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 December, 2004 - 31 December, 2013Categories: Trade-Date AccountingSource: Investment Performance Council (IPC)
The GIPS standards currently state that firms will be required to use trade-date accounting as of 1 January 2005. I know the recent proposed edition of GIPS standards indicated that this requirement would stay in force, but defined trade-date accounting as “Recognizing the asset or liability on the date the transaction is entered into. Impact on performance: between trade date and settlement date, the account recognizes any change between the price of the transaction and the current market value.”
Will this requirement still be effective in January 2005? If so, how should trade date be defined?Yes-firms will be required to implement trade-date accounting as of 1 January 2005. For the purposes of the GIPS standards, trade-date accounting is defined as “recognizing the asset or liability on the date the transaction is entered into.” Settlement-date accounting is defined as “recognizing the asset or liability on the date in which the exchange of cash, securities, and paperwork involved in a transaction is completed.”
When using settlement-date accounting, any movement in value between the trade date or booking date and the settlement date will not have an impact on performance return until settlement date; whereas for trade-date accounting, the change in market value will be reflected for each valuation between trade date and settlement date. If the trade and settlement dates straddle a performance measurement period-end date, then performance return comparisons between portfolios that use settlement-date accounting and those that use trade-date accounting may not be valid. The same problem occurs when comparing settlement-date portfolios and benchmarks.
The principle behind requiring trade-date accounting is to ensure there is not a significant lag between trade execution and reflecting the trade in the performance of a portfolio. For the purposes of compliance with the GIPS standards, portfolios are considered to satisfy the trade-date accounting requirement provided that transactions are recorded and recognized consistently and within normal market practice–typically, a period between trade date and up to three days after trade date (T+3). After 1 January 2005, all firms must recognize transactions on trade date as defined herein.