Gips & Financial Reporting (Ifrs) : BSC Finance, Sem 6 Dec'19 - Mar'20 Nmims, Bangalore

GIPS & Financial
Reporting (IFRS)
BSc Finance, Sem 6
Dec’19 – Mar’20
NMIMS, Bangalore
The course, tests, exams
Course
Part Course Modules Hours
A GIPS 12 24
B Financial Reporting - IFRS 18 36
TOTAL 30 60
Internal Assessment/ External Component

# Course Each Total
1 Internal (Compulsory) 40
‒ Class Test 20
‒ Journal 10
‒ Assignment 10
2 External 60
Class engagement
1. Attendance
– Please be on time; respect each others time
– Attendance will close in 5 minutes from start of session
– Once class starts, everyone must seek permission to enter
– Attendance is your responsibility, please check within a day and revert for any
issues. Beyond a day, no queries or issues will be entertained
2. Please use the breaks for what they are meant for, and do not seek permission to
leave the class in-between the session.
3. Indiscipline in the class will not be tolerated and disciplinary action may be
initiated – apology tendered will not be accepted.
4. Cell phone use during the class will result in all 3 actions: (i) confiscation of
phone which will be deposited with course admin, (ii) student to leave the
particular session immediately, and (iii) student will be marked absent for that
session.
5. Lap top is not required for this course.
6. Everyone must solve problems in the class and actively participate in discussions.
Test dates
# Course On Jan Feb Mar

1 Class Test GIPS 20 Mon - -
2 Assignment IFRS - - 14 Sat
Notes:
1. Class Test date is fixed and won’t change.
2. Please plan your travels accordingly.
3. There will be no retest for absentees or low scorers, so do well.
4. Assignment date may change depending on progress.
5. Assignment may have a presentation element – marks wont
change.
Other information
A. Recommended reading
1. GIPS Standards, by CFA Institute
2. Guidance Statements on GIPS Standards, by CFA Institute
3. IFRS Standards
4. Class PPTs
5. Annual reports of companies
B. Important web sites:
1. www.cfainstitute.org
2. www.gipsstandards.org
3. www.ifrs.org
4. www.icai.org
Introduction to GIPS
Investment Situation
■ You are an investor trying to invest in some mutual funds or other
financial assets which are managed by different investment firms.
■ These investment firms are trying to woo you like they are wooing other
investors.
■ They present to the investors the following:
– Their claims on the performance of similar assets they managed in the past
and also on assets under management currently
– Advertise the such performance/ claims
– Show certain calculations of returns
■ On the face of it, both look attractive.
■ But, you are not sure whether you can rely on their claims or not.
■ WHY?
Enter GIPS
■ GIPS is ‘Global Investment Performance Standards’.
■ Contrary to the name, these standards Do not
– guarantee performance, or
– state what should be the standard of performance by an investment
management firm.
■ So what does GIPS do?
■ GIPS provides an ethical framework for the calculation and
presentation of investment performance history of an investment firm
■ These standards are based on fair representation and full disclosure of
an investment firm’s performance history
■ GIPS are applicable to Investment Firms, Asset Owners, Verifiers
Authority
■ GIPS are issued by the CFA Institute
■ Websites:
– www.cfainstitute.org
– www.gipsstandards.org
Objectives of GIPS
■ Consistent and comparable reporting of an investment firm’s performance
history over time.
– Makes it possible to compare and evaluate performance since they are
prepared following same standards and are consistently applied
■ Provides framework for ethical practices to be followed by investment
firms.
■ Provide confidence to current and prospective clients in the fairness and
integrity of performance presentations.
■ Framework for disclosure of performance by investment firms.
■ Enable comparability of one firm’s presentation with that of another.
■ However, just like in case of any standard, clients must do their due
diligence and understand the performance history, calculations, claims.
Need for GIPS
■ Standardize Investment performance, which avoids
– Establishing calculation methodology which projects strong performance
– Use time periods which show better performance contrary to reality
– Change methodologies often to cover under performance
■ Standardisation of Disclosure/ presentation, which avoids
– Disclosing performance in a manner suitable to it or benefits it and shows its
performance as growing over time or in comparison to others
– An investment firm or the investment manager may present only the best
performing assets
– Present facts in communications or advertisements in a distorted manner
which suppresses underperformance
■ Consistent use of Benchmarks, which avoids
– Use one which shows their performance having outperformed the benchmark
– Change in use of benchmark to suit itself
■ All these raise investor confidence
Benefits of GIPS
■ To current and prospective clients
– Reliability due to standard methodology of calculations/ disclosures
– Comparability – over time, across firms
– Consistency in calculations
■ To Investment firms…besides the above
– Strong internal controls
With use of technology thereby providing greater
– Prevention of frauds operational controls & investor confidence
– Competitive advantage
■ To Investment management industry
– Maintains/ enhances credibility
– Level playing field
– Healthy competition
Applicability, sponsor, countries
■ Compliance with GIPS may be claimed only by Investment Management
Firms.
■ Following may not claim compliance:
– Consultants
– Software companies which make investment related software
– Other who provide investment related data
■ Investment firms can claim compliance firm-wide and not for specific
funds or portfolios.
■ Compliance claim is in respect of all the requirements of the standards
and not in isolation.
■ There are sponsors in 46 countries, mostly the CFA branches.
■ 1700+ firms across the globe have claimed GIPS compliance (as of 6-
Dec-19, up from 1555 same time last year)
Brief history of GIPS
Year Progress
1995 CFA (formerly AIMR) sets up Global Investment Performance Standards
Committee (GIPSC). These were based on AIMR’s PPS
1998 Proposed GIPS released for comments
1999 1st edition GIPS published; IPC replaces GIPSC
2005 2nd edition GIPS published
2005 25 country specific GIPS converged with GIPS eliminating variations
2005 IPC dissolved; GIPS Executive Committee and GIPS Council created
2010 3rd edition GIPS published effective 1 January, 2011
2019 4th edition published effective 1 January, 2020
AIMR : Association for Investment Management and Research

PPS : Performance Presentation Standards
IPC : Investment Performance Council
Key features of GIPS
■ Ethical standards for investment performance presentation.
■ Fair representation and full disclosure is likely to require more than
simply adhering to the minimum requirements of the GIPS standards.
■ Include all actual, discretionary, fee-paying portfolios in at least one
composite defined by investment mandate, objective, or strategy in order
to prevent firms from cherry-picking their best performance.
■ Rely on the integrity of input data.
■ Compliance is must with all requirements of the GIPS standards, updates,
guidance statements, interpretations, Q&A, published clarifications.
■ Every standards has 2 parts
– Requirements which Firms must meet to claim compliance
– Recommendations which a Firm may adopt, and if adopted must comply
Questions?
■ What is a Standard?
■ How GIPS is different from Accounting Standards?
■ If an investment firm complies with GIPS, is it exempt from complying
with applicable Accounting Standards?
■ Do governments mandate compliance with GIPS?
■ Like compliance to Accounting Standards is audited through audit of
financial statements, do you think GIPS has similar option?
■ How are investors protected in India?
Structure of GIPS
I. Provisions of GIPS:
0. Fundamentals of Compliance
1. Input Data
2. Calculation methodology
3. Composite construction
4. Disclosure
5. Presentation and Reporting
6. Real Estate
7. Private Equity
8. Wrap Fee/ SMA (Separately Managed Account) Portfolios
II. Valuation Principles
III. Advertising Guidelines
IV. Verification
V. Guidance Statements
Fundamentals of Compliance (0)
■ 16 Requirements 0.A.1 to 0.A.16
■ 4 Recommendations 0.B.1 to 0.B.4
■ Provision 0.A.1
– Firms must comply with all the requirements of the GIPS standards, including any
updates, Guidance Statements, interpretations, Questions & Answers (Q&As), and
clarifications published by CFA Institute and the GIPS Executive Committee, which
are available on the GIPS standards website (www.gipsstandards.org) as well as in
the GIPS Handbook.
■ Provision 0.A.2
– Firms must comply with all applicable laws and regulations regarding the
calculation and presentation of performance.
■ Provision 0.A.3
– Firms must not present performance or performance-related information that is false
or misleading.
■ Provision 0.A.4
– The GIPS standards must be applied on a firm-wide basis.
■ Provision 0.A.5
– Firms must document their policies and procedures used in establishing and
maintaining compliance with the GIPS standards, including ensuring the existence
and ownership of client assets, and must apply them consistently.
■ Provision 0.A.6
– If the firm does not meet all the requirements of the GIPS standards, the firm must
not represent or state that it is “in compliance with the Global Investment
Performance Standards except for...” or make any other statements that may
indicate partial compliance with the GIPS standards.
■ Provision 0.A.7
– Statements referring to the calculation methodology as being “in accordance,”
“in compliance,” or “consistent” with the Global Investment Performance
Standards, or similar statements, are prohibited.
■ Provision 0.A.8
– Statements referring to the performance of a single, existing client portfolio as
being “calculated in accordance with the Global Investment Performance
Standards” are prohibited, except when a GIPS-compliant firm reports the
performance of an individual client’s portfolio to that client.
■ Provision 0.A.9
– Firms must make every reasonable effort to provide a compliant presentation to
all prospective clients. firms must not choose to whom they present a compliant
presentation. As long as a prospective client has received a compliant
presentation within the previous 12 months, the firm has met this requirement.
■ Provision 0.A.10
– Firms must provide a complete list of composite descriptions to any prospective
client that makes such a request. firms must include terminated composites on
the firm’s list of composite descriptions for at least five years after the composite
termination date.
– Firms must provide a compliant presentation for any composite listed on the firm’s
list of composite descriptions to any prospective client that makes such a request.
– Firms must be defined as an investment firm, subsidiary, or division held out to
clients or prospective clients as a distinct business entity.
– For periods beginning on or after 1 January 2011, total firm assets must be the
aggregate of the fair value of all discretionary and non-discretionary assets
managed by the firm. This includes both fee-paying and non-fee-paying portfolios.
– Total firm assets must include assets assigned to a sub-advisor provided the firm
has discretion over the selection of the sub-advisor.
– Changes in a firm’s organization must not lead to alteration of historical
composite performance.
– When the firm jointly markets with other firms, the firm claiming compliance
with the GIPS standards must be sure that it is clearly defined and separate
relative to other firms being marketed, and that it is clear which firm is
claiming compliance.
■ Provision 0.B.1
– Firms should comply with the recommendations of the GIPS standards, including any
updates, Guidance Statements, interpretations, Questions & Answers (Q&As), and
clarifications published by CFA Institute and the GIPS Executive Committee, which
will be made available on the GIPS website (www.gipsstandards.org) as well as in the
GIPS Handbook.
■ Provision 0.B.2
– Firms should be verified.
■ Provision 0.B.3
– Firms should adopt the broadest, most meaningful definition of the firm. The scope of
this definition should include all geographical (country, regional, etc.) offices
operating under the same brand name regardless of the actual name of the individual
investment management company.
■ Provision 0.B.4
– Firms should provide to each existing client, on an annual basis, a compliant
presentation of the composite in which the client’s portfolio is included.
Provisions relating to
Input Data
Requirements Recommendations
7 4
1.A.1 to 1.A.7 1.B.1 to 1.B.4
Input Data
■ Provision 1.A.1
– All data and information necessary to support all items included in a
compliant presentation must be captured and maintained.
■ Questions:
– What are the aims? What is ‘All’?
– Compliant presentations are for 7 years, but records available for 5 years as
required by law. What’s the status of GIPS compliance?
– Some portfolio is not marketed. Is data for that required to be maintained?
– What type of record keeping? Hard copy/ Photocopy/ Faxes/ Electronic?
– Records not easily accessible?
– Entity regulations require maintenance of records for lesser number of years?
Input Data
■ Provision 1.A.2
■ This provision specifies how ‘Portfolios’ must be valued
■ The provision:
– For periods beginning on or after 1 January 2011, portfolios must be
valued in accordance with the definition of fair value and the GIPS
Valuation Principles in Chapter II.
– Portfolio valuation prior to 1 January, 2011 must be based on market
values, and not on cost basis or book values
■ Portfolio is an individually managed group of investments. A portfolio
may be an account or pooled investment vehicle.
■ Pooled Investment Vehicle: e.g. Mutual Funds, ETFs
Input Data
■ Fair value is defined as the amount at which an investment
– could be exchanged in a current arm’s length transaction
– between willing parties in which the parties
– each act knowledgeably and prudently.
– The valuation must be determined using the objective, observable,
unadjusted quoted market price
– for an identical investment in an active market on the measurement date,
if available.
– In the absence of an objective, observable, unadjusted quoted market
price for an identical investment in an active market on the measurement
date, the valuation must represent the firm’s best estimate of the market
value. Fair value must include accrued income.
Input Data
■ What is arm’s length?
■ Can an enquiry be termed as willingness?
■ An example of prudence!
■ What if identical investments are not available?
■ Can value determined by 3rd party be used?
■ How to include accrued income in Fair Value?
■ Firm must create and maintain policy and procedure to address process to
identify identical investments, and situations when such identification is
not possible?
Input Data
■ Provision 1.A.3
■ This provision specifies 3 things:
– What must be the valuation policy of a “Portfolio’; and
– Frequency of valuation
– Concept of large cash flow
■ The provision
– Firms must value portfolios in accordance with the composite-specific
valuation policy. Portfolios must be valued:
– For periods beginning on or after 1 January 2001, at least monthly.
– For periods beginning on or after 1 January 2010, on the date of all
large cash flows. Firms must define large cash flow for each composite to
determine when portfolios in that composite must be valued.
– No more frequently than required by the valuation policy.
Input Data
■ What is cash flow?
■ What is a large cash flow? When is it determined? For which ne is it to be
determined? What is the level of the cash flow to be defined as ‘large’?
■ Large cash flow: The level at which the firm determines that an external
cash flow may distort performance if the portfolio is not valued. Firms
must define the amount in terms of the value of cash/ asset flow or in
terms of a percentage of the portfolio assets or the composite assets.
■ External cash flow: Capital that enters or exists a portfolio.
■ Large cash flow is Different from ‘significant cash flow’
■ Can valuation be more frequent than1 month? Last statement of the
provision is equally important.
Input Data
■ Large cash flow is Different from ‘significant cash flow’
■ Significant cash flow: The level at which the firm determines that a
client-directed external cash flow may temporarily prevent the firm from
implementing the composite strategy. The measure of significance must
be determined as either a specific monetary amount (e.g., €50,000,000)
or a percentage of portfolio assets (based on the most recent valuation).
■ Can valuation be more frequent than1 month? Last statement of the
provision is equally important.
Input Data
■ Provision 1.A.4
■ This provision specifies when a ‘Portfolio’ must be valued
■ The provision
– For periods beginning on or after 1 January 2010, firms must value
portfolios as of the calendar month end or the last business day of the month.
■ 1st business day to last business day – acceptable?
■ Last Friday of the month (being working day) – acceptable?
■ Cut off day on previous month + 1 day to cut off day in current month –
acceptable?
■ What happens if LWD is a holiday?
Input Data
■ Provision 1.A.5
■ This provision specifies what is the acceptable accounting method with
regard to Trades
■ The provision
– For periods beginning on or after 1 January 2005, firms must use trade date
accounting.
■ Trade Date Accounting is recognizing the asset or liability on the date of
the transaction (purchase or sale) and not the settlement date
■ Such recognition on T+1 or T+2 or T+3 satisfies this requirement
– What is the significance?
Input Data
■ Provision 1.A.6
■ This provision specifies acceptable accounting method with regard to
income
■ The provision
– Accrual accounting must be used for fixed income securities and all other
investments that earn interest income. The value of fixed income securities
must include accrued income.
■ If some market values are cum interest/ dividend, then care should be
taken to exclude the income component to avoid double counting.
■ What about defaulting investments, esp bonds?
Input Data
■ Provision 1.A.7
■ Earlier provisions in section 1 dealt with ‘Portfolios’
■ Now, this provision deals with valuation of ‘Composites’
■ The provision
– For periods beginning on or after 1 January 2006, composites must have
consistent beginning and ending annual valuation dates. Unless the
composite is reported on a non-calendar fiscal year, the beginning and
ending valuation dates must be at calendar year end or on the last business
day of the year.
Input Data - Recommendations
■ Provision 1.B.1
– Firms should value portfolios on the date of all external cash.
■ Provision 1.B.2
– Valuations should be obtained from a qualified independent third party.
■ Provision 1.B.3
– Accrual accounting should be used for dividends (as of the ex-dividend date).
■ Provision 1.B.4
– Firms should accrue investment management fees.
Calculation Methodology
7 2
2.A.1 to 2.A.7 2.B.1 to 2.B.2
Calculation Methodology – Basics
■ By now, you must have understood that an Investment Firm has
– A Composite
– Portfolios which make up a Composite. Portfolios are the ones which are
managed by the Firm
■ Input data applies to both Portfolios and Composites, besides others like
disclosures, advertisements etc.
■ Portfolios are valued periodically.
■ After valuation, the returns must be calculated.
■ Since Composites are made of Portfolios, the returns on Composites are
also required to be calculated.
■ Calculation Methodology deals with both.
■ You must refer to ‘Guidance Statement on Calculation Methodology’
■ When calculating the performance of the portfolios within a composite,
firms must use a time-weighted rate of return, or an appropriate
approximation, that adjusts for external cash flows.
■ Calculation methods that include adjustments to remove the effects of
external cash flows from the performance return are called time-weighted
rate-of-return (TWRR) methods.
■ When calculating the time-weighted rate of return, interim (sub-period)
returns must be geometrically linked to calculate periodic returns.
■ By removing the effects of external cash flows, a time-weighted rate of
return best reflects the firm’s ability to manage the portfolio according to
a specified investment mandate, objective, or strategy, allowing
prospective clients the best opportunity to fairly evaluate the past
performance of the firm and to facilitate comparison between investment
management firms.
■ Provision 2.A.1
■ This provision specifies which returns must be used
■ The provision
– Total returns must be used.
■ The provision does not mention whether it is for Portfolio or
Composite. Logical application tells us that this is for a Portfolio,
because it’s the portfolio which gives a return.
■ Key words:
– Total Return is the rate of return that includes the realized and unrealized
gains and losses plus income for the measurement period.
■ Provision 2.A.2
■ This provision specifies how the returns must be calculated
■ The provision
– Firms must calculate time-weighted rates of return that adjust for external cash flows.
Both periodic and sub-period returns must be geometrically linked. External cash
flows must be treated according to the firm’s composite-specific policy. At a minimum:
■ For periods beginning on or after 1 January 2001, firms must calculate portfolio
returns at least monthly.
■ For periods beginning on or after 1 January 2005, firms must calculate portfolio
returns that adjust for daily-weighted external cash flows.
■ Meaning that on or after after 1 January 2005, firms calculate monthly returns
that adjust for daily-weighted external cash flows.
■ Key words:
– TWRR
– External Cash Flow (which comes in and moves out of the portfolio)
– Geometric linking (like CAGR)
■ Provision 2.A.3
■ This provision talks about returns on cash and cash equivalents
■ The provision
– Returns from cash and cash equivalents held in portfolios must be included in all
return calculations.
■ There must be an ability to control/ decide cash instruments and the
investment therein
– For ex. If a Manager
■ Controls overall portfolio including cash and where such cash is invested –
include the returns from such cash
■ Does not decide where to invest, but controls the portfolio including cash –
include the returns from such cash
■ Key words:
– Cash (generally will not hold physical cash, but bank balances)
– Cash equivalents (FD, overnight call money market, on demand bills)
■ Provision 2.A.4
■ This provision specifies which trading expenses can be deducted to
calculate returns
■ The provision
– All returns must be calculated after the deduction of the actual trading
expenses incurred during the period. Firms must not use estimated trading
expenses.
■ Key words:
– Trading expenses: Are the actual costs of buying and selling of investments.
They include brokerage/ commission, stamp duty, taxes, exchange fees and/
or bid-ask spread from either internal or external brokers. Custodial fees
charged per transaction should be considered custody fees and not trading
expenses.
■ When are trading expenses ‘actually incurred’? When spent?
■ Provision 2.A.5
■ This provision specifies treatment of trading fees that cannot be identified
and introduces several fee related terms
■ The provision
– If the actual trading expenses cannot be identified and segregated from a
bundled fee:
■ When calculating gross-of-fees returns, returns must be reduced by the
entire bundled fee or the portion of the bundled fee that includes the
trading expenses. Firms must not use estimated trading expenses.
■ When calculating net-of-fees returns, returns must be reduced by the
entire bundled fee or the portion of the bundled fee that includes the
trading expenses and the investment management fee. Firms must not
use estimated trading expenses.
■ Key words:
– Bundled Fee: Fee that combines multiple fees into one total or ‘bundled’ fee.
It can include any combination of investment management fees, trading fees,
custody fees, and / or administrative fees.
– Gross-of-Fee: The return on investments reduced by any trading expenses
incurred during the period.
– Net-of-Fee: Gross-of-Fee return reduced by Investment Management Fee
(including performance based and carried interest).
– Investment Management Fee: Fee payable to the Firm for portfolio
management. Are typically asset based (% of assets), performance based, or
a combination of the two. They also include carried interest.
■ Key words:
– Performance based Fee: Fee based on portfolio performance – absolute or
relative to a benchmark.
– Carried interest: Applicable in case on Real Estate and Private Equity.
– Administrative Fee: All fees other than Trading expenses and Investment
Management Fee. Include custody fees, accounting & audit fees, consulting
fees, legal fees,
■ Provision 2.A.6
■ This provision deals with calculation of return on a ‘Composite’
■ The provision
– Composite returns must be calculated by asset weighting the individual
portfolio returns using beginning-of-period values or a method that reflects
both beginning-of-period values and external cash flows.
■ Key words:
– Asset weighting
■ Provision 2.A.7
■ This provision deals with method applicable to calculate returns on
‘Composite’
– Composite returns must be calculated:
■ For periods beginning on or after 1 January 2006, by asset weighting the
individual portfolio returns at least quarterly.
■ For periods beginning on or after 1 January 2010, by asset weighting the
individual portfolio returns at least monthly.
■ Can use either of the below methods:
– Beginning of period values; or
– A method that reflects beginning of period values plus weighted external CF
Summary – Portfolio valuation, return
Provisions for valuation
1 Jan, 2005 1.A.5 Use Trade Date Accounting for valuation

• Value the portfolio at least monthly; and
1 Jan, 2010 1.A.3
• Also value on the date of all large cash flows
Value as at end of calendar month or the last business day
1 Jan, 2010 1.A.4
of the month
1 Jan, 2011 1.A.2 Use Fair Value method for valuation
Provision for calculating returns

• Calculate returns at least monthly; and
1 Jan, 2005 2.A.2
• Adjust for daily-weighted external cash flows
1 Jan, 2010 2.A.2 Money-weighted TWRR
Portfolio return methods
■ TWRR: Time-weighted rate of return. Adjusts for day-weighted
external cash flows.
■ Weight of each external CF is determined as proportion of number of
days that CF is available in the portfolio to the total days in the period.
■ When there is no external cash flow during the period:
r = (EV – BV)/ BV
■ When there is external cash flow during the period:
Called the Modified Dietz Method return calculation:
r = [ (EV – BV) – sum of CF ]
-----------------------------------
[ BV + (CF * sum of Wt CF) ]
Wt CF = (Dt – Di) / Dt
Dt= No. of days in the period; Di = Days from beginning of period to CF day
Modified Dietz method
■ The method is day weighted and assumes that (this is also TWRR)
– External cash flow occurs at end of the day
– If assumed to occur at end beginning of the day, the weights will be
calculated as
Wt CF = (Dt – Di + 1) / Dt
■ Firm may choose to apply either end of day or beginning of day for large
CF. But must have a policy and apply it consistently
■ Advantages:
– Does not require valuation of portfolios when an external cash flow occurs
– It simply takes into account the period for which a value exists
■ Disadvantages
– Less accurate if valuation is required when an external cash flow is large
– External cash flows occur during high market volatility
Improved TWRR method
■ A better version is to apply TWRR by valuing the portfolios at the time of
external cash flows
■ Applicable for period beginning 1 Jan, 2010
■ At every large cash flow, portfolio is valued
■ Returns are calculated for each sub-periods
■ For the period, all the returns of the sub-periods are geometrically linked
■ TWRR – Geometric Linking
■ Monthly Return calculation
– Rm = [ (1+r1)*(1+r2)*(1+r3)…(1+rt)-1 ]* 100
– Where r1, r2 etc. are time-weighted returns for the sub periods 1
through t
■ Quarterly Return calculation
– Rq = [ (1+rm1)*(1+rm2)*(1+rm3) -1 ]* 100
– Where rm1, rm2 etc. are returns for the months 1 through 3
■ Annual Return calculation
– Ra = [ (1+rq1)*(1+rq2)*(1+rq3)* (1+rq4)-1 ]* 100
– Where rq1, rq2 etc. are returns for the quarters 1 through 4
Composite return – summary
■ For Composite, only return is calculated (2.A.6). What about valuation of
a Composite?
■ Method (2.A.6):
– Asset-weighting of individual portfolios
– Use either of the below:
■ Beginning of period values; or
■ A method that reflects beginning of period values and external cash
flows
– Periodicity of return calculation: At least monthly w.e.f. 1 Jan, 2010
■ Composite return calculation uses aggregate method i.e. it combines all
the composite assets as if the composite is one portfolio
■ Provision 2.B.1
– Returns should be calculated net of non-reclaimable withholding
taxes on dividends, interest, and capital gains. Reclaimable
withholding taxes should be accrued.
■ Provision 2.B.2
– For periods prior to 1 January 2010, firms should calculate
composite returns by asset weighting the individual portfolio returns
at least monthly.
Calculation steps – Portfolio
1. At the end of the month, on each portfolio:
• Account for all incomes received
• Include accrued income, on cash & cash equivalents)
• Account for all realized gains and losses
• Account for all expenses
2. Determine all external cash flows.
3. If there is no large CF:
• Value the portfolio at end of the month
• End of the month as per Standard – Last Business Day/ Last Day
• This will account for all unrealized gains and losses
• Calculate return using the Modified Dietz Method
• Portfolio valuation is not required each time an external CF occurs
Calculation steps – Portfolio
4. If there is a large CF:
• Divide the month into sub-periods, each sub period ending on the date when
the large CF occurs
• What date to consider depends on the ‘Large CF’ policy of beginning of day
or end of day
• Value the portfolio at every large CF
• Calculate the return for each sub-period using the Modified Dietz method
• Remember there may be external CF during the sub-period, hence Modified
Dietz Method which day weights the CF is appropriate
• Geometrically link the sub-period returns to obtain return for the month on
the portfolio
5. To calculate quarterly or yearly portfolio returns
• Geometrically link the 3 monthly returns or 4 quarterly returns to obtain the
desired periodic returns
Calculation steps – Composite
5. Next is calculating the return on Composite.
6. Use any of the two methods to the Value the Composite:
• Beginning of Assets weighting method, or
• Beginning of Assets plus weighted CF method
7. Composite returns for the quarter and year are calculated by
geometrically linking the 3 monthly or 4 quarterly returns.
Composite Construction
10 2
3.A.1 to 3.A.10 3.B.1 to 3.B.2
■ Also refer Guidance Statement on Composite Definition
■ Composite: An aggregation of one or more portfolios managed according
to a similar investment mandate, strategy, or objective
– They are the primary vehicle for presenting performance to prospective
clients
■ Provision 3.A.1
■ This provision prescribes which portfolios must be included in a
composite
– All actual, fee-paying, discretionary portfolios must be included in at least
one composite. Although non-fee-paying discretionary portfolios may be
included in a composite (with appropriate disclosure), non-discretionary
portfolios must not be included in a firm’s composites.
■ Key words:
– Fee-paying
– Discretionary
– Non-discretionary
Composite Construction – Key points
■ Only actual portfolios
– That is those portfolios that have real money committed to it
– Hypothetical or simulated models must not be included
■ Fee paying vs. Non-fee paying
– Fee paying are those portfolios that pay investment management fee
– A firm may chose to include non-fee paying portfolios, but can do so on
composite specific basis and not as blanket
– Why?
– Because, disclosures specific to the composite are required when non-fee
paying portfolios are included
■ If non-fee paying portfolios are included, all such portfolios must be
included in that specific composite.
■ In at least one composite: Hence, a portfolio may be included in more
than one Composite.
■ Portfolios with materially dissimilar investment mandate, strategy, or
objective cannot be included in the same Composite.
■ If non-fee paying portfolios are included, Firm must disclose annually,
the percentage of such composite assets represented by non-fee paying
portfolios.
■ Examples of non-fee paying portfolios
– Firm’s own pension plan funds
– Portfolios managed for a charitable organization as part of CSR activities
where no investment management fee is charged
■ Discretion
– Where the Firm has the ability to implement its intended strategy
– Agreed client imposed restrictions significantly hinder the Firm from fully
implementing its strategy
– Legal discretion is not the same as discretion for GIPS purposes
– Define Discretion at Firm level, say “ Discretion is when we are allowed to
manage the funds as we would wish…”
– Not all client imposed restrictions necessarily result in non-discretion
– Degrees of discretion are important considerations to determine discretion
– A subsequent restriction rendering the portfolio non-discretionary will not
result in retroactive removal from the composite
■ Considerations/ Factors
– Is there legal discretion?
– If there are legal non-discretions, say like in the case of large institutions, the
Firm must examine if the actual management of the portfolio makes it
discretionary
– If there are legal discretions, but the mandate given differs from the Firm’s
stated strategy, then it will become non-discretionary
– Investment restrictions in types of securities/ companies/ investment
quantum/ timing
Example of client imposed restrictions
■ Asset allocation requirement different from Firm’s strategy.
■ Restrictions on trading activities, say requiring client approvals (day, period of year,
quantum etc.).
■ Restrictions on asset allocation or investment in type of industries stocks which is against
the strategy of medium to high risk to provide high capital appreciation over long term (e.g.
Chemicals, Polluting Industries, Tobacco & similar products).
■ Instructions to invest only in equity stocks of steel and cement, with quantum thereof as
opposed to Firm strategy of infra companies securities consisting of 25% debt instruments.
■ Restrictions on investment in geographies, countries (e.g. North Korea, Venezuela,
Zimbabwe).
■ Non saleable assets – antiques, sentimental value.
■ Low tax investments to continue.
■ Restrictions on continuing investment when an investment reaches a certain level – in
contrast to objective of long term growth.
■ Higher cash holding as opposed to investment strategy Tax department freezing the
investments.
■ Possible combinations
Fee Paying? Discretionary? Included in Composite
Yes Yes Yes, in at least 1 composite
No Yes May include
Yes No No
No No No
1. The first thing for the Firm to ascertain is whether there is Discretion or not and
whether the portfolio is fee paying or not.
2. If a Firm chooses to include a non-fee paying discretionary portfolio in a
composite, then all non-fee discretionary portfolios meeting the definition of that
composite must be included.
3. In the 2nd case, if such inclusion is in more than 1 Composite, Firm is not required
to include all non-fee paying portfolios of the other Composite.
■ What happens if a portion of portfolio is non-discretionary? Can only that
be excluded?
– Yes, and rest included in composite
– In certain client restrictions (like HTM securities, low tax investment), the
Firm may choose to make only that part as non-discretionary
– But Firm must be sure that such inclusion does not affect the investment
strategy
■ Provision 3.A.2
– Composites must include only actual assets managed by the firm.
– That is hypothetical assets cannot be included; Hybrid composites also not
permitted
■ Provision 3.A.3
– Firms must not link performance of simulated or model portfolios with actual
performance.
■ Provision 3.A.4
– Composites must be defined according to investment mandate, objective, or
strategy. Composites must include all portfolios that meet the composite
definition. Any changes to a composite definition must not be applied
retroactively. The composite definition must be made available upon request.
■ Portfolios can be selected at random. Selection must follow the laid down
criteria under a policy which should be applied consistently.
■ Materially dissimilar portfolios cannot be included in the same composite
– this may distort the return calculation.
■ Hierarchy of Composite Definition:
– Investment Mandate: Large-cap global equities etc.
– Asset Class: Equity, Fixed-income, Real estate, Balanced etc.
– Strategy: Growth, Value, Sector etc.
– Benchmark
– Risk/ Return characteristics
■ Provision 3.A.5
– Composites must include new portfolios on a timely and consistent basis after
each portfolio comes under management.
■ Policy for the same required. Inclusion must be ASAP, preferably at the
start of the next full performance measurement period
■ Provision 3.A.6
– Terminated portfolios must be included in the historical performance of the
composite up to the last full measurement period that each portfolio was
under management.
■ Provision 3.A.7
– Portfolios must not be switched from one composite to another unless
documented changes to a portfolio’s investment mandate, objective, or
strategy or the redefinition of the composite makes it appropriate. The
historical performance of the portfolio must remain with the original
composite.
■ Provision 3.A.8
– For periods beginning on or after 1 January 2010, a carve-out must not be
included in a composite unless the carve-out is managed separately with its
own cash balance.
■ Carve-out is a portion of portfolio that is itself representative of a
distinct investment strategy. (Based on asset class, geography, sector)
■ Carve-out is used to create a track record for a narrower mandate from a
multiple-strategy portfolio managed to a broader mandate.
■ Provision 3.A.9
– If the firm sets a minimum asset level for portfolios to be included in a
composite, the firm must not include portfolios below the minimum asset
level in that composite. Any changes to a composite-specific minimum asset
level must not be applied retroactively.
– Firms that wish to remove portfolios from composites in cases of significant
cash flows must define “significant” on an ex-ante, composite-specific basis
and must consistently follow the composite-specific policy.
■ Ex-ante means ‘before the fact’
■ Ex-post means ‘after the fact’
■ Provision 3.B.1
– If the firm sets a minimum asset level for portfolios to be included in a
composite, the firm should not present a compliant presentation of the
composite to a prospective client known not to meet the composite’s minimum
asset level.
■ Provision 3.B.2
– To remove the effect of a significant cash flow, the firm should use a
temporary new account.
Summary – Composite Construction
■ Firm must have a policy defining every Composite
■ Defined according to investment mandate, strategy, or objective.
■ Definition must be at Firm level, but may be defined at Composite or
asset level if appropriate…. Second is not a default option, but ‘If”.
■ Only fee paying discretionary portfolios must be included.
■ Composites must include only actual assets.
■ All portfolios which satisfy the definition must be included – no cherry
picking.
■ Non-fee paying discretionary portfolios may be included. Firm must then
present the % of composite represented by non-fee paying portfolios at
each annual period.
■ All non-discretionary portfolios must not be included.
Summary – Composite Construction
■ Change to definition can be applied only prospectively.
■ Include new portfolios on a timely and consistent basis after each
portfolio comes under management.
■ Portfolios switched from one composite to another only when the
documented changes to a portfolios investment mandate, objective, or
strategy or the redefinition of composite necessitate the change.
■ Changes to composite or definitions cannot be affect historical
performance.
Disclosure
35 8
4.A.1 to 4.A.35 4.B.1 to 4.B.8
Disclosure
■ Provision 4.A.1
– Claim of Compliance can be presented only in a Compliant Presentation
– Presentation differs for
■ Firms that are Verified
■ Firms that are Not Verified
■ Firms that are Verified
– “[Insert name of firm] claims compliance with the Global Investment Performance
Standards (GIPS®) and has prepared and presented this report in compliance with
the GIPS standards. [Insert name of firm] has been independently verified for the
periods [insert dates]. The verification report(s) is/are available upon request.
– Verification assesses whether (1) the firm has complied with all the composite
construction requirements of the GIPS standards on a firm-wide basis and (2) the
firm’s policies and procedures are designed to calculate and present performance
in compliance with the GIPS standards. Verification does not ensure the accuracy
of any specific composite presentation.”
Disclosure
■ For Composites of a Verified Firm that have also had a Performance
Examination
– “[Insert name of firm] claims compliance with the Global Investment
Performance Standards (GIPS®) and has prepared and presented this report
in compliance with the GIPS standards. [Insert name of firm] has been
independently verified for the periods [insert dates].
– Verification assesses whether (1) the firm has complied with all the composite
construction requirements of the GIPS standards on a firm-wide basis and (2)
the firm’s policies and procedures are designed to calculate and present
performance in compliance with the GIPS standards. The [insert name of
composite] composite has been examined for the periods [insert dates]. The
verification and performance examination reports are available upon
request.”
Disclosure 4.A.1
■ Firms that have Not been Verified
– “[Insert name of firm] claims compliance with the Global Investment
Performance Standards (GIPS®) and has prepared and presented this report
in compliance with the GIPS standards. [Insert name of firm] has not been
independently verified.
Other Disclosures : Definitions etc.
■ Definition of Firm used to determine Total Firm Assets (2)
■ Firm redefinition date, and description & reasons therefor (16)
■ Composite description and creation date, and changes (3, 10, 18)
■ Composite redefinition, and description & reasons therefor (17)
■ Benchmark description and changes thereof (4, 30)
■ All significant events which help interpret compliant presentation (14)
■ Minimum asset level for inclusion in Composite, and changes therein (19)
■ If Compliant Presentation complies with laws/ regulations but conflicts with
GIPS, disclose this fact and manner of such conflict (22)
■ Use of sub-advisor and periods of sub-advisor used (25)
■ If any portfolios were not valued at calendar month end or on the last business day
of the month (26)
■ Use of custom benchmark, or combination of multiple benchmarks with
components, weights etc. (31)
Other Disclosures : Returns, Fees, Valuation
■ Currency used to express performance (7)

■ Gross-of-fees returns (5): if any fees other than trading expenses are
deducted
■ Net-of-fee returns (6): if any fees other than investment management fees
and trading expenses are deducted; if model or actual investment
management fee used; if returns are net of any performance-based fees
■ If material, details of the treatment of withholding taxes on dividends,
interest income, and capital gains (20)
■ If a composite contains portfolios with bundled fees, firms must disclose the
types of fees that are included in the bundled fee (24)
■ Starting 1/1/11, if the composite’s valuation hierarchy materially differs from
the recommended hierarchy in the GIPS Valuation Principles (28)
■ If the firm determines no appropriate benchmark for the composite exists, the
firm must disclose why no benchmark is presented (29)
Other Disclosures : Information
■ List of composite descriptions is available upon request (11)
■ Policies for valuing portfolios, calculating performance, and preparing
compliant presentations are available upon request (12)
Presentation & Reporting
16 9
5.A.1 (a to i) to 5.A.8 5.B.1 to 5.B.9
■ Provision 5.A.1: For each Compliant Presentation
– At least 5 years performance, going up to 10 years
– Composite returns for each annual period identifying as gross-of or net-of-
fees
– At each annual period end:
■ Composite assets
■ Total firm assets or Composite assets as % of total firm assets
■ Total Return for the Benchmark for each annual period.
– Period can be less than 5 years if the Firm or the Composite has been in
existence for less than 5 years.
■ Provision 5.A.2: Starting 1/1/11, at each annual period end
– 3 year annualized ex-post standard deviation of Composite and Benchmark
– Additional 3 year ex-post risk measure for the Benchmark
■ Returns for periods less than 1 year must not be annualized (4)
■ Composite (at each annual period end):
– Includes non-fee paying portfolios: present % of this to total Composite
– Includes portfolios with bundled fees, present % of this to total Composite
Others – Presentation & Reporting
■ Requirements (A)
– Must not link non-GIPS compliant performance to GIPS compliant ones (3)
Returns for period less than 1 year must not be annualized (4).
– Present the percentage of composite assets represented by non-fee-paying
portfolios as of each annual period end (6).
– Present the percentage of composite assets represented by portfolios with
bundled fees as of each annual period end (7).
■ Recommendations (B)
– Should present gross-of-fees returns (1)
– Present Cumulative returns of the composite and the benchmark for all
periods; Equal-weighted mean and median composite returns; Quarterly
and/or monthly returns; Annualized composite and benchmark returns for
periods longer than 12 months (2)
Valuation Principles
20 12
Firms: 8 Firms: 5
Real Estate: 8 Real Estate: 4
PE: 4 PE: 3
Requirements
■ Starting 1/1/11, Portfolios must be valued using Fair Value definition
■ Value investments using objective, observable, unadjusted quoted market
prices for identical investments in active markets on the measurement date, if
available
■ Comply with applicable laws & regulations relating to valuation (0.A.2,
4.A.22)
■ Document their valuation policies, procedures, methodologies, and hierarchy,
including any changes, and must apply them consistently (0.A.5)
■ Disclose that policies for valuing Portfolios, calculating performance, and
preparing Compliant Presentation are available on request (4.A.12)
■ If material, disclose use of subjective unobservable inputs for valuing
portfolios (4.A.27) (from 1/1/11)
■ Disclose if the Composite’s valuation hierarchy materially differs from the
Recommended Hierarchy (4.A.28)
Fair Value
■ It is the amount at which an investment could be exchanged in a current
arm’s length transaction between willing parties in which the parties each
act knowledgeably and prudently. The valuation must be determined
using the objective, observable, unadjusted quoted market price for an
identical investment in an active market on the measurement date, if
available. In the absence of an objective, observable, unadjusted quoted
market price for an identical investment in an active market on the
measurement date, the valuation must represent the firm’s best estimate
of the market value. fair value must include accrued income
■ The GIPS Valuation Principles, including the definition of fair value,
were developed with consideration of the work done by the International
Accounting Standards Board (IASB) and the Financial Accounting
Standards Board (FASB) as well as other organizations.
Valuation Hierarchy recommended.. build
into policies
■ Step 1: Objective, Observable, Unadjusted Quoted Market prices of Identical
Investments in active markets on measurement date available  USE THESE
■ Step 2: Step 1 failed: Objective, Observable, Quoted Market prices for Similar
Investments in active markets available  USE THESE
■ Step 3: Step 2 failed: Quoted prices for identical or similar investments in markets that
are not active available  USE THESE
■ Step 4: Step 3 failed: Market-based inputs, other than quoted prices, that are observable
for the investment available  USE THESE
■ Step 5: Step 4 failed: Subjective unobservable inputs for the investment where markets
are not active at the measurement date
■ Markets that are not active: Where there are few transactions for the investment, prices
are not current, or price quotations vary substantially over time and/or between market
makers
■ Unobservable inputs reflect the firm’s own assumptions about the assumptions that
market participants would use in pricing the investment and should be developed based
on the best information available under the circumstances
Guidance Statements
Briefly
■ Guidance Statements are what they are – additional guidance over and above what
the provisions contain
■ These are written in response to questions that raise new issues beyond the scope
of the simple application of the GIPS standards
■ They are authoritative guidance on a particular topic and may contain additional
topic specific requirements and/or recommendations
■ Firms must comply with all guidance statements. Current Guidance Statements
are the final and latest version of the guidance statement
■ There are 17 Guidance Statements. Some important ones are on:
– Firm definition
– Composite definition
– Error correction
– Fees
– Calculation methodology
– Significant cash flow
Advertising Guidelines
Briefly
■ An advertisement includes any materials that are distributed to or designed for use
in newspapers, magazines, firm brochures, letters, media, websites, or any other
written or electronic material addressed to more than one prospective client
– Inclusive definition; may contain what is not mentioned in the definition
– Not addressed to or intended for, a single prospective client
■ Any written material, other than one-on-one presentations and individual client
reporting, distributed to maintain existing clients or solicit new clients for a firm
is considered an advertisement
■ Firms which are GIPS compliant have the following options while advertising:
– Claim compliance in an advertisement and follow GIPS advertising guidelines; or
– Include a Compliant Presentation in the advertisement
■ GIPS compliance statement for advertisements:
– “[Insert name of firm] claims compliance with the Global Investment Performance
Standards (GIPS®).”
Requirements for disclosure
■ Explain how the Firm is defined
■ Composite description, and how a prospective client can obtain
Composite Description, or a Compliant Presentation
■ Present Composite Total Returns according to (a) 1-3-5 year annualized
returns; (b) period to date returns in addition to (a)
■ Whether returns are presented gross-of-fees or net-of fees
■ Benchmark description and total returns for the Benchmark for the same
period
■ Currency used in presentation
■ Advertisement conforming with laws but conflicting with GIPS, and
manner
Real Estate
Requirements w.e.f. 1/1/11
■ Unless specifically mentioned, following GIPS provision shall apply to
Real Estate also. Relevant section of ‘Real Estate’ specifically calls out the
individual provisions under each which are not applicable to ‘Real estate’
■ Fundamentals of Compliance
■ Input Data
■ Calculation methodology
■ Composite construction
■ Disclosure
■ All real estate composites that include performance for periods beginning
on or after 1 January 2011 must comply with all the requirements and
should adhere to the recommendations of the following real estate
provisions
Real Estate
■ It is ‘Investments’ in:
– Wholly owned or partially owned properties;
– Commingled funds, property unit trusts, and insurance company separate
accounts;
■ Commingled funds are like Mutual Funds, but not subject to stringent
regulations applicable to the later
■ Property unit trust are organized as Trusts under which the Trustee holds
the property for the unitholders. Unitholders units in the Trust
– Unlisted, private placement securities issued by private real estate investment
trusts (REITs) and real estate operating companies (REOCs); and
– Equity-oriented debt (e.g., participating mortgage loans) or any private interest
in a property where some portion of return to the investor at the time of
investment is related to the performance of the underlying real estate.
■ In participating mortgage loans, the lender is entitled to an equitable
interest in the rental income or resale proceeds
Real Estate
■ What it is not?
– Publicly traded real estate securities;
– Commercial mortgage-backed securities (CMBS); and
– Private debt investments, including commercial and residential loans where
the expected return is solely related to contractual interest rates without any
participation in the economic performance of the underlying real estate.
■ The above are not Real Estate under GIPS

– What are they then?
Summary of Real Estate provisions
■ Requirements (6.A)
– Input data (1 to 5)
– Calculation methodology (6 to 9)
– Disclosure (10 to 13)
– Presentation and Reporting (14 to 16)
– Additional requirements for Real Estate Closed-End Fund Composites (17 to
26)
■ Recommendations (6.B)
– Input data (1 to 2)
– Additional requirements for Real Estate Closed-End Fund Composites (9)
Major Requirements
■ At least quarterly valuation of investments following GIPS Valuation
principles in accordance with Fair Value; Portfolios must be valued at quarter
end or last business day of quarter.
■ External valuations every 12 months, performed by an Independent External
Professionally Designated, Certified, or Licensed commercial property
Valuer/ Appraiser.
■ Frequency of such external valuation.
■ Income returns and capital returns must be calculated separately using
geometrically linked time-weighted rates of return.
■ Internal valuation methodologies used to value real estate investments;
material changes to valuation policies/ methodologies; material differences
between internal & external valuation.
■ Present component returns in addition to total returns.
– What is a Component?
Major Requirements (6.A)
■ Measure of Internal Dispersion, high and low annual time-weighted rates of return
for the individual portfolios in the composite if less than 5 portfolios. (16)
– Internal Dispersion is a measure of the spread of the annual returns of individual
Portfolios within a composite; may include high/ low, range of Standard Deviation of
Portfolio returns
■ Calculate annualized Since Inception IRR (SI-IRR) using quarterly CF at minimum.
(17,18); disclose frequency of CF used (21); present SI-IRR benchmark (26)
■ Composites must be defined by vintage year and investment mandate, objective, or
strategy. The composite definition must remain consistent throughout the life of the
composite. (19); and disclose the vintage year of the composite and its definition.
(22)
– Vintage Year defined using 2 methods: (a) the year of the investment vehicle’s first
drawdown or capital call from its investors; or (b) the year when the first committed
capital from outside investors is closed and legally binding
■ Composite since inception paid-in capital, since inception distributions, cumulative
committed capital, total value to since inception paid-in capital, residual value
among others. (25)
Private Equity
Summary of Private Equity provisions
■ Requirements (7.A)
– Input data (1 and 2)
– Calculation methodology (3 to 7)
– Composite construction (8 to 10)
■ Recommendations (7.B)
– Input data (1)
– Calculation methodology (2)
– Composite construction (3 and 4)
What is Private Equity
■ Private placement in an unlisted company?
■ Investing in a fund that invests in portfolio companies?
■ Private placement in a listed company but the specific securities remain
out of listing?
■ Convertible debt?
■ Convertible Preference shares?
■ Secured Debt?
■ Preference Shares?
■ GIPS definition: Investment strategies include, but not limited to, venture
capital, leveraged buy outs, consolidations, mezzanine and distressed debt
investments, and a variety of hybrids, such as venture leasing and venture
factoring
Requirements w.e.f. 1/1/11
■ Apply to the calculation and presentation of private equity investments
made by fixed life, fixed commitment private equity investment vehicles
including primary funds and funds of funds.
■ Also apply to fixed life, fixed commitment secondary funds, which must
apply either the provisions applicable to primary funds or the provisions
applicable to funds of funds, depending on which form the secondary
fund uses to make investments.
■ Private equity open-end and evergreen funds must follow Sections 0–5 in
the Provisions of the Global Investment Performance Standards.
– Evergreen fund is an open fund that allows for on-going subscriptions and/
or redemptions by investors and recycle capital
■ Investments must be valued as per Fair Value definition, and at least
annually.
■ Calculate annualized SI-IRR using daily cash flows. Stock distributions
must be included as cash flows and valued at time of distribution. (3, 4);
and disclose frequency of cash flows.
■ For funds of funds, all returns must be net of all underlying partnership
and/or fund fees and expenses, including carried interest.
– Carried Interest is the profit of General Partners that is allocated from the
profits
– Distinguish between General Partner and Limited Partner
■ Primary funds must be included in at least one composite defined by
vintage year and investment mandate, objective, or strategy.
– Primary Fund is an investment vehicle that makes direct investments rather
than investing through investment vehicles
■ Funds of funds must be included in at least one composite defined by
vintage year of the fund of funds and/or investment mandate, objective,
or strategy.
■ For Funds of funds composites, firms must present the percentage, if any,
of composite assets that is invested in direct investments (rather than in
fund investment vehicles) as of each annual period end.
■ For primary fund composites, firms must present the percentage, if any,
of composite assets that is invested in fund investment vehicles (rather
than in direct investments) as of each annual period end.
Verification
What is Verification
■ A process by which an independent verifier assesses whether
– The firm has complied with all the composite construction requirements of
the GIPS standards on a firm-wide basis, and
– The firm’s policies and procedures are designed to calculate and present
performance in compliance with the GIPS standards.
■ Verification report is issued after a verification has been performed and
opines that the firm has complied with all the composite construction
requirements of the GIPS standards on a firm-wide basis and that the
firm’s policies and procedures are designed to calculate and present
■ It must be performed by a qualified independent third party.
Important provisions
■ A single verification report is issued with respect to the whole firm.
■ Verification cannot be carried out on a composite and, accordingly, does
not provide assurance about the performance of any specific composite.
■ Firms must not state that a particular composite has been “verified” or
make any claim to that effect.
■ The initial minimum period for which verification can be performed is
one year of a Firm’s presented performance
■ A verification report must opine that
– The firm has complied with all the composite construction requirements of
the GIPS standards on a firm-wide basis, and
– The firm’s policies and procedures are designed to calculate and present
Important provisions
■ The firm must not state that it has been verified unless a verification
report has been issued.
■ Principal verifier may use the work of and rely on, another verifier, audit,
internal controls.
■ Sample testing method may be used. Sample selection criteria includes:
number of composites, number of portfolios under each composite, type
of composite, internal controls, computer applications/ software used for
composite construction/ maintenance, external performance
measurements, calculation methodology, policies & procedures etc.
■ What happens when the verifier determines that a verification report

cannot be issued.? Can he qualify his report and issue the same?
Verification procedures
■ Pre verification procedures
■ Knowledge of Regulations, GIPS Standards/ Guidance Statements/ Q&A/
Clarifications
■ Knowledge of the Firm, Policies & Procedures with regard to maintaining
compliance, Valuation basis, Performance calculations
■ Verification procedures
– Fundamentals of Compliance: Firm Definition, Composite definition & maintenance,
proper inclusion in composites, Firm’s definition of various aspects like Significant CF,
Discretion, Firms Policies & Procedures, Benchmark related, etc.
– Determination of discretionary status of portfolios
– Allocation of portfolios to composites
– Data Review which include accounting treatment of incomes, taxes, accrual, purchase &
sale transactions
– Performance Measurement Calculation
– Recalculate rates of return for a sample of portfolios
– Compliant presentations, Maintenance of records

Gips & Financial Reporting (Ifrs) : BSC Finance, Sem 6 Dec'19 - Mar'20 Nmims, Bangalore

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Gips & Financial Reporting (Ifrs) : BSC Finance, Sem 6 Dec'19 - Mar'20 Nmims, Bangalore

Uploaded by

Copyright:

Available Formats

GIPS & Financial

Internal Assessment/ External Component

# Course On Jan Feb Mar

AIMR : Association for Investment Management and Research

1 Jan, 2005 1.A.5 Use Trade Date Accounting for valuation

Provision for calculating returns

■ Currency used to express performance (7)

■ The above are not Real Estate under GIPS

■ What happens when the verifier determines that a verification report

You might also like