value, including investment partnerships, total return is calculated based on the change in value during the period of a theoretical investment made at the beginning of the period. The change in value of a theoretical investment is measured by comparing the aggregate ending value of each class of investor with the aggregate beginning value of each such class, adjusted for any capital contributions or withdrawals during the period.
    • 946-205-50-21 states that if capital cashflows occur during the reporting period, returns are geometrically linked based on the capital cashflow data. 946-205-50-21 further states that geometric linking1 requires the computation of performance allocations or fees for each discrete period within a year in which the invested capital is constant (that is, for each period between investor cashflow dates), then multiplying these performance computations together to obtain the total return for a constant investment outstanding for the entire year. This approach prevents returns being distorted by the timing of subscriptions and redemptions.

1 Geometric linking is the process of combining returns from multiple periods by compounding them rather than simply adding them together. The formula is:

R=(1+r1)(1+r2)⋯(1+rn)−1

 

Please contact the DM Technical Team if you would like worked examples of this calculation methodology.

    • 946-205-50-22 states the effect of performance allocations on total return is calculated on a weighted average aggregate capital basis. This results in a performance calculation less than the maximum if, for example, certain partners had loss carryovers at the beginning of the period.
    • 946-205-50-22 states that as performance allocations or fees may vary between investors within a class, total return for reporting classes that are subject to a performance allocation or fee must report total return before and after the performance allocation or fee for each reporting class as a whole.
    • For non-unitized funds, as per share information is not in scope, the total return section forms the main component of the financial highlights disclosure table.
    • Expense ratios for non-unitized funds are calculated in the same manner as for unitized funds. Please refer to the second bullet point in the Unitized funds section on page 3 for the calculation methodology. The expense ratio section forms the final section of the wider financial highlights disclosure table for non-unitized funds.

The DM Technical Team are available to provide template examples for non-unitized Total Return disclosures or specific worked examples for non-unitized Total Return disclosures, as required.

Conclusion

Financial highlights are a key component of investment company financial statements prepared under US GAAP and provide investors and other stakeholders with transparent and consistent performance information.

Total Return is the mandated performance measure used to prepare financial highlight disclosures unless the criteria for Internal Rate of Return is met. In this article we have set out the applicable criteria for each performance measure together with the calculation and disclosure methodologies.

Please reach out if you would like the DM Technical Team to provide template disclosure examples or specific worked disclosure examples for your investment vehicle.

Our Technical Team