Managers of private equity, venture capital and other alternative private investment funds have not completely dodged the fair-value bullet.
Under new U.S. and international accounting proposals now being circulated, managers would face much tougher rules on explaining how they arrived at an asset's value and the methods used to value assets. They'd also be subjected to more involved reporting requirements.
Fair-value accounting — which took effect in 2007 in the form of Financial Accounting Statement 157 — made the private equity and real estate investment worlds apoplectic. Unable to keep portfolio companies and other assets at book value, the managers feared adopting the standards would cause massive write-downs. Indeed, many investment managers did end up reporting at fair value, which brought down valuations in some cases.
However, how fair value should be applied — especially in a distressed environment — has become a hot topic in the industry, and the new proposals fan the flame.
While not all aspects of the newest fair-value proposals apply to alternative investment funds, those funds are not exempt, said Christine Klimek, communications manager, Financial Accounting Foundation, Norwalk, Conn., which oversees the U.S. Financial Accounting Standards Board.
The financial crisis of the past few years has put the matter of unified international accounting standards on a fast track. Executives of both the FASB and the International Accounting Standards Board were called to account for their progress on convergence at last month's G-20 meeting in Toronto, said Greg Forsythe, Pittsburgh-based director and business valuation technical specialist with Deloitte Financial Advisory Services LLP.
The exposure drafts of each board's fair-value standard were released June 29, with comments due by Sept. 7. Many of the changes proposed by the FASB are meant to bring U.S. standards in line with international standards. Neither the FASB nor the IASB has stated when final standards would be issued, but insiders say they could be made public by the first quarter of 2011.
“Part of this (FASB) standard is a converged standard. When it is finalized, it should apply no matter where a manager is reporting,” said Mr. Forsythe, who is a member of the advisory committee on the global accounting standards.
But the drafts are far from identical. For example, different assets, liabilities and equity instruments are measured at fair value in the U.S. and under international accounting standards. The boards are still “in discussions” and those discussions will continue after the comment periods, according to information on FASB's website.
Robert Stewart, spokesman for the Private Equity Council, a Washington-based industry lobbying and trade association representing some of the largest private equity firms, said his group is “monitoring the situation.”
The international proposal beefs up the IASB's definition of “fair value” to require increased transparency about fair-value measurements, including valuation techniques and assumptions made to measure fair value, according to a July project summary published by the IFRS Foundation, London. The proposal would define fair value as an exit price, rather than the price a firm paid for the asset, as is common among private equity firms.
And in the U.S. proposals, there are three main areas that are likely to be hot topics among alternative investment managers, explained John Hildebrand, a partner in the national professional services group of PricewaterhouseCoopers.