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 August, 2002 - 31 December, 2013Categories: Trade-Date AccountingSource: Investment Performance Council (IPC)Firm B claims compliance with GIPS but uses settlement-date valuations. Beginning 1 January 2005, what will Firm B have to do to remain in compliance with the Standards?
To remain in compliance with the Standards, Firm B will have to discontinue its practice of using settlement-date valuations and begin using trade-date valuations. However, Firm B will not be required to go back and recalculate historical performance of its composites. As with any requirement that becomes effective on a future date, historic composite returns calculated and presented in compliance with the GIPS standards, as they previously existed, should not be recalculated and presented in conformance with a newly implemented standard, unless specifically stated.In addition, Standard 4.A.4 requires firms to disclose if settlement-date valuations are used. For periods after 1 January 2005, firms must still disclose if settlement-date valuations were used for prior periods (e.g., “Settlement-date valuations were used to calculate performance results prior to 31 December 2001.”).
When converting from settlement-date valuations to trade-date valuations, firms must be sure that the ending market value for the last settlement-date period is used as the beginning market value for the first trade-date period (in the absence of cash flows). For example, assume the following:
29 July – Client make initial deposit of $100.
30 July – Firm buys 1 share of XYZ stock at $75 for settlement on 2 August and the remaining $25 is held in cash. XYZ closes the day at $76.
31 July – XYZ closes at $76.50
1 August – XYZ closes at $77
2 August – XYZ closes at $78The market value of the portfolio for each day is as follows:
Trade-Date Basis Settlement-Date Basis 29 July $100.00 $100.00 30 July $101.00 $100.00 31 July $101.50 $100.00 1 August $102.00 $100.00 2 August $103.00 $103.00 The return for the entire period is:
R = (103-100)/100 = 3%
This is true regardless of the accounting methodology used (i.e., trade-date or settlement-date).
Assume that the firm is switching from settlement-date to trade-date valuations as of the close of business on 31 July. In order for the performance to be correct, when the two sub-periods are geometrically linked, the return must equal 3%.
In this very simple example, the settlement-date values are used to calculate the return for July. This produces a return of 0%.
In order to arrive at the correct return when the two sub-periods are geometrically linked, the return for August must be calculated by using the settlement-date beginning market value and the trade-date ending market value. This produces a return of
R = (103-100)/100 = 3%
Geometrically linking the two sub-periods generates the correct return of
R = ((1+0%)*(1+3%))-1 = 3%
Therefore, the correct way for firms to switch from settlement-date to trade-date is to use the settlement-date beginning value and the trade-date ending value for the first month in which they use the new methodology.