ILPA protests consolidation

The Institutional Limited Partners Association has written to suggest amendments to IASB’s latest draft on consolidated financial statements.

The Institutional Limited Partners Association (ILPA) has written to the International Accounting Standards Board to recommend that its Exposure Draft (ED 10), “Consolidated Financial Statements”, be amended to permit private equity funds to report the value of their investments at fair value, rather than reporting them on a consolidated basis with the activities of the fund or other portfolio companies.

The latest draft was released this March. Private equity funds and their investors have both protested the consolidation issue since IAS 27 was released in 2005, on the basis that consolidated accounts are almost meaningless to LPs. Private equity firms have largely chosen to use Generally Accepted Accounting Principles over International Financial Reporting Standards for this reason. Otherwise, funds have to assume the costs of producing two sets of financial reports: one reporting their assets at fair value, and one consolidating accounts for the sake of compliance.

“If private equity funds were required to consolidate portfolio companies as contemplated under ED 10, it would create significant difficulties for their investors and erode the relevance and comparability of the financial statements,” ILPA said in its letter to the IASB.

According to one LP at a past Private Equity International conference, consolidation not only obscures any information about the performance of the underlying portfolio company, but it could trigger unpleasant consequences for the management company. Debt from portfolio companies could work its way through the funds and to the general partners' financial statements. If the general partnership has its own lines of credit, those would have to be renegotiated due to the new levels of debt on the balance sheet.

The European Private Equity and Venture Capital Association (EVCA) has handed in case studies showing the negative impact of consolidation on reporting, and the EVCA, the British Private Equity and Venture Capital Association (BVCA) and the Institutional Limited Partners Association (ILPA) have all been in dialogue with the IASB. But no exemption for private equity funds has yet been granted.

ILPA released its own guidelines on reporting and transparency in September, stipulating specific financial metrics that GPs should provide to their investors, as well as recommending that GPs provide detailed information on their valuation methodologies to investors.