Investment advisers to offshore funds are often entitled to incentive or performance fees. While these fees generally are not payable until the end of the fund's fiscal year and the fees may fluctuate during that period, the incentive fee should be accrued on an interim basis if the fee is to be accounted for as an expense, based on performance to date, and be included as a liability in the calculation of net asset value subject to any clawback provisions. (See ARM 9652.153 when the fee is in the form of a capital allocation). Appropriate disclosure regarding this accrual should be made in the notes to the financial statements. According to the TIS Section 6910.29, accruals for fees not yet crystallized (i.e., finalized and earned) should be calculated as if the fund has realized all assets and settled all liabilities at its reported fair value, and allocated all gains and losses and distributed the net assets to each class of shareholder at the reporting date. In some cases, the incentive fee accrual may reverse in the following year should subsequent performance turn negative before crystallization; that reversal should be reported as a "negative expense" within the expense caption, consistent with the original presentation of the accrual.

Investment advisors to offshore funds often elect to defer all or a portion of their management or incentive fees. The cumulative deferred fees, including amounts newly deferred during the year and earnings on the accumulated balance, are shown as a liability on the fund's balance sheet. Earnings on the accumulated deferred balance should be reported as an expense in the fund's statement of operations, consistent with the presentation of the deferral as a liability. If the earnings rate is indexed to the fund's performance, and performance for the year is negative, a negative expense for the year could result and is appropriate. Appropriate disclosure regarding the deferred fee arrangement should be made in the notes to the financial statements. AAG-INV 7.235 includes an illustration for the presentation and disclosure of deferred incentive fees in the financial statements.