Thursday, February 4, 2010

Early adoption

“I’m late! For a very important date! 
No time to say hello, goodbye! 
I’m late, I’m late, I’m late!”

Thus, spoke the White Rabbit from Alice in Wonderland. But you probably knew that.

When it comes to adopting the new requirements for the Global Investment Performance Standards (GIPS 2010), you don't want to be late. But how about early?

Early adoption is encouraged, just as it was for GIPS 2005 ("Gold GIPS"). With the earlier version there was no discussion as to what this term meant. However, during the November GIPS conference an attendee asked, which caused the panelists to pause and consider. During last week's public GIPS Executive Committee meeting, I asked for clarity and was told that partial early adoption (that is, to adopt certain aspects earlier than others) won't always be permitted; I presume more information will be forthcoming, but I'll take a stab at it.

The standards require certain new items (for example, the three-year standard deviation). Since risk measures have always been recommended, for a firm to add this to their presentation, while adopting early, isn't a problem. However, the standards are also removing certain things (e.g., after-tax provisions). It appears that the EC has decided that you cannot remove something early unless you fully adopt the standards.

I have to confess that the logic is a bit unclear: if the EC has decided that going forward, effective January 2011, after-tax shouldn't be part of the standards, then what is the harm for a firm to decide that they will drop the current GIPS(R) rules for after-tax and offering an alternative presentation? They'll be forced to do this in eleven months, so what's the harm? The suggestion was that if one does this (i.e., drops certain aspects of the GIPS 2005 rules without completely adopting GIPS 2010), then they're not complying with either the 2005 or 2010 versions, but are somewhere in between. I guess this makes some sense.

Therefore, it appears that if you want to start to include new items early, feel free; however, if you want to drop off disclosures that were part of GIPS 2005 but that won't be part of GIPS 2010, you can't do it until you're fully compliant with GIPS 2010. Again, some clarity will most likely be offered soon.

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