partnership accounting general background limitations (compliance approved)

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Partnership Accounting Background and System Limitations

Q1 2015

© 2015 Envestnet, Inc. All rights reserved.

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Introduction

• In this document the Capital Event console will be analyzed further in order to lay out some best practices with regards to the entry and accuracy of Capital Event data.

• The reconciliation of custodial feeds and transaction data will also be reviewed in detail. This will help demonstrate how the relationship between transaction and Capital Event info can impact the system’s reporting abilities.

• There will also be an explanation of the potential issues connected to uploading historical performance data.

• Finally, Envestnet will propose a case for gradual conversion to serve as a type of “trial-run” to determine how well the Partnership Console meets a potential client’s expectations.


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Capital Event Entry:

• As one of the key components of the Partnership Console, the Capital Event page is where the magic happens in terms of Partnership Accounting. The transaction details entered in the Capital Event console are used to calculate individual ownership and market values for each partnership.

• Furthermore, Capital Event data must be entered at the end of each month:


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• Although the system requires each event date to be the last date of the month, there is some flexibility as far as when the actual manual entry of the Capital Event data can take place. Prior months Capital Event data can be entered or adjusted at any time. While current month Capital Event data does have the ability to be dated forward to the last day of the month. Here is a current example for March 2015:

• Future months’ Capital Event data cannot be entered at any time. The point of this is to mitigate against potential Pending Adjustments (which will be addressed in further detail below) displaying on the partnership accounts.

• Keep in mind, while Capital Event data is entered for each month end, the transaction amounts will actually apply to the following month’s Net Investment data for the partnership account. This will be explored further in the next section below.


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Capital Event Transactions and Reports

• We’ve learned the Partnership Console will calculate client ownership percentages and market values through the entry of Capital Event transactions. Now, let’s explore how this data is used to generate various reports at the client and partnership levels. Capital Events Page (12/31/14 example):


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• In most cases, the contribution and withdrawal data will be fed to the client’s Net Investment history which can be found on their Monthly Performance reports. Here’s an example of the PSHIP account (investor level account which symbolizes client’s stake in pool) for the $80,000.00 withdrawal highlighted above:

(Note how the withdrawal amount is applied to the following month, January 2015. The variance of $695.00 can be attributed to other expenses which will not be entered in the Capital Events page).


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• Per system default the $80,000.00 withdrawal entered in the 12/31/14 event was applied to the January 2015 Net Investment balance. Each Capital Events page will specify what month the transaction data will be applied to at the top of the Capital Event table under Contributions & Withdrawals:

• The forward dating of Capital Event transaction history is important to keep in mind because of its relationship to the custodial account feed. Through this custodial feed Envestnet reconciles transaction details that are used to populate many of the platform’s online reports. If the two different sources of data (Capital Event & custodial feed) are displaying unique transaction dates or amounts then pending adjustments will show up on the client’s various reports. Further explanation of pending adjustments and how they arise will be covered over the next few sections.


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Reconciliation of Transactions and Reports

• The reconciliation process is what Envestnet uses to sync up with various custodians in order to document the transaction history taking place at the custodial account level. Here is an example of the transaction page for an existing partnership account on the platform held with the custodian Bessemer:

• Envestnet receives daily files from connected custodians. Note that the date of the transactions match up with the date of the file under the “Source” column.

• Transaction reports received through the custodian also contain details like transaction type, (which impacts account net investment) ticker, dollar amount, etc.…

• Cost Basis data can be received through a separate custodial file feed. However, not all custodians Envestnet syncs with will provide the Cost Basis file so accessibility will vary per investment account. Envestnet also has the ability to manually input cost basis data if provided by the client/firm.


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• The custodial data which is fed to the partnership investment account is used to populate the partnership’s transaction history, which in turn is used to generate some of the platform’s more detailed online reports. Here’s an example of an Income report at the partnership account level:

• As long as transaction data is recorded at the partnership account level (via custodian), then detailed reports similar to the Income report above will generate on the platform.


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• On the other hand, due to the fact that transaction history does not get reconciled to the PSHIP account level (individual investor’s stake in pooled account) some of the detailed reports like the Income report will not generate at the investor level.

• Custodial feed and/or Manual Transaction entry of account history does not specify activity to the level of each individual and therefore there is no transaction specific data recorded at the client level. The transaction data is used to generate some, but not all of the platform’s online reports. So while Income reports will not pull up at PSHIP level, Activity and Performance Summaries and Monthly Performance reports (among other reports) will specify data to the client level as these reports generate using Capital Event history. Here’s an example of a report for an investor’s PSHIP level account:

• Therefore, while all platform reports may not be functional at the investor level, there are plenty of alternative reports that will display desired measurements and calculations. It just may require utilizing several reports in conjunction.

• The relationship between custodial transaction feeds and Capital Event data will also influence the presence of pending adjustment alerts on reports. © 2015 Envestnet, Inc. All rights reserved.

11 Pending Adjustments

• Interest and dividend type of transactions do not get applied to Net Investment calculations so they have no relation to the Capital Events pages. That logic also applies to “Buys” and “Sells” as they are making purchases or sales with funds that were already held in the account.

• All other types of cash flow transactions where there is a change in value of the account (ex. Cash In, Cash Out, Securities In, Securities Out, Management fees etc.) do have an impact on Net Investment calculations, and therefore they must be reconciled to the Capital Events page. If the transaction history does not match up with the Capital Event data for the applicable month, then pending adjustments will show up at both the partnership and client levels.

Partnership level example

Client level Account Overview report:


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• While the Capital Event page forward dates transaction data to the first day of the next month, the actual record date of the activity (according to the transaction history feed) only has to match up within that same month. The transaction could take place at the custodian at any time during the month and as long as the dollar amount and the month of activity match up to what’s been entered in the Capital Event page, the account will not display pending adjustments.

• Pending Adjustments do not have a material effect on rate of return calculations as the pending amount does get factored into the account’s total market value. However, they do give the appearance that there are issues with the account and needless to say, most clients will not be pleased by this.

• Therefore, in order to best prevent the possibility of pending adjustments, Envestnet recommends that any contributions or withdrawals from the custodial accounts be planned for the beginning of each month. That way the Capital Event data may be entered and backdated to the previous month shortly after the custodial feed provides transaction info. This will ensure the least amount of time a pending adjustment could be displayed. Here’s an example of a Family Office client who timed all their cash flow activity around the first week of each month:


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• By timing the entry of Capital Events within the same week as the custodial account level transactions, this client was able to minimize the amount of time pending adjustments could potentially be displayed.

• Different firms will have their own level of concern with the appearance of pending adjustments. Being that most clients only interact with Envestnet reports on a quarterly basis when they receive QPR’s, there should be ample time to make adjustments to resolve any pending adjustments before client reports get published at the end of each quarter.

• The main influence on the presence of pending adjustments is the coordination between custodian level transactions and Capital Event entry. This issue can be minimized by setting consistent schedules around monthly partnership activity. However, there are less predictable examples of pending adjustments displaying on the platform which are related to attempted conversions of historical data.

• In the past Envestnet has attempted to accommodate for the upload of partnership history prior to the date of a Firm’s conversion onto the platform. Through this process Envestnet requests statements or spreadsheets containing historical account activity from the new Firm/client, which are then bulk uploaded onto the platform. This process can involve some manual classification of transaction details and because of this there is significant room for error in correctly labeling transaction dates and types. As discussed above, any discrepancy between transaction details and Capital Event data will lead to pending adjustments so they were appearing frequently on accounts that uploaded archived history.

• Through research Envestnet has determined that the discrepancies are most-likely related to archived cash positions being treated as cash in/out transactions. Development efforts on correcting these issues are underway, but at this time Envestnet does not recommend uploading historical partnership data.


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Conclusion/Next Steps

• Based on the nuances of the Partnership Accounting system explained above, Envestnet would propose a gradual rollout of any prospective client’s involvement into the Partnership Console. A measured approach to the conversion will allow for both Envestnet and the client to determine some best practices for the most efficient and effective use of the Partnership system. Once these processes are established the client’s expansion of the accounting system to more trusts and partnerships will go much more smoothly.

• If and when a potential client is prepared to begin the trial-run process, there are just several details that require clarification before Envestnet can formulate a strategy around establishing this initial partnership group. Points to clarify:

o How many different partnership pools are established for the group? Are there multiple partnership investments (ex. equity pool, fixed income pool, etc.), or just one? Envestnet would recommend beginning with just one pool and then building out from there, depending on how things are going with the initial partnership.

o Once a partnership pool is chosen: Does the pool contain multiple investment accounts or just one account? Which custodian(s) are the accounts held at? This will help determine if Envestnet is set up for direct custodial feed.

o Does the client want to set up all the underlying investors in the pool from the start, or are there additional families/investors in the group that will be added later on? If there are additional investors to be added to the pool besides the initial families/investors, that is no issue, as we can establish a 5th group which will contain the aggregate value of the rest of the pool. Here’s an example of this being done with a past conversion:

(Investor Dummy Rogers was set up as the extra group which aggregated all remaining investor stakes. When a new investor is uploaded onto the platform, the value of their ownership stake can simply be transferred out from the dummy pool to that new individual).


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o Another point to clarify on the initial investors is if they will be set up as individuals or if they will use a family structure. Are they comfortable with one PSHIP account that represents the family’s stake as a whole (ex. Johnson Family PSHIP acct), or does each family member want their own stake tracked individually (ex. Jim Johnson PSHIP, Mary Johnson PSHIP, etc.)? That distinction will impact the number of registrations required to be completed and will have an effect on the overall number of PSHIP accounts created.

• In summary, the Partnership Accounting system is a specialized and unique feature to Envestnet’s platform. Due to the exclusive nature of the Partnership Console there are recommended best practices in order to have the most efficient experience with the system, which were explained above. Furthermore, because the Partnership Console is still in the earlier stages of its development it is recommended that any new prospective partnership clients be gradually introduced to the system to ensure expectations are being met before a full conversion takes place.

Please feel free to send any questions or concerns to: [email protected]

DISCLOSURE:

The services and materials described herein are provided on an “as is” and “as available” basis, with all faults. Envestnet disclaims all warranties, express or implied, including, without limitation, warranties of merchantability or fitness for a particular purpose, title, non-infringement or compatibility. Envestnet makes no representation or warranties that access to and use of the internet while utilizing the services as described herein will be uninterrupted or error-free, or free of viruses, unauthorized code or other harmful components. Envestnet reserves the right to add to, change, or eliminate any of the services and/or service levels listed herein without prior notice.


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partnership accounting general background limitations (compliance approved)

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