On May 15, 2018, the AICPA’s Financial Reporting Executive Committee (FinREC) issued a Working Draft of the AICPA Accounting and Valuation Guide: Valuation of Portfolio Company Investments of Venture Capital and Private Equity Funds and Other Investment Companies. as well as the Working Draft Appendixes and Glossary. FinREC is requesting feedback from interested parties. Ray Rath has been a member of the Task Force working on the development of this guide since its inception approximately five years ago.
The guide provides nonauthoritative guidance for preparers of financial statements, independent auditors, and valuation specialists for accounting and valuation of portfolio company investments held by investment companies (private equity, venture capital and hedge funds) within the scope of FASB ASC 946: Investment Companies. Corporate venture capital groups or pension funds that make investments in similar types of portfolio companies may also find useful insights. Valuation issues where there is divergence in practice are discussed to assist users in estimating fair values for these investments.
The working draft of the guide is almost 650 pages. Despite the length, the guide is not as overwhelming as the page count suggests. The guide is very well structured and readers looking for insights in a specific area will be able to find relevant section(s) and examples quickly. A significant share of the guide ties to 15 extremely robust examples for estimating the value of a PE or VC investment over the period from initial investment to the end of the holding period. Changes in the subject firm, industry and economy and their implications for the valuation are presented in the examples. The examples are intended to capture a variety of different investment situations, industries and stages of development. Readers with a specific question in mind can find the most relevant examples and consult those to help develop valuation insights.
Chapters 1 through 12 provide detailed discussions of a variety of important topics. Chapter 1 provides an Overview of the Private Equity and Venture Capital Industry and Its Investment Strategies. Chapter 2 discusses key elements of the accounting guidance on Fair Value and Related Concepts. The development of Market Participant Assumptions is covered in Chapter 3 and Determining the Unit of Account and Assumed Transaction for Measuring the Fair Value of Investment issues are covered in Chapter 4. Chapter 5 discusses the three valuation approaches in Overview of Valuation Approaches. The Valuation of Debt Instruments is covered in Chapter 6. Valuations of Equity Interests in Simple and Complex Capital Structures are discussed in Chapters 7 and 8, respectively. Control and Marketability issues are presented in Chapter 9. Chapters 10, 11 and 12 discuss Calibration, Backtesting, and Factors to Consider At or Near a Transaction Date, respectively.
Chapter 13, Special Topics, covers a variety of specific situations that frequently challenge those involved in fair value estimates. Chapter 14, Frequently Asked Questions, and Appendix A, Valuation Process and Documentation Considerations, and Appendix B, Valuation Reference Guide, provide further technical insights that are readily accessible to interested users. Appendix C provides Valuation Case Studies, and the guide closes with an extensive Glossary of valuation and industry terms.
Comments are due by August 15, 2018. The targeted date for issuance of the final guide is May 2019. You can visit the AICPA website for additional information. The two documents are as follows: Working Draft of the AICPA Accounting and Valuation Guide: Valuation of Portfolio Company Investments of Venture Capital and Private Equity Funds and Other Investment Companies and the Working Draft Appendixes and Glossary. Those interested in providing comments can submit those to Yelena Mishkevich at firstname.lastname@example.org.
Please feel free to contact Ray Rath at email@example.com or by phone at +1 (323) 229-9447 to answer any questions pertaining to the guide; or contact Michael Haghighat at firstname.lastname@example.org, or call +1 (949) 475‑2801.