Fair value guidance is finally here

Private equity managers last week received long awaited guidance on how they should value assets, including defining fair value as an exit price rather than a purchase price.

Why it took the Financial Accounting Standards Board (FASB) so long to craft guidelines that match international accounting standards remains unclear, but the delay is a little surprising as valuing assets is a critical point in the private equity food chain.

The conversation slowed in 2010, but was expected to pick up this year as the completion of a number of significant projects, including convergence, were coming due.

“I expected it to be hashed out last year, then we heard first quarter, so I’m surprised that the delay lasted until May,” according to a valuation expert. “On the other hand, the language had to be right.”

And the language is specific. For US GAAP, the converged standards will supersede most of its guidance on fair value, although many of the changes are clarifications of existing guidance or wording changes to align with IFRS 13.

Agreement on all matters however proved too difficult for the two boards. For instance a difference in disclosure requirements has the International Accounting Standards Board (IASB) calling for private equity CFOs to show their math when calculating financial instruments defined as “Level 3”. US GAAP, the industry’s predominant choice of standards, is only calling for a brief narrative explaining the logic used in deriving a financial instrument’s fair value estimate, as will IASB.

But the differences shouldn’t rain on what is a parade of good news. In addition to fair value, the boards finalised convergence projects on consolidated financial statements, joint arrangements and disclosure of interests in other entities.

The result is a world where financial statements are read more easily across borders, by both fund managers and increasingly curious investors.