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Does the new AICPA guidance affect your equity?


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For years, funds have valued their equity interests in portfolio companies using the following approach: calculate the enterprise value, subtract any debt and allocate the remainder to the equity classes in order of seniority. Regardless of whether you called this the waterfall method or the current value method (CVM), this approach had its advantages. It was transparent, relatively simple for auditors to test and document, and easy for investors to understand.

However, in May 2018, 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 Guide). For those of you who have not read the Guide in its entirety, it is a summary of best practices, and it acknowledges that the selection of an appropriate methodology for valuing equity interests is dependent on facts and circumstances. The Guide does not suggest any method is superior, but rather that the fund should select the method that best captures the value accruing to equity interests depending on those facts and circumstances. Each method has strengths and weaknesses that should be considered.

RSM recently authored an article in PEI’s Private Fund Manager March 2019 issue that addresses this topic. This article highlights some of the key points to consider when valuing equity interests.

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