Wednesday, May 4, 2011
Early adoption still befuddles me
The 2010 edition has removed some parts of 2005; for example, the after-tax rules. This sparked some early questions as to whether firms could "early adopt" by no longer complying with them, but rather using some other method to calculate their after-tax returns; we were told "no," unless the firm fully adopted the requirements of 2010. The reason, as I recall, was to avoid having a firm be partly compliant with the 2005 edition, and partly compliant with the 2010 version, which would result in the firm being in between two versions, not comply fully with either. Okay, I accepted this and thought it made sense.
It therefore also made sense to me that if this was, in fact, the basis behind the prohibition to drop things from 2005, then surely it also applied to changes that might cause a similar problem. For example, if a firm adopts the new compliance language of GIPS 2010 without fully adopting the other provisions, then they would be out of compliance with the 2005 edition (because of the wording change), but not yet fully compliant with the 2010 edition. However, I was mistaken. A Q&A on the GIPS website which reads:
"We currently claim compliance with the GIPS standards (the 2005 edition). May we adopt selected portions of the 2010 edition of the GIPS standards before 1 January 2011 and not others?
"For periods prior to 1 January 2011, compliant firms may continue to claim compliance with the 2005 edition of the GIPS standards. Firms may choose to early adopt selected new or revised requirements of the 2010 edition of the GIPS standards. However, a firm must not stop adhering to selected requirements of the 2005 edition of the GIPS standards that have been removed in the 2010 edition without adopting all of the requirements of the 2010 edition."
The key wording here is the permission for firms to "early adopt selected new or revised requirements."
I cannot claim complete ignorance of this Q&A, as I believe I came across it some time ago, but failed to really pay it much attention. However, I am conducting a GIPS verification for a client who chose to adopt the new claim statement without adopting any of the other requirements, thus putting them in between two standards. I was prepared to say "sorry, but this isn't permitted" but decided to check the Q&A library and found the above language.
And so, the apparent early basis for denying a firm the ability to drop something that's required in 2005 (but no longer required in the 2010 edition) apparently doesn't rest on this issue of being "in between" two standards, which begs the question "why?" That is, why couldn't a firm have chosen to drop something in advance of fully complying? I guess we'll never know.
At this point very few of our clients have moved to the 2010 edition. And compliance with it isn't required until firms begin to report 2011 numbers, which for some won't occur until early 2012. And so, this issue still has relevance, at least for a few more months. And while I still remain somewhat confused about this topic, I think enough has probably been said about it.