Questions 55 to 60 relate to Global Investment Performance Standards
Sandra Miller Case Scenario
Sandra Miller is a real estate valuator serving Ricard, a professional real estate appraisal
firm. She is analyzing two real estate funds, Fund AX and Fund BY, to determine
whether they are subject to the general or real estate provisions of the Global Investment
Performance Standards (GIPS). Fund AX is a privately-traded, closed-end, leveraged
fund managed by a professional real estate fund manager offering investors expertise in
identifying, developing, and realizing the value of their investments. Fund BY is a
publically traded fund which purchases real estate properties and issues commercial and
residential mortgage-backed securities to investors.
Next, Miller evaluates a commingled real-estate fund offered by High Properties Inc
(HPI), a professional real estate firm. The firm is in the process of converting its financial
reporting and presentation procedures so that they are in compliance with the GIPS
standards. The firm’s compliance officer has drafted three policies addressing returns
calculation, internal valuation, and disclosures.
Returns Calculation:
I. Component returns are defined as the sum of income and capital returns which
must be calculated using the modified Dietz method for all performance results
presented for periods falling after January 1, 2011.
II. Gross-of-fees and net-of-fees total returns must be calculated and presented for
each quarter.
III. Gross-of-fees component returns only need to be presented.
Internal Valuation Policy:
I. Beginning January 1, 2010 all underlying properties will be valued based on the
sale prices of comparable properties with appropriate adjustments. This represents
a shift from the previous valuation policy which was based on an income cap rate
derived from similar properties.
II. Material policy changes need not be disclosed if undertaken prior to January 1,
Disclosures:
I. The composite presentation for each annual period should disclose HPI’s
compliance with US GAAP.
II. The percentage of the total asset value which is not considered real estate should
be disclosed once every thirty-six months.
III. Details of the existing valuation policy should be disclosed for the recent most
period.
Next, Miller analyzes the investment of T&T Foundation in HPI’s fund. T&T joined the
fund two years ago, on January 1, 2013. Miller collects details on the client’s external
cash flow activity with respect to the fund for the first two years of investment (2013 to
2014) and summarizes details concerning quarterly cash flows in an exhibit (Exhibit).
She intends to use the data to estimate the since inception internal rate of return (SI-IRR)
of the investment.
Exhibit:
T&T Foundation’s Quarterly Cash Flow Activity
in the HPI Commingled Fund (2013-2014)
Date Quarter Amount
Initial investment 31 December 2012 0 $300,000
Additional Investment 30 September 2013 3 $50,000
Distribution 31 March 2014 5 $10,540
Distribution 30 June 2014 6 $12,420
Ending value 31 December 2014 8 $378,900
Miller concludes his analysis by observing the growth in the number of portfolios in
HPI’s fund between 2013 and 2015. She observes that the number of portfolios have
grown from 5 to 8 to 14, respectively, in the three years.
55. Which of the following funds are subject to GIPS real estate provisions?
A. Fund AX only.
56. Which of the following statements least accurately highlights why HPI’s returns
calculation policy is inconsistent with GIPS real estate provisions?
A. Total returns must be calculated more frequently.
B. Both gross- and net-of-fees component returns must be presented.
C. The Modified Dietz method does not represent a true time-weighted
return.
57. Which of the following components of HPI’s internal valuation policy is most
consistent with the requirements of the GIPS real estate provisions?
A. I only.
B. II only.
C. Both I and II.
58. In context of HPI’s disclosure policy, which of the following components most
likely represents a recommendation of the GIPS real estate provisions?
A. I
B. II
C. III
59. Using the data in the Exhibit, the measure for SI-IRR on T&T Foundation’s
investment which is consistent with GIPS real estate provisions is closest to:
A. 1.88%.
B. 7.71%.
C. 15.78%.
60. In which of the following years is HPI required to present a specific measure of
internal dispersion for its commingled fund’s compliant performance
presentation?
A. 2015 only.
B. 2014 and 2015 only.
C. All three years.
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