JustasS

GIPS guidance for reporting after-tax returns for periods beginning on or after January 1, 2011 is most likely contained in the:

A) country-specific guidance released by the country sponsors.

B) GIPS standards in the provision regarding calculation methodology.

C) GIPS standards in the section regarding GIPS valuation principles.

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Since after-tax issues are highly dependent on the taxing authority for the country in which the funds are being managed, the specific guidance on the presentation of after-tax returns was removed from the GIPS standards. The responsibility now falls to the country sponsors and the guidance is to be addressed in the country-specific guidance.

JustasS

When adjusting after-tax returns to account for the effects of non-discretionary trades resulting from client directed withdrawals, the adjustment amount should reflect the tax effect that would result from selling:

A) a proportionate amount of each security.

B) the most highly appreciated securities.

C) the securities with the least amount of appreciation.

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Managers have an incentive to use the adjustment amount that reflects the tax effect from selling the most highly appreciated securities as this would result in the highest adjusted returns, but since this may allow for manipulation of reporting, it is recommended that the adjustment value reflect the sale of a proportionate amount of each security.

JustasS

Jonathan Goolsby, a performance-reporting analyst at Handley Asset Management (HAM), is preparing after-tax returns for inclusion in a performance presentation and needs to determine the most appropriate method to incorporate the effects of taxes on returns. HAM employs tax-aware portfolio management strategies. If Goolsby uses the mark-to-liquidation method when computing after-tax returns, the most likely effect is that returns will be:

A) overstated.

B) correctly stated.

C) understated.

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The mark-to-liquidation method assumes all gains, whether recognized or not, are taxed each period. Under this method, taxes will be overstated and returns will be understated for a portfolio that uses tax-aware strategies. For example, HAM may delay selling a stock that has had capital gains to delay taxes to a future period, thus increasing the returns of the portfolio. Under the mark-to-liquidation method, the returns would be calculated as if the stock had been sold and the gains realized in that period. Thus increasing taxes for that period and decreasing returns.