Q & A Database
The GIPS Standards Q&A database contains questions and answers (Q&As) on various searchable topics that provide additional interpretation on an issue. Q&As are considered to be authoritative guidance and must be followed in order to claim compliance with the GIPS standards.
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ArchivedEffective: 1 November, 2012 - 31 December, 2019Categories: Cash FlowSource: GIPS Handbook, 3rd Edition
When should we record an incoming external cash flow to a portfolio: on the date we are notified the cash is incoming or the date that we actually receive the funds? In our situation, we are notified of incoming funds in order to allow us to place trades so that the incoming funds are fully invested when the cash contribution is actually received into the portfolio. We use a trade-date accounting methodology for all securities; however, we do not reflect external cash flows in the portfolio until the cash is physically received (i.e., settlement date). Is this an acceptable methodology to use for reporting performance when there is an external cash flow to the portfolio?
The GIPS standards define trade-date accounting as recognizing the asset or liability on the date of the purchase or sale and not on the settlement date. By definition, the trade-date accounting convention applies only to investment transactions (i.e., purchases and sales of securities). Accounting for an investment transaction on the trade date ensures that the security is reflected in the performance calculation on the date when the ownership and economic risks and rewards are transferred. Therefore, external cash flows are typically booked on the date when they are actually received or distributed.
If trading on the pre-announced external cash inflow before it is received into the portfolio, the portfolio will become leveraged during the period between the trade date and the date when the cash inflow is physically received. In order to “cover” this additional exposure and eliminate the leverage effect, some firms may choose to apply the trade-date and settlement-date principles to pre-arranged cash flows by booking the cash flow with a trade date that reflects the date the firm may trade in advance of the cash inflow and a settlement date that reflects the date when the cash is received. If the firm chooses to match the trade date of pre-announced external cash flows to the trade date of trades related to those cash flows, it should establish this as its policy and treat all pre-announced cash flows consistently.
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