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AICPA guidance focuses on measuring fair value of portfolio companies

What PE and VC funds, investment companies need to know

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As record amounts of capital continue to be raised and deployed by private equity and venture capital funds, the level of scrutiny these investments have garnered among regulators, policymakers, investors and other stakeholders has forced these funds to place greater emphasis on their valuation processes and controls, particularly the methods used to account for their investments.

In an effort to provide a conclusive source of guidance to the industry, the AICPA's PE/VC Task Force, along with the Financial Reporting Executive Committee (FinREC), released a working draft of an accounting and valuation guide, Valuation of Portfolio Company Investments of Venture Capital and Private Equity Funds and Other Investment Companies (the PE/VC guide or the guide). The official release of the guide is anticipated sometime in the spring of 2019.

Despite its nearly 650 pages, the guide’s key focus is on best practices for the valuation of, and accounting for, fund investments in portfolio companies, specifically accommodating the key concepts of fair value for financial reporting purposes.

This white paper provides a brief summary of some of the key topics that may be of significant interest to private equity and venture capital fund financial leaders. These topics include options for the allocation of equity values, and those that may not be widely known but are critical of the accurate reporting of fair value investments, such as backtesting or the treatment of transaction costs.

The specific areas addressed include:

  • Treatment of transaction costs
  • Valuation of debt instruments
  • Valuation of equity interests in complex capital structures
  • Control and marketability
  • Calibration and backtesting
  • Factors to consider at or near a transaction date
  • Overview of special topics

The PE/VC guide was developed to provide guidance, examples and case studies for preparers of financial statements, independent auditors, management and boards of directors of investment companies; professionals who prepare valuation analyses, and other interested parties regarding the accounting for and valuation of portfolio company investments of venture capital and private equity, and other investment companies. The guide focuses on measuring fair value for financial reporting purposes. Because estimating fair value is not an exact science, the principles and examples provided by the AICPA are meant to bring clarity and accuracy to measuring the value of investments.

For a more detailed overview of the guide, download RSM’s white paper.

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