Accounting for Your Investment Portfolio: Risky Business

1. Accounting for Your Investment Portfolio: Risky Business Josh Houchin

2. 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

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

5. Accounting Tax Financial Reporting Audit Senior Management Treasury Reporting Needs Accounting Compliance Risk Performance

6. Reporting Depth Lot Level Detail Level of Detail Executive Summary Constituents

7. Why is Accounting ‘Risky Business’?

8. Reconciliation / Verification • The purpose of this process is to ensure that what should bein 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” “Trust, but verify” - Ronald Reagan

9. 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

10. 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)

11. Proactive GAAP Interpretations • FAS 115-2 • FAS 157 General Rule: An auditor is to AUDIT your assumptions, not DEFINE your policies.

12. 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? • www.clearwateranalytics.com • Make a case and present it to the auditors

13. 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

14. FAS 115-2: Decision Tree

15. Investor Scenario: Application

16. IFRS a Reality • 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

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

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

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

20. Q&A Josh Houchin Clearwater Analytics 208-489-7543 josh@clearwateranalytics.com