Accounting for Your Investment Portfolio: Risky Business Josh Houchin

Who is Clearwater? Launched in 2002 to provide a state-of-the-art, web- based Accounting, Compliance, Performance, and Risk reporting solution for corporate operating funds Products focus on: –Corporate operating funds –Insurance companies –Asset managers –Other institutional investors $500 billion of assets for over 6,000 institutional investors

What we’re covering Reporting needs for treasury Why is investment accounting risky business? –Reconciliation / Verification –GAAP Pronouncements –IFRS –Consolidator –Other tidbits Q&A

Treasury Audit Senior Management Financial Reporting Tax Accounting ComplianceRiskPerformance Reporting Needs

Reporting Depth Level of Detail Executive Summary Lot Level Detail Constituents

Why is Accounting ‘Risky Business’?

The purpose of this process is to ensure that what should be in the bank account is in the bank account. Core accounting data—cash, positions, transactions— must be pristine or else you risk inaccuracies. “You can’t make chicken salad out of chicken droppings” Reconciliation / Verification “Trust, but verify” - Ronald Reagan “Trust, but verify” - Ronald Reagan

Common Reconciliation/Verification Issues Duplicate trades and payments Trade vs. settle date data ‘Dirty prices’ Previous factors Late trades and payments Mathematical inaccuracies Improper maturity dates Improper coding of transactions Dummy data Bad pricing Transposition errors Disparate or improper accounting assumptions

Preventive and Detective Methods Identify controls at source to catch reconciliation/verification issues (SAS70 Type II audit) Automated software programs to verify, reconcile, and recalculate core source of data Monthly spot check (manual)

Proactive GAAP Interpretations FAS FAS 157 General Rule: An auditor is to AUDIT your assumptions, not DEFINE your policies.

Accounting for Investments Solution: –Utilize a combination of resources –Use your consolidator –“Who are the niche players?” –Talk to people—your peers, your vendors, etc. –Read and research Have you taken 20 minutes to read the literature? –Make a case and present it to the auditors

FAS 157: Common Problems Practical Expediency? –We have seen some auditors and/or companies attempt to implement FAS 157 outside the realm of practical expediency (i.e. know specifics about all inputs for all lots) –Over time and with experience this has become less common Understanding pricing methodologies and markets –Fixed income valuation differs from equity valuation –What is the difference between a broker quote and a price received from a pricing vendor (i.e. FTID, JJ Kenny)? Inability to track designations (i.e. audit trail) and create required disclosures

FAS 115-2: Decision Tree

Investor Scenario: Application

Transition from US GAAP to IFRS is a reality –Question of when not if –In our best interest? Proponents of Adoption/Convergence –Existing global standard –Streamlined reporting for some –Comparable financial statements –Efficient capital markets Opponents –Success of GAAP which was originally principles based –Transition a step backwards in comparability –Expense IFRS a Reality

Common Accounting Scenario Reconciliation Primary Custody Bank General Ledger Investment Managers Trades Money Fund Portal 1 Information Flow Management Reports Reporting & Service Money Fund Portal 2 In-house Traders Insert Pic of Excel worksheet Corp treasury compiles and calculates Bloomberg

Optimal Accounting Scenario Consolidator Trades Primary Custody Bank Money Fund Portal 1 Money Fund Portal 2 General Ledger Reporting & Service Integrated Reconciliation Information Flow Investment Analytics

What’s your ‘truck factor’? How damaging would your departure be to your operations?

Q&A Josh Houchin Clearwater Analytics