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?

mik82

bannisja Wrote:
-------------------------------------------------------
> I read "should" as a bit stronger than a
> recommendation only, but who knows:
> 1.B.3 Accrual account SHOULD be used for dividends
> (as of the ex-dividend date).
>
> cfa.teme has it right. when a stock trades ex,
> the px drops by the dividend. that divi is owed
> to a long holder, it's like a receivable that
> *should* be accrued starting on ex date until
> payable. if anyone else stumbles on the wording
> again, keep posting it here. FI is for sure
> accrual, equity then is a "should"... umm, yeah.
> it's so clear now.


Should is an encouragement, but not a requirement.

Everyone "should" show up to work on time, but sometimes traffic is worse than usual.

NO EXCUSES

Unforseen

^ the irony of your post is the NO EXCUSES. nice.

Roflnadal

I read "should" as a bit stronger than a recommendation only, but who knows:
1.B.3 Accrual account SHOULD be used for dividends (as of the ex-dividend date).

cfa.teme has it right. when a stock trades ex, the px drops by the dividend. that divi is owed to a long holder, it's like a receivable that *should* be accrued starting on ex date until payable. if anyone else stumbles on the wording again, keep posting it here. FI is for sure accrual, equity then is a "should"... umm, yeah. it's so clear now.

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.

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.