In explaining GIPS(R) discretion to a client, I hit upon a metaphor: cooking.
Let's say you go out to a fancy restaurant that is serving the "chef's special" that evening. It sounds quite appealing, except you'd like to alter it in some way. Perhaps instead of the fish being cooked medium, as the chef suggests, you want it rare or well done. Or perhaps you ask that a different sauce be used.
The waiter goes back to the chef with your request. The first option is that the chef refuses to do what you ask: if you won't eat it as he/she recommends, then you can go elsewhere. This is equivalent to the firm that refuses any restrictions: you take our investment strategy as we define it or find another manager.
Let's say that the chef says "fine, I will do what the customer asks, but this will not be representative of my special. Please don't suggest to others that they ask this patron how the meal tastes, because it has been altered and no longer represents either my skill or preferences. This is equivalent to a portfolio being considered "non-discretionary" for GIPS purposes.
What if the request is quite minor (instead of preparing the fish medium, please make it medium well)? The chef might be happy to do this and believe that the change is such that the customer will still benefit from his/her creativity and cooking skills. This is like a portfolio with restrictions that is deemed "discretionary" for GIPS purposes: the request is a minor one, such that the account will look very much like the other accounts in the composite.
There's one more variation. Let's say that the request is extreme enough that the meal will not represent the "Chef's special." However, what the customer has asked for sounds like a great idea. An example from my personal experience may help: one of the restaurants we frequent serves a pasta dish with shrimp; I ask that they substitute scallops. CLEARLY this has altered the meal enough that it won't represent the originally advertised item. However, the chef may decide that he/she likes this idea and adds it to the menu. This is what can happen when a client imposes a restriction that alters the account such that it won't represent the strategy, but ends up being a new product. The example I often use in our training classes is the case of "no sin stocks." Perhaps the result will not represent the strategy but might cause the firm to create a new composite, which is a variation of the first, such that the firm now has two somewhat similar composites. For example, "U.S. Equities with sin" and "U.S. Equities without sin." Okay, maybe you won't call them this, but you get the idea.
Discretion, from a GIPS perspective, can be confusing. We hope this helps!