Under the Basel framework, backtesting of VaR models must be performed using both actual P&L and hypothetical P&L. Actual returns represent the total economic impact on the trading portfolio, including intraday trading, fees, and commissions. Hypothetical returns are calculated by freezing the end-of-day positions from the previous day and valuing them using the current day's market prices. Comparing VaR against both sets of returns provides a comprehensive view of the model's accuracy, as hypothetical returns test the model's assumptions without the noise of intraday trading, while actual returns reflect the real-world performance of the portfolio.