GIPS on tax withholding tax and asset weighting

Walsh forgot to point out the GIPS violation involving:


lack of disclosure about fiscal year end.


failure to disclose treatment of withholding tax on capital gains.


frequency of portfolio asset-weighting.

Corect answer is B. Monthly asset-weighting is a recommendation, not a requirement. GIPS requires the use of a standard reporting period, but does not require that nonstandard fiscal years be disclosed. But GIPS does require that firms disclose how they treat withholding taxes on dividends, interest income, and capital gains.

  1. In Standard 2.B.1 (Recommnedation), Returns should be caculated net of non-reclaimable withholding taxes on dividends, interest, and capital gains.

How come it becomes a requirement now in this question?

  1. In Standards 2A,6,7 the return of the composite is the weighted average monthly return of hte accounts in the composite.

How come it becomes a recommendation in this question?

There are 2 approaches to treat deferred taxes, and should be disclosed which one is chosen.

I am not sure that standard 2.B.1. - Composite returns is related to this disclosure.

  1. B 1. says also “if the tax is not reclaimable, it should be treated like a transactions cost.”

Thanks for your response like always! That sentence is the first one I found related to tax withholding… I see now.

Where did you find the deferred tax? That does not ring a bell to me at all.

Also, did you find a standard that confirms this sentence to be correct? "Monthly asset-weighting is a recommendation, not a requirement. " Based on 2A6,7 it looks like it is a requirement.

Sorry to ask you some dumb question. Sometimes for some reason I just cannot read GIPS for too long.

There are two methods or incorporating tax effects on returns:

  • The pre-liquidation method
  • The mark-to-liquidation method

First ignores unrealized G/L thus understating tax liability.

Second, assumes all G/L were recognized for taxation within period, thus overstating tax liability.

"Standard 2.A.7. For periods beginning January 1, 2006, firms must calculate composite returns by asset-weighting the individual portfolio returns at least quarterly. For periods beginning on or after January 1, 2010, composite returns must be calculated by asset-weighting the individual portfolio returns at least monthly."

Thanks! I see now. That is what you meant by deferred tax.

For standard 2.A.7, this is what what I am confused about. The standard is a requirement but the answer states that is a recommendation. Guess this is a wrong explanation.

“Monthly asset-weighting is a recommendation, not a requirement.”