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.

Content from prior Q&As was included in the GIPS Standards Handbook as much as possible and many Q&As were archived. Change the Status drop-down filter to "Archived" to see the archived Q&As.

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Archived

Effective: 1 March, 2006 - 31 December, 2019

Categories: Cash

Source: GIPS Handbook, 2nd Edition

Firm B seeks to have all of its clients’ funds 100% invested at all times. However, because of the nature of cash flows in the buying and selling of assets, cash may be held in the accounts for a short period. The firm holds this cash in a money market account. How should Firm B account for the income generated by the assets in the money market account when calculating investment performance?

Both the value of and interest earned on the money market account must be included in the portfolio’s rate of return calculation. The firm has two options. Because the money market fund is clearly a cash substitute in this case, Firm B could recognize interest income on a cash basis. Firm B could also choose to recognize interest income on an accrual basis. Because there is no published interest rate for money market funds on which to accurately accrue the income, Firm B may use the last actual interest rate from the money market fund to accrue income for the current period, and when the actual rate for the current period becomes known, it can adjust returns to allocate the actual income earned to the proper period. Once Firm B chooses an accounting method, it must be applied consistently to ensure continuity and consistency of results.