GIPS Accrual Accounting Requirements income, equity, required, accounting

John10

Are we required to use accrual accounting for fixed income AND equity or just fixed income?

justin88

That's what I thought. Anyone reading this do Schweser Volume 2, Exam 1AM, Question 4, Statement 1?

I said inaccurate for the very reason mentioned above...



Edited 1 time(s). Last edit at Saturday, May 7, 2011 at 07:56PM by jdane416.

skycfa

at least in the summary of GIPS pg 350 CFAI book it says "accrual accounting must be used for all assets that accrue interest income, and for periods beginning 1/1/05, trade date accounting must be used".

was the schweser thing something not INTEREST income related? if so, sneaky, but that is the wording of GIPS anyways. interest income = FI and equity.

I am starting to hate studying.

nannan66

Here's the quote from Schweser:

"all composites will have the same beginning and ending annual dates. We will apply accrual acouting to all interest generated by the bonds in our portfolios. Starting in 2010 we will cal ulate time weighted returns on the date if all large external cash flows. All discretionary, fee paying portfolios will be included in at least one composite and composites will be defined according to invest strategy and or objectives."

I said this was inaccurate because all fixed income AND equity use accrual accounting. Am I missing something here?

mp3bu

maybe they are not updated to the 2010 standards....

CP

bkballa

Agree with CP, they haven't caught up with GIPS updates.

Schweser's violation? (A) Knowledge of the Law (B) Misrepresentation (C) Performance Presentations, Duties to Clients



Edited 1 time(s). Last edit at Saturday, May 7, 2011 at 08:38PM by jbaphna.

liangfeng

This may have already been figured out by now, but I just stumbled across the thread.

Seems like accrual accounting is still just a recommendation for equities. I found this several places in the CFAI curriculum. Below are the GIPS statements, including section references.

1.A.6 Accrual accounting MUST be used for fixed-income securities and all other investment that earn interest income.

1.B.3 Accrual account SHOULD be used for dividends (as of the ex-dividend date).

Chuckrox

cfateme Wrote:
-------------------------------------------------------
> This may have already been figured out by now, but
> I just stumbled across the thread.
>
> Seems like accrual accounting is still just a
> recommendation for equities. I found this several
> places in the CFAI curriculum. Below are the GIPS
> statements, including section references.
>
> 1.A.6 Accrual accounting MUST be used for
> fixed-income securities and all other investment
> that earn interest income.
>
> 1.B.3 Accrual account SHOULD be used for dividends
> (as of the ex-dividend date).


Please don't mix it up!

You can only use accrual accounting for fixed income instruments because you are "sure" of receiving your coupon payment. When you sell you FI, you will sell at a dirty price, which is inclusive of the pro rata expected coupon.

You cannot accrue dividends that have not been declared on equities. Never in my life have I heard of a clean price or dirty price for equity investments. When you have equities that has been adjusted for dividend payment, you can add the expected dividend income (less taxes) to your valuation of the equity portfolio, before you receive the dividends in cash. You can only do this because you are entitled to it.

Valores

Just curious about the clean/dirty prices in Fixed Income. When buying bonds, we pay it at dirty price -- the actual price. Then do we need the clean price? Because the clean price looks more stable over time? Sounds like a "manipulation".

PalacioHill

Many thanks, Ninja. It's clear to me now.