On January 1, 2010 the Global Investment Performance Standards (GIPS) rules on accounting for carve-outs will change. This will affect investment management firms in various ways, but specifically:

• If a firm intends to carve-out an asset class, sector, industry, size range or style type, each carved-out segment must have either its own cash balance or be accounted for separately, with its own associated cash position. The use of hypothetical cash allocations will no longer be allowed.
• Firms that continue to use carve-outs for a particular strategy are required to include in the composite all similar portfolio segments managed according to that strategy firm-wide.

This report provides five options for firms who want to move forward with carve-outs under the new "actual cash" requirement and the pros and cons associated with each.