Are we required to use accrual accounting for fixed income AND equity or just fixed income?
anything that accrues interest, accrual accounting. FI and equity.
That’s what I thought. Anyone reading this do Schweser Volume 2, Exam 1AM, Question 4, Statement 1? I said inaccurate for the very reason mentioned above…
I recall, FI interest accrual was required and Equity dividends only a reccomendation, but that changed recently, right?
at least in the summary of GIPS pg 350 CFAI book it says “accrual accounting must be used for all assets that accrue interest income, and for periods beginning 1/1/05, trade date accounting must be used”. was the schweser thing something not INTEREST income related? if so, sneaky, but that is the wording of GIPS anyways. interest income = FI and equity. I am starting to hate studying.
Here’s the quote from Schweser: “all composites will have the same beginning and ending annual dates. We will apply accrual acouting to all interest generated by the bonds in our portfolios. Starting in 2010 we will cal ulate time weighted returns on the date if all large external cash flows. All discretionary, fee paying portfolios will be included in at least one composite and composites will be defined according to invest strategy and or objectives.” I said this was inaccurate because all fixed income AND equity use accrual accounting. Am I missing something here?
maybe they are not updated to the 2010 standards…
Agree with CP, they haven’t caught up with GIPS updates. Schweser’s violation? (A) Knowledge of the Law (B) Misrepresentation © Performance Presentations, Duties to Clients
This may have already been figured out by now, but I just stumbled across the thread. Seems like accrual accounting is still just a recommendation for equities. I found this several places in the CFAI curriculum. Below are the GIPS statements, including section references. 1.A.6 Accrual accounting MUST be used for fixed-income securities and all other investment that earn interest income. 1.B.3 Accrual account SHOULD be used for dividends (as of the ex-dividend date).
cfateme Wrote: ------------------------------------------------------- > This may have already been figured out by now, but > I just stumbled across the thread. > > Seems like accrual accounting is still just a > recommendation for equities. I found this several > places in the CFAI curriculum. Below are the GIPS > statements, including section references. > > 1.A.6 Accrual accounting MUST be used for > fixed-income securities and all other investment > that earn interest income. > > 1.B.3 Accrual account SHOULD be used for dividends > (as of the ex-dividend date). Please don’t mix it up! You can only use accrual accounting for fixed income instruments because you are “sure” of receiving your coupon payment. When you sell you FI, you will sell at a dirty price, which is inclusive of the pro rata expected coupon. You cannot accrue dividends that have not been declared on equities. Never in my life have I heard of a clean price or dirty price for equity investments. When you have equities that has been adjusted for dividend payment, you can add the expected dividend income (less taxes) to your valuation of the equity portfolio, before you receive the dividends in cash. You can only do this because you are entitled to it.
Just curious about the clean/dirty prices in Fixed Income. When buying bonds, we pay it at dirty price – the actual price. Then do we need the clean price? Because the clean price looks more stable over time? Sounds like a “manipulation”.
me.tega - Agreed. That quote from the GIPS standards is intended to recommend that equities be valued with “accrued” dividends only as of the ex-date - which, as you point out, is the only time you’re legally entitled to the payment. As for a “clean” and/or “dirty” price, I agree these are inappropriate terms to use for equities. But, equity prices do exhibit a similar effect, in that the market trades off after the ex-date to at least partially incorporate the dividend payment due to (and retained by) the seller.
The Clean Price is not a manipulation - it is the valuation of the bond at every coupon pmt date. Any other time you add in the interest you have accrued (but not yet received) to get the dirty price. the dirty price price arises b/c people trade bonds on other days than the coupon date (it includes earned interest for the portion of the period you held the bond between coupons). However the clean price is what you would use for any capital gains/loss information. Since Cap gains/Losses are taxed differently from Interest (depending on your country’s tax regime) your accounting of changes in the clean price would be important.
Many thanks, Ninja. It’s clear to me now.
I read “should” as a bit stronger than a recommendation only, but who knows: 1.B.3 Accrual account SHOULD be used for dividends (as of the ex-dividend date). cfa.teme has it right. when a stock trades ex, the px drops by the dividend. that divi is owed to a long holder, it’s like a receivable that *should* be accrued starting on ex date until payable. if anyone else stumbles on the wording again, keep posting it here. FI is for sure accrual, equity then is a “should”… umm, yeah. it’s so clear now.
clean vs dirty price for a zero coupon bond
Bannisja, I had assumed (perhaps incorrectly) that all numbered items with a B in it ( as in 1.B.3) to be reccomendations and all A’s were requirements. Not sure if that’s true, but that’s how I distinguished between them.
bannisja Wrote: ------------------------------------------------------- > I read “should” as a bit stronger than a > recommendation only, but who knows: > 1.B.3 Accrual account SHOULD be used for dividends > (as of the ex-dividend date). > > cfa.teme has it right. when a stock trades ex, > the px drops by the dividend. that divi is owed > to a long holder, it’s like a receivable that > *should* be accrued starting on ex date until > payable. if anyone else stumbles on the wording > again, keep posting it here. FI is for sure > accrual, equity then is a “should”… umm, yeah. > it’s so clear now. Should is an encouragement, but not a requirement. Everyone “should” show up to work on time, but sometimes traffic is worse than usual.
^ the irony of your post is the NO EXCUSES. nice.