The American Institute of CPAs’ accounting and valuation guide for the private equity and venture capital industry is a “non-authoritative implementation guidance on fair value,” according to Yelena Mishkevich, senior manager of accounting standards at AICPA, and it can still be useful for small and middle-market firms.
The AICPA released its guidelines on August 19, after releasing a draft of it on May 15, 2018.
Many experts agree that the guide doesn’t change best practices but is a thorough explanation of calculating fair value in compliance with ASC 820, which is a fair value compliance principle under Generally Accepted Accounting Principles.
The guide which is over 600 pages long includes “16 case studies which are real life examples to show how diverse best practice is,” Mark Smith, senior manager of valuation services at AICPA, tells Private Funds CFO.
The guideline is more useful for small or middle market firms, says Dale Thompson, an assurance partner at BDO.
“The guide helps smaller managers because oftentimes, due to resource limitation, their valuation documentation doesn’t show full compliance,” he says. “Now they have a tool to point to they can tailor their circumstances to show auditors and others how they fully comply with the fair value determination standard.”
This is crucial even for firms that outsource their valuations, Thompson went on to say.
“Even if you do outsource accounting or valuation, at the end of the day the private fund manager is responsible for fair value,” he says. “They would need to understand how those third parties are coming up with their valuations and with this guide now they have benchmarks with which to compare to what they received in order to see if the third party is complying with best practices.”
The guide doesn’t change fair value best practices but provides an outline and guidance which can serve as a “refinement of your process” says Steve Davis, a managing director at Murray Devine Valuation Advisors.
“You might have people taking different viewpoints on how to consider an exit scenario or transaction,” he says. “The guide helps bring everybody together in a consistent fashion on how to best approach the valuation instead of people doing things in 10 different ways.”
Thompson sees this guide as the central document everyone will possibly turn to from now on, “rather than going to ASC 820.” He also explains that the eventually there might be a need for a new guide if new asset classes emerge.
“Crypto is one which obviously wasn’t addressed,” he says. “It’ll be interesting to see as time progresses and as new asset classes come on board what challenges they represent. Of course, it doesn’t change how you approach valuations but it would be nice to see examples, just like in this current guide.”