How to Expense Broken Deal Costs on a Failed Portfolio Investment Transaction
Expensing due diligence, legal, and advisory costs incurred on a potential portfolio investment that did not close.
| Account Name | Type | Debit ($) | Credit ($) |
|---|---|---|---|
| Broken Deal Costs Expense | Expense (+) | 185,000.00 | - |
| Accounts Payable - Legal & Advisory (Broken Deal) | Liability (+) | - | 185,000.00 |
💡 Accountant's Note
When a potential acquisition falls through, all costs incurred (legal due diligence, financial due diligence, management consulting, travel) must be immediately expensed — they cannot be capitalized since no asset was acquired. The LPA specifies whether broken deal costs are borne by the fund (reducing LP NAV) or by the GP management company.
Practitioner & Systems Framework
💻 ERP Architecture
Maintain a deal pipeline project code for each potential investment. If the deal closes, accumulated costs are capitalized to the investment. If broken, costs are immediately expensed and the project code is closed. Some GPs recover broken deal costs from deal fees on future successful transactions.
⚠️ Audit Flags
Auditors verify that costs allocated to the fund versus the GP management company are consistent with the LPA. Any cost-sharing arrangements between funds must be clearly documented.
📄 Required Documentation
LOI or NDA showing the transaction was pursued, invoices for DD costs, board/IC memo documenting the decision to abort the transaction, LPA broken deal cost provisions.
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Expert Analysis by Qusai Ahmad
General Accountant Supervisor & IFRS Specialist
Specialized in SAP GUI automation and Middle Eastern tax compliance. Building digital tools for the next generation of finance leaders.