Accounting for Your Investment Portfolio Risky Business

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Accounting for Your Investment Portfolio
Risky Business Tyler McKay Haws, CPA
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Investment Reporting
Time
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Who Needs Investment Information
Accounting
Compliance
Risk
Performance
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What most companies do for investment accounting
reporting

• Receive reports from multiple service providers
  in disparate formats using disparate assumptions
  when the service provider makes them available
  (2-5 days after the fiscal period close)
• Solely rely on service providers to deliver
  periodic (monthly) investment accounting,
  compliance, risk and performance information for
  all reporting, risk management and investment
  decision making
• Depend on service providers to understand,
  implement and adapt to FASB/EITF and/or other
  regulatory changes and industry best practices
• Manually aggregate, manipulate and supplement the
  service provider reports for accounting close
  entries, financial disclosures, tax, treasury and
  reports to senior management

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Risk 1 of 2

• Risk One
• Improper and inconsistent accounting
  methodologies are being applied to the portfolio
  
• Consequences
• Disparate accounting assumptions from multiple
  providers
• Inaccurate cycle-close figures and journal
  entries
• Restatement of earnings
• Antidote
• A single, independent accounting and disclosure
  provider that uses consistent, client-defined
  accounting assumptions applied across all
  investment assets and specifically designed for
  corporate cash investors.

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Accounting Assumptions

• Available-for-sale, trading, or held-to-maturity
  classification
• Trade date vs. Settle date
• Tax lot or average cost inventory method
• FIFO, LIFO, or Specific lot method
• Straight-line or Constant-yield amortization
• Amortization methodology on callables
• Amortization methodology on ABS and MBS
• Balance sheet classification of Auction- and
  Variable-rate securities

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Definitions of Trade and Settle Dates

• Trade date -- On trade date, an agreement is
  entered into that establishes the negotiated
  elements of the transaction including the
  security description, quantity, price, and
  delivery terms.
• CONTRACTUAL OBLIGATION
• Settle date -- The date the securities must be
  delivered and payment received is referred to as
  the settlement date. an agreement is entered into
  that establishes the negotiated elements of the
  transaction including the security description,
  quantity, price, and delivery terms.
• EXCHANGE OF CASH AND SECURITIES

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Example

• Company X purchases 2 million of a 2-year
  maturity corporate note at a price of 100 on June
  29 for settlement 3 days later on July 2. The day
  after trade date (June 30), which is Company Xs
  cycle-close, the note is downgraded to junk and
  the price is reduced to 95 and the impairment is
  determined to be other-than-temporary. On settle
  date the price is still 95.

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Trade date vs. Settle date

• B/S I/S
• Trade Date Asset 2M NA
• Liab 2M
• Cycle-Close Asset 1.9M Loss of 100K
• Liab 2M
• OE - 100K
• Settle Date Asset 1.9M NA
• Cash - 2M
• OE - 100K

June 29
June 30
July 2
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Trade date vs. Settle date

• B/S I/S
• Trade Date NA NA
• Cycle-Close NA NA
• Settle Date Asset 1.9M Loss of 100K
• Cash - 2M
• OE - 100K

June 29
June 30
July 2
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• THREE PROBLEMS WITH
• SETTLE DATE ACCOUNTING
• Does not give true picture of balance sheet,
  including unrealized gains/losses, assets, and
  liabilities.
• Allows a company to leverage themselves at
  cycle-close with no financial statement impact.
• Cash basis of accountingnot GAAP.

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Amortization Methodology on Callables
105
102
100
2
5
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Amortization Methodology on Callables
102
101
100
2
5
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Amortization Methodology on Callables
102
100
2
5
98
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Risk 1 of 2

• Risk One
• Improper and inconsistent accounting
  methodologies are being applied to the portfolio
  
• Consequences
• Disparate accounting assumptions from multiple
  providers
• Inaccurate cycle-close figures and journal
  entries
• Restatement of earnings
• Antidote
• A single, independent accounting and disclosure
  provider that uses consistent, client-defined
  accounting assumptions applied across all
  investment assets and specifically designed for
  corporate cash investors.

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Risk 2 of 2

• Risk Two
• Deficient and ineffective internal accounting
  processes and control framework.
• Consequences
• Improper segregation of duties
• Inefficient and time-consuming cycle-close
  process
• SOX material weakness
• Antidote
• A single, independent accounting and disclosure
  provider that uses consistent, client-defined
  accounting assumptions applied across all
  investment assets and specifically designed for
  corporate cash investors.

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Treasury Operations
Custody
Report Reconcile Record
Authorization
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An Optimal Accounting Process
Custody
Securities
Cash
Trade Execution
Investment Managers
Accounting Platform
Investment Policy
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Sub-Optimal Accounting Process
General Ledger
Custody/Safekeeping
Broker/Counterparty
Securities
Close Entries
Cash
Trade Execution
Investment Manager
Investment Policy
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Accounting Pronouncements

• EITF 96-12
• FAS 115
• FAS 115-1
• EITF 03-1
• APBO 21
• SAS70
• FAS 95
• SAS94

• FAS 133
• PCAOB 2
• IAS 39
• FAS 52
• SOP 03-3
• FAS 140
• CON6
• Etc.

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Risk 2 of 2

• Risk Two
• Deficient and ineffective internal accounting
  processes and control framework.
• Consequences
• Improper segregation of duties
• Inefficient and time-consuming cycle-close
  process
• SOX material weakness
• Antidote
• A single, independent accounting and disclosure
  provider that uses consistent, client-defined
  accounting assumptions applied across all
  investment assets and specifically designed for
  corporate cash investors.

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Accounting for Your Investment Portfolio
Risky Business Tyler McKay Haws, CPA