The Private Equity and Venture Capital Task Force of the American Institute of Certified Public Accountants (AICPA) has drafted a comprehensive guide to fair valuing investments which translates US GAAP ASC 820: Fair Value Measurements and Disclosures as applicable to investment companies.

The draft AICPA guide Valuation of Portfolio Company Investments of Venture Capital and Private Equity Funds and other Investment Companies (‘the Guide’) is intended to clarify, address possible issues, and illustrate the application of ASC 820 for investment companies. It aims to help them understand the required levels of research, documentation and performance considerations in achieving the valuation quality foreseen by the ASC and to achieve a best practice approach to compliance with the accounting standards.

The AICPA Guide is written as voluntary guidance for investment companies, as defined in ASC 946: Financial Services – Investment Companies (paras 946-10-15-4 to -9), and stakeholders interested in valuations including, but not limited to, managers, accountants, auditors and valuation specialists. Each stakeholder group mentioned is directed to specific relevant chapters of the Guide.

It is however mandatory for specialist credential holders who are Certified in Entity and Intangible Valuations (CEIV).

The Guide is ‘nonauthoritative’ (does not supersede US GAAP) and provides guidance only for fair value assessment for financial reporting purposes.

It addresses the valuation of debt and equity instruments in a portfolio company (controlling and significant stakes), not whole-company valuations, and valuation on a going concern basis, not on a liquidation basis as per ASC 205: Presentation of Financial Statements.

Key issues addressed by the Guide are:
• Applying the market participant assumption when an investment is to be held until a longer-term strategy has outworked, yet must be valued ‘artificially’ at a reporting date;
• Identifying what market participants would buy – a single security or a package of debt / equity instruments (the ‘unit of account’ for valuation purposes);
• Approaches to valuing debt and equity stakes in both simple and complex capital structures;
• Identifying Level 3 relevant unobservable inputs at time of initial recognition of the investment which together will approximate the purchase price, and can be used for reliable subsequent measurement (‘calibration’);
• Valuing early stage investments with no previous transactions in the instrument;
• Valuation of instruments with rights and privileges not enforced; rights associated with preferred stock;
• Valuation of convertible instruments, options and warrants; commitments to portfolio companies.

US GAAP reporters currently using IPEV Valuation Guidelines may prefer the AICPA Guide as it is the first industry-specific interpretation of ASC 820, it respects increased SEC scrutiny of valuations and is drafted specifically for US GAAP financial reporting purposes.

By contrast, IPEV Valuation Guidelines (also nonauthoritative) consider both IFRS and US GAAP and aim to provide valuations consistent with both.

Industry stakeholders will undoubtedly find another set of guidelines useful in providing directions on valuations, which has been an area of significant judgement and focus for them.

Comments on the draft Guide are welcome until August 15, 2018. A final version is expected around May 2019.

Please do not hesitate to contact your Client Services team should you have questions or require further assistance.

The Guide contains two parts and can be read here.