AICPA Releases Valuation Working Draft for PE and VC Portfolio Investments

The AICPA issued a working draft titled Valuation of Portfolio Company Investments of Venture Capital and Private Equity Funds and Other Investment Companies.  This guide provides nonauthoritative guidance and illustrations for preparers of financial statements, independent auditors, and valuation specialists regarding the accounting for and valuation of portfolio company investments held by investment companies within the scope of FASB ASC 946 (including private equity (PE) funds, venture capital (VC) funds, hedge funds, and business development companies).

The working draft is a comprehensive document composed of two parts totaling 649 pages and includes numerous case studies and examples.  The AICPA’s Financial Reporting Executive Committee and the PE/VC Task Force is accepting comments on this working draft until August 15, 2018.  Copies of the working draft can be downloaded from the AICPA website:  https://www.aicpa.org/interestareas/frc/accountingfinancialreporting/working-draft-of-pe-vc-guide.html

Comments can be sent to Yelena Mishkevich at yelena.mishkevich@aicpa-cima.com .

While only in draft form, much of what is included in the working draft will make its way into the final guide and will be viewed as best practices by financial statement auditors and regulators.

The “guide to the guide” is summarized as follows:

The task force has organized the guide with chapters, topics and case studies identified to help direct users of the guide to areas that might be of most interest to them. Given the broad scope of the guide, some users may be more interested in some sections than others. The following discussion highlights the sections that may be most relevant as a resource for various users. To derive the most benefit from this guide, users are encouraged to read this guide in its entirety for an overview of the key concepts, before reviewing specific areas of interest in more detail.

• Investment company managers may wish to focus on the case studies, reviewing the list in appendix C to identify the situations that are most similar to their funds’ investment styles. They may also wish to consider the implications for their funds of the guidance in chapter 10, “Calibration,” chapter 11, “Backtesting,” chapter 12, “Factors to Consider At or Near a Transaction Date,” and appendix A, “Valuation Process and Documentation Considerations.”
• Venture capital fund managers may wish to focus on case studies 8–12 in appendix C, which present examples of investments in early-stage companies and companies with complex capital structures. They may also wish to consider the guidance in chapter 8, “Valuation of Equity Interests in Complex Capital Structures,” and paragraphs 13.39–.43 regarding the valuation of early-stage company investments when there has been no recent round of financing.
• In addition to the suggested points of focus noted previously for investment company managers, accountants and auditors may also wish to focus on chapter 4, “Determining the Unit of Account and the Assumed Transaction for Measuring the Fair Value of Investments,” as well as reviewing the background on the industry in chapter 1, “Overview of the Private Equity and Venture Capital Industry and Its Investment Strategies,” chapter 2, “Fair Value and Related Concepts” and chapter 3, “Market Participant Assumptions.”
• Valuation specialists may benefit from the background on the industry in chapter 1, and may also want to consider the valuation chapters 5 – 9 (especially the discussion on premiums and discounts and calibration in chapter 9, “Control and Marketability”) and chapter 10, “Calibration.” In addition, the material in chapter 4, “Determining the Unit of Account and the Assumed Transaction for Measuring the Fair Value of Investments,” sets the context for the valuation and provides examples.
• All users of the guide may want to review chapter 13, which addresses special topics and frequently asked questions in chapter 14 to identify those topics and responses that are applicable to their situations.

Chaffe has extensive experience in valuing portfolio companies and has worked with the big four and regional CPA firms. Due to the fact that we do not offer tax and auditing services, Chaffe is fully independent, cost-efficient, and focused on meeting auditing deadlines.

Contact Marc Katsanis mkatsanis@chaffe-associates.com for more information on how Chaffe can assist you in preparing for compliance with the coming guidelines.