Private equity managers may see restrictions in 2011 on how they value assets, including defining fair value as an exit price rather than a purchase price, as the Financial Accounting Standards Board (FASB) looks to craft guidelines that match international accounting standards.
The conversation slowed in 2010, but is expected to pick up again early next year. One portfolio valuation expert says that mid-2011 is targeted for the completion of a number of significant projects including convergence.
The last major action came in June when FASB issued an exposure draft of proposed changes to its fair value measurement guidance, FASB Accounting Standards Codification Topic 820, as part of the Fair Value Measurements and Disclosures– Joint Project of the International Accounting Standards Board (IASB) and FASB.
The objective of the proposal was to ensure that fair value has the same meaning in the generally accepted accounting principles (GAAP) of the US and the IFRS.
The proposal would limit how firms could value assets. Under the current rules, a private equity manager could either combine assets and value them as a group, or value each individually. The new proposal would require individual valuation of assets.
The fundamental impact would be if an investor holds control equity in a private company, today they look at what they would receive if they sold it. The proposal values a single share of that company and multiplies by the holdings. The value associated with control would disappear.
A second significant change concerns whether a fund owns control equity in an underlying portfolio and owns a portion of the debt.
Lastly, private equity managers would be required to disclose the effect on the reported value of certain assumptions they made to value an asset.
Private equity managers have been waiting for resolution for months and insiders are betting that we will have an answer in early 2011.
“I think there has been a lot of preparation on the part of private equity firms and I think we’ve all been prepared for convergence for some time. We expect a decision by April,” said one CFO.