Wednesday, April 7, 2010

Materiality is growing

Defining materiality can be a challenge: but if you thought doing it regarding returns was difficult, think about the other areas where it will be required for firms that claim compliance with the Global Investment Performance Standards (GIPS(R)), as a result of GIPS 2010.

Compliant firms will need to include details on their treatment of withholding taxes, if material (¶ 4.A.20). You must also disclose details regarding the use of leverage, derivatives, and shorts, if material (¶ 4.A.13).

Fair value is now being employed and it brings along a couple new requirements. If you use a fair value hierarchy which is materially different than the one recommended, you need to disclose this (¶ 4.A.28). The fifth level of the hierarchy deals with the use of "subjective unobservable inputs," and firms must now disclose if they're used to value portfolio investments, if material (¶ 4.A.27).

Compliant firms “must disclose and describe any known material differences in exchange rates used among the portfolios within a composite, and between the composite and the benchmark” (¶ 4.A.21).

The real estate and private equity rules now require firms to disclose material changes to valuation policies and/or methodologies (¶ 6.A.10.c and ¶ 7.A.14). And the real estate rules also require firms to disclose material differences between external valuation and the valuation used in performance reporting and the reason for the differences (¶ 6.A.10.d).

We find a variant to materiality in the changes to the portability rules, where we find that decision makers must remain substantially intact (¶ 5.A.8.a.i).

Much of this is highly subjective and will require some thought. We hope to provide some guidance on this in the coming months, most likely in our newsletter. And we welcome your thoughts on these issues, as well.

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