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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Archived

Effective: 1 January, 2006 - 31 December, 2019

Categories: Private Equity

Source: Interpretive Guidance for Private Equity

Please clarify the recognition of management fees and carried interest accrual.

In constructing cash flows for calculating performance, management fees should be recognized as dated cash flows accrued at the quarterly, annual, or other periodic date when such management fees are payable. This method is in contrast to the occasional practice or treatment in which management fees are simply subtracted from the ending net asset value used in calculating performance. This latter treatment delays recognition of the management fee and thus artificially increases the rate of return calculated by an IRR calculation.
Carried interest accrual creates another problematic treatment. The net asset value used at the end of the period for which performance will be made up of largely unrealized and some realized investments yet to be distributed. The net asset value should have subtracted actual carried interest for realized investments that have not been distributed and should have fair value estimates of accrued carried interest subtracted for any investments that have yet to be realized. The intent is to provide an estimate of what the limited partner would receive if the unrealized portfolio were liquidated and distributed at the date of performance calculation.