It looks as if European private equity firms may have to deal with the implications of International Accounting Standard 27 (IAS 27) following comments by its chairman Sir David Tweedie.
The European Private Equity and Venture Capital Association (EVCA) is lobbying for an exemption from IAS 27. The proposed measure stipulates that companies prepare consolidated accounts, meaning that financial information relating to a parent company and all its subsidiaries would have to be presented as if the group were one single entity. While aimed primarily at public companies, unlisted businesses are not exempt.
Quoted by The Herald newspaper, Tweedie said: “I am a cynic [about an exemption]. The worry is that a company won’t have to set up an SPV [special purpose vehicle] to hide stuff off the balance sheet. It can just become a venture capitalist and lump all the (debts and losses) in there instead.”
The EVCA argues that having to mesh together the accounts of all private equity funds’ underlying portfolio companies into a homogenous entity would be misleading for investors in those funds because it would fail to reflect that companies in a private equity portfolio of direct investments are typically at different stages of development.
Although funds would be allowed to provide investors with fair value accounts alongside consolidated accounts, EVCA secretary general Javier Echarri suggested this would be confusing, particularly for investors who are new to private equity. It would also create an unwelcome new administrative burden.
The IASB’s hardening stance comes in the wake of the current controversy surrounding bankrupt Italian food company Parmalat, and follows US accounting irregularities at the likes of Enron and WorldCom. Towards the end of last year the EVCA was buoyed by news that the Financial Accounting Standards Board (FASB) in the US had confirmed an exemption for all investment companies in the country – a move that it was hoped would be followed on this side of the Atlantic. But the FASB exemption is being reviewed, with a final conclusion expected next month.
The new rules for consolidation are set to be drawn up in March 2004, ahead of the application of the rules in January 2005.